Assam- Minimum Agricultural Income tax on Book Profit of tea companies - is not tax on agricultural income, hence appears to be ultravirse the Constitution of India (second article).

[CA DEV KUMAR KOTHARI]

References and links:

Statutory provisions:

The Constitution of India Article 246 read with Union List entries 82 and 85 State List entry 46, Article 366 clauses –1, 6, 8, 28 and 29.

Section 2(1A) and S. 115J, 115JA and 115JB of Income-tax Act, 1961.

Rule 7, 7A, 7B and 8 of the Income-tax rules, 1962.

Section 8B and 8C of the Assam Agricultural Income Tax Act, 1939.

Judgments:

Tata Tea Ltd Vs. State of West Bengal - 1988 (5) TMI 6 - SUPREME Court.

Assam Co. Ltd Vs. State of Assam - 2001 (3) TMI 89 - SUPREME Court.    

Karimtharuvi Tea Estates Ltd Vs. State of Kerala - 1962 (11) TMI 44 - SUPREME COURT

Anglo –American Direct Tea Trading Co. Ltd Vs. Commissioner of Agricultural Income-tax, Kerala -1968 (1) TMI 1 - SUPREME Court

Articles:

Provision of Minimum Agricultural Income tax (AMAT) under the Assam Agricultural Income Tax Act, 1939 (AAIT ACT) appears to be invalid and unconstitutional provision.

http://www.taxmanagementindia.com/visitor/detail_article.asp?ArticleID=965

Assam Agricultural Income Tax Act - effective dates in relation to tax on book profit - case of Kanoi Estates P. Ltd - many vital contentions missed by petitioner- http://www.taxmanagementindia.com/visitor/detail_article.asp?ArticleID=5144

Section 115J, 115JA and 115JB may be ultravirse the Constitution of India and the Income-tax Act,1961 - a study with reference to some very weakly prepared and contested cases about validity of provision for tax on book profit / minimum alternate tax (MAT) and some suggestions for tax payers and government both. http://www.taxmanagementindia.com/visitor/detail_article.asp?ArticleID=5186

Earlier article:

The readers are requested to refer to earlier article also in which provisions of S. 8B and 8C were reproduced and analyzed. Please see http://www.taxmanagementindia.com/visitor/detail_article.asp?ArticleID=965

In this article further discussion is made with reference to the provisions of the constitution of India (COI). On a serious consideration it is felt that the provisions of S.8B and 8C of the Assam Agricultural Income tax about minimum agricultural income tax are not valid provisions. In other articles, on detailed study, the author has expressed views that even provisions of S. 115J, 115JA and 115JB of the Income-tax Act, 1961 may be invalid.

Power to levy tax on agricultural income:

State Governments in India are empowered to levy tax on agricultural income derived from agricultural lands situated within concerned state. This power is found from 46^th entry in the State List in the VII Schedule to the COI. The operating portion of the Schedule and the entry reads as follows:

The Seventh Schedule

(Article 246)

List II - State List

46. Taxes on agricultural income.

Tax on Income other than agricultural income:

The Central Government or UOI is authorized levy tax on income and corporation tax the relevant entries are as follows:

List I - Union List

82. Taxes on income other than agricultural income

85. Corporation tax.

Definitions in COI:

The meaning of ‘agricultural income’ and other related words are found in the Article 366 of the COI. Related definitions are reproduced below:

Article 366 in The Constitution Of India 1949

366. Definition In this Constitution, unless the context otherwise requires, the following expressions have, the meanings hereby respectively assigned to them, that is to say

(1) agricultural income means agricultural income as defined for the purposes of the enactments relating to Indian income tax;

(6) “corporation tax” means any tax on income, so far as that tax is payable by companies and is a

tax in the case of which the following conditions are fulfilled:—

(a)     that it is not chargeable in respect of agricultural income;

(b) that no deduction in respect of the tax paid by companies is, by any enactments which may apply to the tax, authorised to be made from dividends payable by the companies to individuals;

(c) that no provision exists for taking the tax so paid into account in computing for the purposes of Indian income-tax the total income of individuals receiving such dividends, or in computing the Indian income-tax payable by, or refundable to, such individuals; (8) “debt” includes any liability in respect of any obligation to repay capital sums by way of annuities and any liability under any guarantee, and “debt charges” shall be construed accordingly;

