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

[C.A. DEV KUMAR KOTHARI]

Synopsis:

Assam Government has imposed minimum agricultural Income (MAIT) tax on book profit of tea companies by deeming certain agricultural Income based on book profit even though there is no agricultural Income in accordance with regular provisions. As discussed in this write-up, book profits cannot e considered as agricultural Income in the context of the Indian Constitution read with the Income Tax Act, 1961. Therefore, the provision of MAIT, does not satisfy the test of 'tax on agricultural Income' to which state government is authorized. The provisions of Section 8B of the AAIT Act are inconsistent with the preamble of AAIT Act itself, the provisions are not supported by provisions of the Indian Constitution read with provisions relating to 'agricultural Income', as found in the Income Tax Act, 1961 and the Income Tax Rules 1962. Therefore S. 8B of the AAIT Act appears to be invalid, unconstitutional and need to be tested on judicial scrutiny in this regard.

Reasons for no agricultural Income tax or lower agricultural Income tax:

Before discussion about MAIT, it is necessary to find out reasons for no tax payable or lower tax payable under AAIT Act. Some of reasons are as follows:

a.       Losses suffered in past which are to be set off against current agricultural Income.

b.      Unabsorbed depreciation which   is required to be set off against current Income.

c.       Incentives allowed under Income-tax Act 1961 in computation of composite Income.

d.      Incentives allowed under Income-tax Act 1961 against business Income of tea activity (40%) and corresponding deduction allowable against gross agricultural Income from tea (60%) to allow full benefit allowed against Income from 'sale of tea cultivated and manufactured by assessee and to compute 'agricultural Income' within the meaning of Indian Constitution on which the state government can impose tax.

In nut shell it can be said that situations of no tax or lower tax arises only because deduction, incentives and benefits are allowed or because the tea industry or particular company has suffered huge losses in past.

Minimum Agricultural Income tax on bok profit in Assam:

The AAIT Act has been amended w.e.f. 01.04.2009 to provide for levy of tax by state government of Assam as minimum agricultural Income tax (MAIT) on agricultural book profits in case of companies deriving Income from cultivation, manufacture and sale of tea. This is a deeming provision.

Recently vide notification dated 03.07.2010 AAIT Rules have also been amended to provide for provisions in regard to ascertainment of minimum agricultural Income tax payable by assessee and changes in form of return  and other related provisions.

First year of MAIT:

In view of above it appears that the effective date of amendment in AAIT Act that is 01.04.2009 speaks about accounting year or agricultural previous year and not the assessment year. The provisions if at all applicable will be applicable to the agricultural year beginning on 01.04.2009 and after wards and not to assessment year beginning on 01.04.2009. Therefore, the first year for minimum agricultural Income tax will be uniform financial year 2009-10 and the assessment year 2010-11. 

Preamble for the new provisions:

The preamble for amendment reads as follows:

Whereas it is expedient further to amend the Assam Agricultural Assam Income Tax Act, 1939, hereinafter referred to as the principal Act, in the Act IX of 1939 manner hereinafter appearing:

Discussion about preamble:

From a bare reading of the preamble it is apparent that any reason has not been given for the amendment. Merely stating that it is expedient is not sufficient to bring in a major change in the policy of tax on agricultural Income. This aspect is more important because the amendment is not a regular or normal amendment in relation to computation of agricultural Income by allowing further deductions from net agricultural Income as computed under IT Act, but it brings in the statute book an altogether new concept and altogether new charge of tax on DEEMED AGRICULTURAL INCOME.

The new provisions:

The new provision is reproduced below with highlights:

1.      Insertion of new Section 8B

In the principle Act, after section 8A, a new section 8B shall be inserted, namely:-

Determination of agricultural Income in relation to book profit of the assessee for the purpose of Levy of agricultural Income tax.

