AGRICULTURAL INCOME

 

Sec 2(1A) of the Indian Income Tax,1961 defines agricultural income as:-


"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;

(c) any income derived from any building owned and occupied by the receiver of the rent or revenue of any such land, or occupied by the cultivator or the receiver of rent-in-kind, of any land with respect to which, or the produce of which, any process mentioned in paragraphs (ii) and (iii) of sub-clause (b) is carried on:
Provided that-

(i) the building is on or in the immediate vicinity of the land, and is a building which the receiver of the rent or revenue or the cultivator, or the receiver of rent-in-kind, by reason of his connection with the land, requires as a dwelling house, or as a store-house, or other out-building, and

(ii) the land is either assessed to land revenue in India or is subject to a local rate assessed and collected by officers of the Government as such or where the land is not so assessed to land revenue or subject to a local rate, it is not situated-

(A) in any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee or by any other name) or a cantonment board and which has a population of not less than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year; or

(B) in any area within such distance, not being more than eight kilometers, from the local limits of any municipality or cantonment board referred to in item (A), as the Central Government may, having regard to the extent of, and scope for, urbanization of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette.

Explanation. -For the removal of doubts, it is hereby declared that revenue derived from land shall not include and shall be deemed never to have included any income arising from the transfer of any land referred to in item (a) or item (b) of sub-clause (iii) of clause (14) of this section;


Explanation 2.---For the removal of doubts, it is hereby declared that income derived from any building or land referred to in sub-clause (c) arising from the use of such building or land for any purpose (including letting for residential purpose or for the purpose of any business or profession) other than agriculture falling under sub-clause (a) or sub-clause (b) shall not be agricultural income ;
Sec 10(1) of the said Act states that in computing the total income of a previous year of any person, any income falling within the scope of agricultural income shall not be included.In other words agricultural income is exempt from income tax.

The scope of agricultural income is quite wide. Circumstances of the facts has a great impact on deciding the inclusion or exclusion of income as agricultural income.


(1) Income from nurseries i.e income from sale of plants grown directly in the pots and the sale of seeds, was treated as agricultural income within the meaning of section 2(1) of the Income-tax Act, 1961 in the Madras High Court by judges R. JAYASIMHA BABU & MRS. A. SUBBULAKSHMY in the COMMISSIONER OF INCOME-TAX vs SOUNDARYA NURSERY.

R. JAYASIMHA BABU J.
--The question brought before us by the Revenue is, as to whether the income from sale of plants grown directly in the pots and the sale of seeds, can be treated as agricultural income within the meaning of section 2(1) of the Income-tax Act, 1961?

The finding of the Tribunal is that the plants were not grown in the pots directly, but they are, after several operations carried out in the land, viz., cutting, gootying and inarching for the plants, transplanted in suitable containers, including pots and kept in the green house or in shade, and the trees were grown on the land directly.
The assessee, during the relevant assessment years, viz., 1978-79 to 1982-83, was carrying on the business of a nursery under the name and style of "Soundaraya Nursery". It had extensive farm land of 10 acres in Vengaivasal village on the outskirts of Madras city as well as 41 grounds in Nandanam, Madras, and various types of fruit plants, flower plants, vegetable plants and seedlings were grown. The method of propagation of the large varieties of plants grown by the assessee has been extensively set out in the order of the Tribunal, the relevant portion whereof is as under :


"1. Layering : This is done for lemon, guava, and most flowering plants.
The process is as follows : A branch of the mother plant is bent down and a slit is made in the node. This is pressed down to a pot containing soil so that the slit node is under the soil. Watering is done regularly till roots start emanating from the slit node. Then the new plant is separated by cutting at the node and the plant is sold.

2. Gootying or marcotage : This is done mainly for ficus docors, cananga, mussenda, etc. A branch of the mother plant is slit at the node and the node is covered with manure and soil and wrapped in ploythene. This is watered regularly till roots emerge at that point. Then it is cut and transferred to containers for sale.

3. Inarching : This is done mainly for mangoes, sappotas, etc. The seed is planted in seed beds. After the seeds germinate and grow, which takes about 15 months, the seedlings are transferred to pots and these are taken to the mother trees for inarching, i.e., a branch of mother plant is bent and tied with the seedling after both branches are slit. The slit branches are waxed together and tied with coconut fibre. The plant is watered regularly and the new plant is separated after three months. It is important to note that the new plant is of the same sub-species as the mother plant irrespective of the seedling. This is one type of grafting. Other types are bud-grafting, saddle-grafting, side grafting, cleft grafting, etc.

4. Cutting : This is done for some ordinary plants like bougainvillea, lantana, etc. A cutting is taken and planted in seed beds mainly of sand. After rooting (which takes several months), the plant is transferred to pots.
5. Hybridisation : Here pollen is transferred from the plant to the stigma of the other. Seeds from hybridised flowers are then planted. New varieties of flowers may develop. Several dozen attempts have to be made before one is successful."