 (28) taxation includes the imposition of any tax or impost, whether general or local or special, and tax shall be construed accordingly;

(29) tax on income includes a tax in the nature of an excess profits tax;

The Central Government or the UOI is empowered to levy tax on income other than agricultural income. Even in case of Corporation tax, the Central Government is not authorized to levy tax on agricultural profits of a corporation. The authority to levy tax on income is derived from the following entries in the Union List:

We find that the terms ‘ agricultural income’ though defined in Article 366, yet it adopts the meaning of agricultural income for the purposes of income –tax that is presently under the Income-tax Act,1961. The term ‘corporation tax’ has been specifically defined in the COI. The terms ‘income ‘ and   ‘excess profit’ are not defined in the COI.

The term ‘tax’ has not been specifically defined in COI but it derives meaning from the specific meaning given for the word ‘taxation’.

Therefore, ‘tax’ in nature of tax on income can be either a tax or an impost on the following type of incomes:

1. tax or impost on ‘agricultural income’ , which can be levied by a State Government only,
2. tax or impost on ‘income’ , which can be levied by the central Government,
3. tax or impost on excess profits , which can be levied by the central Government,
4. tax or impost on income of companies as ‘corporations tax’ as defined in Article 366 (6).

Tax on Agricultural Income:

As discussed above State Government is authorized to levy tax on agricultural income derived from lands situated in the state. The tax should be in nature of a ‘tax’ or ‘impost’. The terms ‘tax’ or ‘impost’, means a final collection of tax. For example, Tax deducted at source (TFD), and installments of advance tax , though part of process of collection of tax in advance, cannot be called a ‘tax’ or ‘impost’ within the meanings of above entries in the Union List and State List. Because TDS, and installments of advance tax are not tax but provisional collection of tax in advance. Such collection or a part of such collection may become ‘tax’ or ‘impost’, on determination of ultimate tax liability of assessee only to the extent of such ultimate tax liability determined. If any excess TDS and advance tax is found collected, the same will be refundable.

The term ‘Agricultural income’ derives meaning from the provisions of the Income-tax Act,1961.We find meaning of agricultural income from combined reading of the provisions of Section 2(1A) read with Rules 7, 7A,7B and 8 of the Income-tax Rules,1962. We also need to refer to the meaning of ‘agricultural income’ as given in the annual Finance Act of each year.

On combined reading of these provisions we find that agricultural income is to be computed as per provisions for computation of income under the Income tax Act. In case of income derived from cultivation and/ or manufacture of agricultural produces agricultural income is to be computed as per provisions applicable to computation of income from business. As per applicable Rules , which falls under category ‘special cases’ also, in case of combined activities of cultivation, manufacture and sale of rubber (Rule 7A), coffee (Rule 7B) and tea (Rule 8) the income is to be computed as if it is business income and then certain part is chargable under the Income-tax Act and balance is considered as agricultural income on which State Government can impose tax.

Constitutional validity Rule 8 has been upheld and now it is well settled that the agricultural income from cultivation, manufacture and sale of tea is 60% of the composite income computed under the Income-tax Act, 1961.

Tata Tea Ltd Vs. State of West Bengal - 1988 (5) TMI 6 - SUPREME Court.

It has also been held by the Supreme Court that the State Government can allow reduction from any income which is considered as agricultural income under IT Act, like 60% of composite income of tea, as relief while levying Agricultural Income Tax but are not empowered to make any addition so as to increase ‘agricultural income’ over and above what is considered as agricultural income for the purposes of IT Act. – Karimtharuvi Tea Estates Ltd Vs. State of Kerala - 1962 (11) TMI 44 - SUPREME COURT

Agricultural income even for the purposes of tax on agricultural income to be levied by State Government is to be taken as per the computation made by the Central Assessing Officers in accordance with Rule 8.- Assam Co. Ltd Vs. State of Assam - 2001 (3) TMI 89 - SUPREME Court.    