8B. Notwithstanding anything contained in any other provision of this Act, in case of an assessee, being a company, which derives Income from cultivation, manufacture and sale of tea if the agricultural Income tax payable under this act on the sixty per cent portion of agricultural Income computed as per provisions of the Income Tax Act, 1961 ( Central Act, 43 of 1961) is less than ten per cent of the sixty percent of the book profit computed in the manner as referred to in section 115JB of the Income Tax Act, 1961, (Central Act  43 of 1961) sixty percent of such book profit shall be deemed to be the agricultural Income for the purpose of levy of agricultural Income tax under this act of such assessee and the assessee shall be liable to pay agricultural Income tax at the rate of ten percent of such Income."

According to the provision as highlighted above the following salient features are noted:

It is for determination of agricultural Income.

It is for determination of agricultural Income in relation to book profits of companies.

It is applicable only to an assessee, being a company, and not any other assessee.

Furthermore, it is applicable only to a company which derives Income from cultivation, manufacture and sale of tea, and not in relation to any other agricultural activity.

The provision will apply only when the specified type of assessee is having agricultural book profit and only when agricultural Income-tax payable under AAIT Act is less than 10% on agricultural book profit (broadly speaking 60% of composite book profit as understood by people conversant in this regard).

In case the agricultural Income tax payable under normal computation is less than 10% of 60% of composite book profit, then only this provision will apply.

Not applicable when no tax is payable:

In case there is no tax payable on computation made as per other provisions of AAIT Act, then the new section 8B will not be applicable. The precondition is a computation of positive total agricultural Income on which tax is payable, otherwise the charging section shall not apply. The situation of no tax payable will be like (a) where past losses and unabsorbed depreciation are not yet fully set-off die to inadequate Income, (b) incentives allowable under AAIT Act as well as incentives allowable under IT Act and corresponding incentive against agricultural Income are more than gross agricultural Income, (c) loss of other agricultural activity are set off etc. In such situation when even all deductions allowable are not exhausted, how a tax can be imposed by deeming certain part of book profit as agricultural Income.

On reading of provision and amendment in Rules also it is found that the section shall apply when there is applicability of provisions of S. 115JB, under the Income-tax Act, 1961 and assessee company is required to compute and submit relevant certificate in form 29B. When there is no such requirement, under Income Tax Act, the section 8B of AAIT Act will also not apply.

As per form of computation of MAIT also it is evident that there should be some tax payable under AAIT Act. If there is no tax payable, then the Rule cannot be applied. This is because one has to compare tax payable on agricultural Income computed as per normal provisions and the amount of 10% of book profit. When there is no tax payable, there is no question of comparison and then MAIT will also not apply.

Reasons for provision being invalid provision:

Any reason for amendment has not been given and the amendment is an altogether new concept in the area of tax on agricultural Income.

Such taxation is not within the scope of the AAIT Act and its purposes in accordance with the preamble to the AAIT Act.

The amendment is also not incidental to the provisions of tax on agricultural Income arising from lands situated in the state of Assam. 

The provision also appears to be ultra virse the Indian Constitution. As per the Constitution, state governments are empowered to levy tax on agricultural Income derived from lands situated in particular state. For this purpose 'agricultural Income' means agricultural Income as defined for the purposes of tax on Income that is the Income-tax Act 1961 and Income-tax Rules, 1962, at present.

Not in accordance with constitutional meaning:

The levy of MAIT by the new provisions in the AAIT Act are not supported by the meaning of agricultural Income for the purposes of our constitution for the following reasons:

There is no provision under the IT Act according to which any part of book profit can be regarded as taxable agricultural Income. The agricultural Income from such activity has to be computed as per the provisions of Income tax Act read with Rule 8 of the Income Tax Rules. The state governments can allow further relief but cannot impose further burden by disallowing expenses or treating higher portion of Income as agricultural Income.

Taxable agricultural Income in such activity is derived only when there is a computation of agricultural Income as per Rule 8 from which further relief has to be allowed as per provisions of IT Act read with Indian Constitution in form of deductions from gross agricultural Income (60%) and then state government can allow further relief from gross agricultural Income to compute the net agricultural Income.

