K. Jagannatha Shetty, J.
1. This is a reference under section 256(1) of the Income-tax Act, 1961. The Tribunal has referred the following three questions :
'1. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the acquisition in this case consisted of two different transactions, viz., the acquisition of the land on the one hand and other assets on the other hand
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the excess realised on the trees and other assets on account of acquisition of the land constitute agricultural income and, therefore, exempt from taxation
(3) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the cost of acquisition of the land has to be taken as on April 1, 1970, when agricultural land came to be considered as assets within the meaning of section 2(14) of the Income-tax Act, 1961 ?'
2. For the assessment year 1974-75, the assessee filed a return declaring an income of Rs. 5,040 with a net agricultural income of Rs. 2,000. The Income-tax Officer noticed that the assessee had received a sum of Rs. 2,92,263 as compensation for acquisition of his land and the assessee had 28198 shares in the compensation awarded and, accordingly, he brought to tax, long-term capital gains derived by the assessee. While so determining, the Income-tax Officer has separately taken into consideration the compensation awarded for the land acquired and also for malkies and trees. He has taken into consideration the fair market value as on January 1, 1954, at Rs. 3,000 per acre as against the claim of the assessee that it should be Rs. 10,000 per acre.
3. The assessee appealed to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner noticed that the land was acquired in 1973 at Rs. 12,000 per acre and so it was unreasonable to assume that the land had a value of Rs. 10,000 per acre in 1954. As regards the capital gains in respect of trees and malkies, the Appellate Assistant Commissioner found that the cost of acquisition taken into consideration by the Income-tax Officer was low and he, therefore, directed that a sum of Rs. 99,572 should be taken in place of Rs. 62,900 adopted by the Income-tax Officer. He also directed reworking of the capital gains.
4. The assessee appealed to the Tribunal. The Tribunal found that the assessee purchased the land on May 16, 1953, for Rs. 3,750 and thereafter raised coconut garden and vineyard along with other plants. The Tribunal after considering the provisions of the Land Acquisition Act, 1894, came to the conclusion that what was acquired was only the land and separate purchase was made of the trees and other plants with the result that it should be treated as two transactions instead of one. After holding that it was two transactions, the Tribunal considered the results as follows :
'As far as the asset other than the land was concerned, the assessee had received a sum of Rs. 2,25,017 which includes cost of well, pump sets, etc., and trees and plants.'
5. The Tribunal held that that part of the compensation should be regarded as agricultural income, which should not be considered as capital gains.
6. Then the Tribunal alternatively examined the fair market value of the land in the following terms. The land in question was agricultural land which was held by the assessee prior to April 1, 1970. It became a capital asset only with effect from April 1, 1970, when section 2(14) of the Income-tax Act was amended. The agricultural land held by the assessee prior to April 1, 1970, was, therefore, not a capital asset. The Tribunal accordingly directed that the cost of acquisition of the capital asset should be the cost as on April 1, 1970, for purpose of computing the capital gains.
7. We will now take up the third question first for consideration. There is hardly any basis for the reasoning adopted by the Tribunal. The agricultural land became a capital asset from April 1, 1970, but that does not mean that the cost of acquisition of the land has to be taken as on April 1, 1970, itself. The cost of acquisition of every capital asset has to be determined in accordance with section 48 or upon option being exercised by the assessee under section 55(2) of the Income-tax Act. The Income-tax Officer and the Appellate Assistant Commissioner have very rightly determined the cost of acquisition as on January 1, 1954. The finding of the Tribunal that the cost of acquisition has to be determined as on April 1, 1970, is untenable. The assessee was in possession of the asset long prior to April 1, 1970. It is, therefore, not correct to state that the cost of acquisition has to be taken only as on that date.
8. We, therefore, answer the third question in the negative and in favour of the Revenue.
9. We shall now turn to the first question. This legal formulation proceeded on the basis that there were two transactions in the acquisition, one pertaining to the land and the other to malkies thereon. This is wholly incorrect. The land was compulsorily acquired by the C.I.T.B., Bangalore. There were no two transactions. While making the award, the land and the tree growth were separately valued, but that does not mean that there were two transactions. The Tribunal, therefore, was not correct in drawing an inference that there were two transactions, one for acquiring the land and the other for the trees and malkies.
10. We, therefore, answer the first question in the negative.
11. This takes us to the second question. The Tribunal has held that the excess realised from the trees and other plants on account of acquisition of the land constituted agricultural income and, therefore, exempt from taxation. This conclusion was based on the wrong assumption that the tree growth has been separately acquired. It was none the less a compulsory acquisition. Compulsory acquisition also falls within the scope of the transfer defined under section 2(47) of the Income-tax Act.
12. In State of Kerala v. Karimtharuvi Tea Estates Ltd. : 60ITR275(SC) , the Supreme Court observed that the trees grown by the owners of the estates in the estate as shade trees constituted capital asset and the proceeds derived therefrom by sale of such trees would not constitute agricultural income under the Kerala Agricultural Income-tax Act, 1950.
13. In Travancore Tea Estates Co. Ltd. v. CIT : 93ITR314(Ker) , the Kerala High Court has held that the trees which stand on agricultural land cannot be considered as 'agricultural land' and they constitute capital asset and the profits arising from their sale would be assessable as capital gains.
14. The same view has been expressed by the Madras High Court in Beverley Estates Ltd. v. CIT : 117ITR302(Mad) .
15. Mr. Bhat, for the assessee, urged that he did not base his case on the ground that the tree growth was separately acquired and his contention was that the compensation paid for loss of plants and trees was attributable to the loss of future income from the trees and plants and, therefore, it should be treated as agricultural income. It may be noted that this contention has not been considered by the Tribunal in reaching the above-said conclusion on the second question.
16. We, however, answer the second question in the negative and in favour of the Revenue. Our answer to this question is purely based on the finding recorded by the Tribunal and we must hasten to add that the assessee should not be shut out by these answers from arguing his case on the contention which he has raised in the memorandum of appeal.