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TMI Blog1970 (3) TMI 32X X X X Extracts X X X X X X X X Extracts X X X X ..... les made thereunder. Being of that view, the respondent thereafter issued a notice No. I.T.A. Com. 18/67-68 dated 29th July, 1967, calling upon the assessee-company to show cause on or before August 24, 1967, why its income should not be enhanced by adding the following amounts : 1. Profit from agricultural operations 14,59,415 2. Provision for depreciation on fixed assets in the agricultural operations account 60,308 3. Expenses pertaining to the previous years 60,090 --------------- Total 15,69,813 --------------- It is stated that on July 29, 1967, the Appellate Assistant Commissioner expressed th e view that the sugarcane produced by the assessee-company on its own farm was utilized by it as raw material by its factory and therefore no exemption could be given in respect of the market value of that sugarcane. In the notice also he referred to the discussion which he had with the representative of the petitioner-company. In these circumstances, the petitioner-company alleges that the Income-tax Officer had already formed an opinion against the assessee and that, therefore, no useful purpose would be served by making any representations to him in pursuance of his notic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me from these two heads are distinct and are ascertainable without reference to one another. The sugarcane produced by the petitioner-company is not sold but is utilized for its sugar manufacturing business. As there is no sale of sugarcane produced by the asessee-company the respondents contended that the market value thereof cannot be exempted under rule 7 of the Rules, when there is no sale, no hypothetical estimate of the agricultural income of the assessee-company could be made and deduction be allowed. It is also contended that rule 7 has no application as according to them the income returned by the assessee is not "derived in part from agriculture and in part from business". In view of section 295(2)(b), the respondent pleaded that rule 7 would apply only where the income is partly from agriculture and partly from business and not otherwise. It is also further averred that the Appellate Assistant Commissioner had merely formed a prima facie opinion at the time of issuing the impugned notice and it was still open to the assessee-company to make its representation and satisfy that it was entitled to exemption under rule 7 of the Income-tax Rules, 1962. On that ground it is ur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s used for agricultural purposes and 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 ; (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-inkind 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 ..." It is submitted in the counter that the exemption that is now claimed is in respect of the agricultural produce raised by the assessee company on its farm. As agricultural income defined under section 2(1)(b) of the Act also includes any income derived from such land by agriculture, the sugarcane raised by the assessee-company would be agricultural income. If nothing further was done by the assessee-company, it is not disputed by the respondent, that this agricultural produce or income would no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts own factory, must also have certain value and the value thereof would be its agricultur al income within the meaning of section 2(1)(b) of the Act. That agricultural income is mingled with the income derived by the factory from the production of Sugar by utilising that sugarcane as raw material for the production of sugar. The sugar that is ultimately produced by the factory is from the raw material (s arcane) raised by the assessee-company on its own farm and also purchased by it from other growers. That agricultural income is thus inextricably mixed up with the income dei ived by the assessee-company by the sale of sugarcane produced by it. The amount realised by the sale of sugar represents not only the income derived from the operation of the factory but also of the farm in which the raw material was produced. Merely because separate accounts are maintained by the assessee-company for the agricultural farm and sugar factory as such, the farm income derived does not cease to be agricultural income and become solely profits and gains of business. The assessee-company, for a better management of its various activities, may maintain separate accounts so that it may be able to as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w material, there cannot be a sale by the assessee to the assessee himself ; but yet the agricultural produce raised by the assessee would constitute agricultural income within the meaning of section 2(1) of the Act and this income is not liable to tax. It is precisely because that income is ploughed into the business as raw material and the ultimate profits or gains of the business comprises partly of this agricultural income which was ploughed into it in the form of raw material, the necessity to calculate the quantum of this agricultural income arises, for agricultural income has to be excluded under section 10(1) of the Act in computing the assessee's total income that is liable to tax. If the income derived by the assessee-company is determined without excluding this income, then it would have comprised of not merely the income derived from business but also partly of agricultural income which has to be excluded under section 10(1) of the Act and the taxation of which is also not within the competence of the Union. Charging any portion of the agricultural income to income-tax would be violative of article 246(1) of the Constitution of India. If the agricultural income has to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Agricultural Income-tax , their Lordships of the Supreme Court considered the question whether agricultural produce itself is " agricultural income" within the meaning of clause (i) of section 2(1)(b) of the Bengal Agricultural Income-tax Act (IV of 1944). Under that Act de agricultural income " was defined somewhat in similar terms as it is defined in the Income-tax Act, 1961. Section 2(1)(b)(i) of that Act reads as follows : "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 item (ii)." In that case a large tract of land under lease from the local Government, grew bamboos, thatching grass and fuel timber by agricultural operations which were carried on by its servants and labourers. After they were grown they were not sold but were utilised by the appell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the High Court when it held that the agricultural produce utilised by the appellant for its business constitutes income under section 2(1)(b)(i). If the agricultural produce used by the appellant was not intended to be included within the definition of income under section 2(1)(b) we apprehend that the whole clause would have been very differently worded. Where income deived from sale was intended to be prescribed the legislature has done so in terms by clause (iii) of section 2(1)(b). Where the marketable condition of the produce resulting from the employment of the specified processes and income derived from the adoption of such processes was intended to be included in the income the legislature has done so by clause (ii) ; and so those two cases having been specifically provided for by the two respective clauses there would be no justification for introducing the concept of sale in construing clause (i) of section 2(1)(b). The words in section 2(1)(b)(i) are, in our opinion, wide, plain and unambiguous and they cannot be construed to exclude agricultural produce used by the appellant for its business." Mr. Anantha Babu, however, argues that the observation of the Supreme Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n several years but was sold only in the previous year ; he was, therefore, held to have realised the " agricultural income " only in the year in which he sold that produce and not in the year in which he raised it. While holding so the Supreme Court laid down that consumption of such agricultural produce or its use for the business of the assessment would also render that produce as "agricultural income." These two decisions of the Supreme Court clearly lay down that the sale of agricultural produce is not necessary in order that the agricultural produce may be held to have yielded an income. It was enough if the agricultural produce is either disposed of by sale or by its use in the manufacture or other process carried on by the assessee to make it "agricultural income". In view of the above dicta of the Supreme Court we must hold that the sugarcane raised by the assessee-company became its "agricultural income" when it used it as a raw I material for the manufacture of sugar. The assessee-company was, therefore, entitled to the deduction of the market value of such sugarcane in accordance with rule 7(2) of the Rules. In view of the above, the Appellate Assistant Commissioner m ..... X X X X Extracts X X X X X X X X Extracts X X X X
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