Computation of agricultural Income for the purpose of Indian Constitution:

For computing agricultural Income for the purposes of Indian Constitution first gross agricultural Income is computed that is 60% of composite Income, from such gross agricultural Income deductions corresponding to deductions allowed against 40% of Income under IT Act are to be allowed to workout 'net agricultural Income' as defined in the Indian Constitution read with the provisions of IT Act and IT rules.

From such net agricultural Income state government can allow further deductions but cannot increase it. There are provisions to allow further deductions in the AAIT Act.

Accordingly it is fond that AAIT Act provide some special incentives and relief, which are required to be considered to determine net taxable Income. Similarly past agricultural loss is also required to be set off as per applicable provision from time to time.

Only after completion of all above steps the stage for computation of agricultural Income tax will come. If before that stage is reached, it is found that there is loss or that all relief including setoff of past losses is not possible, there cannot be a computation of tax payable. Unless there is computation of tax payable, the next step will not be possible.

Type of assessee:

In the context of Income tax Act as applicable to   such activity, there is no difference between an agriculturist being a company or any other organization or individual. Therefore, the levy only on companies engaged in cultivation, manufacture and sale of tea is not in accordance with the meaning of agricultural Income under IT Act hence for the purpose of Indian Constitution.   

The levy in terms of new section 8B will attract tax on deemed agricultural Income. There is no such concept of deemed agricultural Income under the Indian Constitution and the Income tax Act. Rule 8 relating to tea does not provide any such deeming provision.

There is no intelligible differentia between a cultivator, manufacturer and seller of tea being a company and any other person; in any case any case has not been made out by the state by giving reasons for the same.

Type of agriculturists:

There is no intelligible differentia as to agricultural activity of cultivation of tea and other crops in the state of Assam. When AAIT Act is applicable to other agricultural activities in similar manner as applicable to tea, there is no valid reason to impose tax on book profit of tea companies.

Conclusions:

The provisions of Section 8B of the AAIT Act are inconsistent with the preamble of AAIT Act itself, the provisions are not supported by provisions of the Indian Constitution read with provisions relating to 'agricultural Income', as found in the Income Tax Act, 1961 and the Income Tax Rules 1962. Therefore the provisions of S. 8B of the AAIT Act are invalid, unconstitutional and need to be tested on judicial scrutiny in this regard.

THE ASSAM AGRICULTURAL INCOME TAX (AMENDMENT) BILL 2009

A

BILL

Further to amend the Assam Agricultural Income Tax Act, 1939 Preamble.

Whereas it is expedient further to amend the Assam Agricultural Assam Income Tax Act, 1939, hereinafter referred to as the principal Act, in the Act IX of 1939 manner hereinafter appearing:

It is hereby enacted in the Sixtieth Year of Republic of India as follows:-

Short title, extent and commencement:

1.      (1)  This Act may be called the Assam Agricultural Income Tax (Amendment) Act, 2009.

(2)  It shall have the like extent as the principal Act.

      (3)  It shall come into force on the first day of April, 2009.

2.      Insertion of new Section 8B

In the principle Act, after section 8A, a new section 8B shall be inserted, namely:-

Determination of agricultural Income in relation to book profit of the assessee for the purpose of Levy of agricultural Income tax.

8B. Notwithstanding anything contained in any other provision of this Act, in case of an assessee, being a company, which derives Income from cultivation, manufacture and sale of tea if the agricultural Income tax payable under this act on the sixty per cent portion of agricultural Income computed as per provisions of the Income Tax Act, 1961 ( Central Act, 43 of 1961) is less than ten per cent of the sixty percent of the book profit computed in the manner as referred to in section 115JB of the Income Tax Act, 1961, (Central Act 43 of 1961) sixty percent of such book profit shall be deemed to be the agricultural Income for the purpose of levy of agricultural Income tax under this act of such assessee and the assessee shall be liable to pay agricultural Income tax at the rate of ten percent of such Income."