ITAT judgement: Compensation received for loss of Trees is now free of tax


The Income Tax Appellate Tribunal (ITAT), Mumbai Bench held that no Tax is applicable on Compensation received for loss of Trees.

Facts of the case:

The assessee, M/s. Flower valley Agro Tech Pvt. Ltd. being resident corporate assessee is stated to be engaged in the business of manufacturing and trading of essential oil, plantations & extraction of essential oils.  An assessment was framed under section 143(3) wherein returned a loss of Rs.22.22 Lakhs was reduced to Rs.12.08 Lakhs in view of the addition of Rs.10.14 Lakhs under the head Income from other sources.

The sum of Rs.10.14 Lakhs was received by the assessee from Assam Electricity Grid Corporation for cutting of trees on assessee’s land for heavy electric lines.

The Agarwood trees weighing 4100 Kgs as obtained from the cutting of trees were sold for Rs.2.05 Lacs which has been claimed as well as accepted to be an agricultural income. The assessee pleaded that the compensation so received shall either be capital receipt not chargeable to tax or alternatively, it would be in the nature of agricultural income exempt under section 10(1).

Interpretation of law:-

The.AO opined that agriculture would involve the cultivation of land when the integrated activity carried on the said land comprising of basis operations followed by subsequent operations is performed. If this is done, the income so earned could be said to be the agricultural income. The trees until cut form an integral part of the land. The trees were cut to give way to high tension wires which were to pass through the assessee’s land. Though the trees were cut but right over the soil was retained by the assessee.

Therefore, AO held that the income would not be agricultural income. The alternative plea that the same would be capital receipts was rejected by observing that standing trees would qualify as capital assets. Any compensation received in lieu thereof would be capital receipts chargeable to tax. Upon cutting off the tree, the assessee’s right there-in stood extinguished.

Finally, the income so earned was held to be taxable under the head Income from other sources. It was submitted before the CIT(A) that the trees grown, nursed and protected by the company since the last many years was a capital asset from which regular income was derived from year to year. Cutting the tree permanently was a loss of a capital asset. However, the CIT(A) rejected the contention.


The coram consisting of Amarjit Singh and Manoj Kumar Aggarwal noted that the trees so cut by the assessee would form part of its trading operations since the assessee would be earning revenue by utilizing these trees. Had the trees not been cut, the assessee would have earned more revenue from the trees.

The Tribunal observed that any compensation received in lieu of loss thereof would form part of assessee’s trading operations. The same is evident from the fact that cut trees sold by the assessee constituted its trading income and the same were accepted to be agricultural income. Therefore, the ITAT held that similar treatment was to be given to the compensation received for loss of trees. It would akin to a situation where the assessee lost its trading stock and received compensation for loss of the stock.

The same would certainly be trading income for the assessee. Since the income was earned from trees; the same would constitute agricultural income in the hands of the assessee.

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