Soundarya Nursery have developed 32 new varieties of hibicus alone. A new variety developed called cossandra soundarya is popular, not just in India, but also in the U.S.A.

The Tribunal, after considering all the relevant facts, as also the applicable law, concluded that the assessee's activities are to prepare seedlings on scientific lines ; that the other plants are grown on prepared beds on lands owned by it and the plants are then grafted or budded ; that the resulting grafts are transplanted in suitable containers and are reared in green houses or in shade and after they take root, they are transmitted to large containers filled with top soil and manure, etc., till they establish themselves ; and thereafter those plants are sold and that the primary source of the plant is the mother plant, which is reared on earth and for which activities, certainly contribution of human labour and energy are essential.

Learned counsel for the Revenue contended before us that the plants are only grown in pots and no matter the period for which they are so grown, that activity can never be regarded as agricultural operations. In support of that submission, counsel referred to the decision of the Allahabad High Court in H. H. Maharaja Vibhuti Narain Singh

v. State of U. P. [1967] 65 ITR 364, wherein the court made an observation which was clearly obiter that agriculture cannot be carried on in pots, as in that case, a large number of coconut plants were nurtured on land in the nursery.
Our attention was then invited by learned counsel to the decision of the Supreme Court in the case of CIT v. Raja Benoy Kumar Sahas Roy [1957] 32 ITR 466, which is the leading case of "agriculture". It was held therein that agriculture in its primary sense denotes the cultivation of the field and is restricted to cultivation of the land in the strict sense of the term, meaning thereby tilling of the land, sowing of the seeds, planting and similar operations on the land and these are basic operations, which require the expenditure of human skill and labour upon the land itself. The apex court further held that besides the basic operations, the subsequent operations would also be comprehended within the terms of agriculture, and such subsequent operations are illustrated as weeding, digging the soil around the growth, removal of undesirable undergrowth and all operations which foster the growth and preservation of the same not only from insects and pests, but also from depradation, from outside, tending, pruning, cutting, harvesting and rendering the produce fit for the market, which would all be agricultural operations, when taken in conjunction with the basic operations.

All the products of the land, which have some utility either for consumption or for trade or commerce, if they are based on land, would be agricultural products. Here, it is not the case of the Revenue that without performing the basic operations, only the subsequent operations, as described in the decision of the apex court have been performed by the assessee. If the plants sold by the assessee in pots were the result of the basic operations on the land on expending human skill and labour thereon and it is only after the performance of the basic operations on the land, the resultant product grown or such part thereof as was suitable for being nurtured in a pot, was separated and placed in a pot and nurtured with water and by placing them in the green house or in shade and after performing several operations, such as weeding, watering, manuring, etc., they are made ready for sale as plants all these questions would be agricultural operations all this involves human skill and effort. Thus, the plants sold by the assessee in pots were the result of primary as well as subsequent operations comprehended within the term "agriculture" and they are clearly the products of agriculture.

So far as the seeds are concerned, we are surprised that, that question should have been raised at all by the Revenue, as it is not possible for the seeds to exist without the mother plants, and the mother plant, it is nobody's case, was not grown on land. It is also not the case of the Revenue that the seeds were the result of the wild growth and not on account of cultivation by the assessee. The seeds were clearly a product of agriculture and the income derived from the sale of seeds, was agricultural income.

We answer the question referred to us in favour of the assessee and against the Revenue. The assessee will be entitled to costs in the sum of Rs. 1,500 (rupees one thousand and five hundred only).

Taexpert Citation : 659 OF 1998
ITR Citation : 241 ITR 530
Decision Dates(s) : 5/8/1998
Assessment Year : 1978-79
Section(s) Referred : s. 2(1), Income Tax Act, 1961


(2) The profit arising from the sale of agricultural lands does not amounts to capital gains within the meaning of the Income-tax Act, 1961.The following case of

Singhai Rakesh Kumar.vs Union Of India And Others

by the judges S. P. BHARUCHA., DORAISWAMY RAJU., MRS. RUMA PAL. in the Supreme Court.
The judgment of the court was delivered by


S. P. BHARUCHA J.---Under challenge are the orders of a Division Bench of the High Court of Madhya Pradesh (see [1997] 227 ITR 81), dismissing a writ petition filed by the appellant-assessee and answering against him a reference made by the Income-tax Appellate Tribunal of the following question :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the profit arising from the sale of agricultural lands did not amount to capital gains within the meaning of the Income-tax Act, 1961 ?"
The reference related to the assessment years 1981-82 and 1983-84.

