BALAKRISHNA AYYAR, J. - The question referred for our decision is whether on the facts and in the circumstances of this case, the sum, of Rs. 12,258-6-6 received by the assessee is income chargeable under the Income-tax Act.
The relevant facts are these : The assessee owns an estate called Lakshmi Gardens in Ceylon. This estate is worked as one unit along with another estate called Mallewanitiva Estate. Both the estates were taken over by the military authorities and were in their occupation between June, 1942, and September, 1946. After the military authorities surrendered possession to the assessee, she sent in a claim for damages amounting to Rs. 23,673-15-0. This claim of the assessee was eventually settled by the military authorities by payment to her of a sum of Rs. 12,258-6-6. The Income-tax authorities treated this amount as income and charged tax on it. The appeal to the Assistant Commissioner failed. A further appeal to the Income-tax Appellate Tribunal proved equally unsuccessful. Finally, the assessee came to this court and under section 66(2) of the Income-tax Act the Tribunal was directed to state a case on the question quoted above.
In support of her claim the assessee filed a 'valuation report', which is annexure A-2 to the letter of reference. When it is examined in detail it will be found that certain items claimed in it are obviously of a revenue nature. For instance, there is a claim for Rs. 1,108 for remunuring the property. Now, manuring is a current item of expenditure and cannot be treated as in the nature of capital expenditure. There is a second claim for loss of crops during the period the estate remained idle while it was being restored to the original state. This, again, cannot be treated as of a capital nature. The third claim is for clearing weeds, terracing the property and also cutting rank jungle growth. The amount claimed under this had was Rs. 1,240 and that to is clearly of a revenue nature. The fourth claim of Rs. 35 was for cleaning a wall. That again must be treated as a current expense. Another item is a sum of Rs. 1,127 which the assessee claimed to have paid as 'quantity valuation fees'. This again must be treated as of a current nature. In addition, there was a small claim for labour for removal of two service wooden gates, the amount being put at Rs. 17.50. Likewise, there was another claim for replastering an area of five square feet. When these are totalled up, we get a little over Rs. 4,000.
Among the other items claimed is a sum of Rs. 5,768, for the loss of some 305 cocoanut trees which the army authorities had apparently cut down. Similarly, there is a claim for a sum of Rs. 815 at the rate of Rs. 5 per tree for 162 arecanut trees. Then there is another claim for 9 jack trees at Rs. 35 each.
The question is whether these items should be treated as in the nature of replacement of capital or in the nature of revenue receipt. Mr. Rama Rao Sahib for the Department argued that they must be treated in the same way as we would the expenditure incurred when old trees in an estate are cut down and new trees planted in their place. In a large garden certain trees grow old and as they reach the end of their useful age, young trees are planted below them or to take their place. In such a case it will be perfectly correct to say that the value of the old trees cut down cannot be debited to capital. But the present is not such a case at all. Those who are familiar with the administration of the Malabar Compensation for Tenants Improvements Act know that when a tenant is ordered to be evicted compensation for cocoanut trees, arecanut trees and other fruit bearing trees are paid on the footing that they constitute a permanent improvement to the land; in other words, they are treated as a capital asset. Likewise when property is acquired under the Land Acquisition Act. The argument of Mr. Rama Rao Sahib would place fruit bearing trees with a life span of several years in the same came category as standing crops of paddy or millets. Obviously that cannot be done. These items must clearly be treated as compensation paid for loss of capital.
In addition there were claims for damages to the cultivable surface of the property. The army authorities had dug up various portions of the land and filled them up with concrete. These had to be dug up and removed. In addition, they had planted or buried several cement blocks which to had to be removed. After that the pits had to be re-filled with earth. The expenses incurred for these purposes must also be treated as capital costs being work intended to restore the property to its original position.
The total claimed by the assessee was Rs. 23,673-15-0. We have have already found that the amount which may be properly regarded as receipts in the nature of income is little over Rs. 4,000. We consider that where a composite sum of this nature has been received, the only correct way of dealing with it would be to apportion it between capital and income in the ratio disclosed by the claims preferred. That ratio is approximately one to five as between income and capital. We, therefore, answer the question referred to us in this manner : One-sixth of the amount of Rs. 12,258-6-6 received by the assessee will be treated as income chargeable under the Income-tax Act and five-sixths will not be so treated. No order as to costs.
Reference answered accordingly.