Agricultural income means agricultural income as per section 2 of IT Act read with Rule 7, 7A, 7B and 8,)

Section 8B of the Assam Agricultural Income Tax Act, 1939:

Imposition of tax u/s 8B of the Assam Agricultural Income tax Act, 1939 can be challenged as invalid for the following reasons:

a. Tax on book profit u/s 8B of AAIT Act is not a ‘tax’ or’ impost’ on agricultural income within meaning under article 366 of the COI.

b. Tax collected is eligible for adjustment against future taxes in accordance with section 8C therefore, it is a provisional or advance collection but not ‘tax’ or ‘impost’ hence not permissible under COI.

c.  The amount collected u/s 8B is with an obligation to adjust the same against future liability of tax, therefore, it is in nature of a ‘debt’ of the State Government, within the inclusive definition of ‘debt’ as per Article 366(8) and also as per general commercial principals.

d.  Under COI, agricultural income means any agricultural income for the purposes of Income-tax. Any portion of deemed income (or even deemed agricultural income for the purposes of income-tax) cannot be called ‘agricultural income’ within the meaning under Article 366 and entry in state list.

e.  Any part of book profit cannot be called ‘agricultural income’ in context of any provision which enables levy of tax on agricultural income. Such portion of book profit is not agricultural income within the meaning under the Indian Constitution.

f.  It is inconsistent with the preamble and objects or purposes   of AAIT Act which reads “to provide for the imposition of a tax on agricultural income. Any portion of book profit of any company cannot be considered ‘agricultural income’.

g.  It is inconsistent with the meaning of “agricultural income’ under section 2(a) of the AAIT Act.

2. Definitions. - In this Act, unless there is anything repugnant in the subject or

   context -

(a) "Agricultural income" means -

(1) Any rent or revenue derived from land which is used for agricultural purposes, and is either assessed to land revenue in Assam or subject to a local rate assessed and collected by officers of the Government as such;

(2) 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 sub-clause (ii);

Explanation. - Agricultural income derived from such land by the cultivation of tea means that portion of the income derived from the cultivation, manufacture and sale of tea as is defined to be agricultural income for the purposes of the enactments relating to the Indian Income tax;

 h.  Agricultural income as defined or determined for the purpose of levy of tax u/s 8B is totally inconsistent with definition of agricultural income under AAIT Act, IT Act and computation provisions of Rule 8 of IT Rules. Agricultural income, for the purpose of taxation as per Indian Constitution is 60% of composite income determined under Rule 8 of the IT Rules. from such 60% portion being agricultural income, the state can allow further deductions but cannot make additions or variations in a manner to impose tax which is in excess of tax on 60% of composite income determined under Rule 8. Section 8B apparently try to impose agricultural income tax when tax as per Rule 8 is lower than tax determined u/s 8B of AAIT Act. This is not permissible.

i.  Section 8B apply only to companies and not another assesses deriving similar income, thus it is discriminatory without intelligible differentia. It may be mentioned that all persons (whether be an individual, firm or company) who own a tea garden and factory and is engaged in cultivation, manufacture and sale of tea made from tea leaves grown by himself are equally placed as they carry similar activities. Thus there is no intelligible differential between an individual or firm or HUF and a company who are deriving income from cultivation, manufacture and sale of tea.

j.  Agricultural income from cultivation of tea leaves: In case cultivator himself manufacture and sell tea than Rule 8 apply and 60% of composite income is agricultural income from cultivation of tea, and where cultivator sells green tea leaves and Rule 8 is not applicable and his entire income from cultivation and sale of green tea leaves is agricultural income and is exempt under IT Act. So far profit from cultivation of tea leaves is concerned it is similar, though computed in different manner. Therefore , collection u/s 8B only from a company engaged in composite activities and not collecting from company or persons engaged in growing and selling tea leaves is not based on any intelligible criterion. 

k.  Section 8B apply only to companies having income from sale of tea cultivate and   manufactured by an assessee.  It does not apply to others who have income from cultivation of tea , cultivation of rubber and cultivation of any other agricultural produce. All such persons are equally placed and belongs to same category. Therefore, there is no intelligible differentiation.

l.  The charging section 3 of AAIT Act, imposes tax on “total agricultural income” of a person. “agricultural income” and “total agricultural income” are defined in section 2 (a) and 2 (p) respectively of AAIT Act. Any part of book profit of a company cannot be called ‘agricultural income’ or’ total agricultural income’ within the respective meaning.

m.  Thus S. 8B cannot be enforced to impose a tax on a portion of book profit, deemed as agricultural income by merely  starting the provision with words  “not withstanding …“ . Any exception created must be within the overall objective of the enactment. By merely using words “notwithstanding”, overall limits of power to levy tax on agricultural income cannot be exceeded.