In the previous years relevant to the assessment years 1981-82 and 1983-84 the assessee sold agricultural lands which were situated within the municipal limits of Bina. He made capital gains thereon and the Income-tax Officer made him liable to capital gains tax. The first appellate authority agreed with the Income-tax Officer and the assessee approached the Tribunal. The Tribunal held that the profit on the sale of agricultural lands was not capital gains within the meaning of the provisions of the Income-tax Act, 1961. From the order of the Tribunal the question aforestated was referred to the High Court. Pending the reference, the assessee filed in the High Court the writ petition the order upon which is impugned. The writ petition asked the High Court to declare as unconstitutional the Explanation to clause (1A) and sub-clause (iii) of clause (14) of section 2 of the Income-tax Act, 1961 and to declare that capital gains arising from the sale of agricultural lands within a municipal area were not liable to capital gains tax under the Income-tax Act, 1961. The High Court dismissed the writ petition and answered the reference against the assessee.

Article 366 defines, in clause (1), "agricultural income" to mean "agricultural income as defined for the purposes of the enactments relating to Indian income-tax". Entry 46 of List 11 of the Seventh Schedule to the Constitution speaks of "taxes on agricultural income" ; in other words, if is for the States to legislate on the subject of taxes on agricultural income. Entry 82 of List I of the Seventh Schedule reads "taxes on income other than agricultural income" ; in other words, it is for the Union to legislate on the subject of taxes on income other than agricultural income.

In the Indian Income-tax Act, 1922, "agricultural income" was defined in clause (1) of section 2. Sub-clause (a) thereof alone is relevant for our purpose. Thereunder, "agricultural income" meant "any rent or revenue derived from land which is used for agricultural purposes . . ." Section 2(4A) defined "capital asset" to mean "property of any kind held by an assessee" but not "any land from which the income derived is agricultural income".

It was submitted by learned counsel for the assessee that "agricultural income" in clause (1) of article 366 must be read only as it was defined in 1950 when the Constitution came into force ; that is to say, in the manner indicated in sections 2(1)(a) and 2(4A)(iii) of the 1922 Act. To decide the correctness of the submission, it is necessary to give true meaning to clause (1) of article 366. "Agricultural income" thereunder means "agricultural income as defined for the purposes of the enactments relating to Indian income-tax". The definition does not say that "agricultural income" means "agricultural income as defined in the 1922 Act". It does not even say that it means "agricultural income as defined for the purposes of the enactment relating to Indian income-tax". It says that it means "agricultural income as defined for the purposes of the enactments relating to Indian income-tax". The use of the plural "enactments" is very relevant. It means that agricultural income for the purposes of the Constitution means agricultural income as it is defined at the relevant time in the enactment that then relates to income-tax.

In the judgment of this court in Bajya v. Smt. Gopikabai [1978] AIR 1978 SC 793 ; [1978] 2 SCC 542, the position in law, as applicable here, is stated thus :

"Broadly speaking, legislation by referential incorporation falls in two categories : First, where a statute by specific reference incorporates the provisions of another statute as of the time of adoption. Second, where a statute incorporates by general reference the law concerning a particular subject, as a genus. In the case of the former, the subsequent amendments made in the referred statute cannot automatically be read into the adopting statute. In the case of the latter category, it may be presumed that the legislative intent was to include all the subsequent amendments also made from time to time in the generic law on the subject adopted by general reference. This principle of construction of a reference statute has been neatly summed up by Sutherland, thus :
'A statute which refers to the law of a subject generally adopts the law on the subject as of the time the law is invoked. This will include all the amendments and modifications of the law subsequent to the time the reference statute was enacted'.

Corpus Juris Secundum also enunciates the same principle in these terms :

'Where the reference in an adopting statute is to the law generally which governs the particular subject, and not to any specific statute or part thereof, . . . the reference will be held to include the law as it stands at the time it is sought to be applied, with all the changes made from time to time, at least as far as the changes are consistent with the purpose of the adopting statute'."

Under the terms of the Constitution, Parliament is empowered to legislate to say what "agricultural income" means. What Parliament says in this regard in the statute then current relating to income-tax is the definition of "agricultural income" for the purposes of the Constitution. In regard to such agricultural income the States may legislate. In regard to all other income it is for Parliament to legislate. (see Karimtharuvi Tea Estates Ltd. v. State of Kerala [1963] 48 ITR (SC) 83).

