SUHAS CHANDRA SEN, J. - (1.) THE Tribunal has referred the following question of law under s. 256(1) of the IT Act, 1961, to this Court as follows : "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the amount of Rs. 4,80,744, was neither assessable to capital gains tax nor as an item of business income ?
(2.) THE assessee is a non-resident and is represented for the purpose of its income-tax assessment by its agents in India, M/s James Finlay and Co. Ltd. THE assessment year involved is 1969- 70, the corresponding accounting period being the year ending 30th Nov., 1968. The assessee grows, manufactures and sells tea. The ITO computed the assessee's total income under s. 143(3) of the IT Act, 1961, for the asst. yr. 1969-70, at a loss of Rs. 9,53,497. After the ITO completed the assessment on the assessee, it came to the notice of the CIT on perusal of the assessee's records, that the assessee had sold certain timber on which it had made a profit of Rs. 4,80,744. The assessee had pleaded before the ITO that the above profit of Rs. 4,80,744 represented its agricultural income and was not liable to be included in the computation of its total income from tea business. The CIT held that as the sale proceeds did not represent agricultural income, the ITO had not applied his mind to the issue and, therefore, the CIT considered that the order passed by the ITO was erroneous in so far as it was prejudicial to the interests of the Revenue. The CIT accordingly served on the assessee a notice under s. 263 of the Act for hearing. M/s James Finlay and Co. Ltd., the assessee's agents, attended and made oral as well as written submissions. On a consideration of the submissions made by the assessee, the CIT formed a view that apart from the erroneous decision taken by the ITO to treat the amount of Rs. 4,80,744 as agricultural income, it was possible to take an alternative view also to treat the surplus on the sale of timber as income under the head "Capital gains". The CIT, therefore, issued a supplementary notice under s. 263 of the Act and the assessee gave a written reply to this notice also. The CIT, after considering the oral as well as the written submissions made by the assessee and following the decision of the Supreme Court in State of Kerala vs. Karimtharuvi Tea Estate Ltd. (1966) 60 ITR 275 (SC), came to the following finding : "Thus, I hold that the surplus so obtained on sale of such trees represents capital gains and such gains are not only Rs. 4,80,744 but also Rs. 12,868 that has been taken to the Project Account, since it is immaterial whether such cultivated trees so felled came from wind barriers or the project area." The assessee preferred an appeal to the Tribunal. The case of the assessee before the Tribunal was-- (i) that the proceedings under s. 263 initiated by the CIT were wholly misconceived and that the order passed in pursuance thereof was untenable in law ; (ii) that the CIT's finding that the surplus on sale of timber represented "Capital gains" is erroneous and so his directions to the ITO in that regard are bad in law ; (iii) that, on the facts and in the circumstances of the case and having regard to the principles of law as laid down in judicial decisions, the CIT should have accepted the assessee's plea that the said surplus represented wholly agricultural income and as such was exempt for the purpose of computation of its total income. The Tribunal held that the sale proceeds of the trees did not represent capital receipt. In fact, the sale proceeds represented agricultural income. The Tribunal, therefore, did not go into the question of validity of the proceedings initiated by the CIT under s. 263. The Tribunal ultimately held that since the receipt was neither assessable as capital gains nor as business income, the ITO's order was not erroneous and prejudicial to the interests of the Revenue. Whether the income received by the assessee is to be treated as agricultural income or not is basically a question of fact. By virtue of the provisions of s. 10(1) of the IT Act, the agricultural income cannot be taken into account in computing the total income of an assessee of any previous year."Agricultural income "has been defined in s. 2(1) of the IT Act. Clauses (a) and (b) of sub-s. (1) of s. 2 are material for the purpose of this case and are as follows :-- "2. In this Act, unless the context otherwise requires, -- (1)'agricultural income' means-- (a) any rent or revenue derived from land which is situated in India and is used for agricultural purposes ; (b) any income derived from such land by-- (i) agriculture ; or (ii) the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render the produce raised or received by him fit to be taken to market ; or (iii) the sale by a cultivator or receiver of rent-in-kind of the produce raised or received by him, in respect of which no process has been performed other than a process of the nature described in paragraph (ii) of this sub-clause.
(3.) THE definition goes to show that not only any income derived from land by agriculture will be treated as agricultural income but any income derived from any process by a cultivator to render the produce raised or received by him fit to be taken to market will also be treated as an agricultural operation and the income therefrom will be regarded as agricultural income. THE Tribunal has specifically recorded in its order the assertion of fact by the assessee that the cultivation of eucalyptus and red and blue gum trees was undertaken to provide shelter to the tea bushes and also for ensuring a continuous supply of fuel. THE trees were coppiced (clear felled) after ten years so that the trees would regenerate themselves. Only those trees were cut down which had attained a particular stage in their growth. By the felling of the trees, the area was neither denuded nor was it left in such a state that there would be no regeneration. THE Tribunal has noted that this assertion of fact by the assessee was not contradicted by the Revenue. It has been stated by the Tribunal that they proceeded to deal with the case on the premise that the trees which were "clear felled" would regenerate themselves. THEre was no denudation of the area. It is also to be noted that there is no dispute as to the assertion of the assessee that the trees were planted and nurtured by the assessee. The trees were not of spontaneous growth.;