ISAAC J. - The following two questions have been referred for the decision of this court by the Kerala Agricultural Income-tax Appellate Tribunal under section 60(1) of the Agricultural Income-tax Act, 1950, on the application of the assessee :
1. Whether, on the facts and in the circumstances of the case, the receipt from the sale of teak trees for the purpose of planting the area with rubber is capital in nature and exempt from the Agricultural Income-tax Act.
2. If the answer to the above question is in the negative, whether the expenses incurred in the prior years for the purpose of obtaining the said agricultural income is allowable as deduction from the proceeds of the trees.
The relevant assessment years are 1963-64 and 1964-65; and the corresponding previous years are 1137 M.E. and 1138 M.E. The assessee planted teak in 1122 M.E. for the purpose of deriving income by the sale of trees. In 1137 M.E., the teak trees were sold for a sum of Rs. 76,500 out of which she received Rs. 43,250 in the same year, and the balance was received in the year 1138 M.E. The assessees total agricultural income for the year 1963-64 was determined at Rs. 62,021 including the sum of Rs. 43,250 received by sale of teak trees, while her total agricultural income for the year 1964-65 was determined at Rs. 61,041 including the sum of Rs. 33,250 received in 1138 M.E. on account of the price of teak trees. The assessee contended that the trees were cut and removed from the land with their roots for the purpose of planting rubber, and that the amount received by the sale of the trees was, therefore, capital and not income. In the alternative the assessee contended that she was entitled to a deduction of Rs. 20,342.95 on account of expenditure as detailed below :
(i) Expenses incurred from 1122 to 1125 for planting teak.
(ii) Expenses for maintenance and upkeep of the plantation.
(iii) Interest on the above two amounts.
Both the contentions of the assessee were rejected by the Appellate Tribunal and the subordinate authorities. Regarding the sum of Rs. 7,750 the Tribunal said that the expenses incurred for planting teak was capital expenditure. It also held that both this amount as well as the sum of Rs. 4,978.02 were not incurred in the previous year and were not therefore allowable under section 5 of the Act in computing the total agricultural income. Regarding the sum of Rs. 7,640.93 the Tribunal pointed out that the claim to deduct interest on the assessees own money expended for plantation was not tenable under the Act.
In support of the contention that the amounts received by the assessee by sale of teak trees did not constitute income, her learned counsel first cited the decision of this court in Commissioner of Income-tax v. Venugopala Varma Raja. The question for decision in that case was whether the amount received by sale of trees spontaneously grown in a forest land was income or capital. This court held that, in view of the fact that the trees were cut above a particular height from their root leaving intact the stumps in such a manner as to ensure regeneration, future growth, further felling and a subsequent income, the amounts received by the sale of the trees were income and not capital. Reliance was placed by the learned counsel on the following dictum contained in the above decision :
'The question for determination is whether the Rs. 75,000 was received by the assessee for the removal of the trees with their roots or whether it was for the felling of the trees in such a way as to permit and ensure their regeneration. If the latter was the case, as we think it is, then, the amount received should be considered not as a capital but as a revenue receipt.'
On the basis of the above statement, the learned counsel contended that the amounts received in the instant case were capital, as the trees were completely removed with their roots without the possibility of getting any future income therefrom. The passage cited above only states that, if the trees are felled in the manner mentioned therein, the receipt by sale of the trees should be considered as income and not capital. It does not follow therefrom that if the trees are removed without the possibility of regeneration and fetching a future income, the receipt by sale of the trees would be capital.
The assessees learned counsel also cited the decisions of this court in State of Kerala v. Karimtharuvi Tea Estates Ltd. and Elixir Plantations Ltd. v. Commissioner of Income-tax. In the first case it was held that the amount received by sale of trees planted for providing shade for tea was capital and not income, obviously for the reason that the trees were not planted for deriving an income, but for providing shade for the tea plants. In the second case, it was held that the amount received by sale of dead and windfallen avenue trees from a coffee estate was capital. These decisions have no relevancy to the instant case. The learned counsel cited also the decision of the Allahabad High Court in Raja Jagadish Pratap Sahai v. State. In that case, the Talukdar of an estate sold a number of tress from his estate on the apprehension that he would be divested of the ownership of the land when the Zamindari abolition statute came into force. The court held, following the dictum of Sir George Lowndes in Commissioner of Income-tax v. Shaw Wallace & Co., that the amount received by the Talukdar under the above circumstances was not income. This decision has also no application to the controversy before us.