It is in this background that the impugned amendments in the 1961 Act may be seen. Clause (1A) of section 2 defined "agricultural income" to mean, inter alia, "any rent or revenue derived from land which is situated in India and is used for agricultural purposes". Clause (14) of section 2 defined "capital asset" to mean "property of any kind held by an assessee . . . but does not include agricultural land in India . . .". The words "agricultural land in India" were substituted by the Finance Act, 1970, with effect from April 1, 1970, to read thus :

"(iii) agricultural land in India, not being land situate---
(a) in any area which is comprised within the jurisdiction of a municipality (whether known as a 'municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment board and which has a population of not less than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year ; or
(b) in any area within such distance, not being more than eight kilometres. from the local limits of any municipality or cantonment board referred to in item (a), as the Central Government may, having regard to the extent of, and scope for, urbanisation of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette;"

It appears that by reason of the decision of the Bombay High Court in Manubhai A. Sheth v. N. D. Nirgudkar, Second ITO [1981] 128 ITR 87, an Explanation was added by the Finance Act, 1989, with effect from April 1, 1970, to clause (1A) of section 2 which read thus :

"Explanation.--- For the removal of doubts, it is hereby declared that revenue derived from land shall not include and shall be deemed never to have included any income arising from the transfer of any land referred to in item (a) or item (b) of sub-clause (iii) of clause (14) of this section ;"

The position, as a result, is that income arising from the transfer of agricultural land that falls within the terms of items (a) and (b) of sub-clause (iii) Of Clause (14) of section 2 falls outside the ambit of revenue derived from land and therefore, outside the ambit of "agricultural income". Such income, therefore, is liable to capital gains tax chargeable under section 45 of the 1961 Act.

Parliament has, as aforestated, the power to define what agricultural income is in the 1961 Act ; the amendment of clauses (1A) and (14) of section 2 thereof in the manner aforestated are, therefore, good in law. The effect is that the assessee is liable to pay capital gains tax on the sales of his lands within the municipal limits of Bina.

We are of the view, therefore, that the High Court was right in the conclusions that it came to. The appeals are dismissed with costs.

Taexpert Citation : 680 OF 2000
ITR Citation : 247 ITR 150
Decision Dates(s) : 28/11/2000
Section(s) Referred : s. 2(1A) , s. 2(14) , s. 45,
Income Tax Act, 1961 art. 366(1),

Constitution of India


(3) Income from the sale of the cocoons could not in law be regarded as agricultural income.This decision was delivered by the judges B. N. KIRPAL., S. P. KURDUKAR in the Supreme Court in the case of
K. Lakshmanan And Co. And Others vs Commissioner Of Income-Tax.
In Brief
Facts

The appellant is a partnership firm constituted for the purpose of carrying out agricultural activities. During the course of its business it indulges in the activity of growing mulberry leaves and earning silk worms. The assessee purchases silk worm eggs and when they are hatched the worms are principally fed on mulberry leaves. The mulberry leaves are plucked from the trees grown by the appellant and these leaves are cut into strips which are fed to the silk worms. The worms wind around themselves the saliva which oozes from their mouth and the hardened saliva forms the protective cocoons. These coons are then sold in the market by the appellant.
Issue

Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that he income derived by the assessee from the process, i.e., the rearing of silk worms, is not entitled to exemption under section 2(1)(b)(ii) of the Income-tax Act, 1961 ?
Findings
Yes.
Reasoning

It is clear from the reading of the statutory provision that what is taken to the market and sold must be the produce which is raised by the cultivator. Even though for the purpose of making it marketable or fit for sale, some process may have to be undertaken, the section does not contemplate the sale of an item or a commodity which is different from what is cultivated and processed. Had mulberry leaves been subjected to some process and sold in the market as such, then certainly the income derived therefrom would be regarded as agricultural income but the case of the appellant before the authorities, and in the Court, has been that mulberry leaves cannot be sold in the market and they can only be fed to the silk worms. The agricultural produce of the cultivator will be mulberry leaves and by no stretch of imagination can the silk worms, and certainly not the silk cocoons, be regarded as the agricultural produce of the cultivator. The income derived by the appellant from the sale of the cocoons could not in law be regarded as agricultural income.

JUDGMENT


Civil Appeals Nos. 5086-97 of 1984 :


The short question which arises for consideration in this batch of appeals is whether or not the income derived from the business of rearing silk worms is "agricultural income" as defined under section 2(1) of the Income-tax Act, 1961 (for short, "the Act").

The appellant is a partnership firm constituted for the purpose of carrying out agricultural activities. During the course of its business it indulges in the activity of growing mulberry leaves and rearing silk worms. The assessee purchases silk worm eggs and when they are hatched the worms are principally fed on mulberry leaves. The mulberry leaves are plucked from the trees grown by the appellant and these leaves are cut into strips which are fed to the silk worms. The worms wind around themselves the saliva which oozes from their mouth and the hardened saliva forms the protective cocoons. These cocoons are then sold in the market by the appellant.