n.  Though S.8B and 8C of the AAIT Act have been drafted on lines of S.115JB and 115JAA of the IT Act, with some modifications, both are not on the subject of tax on agricultural income. S.115JB read with 115JAA are special provisions for deemed income , and provisional collection. These are not for levy of special tax by way of tax on income or excess profit, but are provisions for payment of tax by certain companies. This is also in nature of special provision for collection of certain amount from companies, the amount collected can be adjusted against future tax liability over a period of ten years. Thus the amount collected u/s 115JB is also not a ‘tax’ or’ impost’. In any case S. 115JB does not define any portion of book profit of a tea company to be ‘agricultural income’. In section 115JB adjustments are allowed for any tax free or exempted income and not merely for agricultural income from cultivation , manufacture and sale of tea. Even purely agricultural income is to be deducted from book profit u/s 115JB, whereas S. 8B does not include profit from cultivation and sale of green tea leaves. Therefore, it cannot be said that 60% of book profit of a tea company is agricultural income, though it may be considered to be 60% of book profit but book profit is not income and 60% of book profit is not ‘agricultural income’ within the meaning of provisions of the COI.

Tax credit for excess of Ag. MAT over normal AG. IT:

Tax credit u/s 8C is allowed only within three years from the year in which Ag. MAT is paid u/s 8B. Whereas under IT Act tax credit of excessive tax paid u/s 115JB (above normal tax) is allowed within a period of 10 years from the year in which MAT u/s 115JB is paid. Therefore, it cannot be said that section 8B and 8C of the AAIT Act are in tandem with S.115JB read with S. 15JAA                                                                              

Other points which are against levy of Minimum tax u/s 8B of AAIT Act:

Contradictory provisions under AAIT Act:

Not considering book profit from cultivation of tea, or any other agricultural produce and considering only 60% of book profit from sale of tea cultivated and manufactured by assessee clearly shows that book profit is not considered ‘agricultural income’.

Provisions of MAT under IT Act and Section 8B of AAIT Act:

In IT Act we find Special provisions for collection of minimum tax which started from assessment year 1988-89 by insertion of S. 115J which was in force during AY 1988-89 to 1990-91. Then Section 115JA was in force during AY 1997-98 to 2000-2001. From AY 2001-02 provisions of S. 115JB are in force.

It is pertinent to note that the Central Assessing Officers compute income of Tea companies as per Rule 8 and40% of composite income is charged to tax under IT Act and 60% portion of composite income is left un-assessed under IT Act as the same is considered as ‘agricultural income’ for the purpose of income-tax and the COI.

While computing book profits, credits and debits found in the P & L account which pertains to most of exempted income are adjusted in book profit. The credits are reduced from book profit and debits are added to book profit. It is not a case that exempted income or 60% of composite income, is reduced from book profit. The adjustment of credits and debits in relation to exempted incomes is to determine book profit and not ‘gross total income’ or ‘total income’ or ‘agricultural income’ for the purposes of tax on income and tax on agricultural income.

In S. 115JB adjustments are also to be made for any kind of agricultural activity like cultivation and sale of tea, cultivation of coffee and rubber, cultivation of any other crop as well as for cultivation, manufacture and sale of tea, coffee and rubber. Even if there is loss (due to expenses / debits being higher than income/ credits) such loss is adjusted and book profit of company get increased.

Thus in any computation so made u/s 115JB any part of book profit relating to agricultural activities is not considered as ‘agricultural income’ in context of S. 115JB.

Whereas under the AAIT Act, we find that for the first time section 8B has been inserted w.e.f. 01.04.2009 in an attempt to collect minimum amount on 60% of book profit from cultivation, manufacture and sale of tea. The amount so collected is also eligible for adjustment against ‘tax on agricultural income’ in future.

Therefore, not providing a provision corresponding to S. 115J, 115JA and 115JB till 31.03.2009 and also keeping out of scope of S. 8B profit from cultivation of any agricultural produce including tea, clearly indicates that the State Government has not considered any portion of book profit from cultivation of tea or any other agricultural produce as agricultural income. Therefore provision of S.8B and S. 8C are contradictory to the purpose of the AAIT Act and are not to impose a tax or impost on agricultural income.