The last decision relied on by the learned counsel for the assessee was that of the Bombay high Court in Commissioner of Income-tax v. N. P. Patwardhan. That was a case where trees spontaneously grown in an extensive tract of grass lands were sold with a condition that the trees should be removed with their roots. It was held that the amount received by the sale of the trees was capital and not income. The reason of the decision is contained in the following statement :
'According to the Tribunal the trees which had stood on the land all these years having been disposed of with their roots once and for all, the receipts were merely a capital accretion. In our opinion, the view taken by the Tribunal is right. The asset of the man was the land with the wild growth of trees on it. If the land with the trees had been sold, there could have been no doubt that the sale was a realisation of capital and it would not have been possible to argue that the transaction in so far as it involved a sale of the trees was a sale producing income and the remaining part of the transaction was a capital sale. In the present case the land is retained by the assessee but a part of the asset is disposed of in its entirety by selling the trees with roots once and for all. As we have already stated earlier whether in a given case there is a capital sale or sale producing income must depend upon the facts and circumstances of the case and it seems to us that, in a case like the present, where a man, on whose lands a wild growth of trees had stood for a number of years without any attempt being made by him to realise any income therefrom, sells the trees once and for all with their roots the transaction is on account of capital and not of revenue, for by disposing of the roots of the trees he has disposed of the source from which a fresh growth of wood would spring up.'
The above principle has no application to a case of sale of trees planted for the purpose of deriving income by their sale. In such a case, it does not matter whether the trees are sold with the roots, or on condition that they should be cut only in such a manner as to allow regeneration from the stumps and bring in future income. There is no finding in this case, and we are not also aware, as to how teak trees are cut and sold in the usual course of the working of a teak plantation. There may be quite a number of varieties of plantations in which the income is only from the sale of the trees, which would not regenerate from their stumps, and the land has to be replanted after cutting and removing the trees with their roots. There can be no doubt that the amount received by sale of the trees in such a case would be income, though the sale may be with the roots of the trees. We have no doubt that, in a case where trees are planted for the purpose of deriving income by sale of the trees, the amounts received by the sale of the said trees would be income irrespective of the manner in which the trees are removed from the soil.
The learned counsel advanced a further contention that planting of trees is arboriculture, and that the income received therefrom is not agricultural income. Such a contention was not raised before the Appellate Tribunal; and it seems to have been raised before us on the basis of an observation contained in the decision of the Privy Council in Raja Mustafa Ali khan v. Commissioner of Income-tax. We have no doubt that income received by sale of trees planted for the purpose of deriving income is 'agricultural income' as defined in the Act, by whatever name the planting of the said trees called. The Supreme Court has considered elaborately the meaning of agricultural income in Commissioner of Income-tax v. Raja Benoy Kumar Sahas Roy.
The next question for consideration is whether the three amounts claimed by the assessee as expenditure are allowable in computing her agricultural income. The claim on account of interest is not certainly allowable, because it is not an amount which she paid to any person by way of interest, but an amount which she would have earned by way of interest if the amounts expended by her for the plantation were invested on interest. One of the objections upheld by the Appellate Tribunal for disallowing the sum of Rs. 7,750 expended by the assessee for planting the trees that it was a capital expenditure. This objection cannot be sustained, as the trees by themselves do not constitute capital. In our opinion, expenses incurred by a person for planting trees for the purpose of deriving income by the sale of the said trees would be revenue expenditure. The claim for deduction of the above amount as well as for the sum of Rs. 4,978.02 expended for maintenance and upkeep of the plantation was rejected by the Appellate Tribunal also on the ground that these two expenditures were not incurred in the previous year. Learned counsel for the assessee contended that the claim in respect of these two amounts would fall under clause (j) of section 5 of the Act, and that the assessee was entitled to deduct the said amounts. Section 5(j) reads as follows :
'5. Computation of agricultural income. - The agricultural income of a person shall be computed after making the following deductions, namely : .....
(j) any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of deriving the agricultural income.....'