Before the Income-tax Officer, the appellant claimed that the entire income which it derived from the growing of the mulberry leaves to the sale of the cocoons, was exempt from levy of income-tax as it was "agricultural income" within the meaning of that expression in section 2(1) of the Act. The Income-tax Officer accepted the contention of the appellant only in so far as it related to the growing of the mulberry leaves but did not accept the appellant's contention that the rearing of the worms and the selling of the cocoons resulted in agricultural income. He accordingly concluded that that part of the income which was attributable to growing of mulberry leaves alone constituted agricultural income and was exempt from levy of income-tax but the income derived from the rearing of silk worms on the leaves and selling of the cocoons was not agricultural income. Therefore, the Income-tax Officer estimated the income derived from the process of growing silk worms and rearing of cocoons at 25 per cent. of the total income and subjected the same to tax in the assessment years involved.


The Appellate Assistant Commissioner, in the appeals filed by the appellant, accepted its contention and came to the conclusion that income derived by it from growing mulberry leaves and from rearing of silk worms and cocoons was exempt from tax under the Act.


The Revenue then filed an appeal before the Income-tax Appellate Tribunal which allowed the same and came to the conclusion that even though mulberry leaves did not have a market the case would still not fall within the purview of section 2(1) of the Act inasmuch as the agricultural produce, viz., the mulberry leaves, was not what was sold in the market and what in fact was sold were cocoons which were not the agricultural produce of the appellant. At the instance of the appellant, the Tribunal then stated the case and referred the following question of law to the High Court :


"Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that the income derived by the assessee from the process, i.e., the rearing of silk worms, is not entitled to exemption under section 2(1)(b)(ii) of the Income-tax Act, 1961 ?"


The High Court in the impugned judgment has answered the question of law in favour of the Revenue as it came to the conclusion that feeding of mulberry leaves to silk worms was not a process employed by the cultivator of mulberry leaves to make them marketable by way of producing silk cocoons.


On the basis of the facts found by the Tribunal, we do not find any infirmity in the conclusion of the High Court. Section 2(1) of the Act defines the expression "agricultural income". The relevant part of the definition reads thus :

"2. In this Act, unless the context otherwise requires,---

(1) 'agricultural income' means---. . .

(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 ... "
Eliminating the unnecessary words from the said definition, "agricultural income" would mean any income derived from such land by the performance by a cultivator of any process ordinarily employed by him to render the produce raised by him fit to be taken to market. It is clear from the reading of the aforesaid statutory provision that what is taken to the market and sold must be the produce which is raised by the cultivator. Even though for the purpose of making it marketable or fit for sale, some process may have to be undertaken, the section does not contemplate the sale of an item or a commodity which is different from what is cultivated and processed. Had mulberry leaves been subjected to some process and sold in the market as such, then certainly the income derived therefrom would be regarded as agricultural income but the case of the appellant before the authorities, and in this court, has been that mulberry leaves cannot be sold in the market and they can only be fed to the silk worms. The agricultural produce of the cultivator will be mulberry leaves and by no stretch of imagination can the silk worms, and certainly not the silk cocoons, be regarded as the agricultural produce of the cultivator.


The aforesaid view finds support from the following observations of this court in Dooars Tea Co. Ltd. v. Commr. of Agrl. I. T. [1962] 44 ITR 6 at page 12 :


"Section 2(1)((b) consists of three clauses. Let us first construe clauses (ii) and (iii). Clause (ii) includes cases of income derived from the performance of any process therein specified. The process must be one which is usually employed by the cultivator or receiver of rent-in-kind ; it may be simple manual process or it may involve the use and assistance of machinery. That is the first requirement of this proviso. The second requirement is that the said process must have been employed with the object of making the produce marketable. It is, however, clear that the employment of the process contemplated by the second clause must not alter the character of the produce. The produce must retain its original character and the only change that may have been brought about in the produce is to make it marketable. The said change in the, condition of the produce is only intended to make the produce a saleable commodity in the market. Thus clause (ii) includes within the categories of income, income derived from the employment of the process falling under that clause. As we have just observed the object of employing the requisite process is to make the produce marketable but in terms the clause does not refer to sale and does not require that the income should be obtained from sale as such though in a sense it contemplates the sale of the produce."

 

We are in respectful agreement with the aforesaid observations. The High Court, as we have already observed, has rightly come to the conclusion that the income derived by the appellant from the sale of the cocoons could not in law be regarded as agricultural income. The question of law was, therefore, rightly answered in the affirmative and against the appellant.


The appeals are accordingly dismissed. There will be no order as to costs.

Civil Appeals Nos. 4485-4485A-4485C of 1995 :


These appeals having not been pressed are dismissed.
Taexpert Citation : 529 OF 1998
ITR Citation : 239 ITR 597
Decision Dates(s) : 4/2/1998
Section(s) Referred : s. 2(1) , s. 2(1)(b)(ii), Income Tax Act, 1961


(4) Income derived from sale of timber in the instant case is agricultural income and is not assessable under the

Income-tax Act, 1961 as per the case of
Commissioner Of Income-Tax.vs Kannan Devan Hills Produce Company Limited
in the Calcutta High Court by the judges SUHAS CHANDRA SEN., BHAGABATI PRASAD BANERJEE.
InBrief

The assessee grows, manufactures and sells tea. Whether sale of timber from assessee estates is in the nature of agricultural income. Such income is agricultural in nature under s. 2(1).

