The main legal point established in the judgment is that the sale of agricultural land with standing trees does not involve a transfer of capital asset, and hence the gains arising from such sales are not liable to be taxed under the Incometax Act.

1. This reference under S.256(1) of the Incometax Act, 1961 by the Incometax Appellate Tribunal, Cochin Bench raises an important question of law relating to capital gains.

2. The assessee, during the previous year relevant for the assessment year 1975-76, sold under three sale deeds of even date, 15.5 acres of rubber estate in Arakulam Village of Thodupuzha Taluk for an aggregate amount of Rs. 60,000/-. The Incometax Officer, drawing support from the decision in Travancore Tea Estates Co. Ltd. v. C.I.T. (1974) 93 I.T.R. 314 (Ker), held the view that the standing rubber trees in the estate do not form part of the land and being capital asset the gains arising from the sale thereof had to be brought to tax. Accordingly, the Incometax Officer bifurcated the transaction as sale of land and sale of trees separately and artificially apportioned the consideration received and computed the capital gains on the sale of rubber trees at Rs. 6568/-. The assessee challenged the assessment in appeal. The Appellate Assistant Commissioner allowed the appeal accepting the contention of the assessee that the standing rubber trees in the estate form part of the agricultural land and do not constitute a capital asset and no capital gain is assessable.

3. The revenue carried the matter in further appeal before the Appellate Tribunal and contended that when a rubber estate is sold, the rubber trees in the estate constitute a capital asset and capital gains arise on the transfer of the trees involved in the sale of the estate. The Tribunal found that 15.5 acres of rubber estate was sold by the assessee under the three documents, with trees standing thereon, and what was sold under each document was land with standing trees. The Tribunal held that what was sold under each of the three documents mentioned was only agricultural land and hence gains arising from such sales is not liable to be taxed under S.45 of the Incometax Act. The Tribunal relied on the principles laid down by the Supreme Court in Vishnudatta Antharjanam v. Commr. of Agrl. I.T., (1970) 78 I.T.R. 58 that so long as the trees remain uncut, they form part of the land sold, in concluding that what was sold is only land. The Tribunal also said that the transaction of the sale cannot be split up as sale of land and sale of trees. The appeal preferred by the revenue was dismissed by the Tribunal by its order dated 14-3-1979 copy of which is annexure H to the statement of the case. At the instance of the revenue the following question of law is referred as arising out of that order:

"Whether on the facts and circumstances of the case, it is open to the Department to consider transactions evidenced by the three sale deeds executed by the assessee on 16-1-1974, by which fifteen and half acres of rubber estate together with trees standing thereon were sold, as consisting of two sales, namely, sales of land and sales of trees and then proceed to bring to tax the capital gains arising from the sale of the trees?"

4. In order to sustain the claim that capital gain is exigible on the trees comprised in the rubber estate sold by the assessee, it has to be shown that such trees constitute a capital asset within the meaning of the term in S.2(14) of the Incometax Act. Agricultural land in rural areas continues to be excluded from the definition of 'capital asset'. The estate sold by the assessee is in a rural area and the revenue has no case that Arakulam Village is an urban area. The case put forward is that the rubber trees in the estate do not form part of the agricultural land, on the principle stated in the case of Travancore Tea Estates Co. Ltd. v. C.I.T., 93 I.T.R. 314 and the trees standing in the estate are different and separate from the land and could be property of any kind held by the assessee attracting levy of incometax on capital gains when transferred. Reliance is also placed on Commr. of Agrl. LT. v. Kailas Rubber Co. Ltd. (1966) 60 I.T.R. 435 and another decision of this C