The learned counsel pointed out that clauses (a) to (n) in section 5 of the Act contains the 14 heads of deductions allowed in computing the agricultural income of an assessee; that out of the said 14 heads of deduction all except those which fall under clauses (i), (j), (k) and (1) require that the expenses falling under those heads should have been incurred in the previous year; and that there was no such qualification in the case of expenses falling under clauses (i), (j), (k) and (1) and that it was not, therefore, necessary for obtaining deduction of the aforesaid two amounts that they should have been expended in the previous year. This is a plausible argument in the light of the use of the words 'in the previous year' in 10 out of the 14 clauses in section 5 of the Act, and the omission of the words in the remaining four clauses. However, there is difficulty in accepting this argument. Under the scheme of the Act, each year is a separate self-contained period; and for computing the income of an year, the expenditure incurred in that year alone can be deducted. In Commissioner of Income-tax v. Chitnavis the Privy Council said :
'Although the Act nowhere in terms authorises the deduction of bad debts of a business, such a deduction is necessarily allowable. What are chargeable to income-tax in respect of a business are the profits and gains of a year; and in assessing the amount of the profits and gains of a year account must necessarily be taken of all losses incurred, otherwise you would not arrive at the true profits and gains. But the losses must be losses incurred in that year.'
The same principle would apply in the case of computation of agricultural income also.
The above principle would not, however, apply in the computation of income of a venture whose profits cannot be ascertained until the venture is complete. In such a case, the profit can be determined only after deducting the whole expenditure incurred for deriving the income, irrespective of the question whether it was incurred in the previous year or earlier. It has been well established by the decisions of the Privy Council in Chitnavis case as well as by the decisions of the Supreme Court in Badridas Daga v. Commissioner Income-tax and Commissioner of Income-tax v. Mysore Sugar Co. Ltd. that the list of allowances enumerated in section 10(2) of the Indian Income-tax Act, 1922, is not exhaustive, and that an expenditure not falling within any of the express deductions may be allowed, if it is deductible on ordinary principles of commercial accounting. In Badridas Dagas case Venkatarama Aiyar J. said :
'....When a claim is made for a deduction for which there is no specific provision in section 10(2), whether it is admissible or not will depend on whether, having regard to accepted commercial practice and trading principles, it can be said to arise out of the carrying on of the business and to be incidental to it. If that is established, then the deduction must be allowed, provided of course there is no prohibition against it, express or implied, in the Act.'
The same principle would apply in computing agricultural income also. The question whether expenditure incurred during years prior to the accounting year can be allowed in computing the profits of a business arose directly for decision in Gustad Dinshaw Irani v. Commissioner of Income-tax. Dealing with this question, Chagla C.J. said :
'In the case of a single venture the profits become assessable only when that venture comes to an end and in this case the venture came to an end in the year of account. It was only then that the profits could be ascertained and the profits subjected to tax. Therefore, the question that arose in the year of account was : What were the real profits from a commercial point of view which the assessee earned It is impossible to contend that the real profits were the amount actually realised by the assessee by the assignment of his right under the agreement with the municipality without taking into consideration the expenses that he had incurred prior to this assignment. If one were to ignore the expenses, then one would not arrive at the real profits which the assessee earned. Mr. Joshi on behalf of the department says that under the Income-tax Act only those expenses can be deducted under section 10 which were incurred in the previous year and if any expense was not incurred in the previous year but was incurred in previous years, then that expenditure is not a legitimate deduction under section 10. That, in our opinion, is a wrong approach to the question. What we have to consider is what are the commercial profits, the real profits, which have been earned in the year of account and which are liable to tax, and if those real profits can only be arrived at after taking into consideration the expenditure incurred in the prior years, then even though the expenditure may not strictly fall within the ambit of section 10, for the purpose of assessing the real profits credit must be given to the assessee in respect of the expenditure incurred in the prior years.'
We respectfully agree with the above statement of the law. Applying the above principle in the instant case, it follows that the assessee is entitled to deduct the sums of Rs. 7,750 and 4,978.02 in computing her agricultural income for the assessment year 1963-64.
In the result, we answer question No. 1 in the negative and against the assessee. Our answer to the second question is that the assessee is entitled to deduct the sum of Rs. 7,750 being the expenditure incurred for planting the trees, and the sum of Rs. 4,978.02, being the expenditure incurred for the maintenance and upkeep of the trees, in computing her assessable agricultural income for the year 1963-64. The parties will bear their own costs. A copy of this judgment will be forwarded to the Appellate Tribunal as required by section 60(6) of the Act.