JUDGMENT

SUHAS CHANDRA SEN J. -The Tribunal has referred the -following question of law under section 256(1) of the Income-tax 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 ?


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 November 30, 1968.


The assessee grows, manufactures and sells tea. The Income-tax Officer computed the assessee's total income under section 143(3) of the Income-tax Act, 1961, for the assessment year 1969-70, at a loss of Rs. 9,53,497. After the Income-tax Officer completed the assessment on the assessee, it came to the notice of the Commissioner 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 Income-tax Officer 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 Commissioner held that as the sale proceeds did not represent agricultural income, the Income-tax Officer had not applied his mind to the issue and, therefore, the Commissioner considered that the order passed by the Income-tax Officer was erroneous in so far as it was prejudicial to the interests of the Revenue. The Commissioner accordingly served on the assessee a notice under section 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 consideration of the submissions made by the assessee, the Commissioner formed a view that apart from the erroneous decision taken by the Income-tax Officer 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 Commissioner, therefore, issued a supplementary notice under section 263 of the Act and the assessee gave a written reply to this notice also. the Commissioner, 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 v. Karimtharuvi Tea Estate Ltd.

[1966] 60 ITR 275, 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 section 263 initiated by the Commissioner were wholly misconceived and that the order passed in pursuance thereof was untenable in law ;


(ii) that the Commissioner's finding that the surplus on sale of timber represented " Capital gains " is erroneous and so his directions to the Income-tax Officer 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 Commissioner 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 Commissioner of Income-tax under section 263. The Tribunal ultimately held that since the receipt was neither assessable as capital gains nor as business income, the Income-tax Officer'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 section 10(1) of the Income-tax 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 section 2(1) of the Income-tax Act. Clauses (a) and (b) of sub-section (1) of section 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.


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.


The question that has really to be decided in this case having regard to the definition of " agricultural income " given in section 2(1) of the Income-tax Act, is whether the income arising from the sale of the trees can come within the ambit of the phrase " any income derived from such land by agriculture ". It is well-settled that income from sale of forest trees of spontaneous growth will not be agricultural income. There may be some dispute where the trees are of spontaneous growth but regular operations in forest trees have taken place to help the growth of the trees.. Whether the activities of nurturing trees of spontaneous growth will amount to agriculture or not will depend upon the facts of each case. But in the case before us, the trees are not of spontaneous growth. They have Peen planted by, the assessee for the purpose of protecting the tea bushes. It cannot be. doubted that agricultural operations have taken place on the land on which the trees have been planted. Basically, the land has been under cultivation for production of tea. In the case of Megh Raj v. Allah Rakhia, AIR 1942 FC 27 ; [1942] FCR 53, the Federal Court confirmed decision of the Punjab Chief Court to the effect that land used as a tea garden was used for " agricultural purposes In fact, there is no dispute in this case that the activity relating to planting, growing and nurturing of the tea bushes will come within the ambit of the expression " agricultural The planting of trees to protect the tea bushes must be regarded as part of the agricultural activity. The purpose of the planting of the trees was to protect the tea bushes from damage that may be caused by high winds. The planting of the trees in this case was part of the agricultural process of growing the crop of tea. Therefore, the income derived from sale of the trees will clearly come within the ambit of the expression "any, income derived from such land by agriculture".


In the case of CIT v. Raja Benoy Kumar Sahas Roy [1957] 32 ITR 466 (SC), the assessee owned an area of 6,000 acres of forest land. The forest was originally of spontaneous growth which had been in existence for about, 150 years. A considerable income was derived ,by the assessee from sale of Sal and Piyasal trees. The question was whether the income derived from sale of timber was " agricultural income " or not within the meaning of section 4(3)(viii) of the Indian. Income-tax Act, 1922. The Tribunal had found that considerable amount of human labour and care were being applied year after year for keeping the forest alive as also reviving the portions that got denuded as a result of destruction by cattle and other causes. It was found that the assessee have employed staff for the purpose of pruning, weeding, felling, clearing and guarding the trees against pests and other destructive elements. It was also found that the assessee used to cut channels to help the flow of rain water and used to sow seeds after the digging of the soil in a denuded area.


The Supreme Court held in that case that, if the only finding of fact was that the forest in question was of spontaneous growth, then the conclusion would be that the income was not agricultural income. But the Tribunal had found that, in some portions of the forest area, the proprietors had planted fresh trees and had performed operations for the purpose of nursing the trees planted by them. The Supreme Court observed at page 512 It cannot be denied that so far as those trees are concerned, income derived therefrom would be agricultural income. In view of the fact that the forest is more than 150 years old, the area which had thus become denuded and replanted cannot be considered to be negligible. The position, therefore, is that the whole of the income derived from the forest cannot be treated as non-agricultural income".


