The main legal point established in the judgment is that the excess realized from trees and plants on account of acquisition of the land did not constitute agricultural income and was not exempt from taxation.

K. Jagannatha Shetty, J.—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