Income derived from the sale of forest trees is not a capital receipt and is liable to tax, even though there is exhaustion of capital assets in the shape of valuable and long-standing trees. Income derived from the sale of forest trees is not agricultural income, as it does not result from the cultivation of the soil. Interest receipts from grantees are not agricultural income and are not exempt from income tax.

Sinha, J.

1. These references are under Sec. 66(2), Income-Tax Act. As the questions involved in these cases are common, they will be dealt with by this judgment.

2. The following four questions were framed by this Court at the instance of the assessee, and the Tribunal has stated the case in regard to those questions.

"1. Whether in the facts and circumstances of the case the receipts of Bankura forest lease are capital receipts or, in the alternative, constitute agricultural income?

2. Whether in the facts and circumstances of the case the receipts from Kharagpur forest are agricultural income?

3. Whether the interest receipts from Babuana and Dayana grantees are agricultural income?

4. Whether the debt amounting to Rs. 23,541-owed by P. E. Guzadar & Co. should have been allowed as a loss relating to the business carried on by the assessee "

Questions 1, 2 and 3 are common in all the references, while question No. 4 arises only in respect of Miscellaneous Judicial Case No. 24 of 1951, which arises out of the order passed for the assessment year 1948-49 in Income Tax Appeal No. 1481 of 1949-50. So far as the first two questions are concerned, there is slight difference in the case in regard to Bankura forest and Kharagpur forest: In regard to Bankura forest, the forest is leased out by auction on short terms for lump sums. The terms of the lease are not to be found on the records of these cases.

It is, however, said that, according to the terms of the lease, the lessee is entitled to cut down and remove all sal trees, but not those which are more than 3 feet in girth above 3 feet from the ground, and all other jungle trees, other than fruit-bearing trees and valuable timber trees. The lessee is further entitled to cut stumps not higher than 5 feet over ground so that new shoots may grow in rains and in time major trees are produced. The lessee cannot enter the forest during the rains, when new shoots come out, and he has to guard the forest from tresspassing by men and cattle. After the period of the lease expires, the lessee loses all his rights to enter the land and the land reverts to the assessee. It is claimed by the assessee that the receipt from these forests is not income and it is a capital receipt and thus not taxable on the ground that the lessee becomes possessed of the trees and the jungle during the period of the lease and is entitled to cut and remove them and, on that account, the money paid by the lessee is capital receipt in the hands of the assessee for transferring the trees to the lessee or transferring the rights to cut the trees.

In the alternative, the assessee claims that, as human skill and labour is employed, the income from the forest is covered by the definition of agricultural income, as given in the Act, and, therefore, exempt from income-tax. So far as the case in regard to Kharagpur forest is concerned, there is no lease and there are three sources of income from that forest, namely, (1) from bamboos, (2) from sabai grass and (3) from timber. The assessment in regard to the first two is not challenged; the assessment in regard to income from timber only is challenged.

3. I would like first to deal with Bankura forest. Mr. Mazumdar, appearing in this Court on behalf of the assessee, has placed reliance on the case of Commr. of Income-tax, B. and O. V/s. Kamakshya Naraiu Singh, AIR 1947 Pat 252 (A). That case, on facts, is entirely different. In that case, the assessees predecessor had granted a prospecting license in respect of certain coal bearing lands. The licensee had the option to have a renewal and also to take a coal mining lease on certain terms and conditions. During the minority of the assessee, the Court of Wards, which was in possession of the estate of the assessee had extended the license several times. When the assessee attained majority, he raised the question that the licenses and the leases granted by the Court of Wards were ultra vires, and he further claimed that he