Therefore, the view of the Supreme Court appears to be that, where 'the trees have been planted and nurtured, the operations of planting and nurturing trees would be agricultural and the income derived from sale of such trees would be agricultural income.


In the case of V. Venugopala Varma Rajah v. CIT [1970] 76 ITR 460 (SC), the Supreme Court had to consider a case of income derived from cutting and selling of trees. There it was found that the stumps of the trees were allowed to remain in the land so that the trees might regenerate. The Supreme Court observed (at page 466) : " it is true that tree is a part of the land. But by selling a part of the trunks, the assessee does not necessarily have to realise a part of his capital". In that case, however, the dispute was whether the income was of capital or revenue nature. The Supreme Court in that case referred to the judgment of the Kerala High Court in the case of State of Kerala v. Karimtharuvi Tea Estate Ltd. [1964] 51 ITR 129. That was a case under the Kerala Agricultural Incometax Act. The question was whether the amount realised from sale as firewood of old and useless gravelia trees grown and maintained in the tea gardens for the purpose of affording shade to tea plants was a capital receipt or revenue receipt. There was no dispute that the income derived from sale of the trees was agricultural income' In fact, it was observed by the Kerala High Court that (at page 465 of 76 ITR ), " the gravelia trees were grown and maintained for the sole purpose of providing shade to the tea bushes in the tea estates of the assessee. That such shade is essential for the proper cultivation of tea cannot be disputed and the trees should hence be considered to be as much a part of the capital assets of the company as the tea bushes themselves


If the ratio of the judgment of this case is to be applied, then the trees which have been planted to protect the tea bushes will have the same character as that of the tea bushes themselves. If income derived from the sale of tea or the tea bushes will be agricultural income, then the income derived from the sale of the trees will also be agricultural income. In the case of Consolidated Coffee Estates (1943) Ltd. v. Commr. of Agrl. L T. [1970] 76 ITR 29 (Mys), the question before the Mysore High Court was, inter alia, whether income derived from rosewood timber was agricultural income or not. The Mysore High Court held that to deter- mine the question, two tests must be satisfied :

(1) that the land must be used for growing all or any of the commercial crops ; and

(2) that the income should be derived from such land by agriculture.

In that case, rosewood trees of spontaneous growth in forest area had been retained for the coffee plantation for affording shade for coffee bushes. It was held that, if the trees were of spontaneous growth, the income derived from such trees would not be income from the land by agriculture. The finding of fact in that case was that the rosewood trees were not planted by human agency or labour but those were in existence before the estates were opened and they were retained as shade trees for the coffee bushes.


The Mysore High Court, however, held that the shade trees were absolutely essential for the protection of coffee bushes and, therefore, the shade trees were part of the fixed assets of the planter. The proceeds of sale of timber of the shade trees were of capital nature and not taxable as income.


If the two tests laid down by the Mysore High Court are applied, then, in the instant case, it will be seen that the income arising out of the sale of the trees was clearly of agricultural nature. The land has been utilised for growing tea and had been subjected to agricultural operations for that purpose. The trees were not of spontaneous growth but were planted by human agency for providing shelter to the tea bushes.


Moreover, the planting and nurturing of the trees in the instant case cannot be treated as something apart from and independent of various agricultural activities that have taken place for producing tea. The planting and nurturing of the trees were done for protection of the tea bushes and were inextricably linked up with the process of agricultural operations undertaken for production of tea. Therefore, the income derived from the sale of the trees in the instant case will be clearly, agricultural. In my judgment, the amount of Rs. 4,80,744 derived from sale of timber in the instant case was agricultural income and was not assessable under the Income-tax Act, 1961. Under the circumstances, it is not necessary to express any opinion on whether the amount could be treated as capital gain or not. Therefore, the question referred is answered by saying that the amount of Rs. 4,80,744 was agricultural income within the meaning of sub-section (1) of section 2 of the Income-tax Act, 1961.


There will be no order as to costs.
BHAGABATI PRASAD BANERJEE J.-I agree.
Taexpert Citation : 938 OF 1990
ITR Citation : 200 ITR 453
CTR Citation : 103 CTR 11
Taxmann Citation : 63 TAXMANN 235
Decision Dates(s) : 10/1/1990
Assessment Year : 1969-70
Section(s) Referred : s. 2(1), Income Tax Act, 1961


(5) If no agricultural operations are conducted in the accounting year.and it is situated within the limit of municipal corporation, capital gains are attracted when the land is sold. i.e. capital gains are exigible. The above is justified in the case of


Commissioner Of Income-Tax.vs Laxmi Development Co.
In the MADHYA PRADESH High Court by th judges G. G. SOHANI., R. K. VERMA.

JUDGMENT
The judgment of the court was delivered by
G. G. SOHANI J.-By this reference under section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as " the Act "), the Income-tax Appellate Tribunal, Indore Bench, has referred the following question of law to this court for its opinion :


" Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the profit derived by the assessee on the sale of agricultural land is agricultural income within the meaning of section 2(1) of the Income-tax Act and is not liable to tax as capital gains under the provisions of the Income-tax Act, 1961 ?"
The material facts giving rise to this reference, briefly, are as follows :


The assessee is a registered partnership firm. The assessment year in question is 1977-78 for which the accounting year ended on October 31, 1976. During the relevant accounting year, the assessee made a profit of Rs. 97,988 by selling a parcel of agricultural land situated within the limits of the Indore Municipal Corporation. That land was purchased by the assessee in the year 1964 with a view to develop it but the assessee had neither developed it nor carried on any agricultural operations on the land. The Income-tax Officer held that the assessee had purchased the land with a profit motive and the profit was, therefore, income from business and taxable as such. The appeal preferred by the assessee before the Appellate Assistant Commissioner was dismissed. On further appeal before the Tribunal, the assessee contended that the land in question being agricultural land, profit earned by its sale was not taxable under the Act. This contention was upheld by the Tribunal and it was held that the income derived by the assessee by the sale of agricultural land was agricultural income and was not liable to tax under the Act. Aggrieved by the order passed by the Tribunal, the Revenue sought a reference and it is at the instance of the Revenue that the aforesaid question of law has been referred to this court for its opinion.


The answer to the question referred to us turns on the meaning of the expression " agricultural income " as defined by section 2(1) of the Act. That definition is as follows :


"2(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

(c) any income derived from any building owned and occupied by the receiver of the rent or revenue of any such land, or occupied by the cultivator or the receiver of rent-in-kind, of any land with respect to which, or the produce of which, any process mentioned in paragraphs (ii) and (iii) of sub-clause (b) is carried on:
Provided that (i) the building is on or in the immediate vicinity of the land and is a building which the-receiver of the rent or revenue or the cultivator, or the receiver of rent-in-kind, by reason of his connection with the land, requires as a dwelling house, or as a store-house, or other out-building, and


(ii) the land is either assessed to land revenue in India or is subject to a local rate assessed and collected by officers of the Government as such or where the land is not so assessed to land revenue or subject to a local rate, it is not situated (A) in any area which is comprised within the jurisdiction of municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee or by any other name) or a cantonment board and which has a population of not less than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year ; or


(B) in any area within such distance, not being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in item (A), as the Central Government may, having to the extent of, and scope for, urbanisation of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette."


From a perusal of the aforesaid provision, it is clear that when exemption as agricultural income is sought under sub-clause (a) or (b) or (c) of section 2(1) of the Act, the primary condition that must be satisfied is that the land in question must be actually used for agricultural purposes in the accounting year. On the question as to whether capital gains arising from the sale of land situated in India and used for agricultural purposes, can or cannot be held to be agricultural income within the meaning of section 2(1) of the Act, there are conflicting decisions. In Manubhai A. Sheth v. N. D. Nirgudkar, 2nd ITO [1981] 128 ITR 87, the Bombay High Court has taken the view that capital gains arising from the sale of land used for agricultural purposes would be revenue derived from such land and, therefore, agricultural income. In D. L. F. Housing and Construction (P.) Ltd. v. CIT [1983] 141 ITR 806 (Delhi), the Delhi High Court has, however, taken the view that if the corpus itself is disposed of by way of sale, it cannot be held by any stretch of reasoning that the sale proceeds would be " income ". It is, however, not necessary in the instant case to go into that question in detail because so far as the present case is concerned, it has been found that the land in question was not used by the assessee for agricultural purposes in the accounting year in question. In view of this finding, income derived by sale of that land could not be held to be agricultural income within the meaning of section 2(1) of the Act. As the land sold by the assessee was situated within the limits of the Indore Municipal Corporation, it would be a " capital asset " as defined by section 2(14) of the Act. The profit derived by the assessee by the sale of land was, therefore, liable to be taxed as capital gains. The Tribunal, in our opinion, erred in holding that the profit earned by the assessee by sale of that land was agricultural income not liable to be taxed.

For all these reasons, our answer to the question referred to this court is in the negative and against the assessee. In the circumstances of the case, parties shall bear their own costs of this reference.


Taexpert Citation : 512 OF 1987
ITR Citation : 171 ITR 124
CTR Citation : 66 CTR 63
Taxmann Citation : 34 TAXMANN 367
Assessment Year : 1977-78
Section(s) Referred : s. 2(14) , s. 2(1) , s. 45, Income Tax Act, 1961