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The Forest Development Corporation of Maharashtra Limited Versus The Additional Commissioner of Income Tax, The Deputy Commissioner of Income Tax., The Commissioner of Income Tax

2017 (8) TMI 384 - BOMBAY HIGH COURT

Agricultural income or not - turnkey contract of plantation - to create and develop plantations, rock gardens etc. for companies/institutions - splitting the income derived from the turnkey contract of plantation in two different stages - income received at the second stage - interest in land - executors of trust - Held that:- Executor had a right to receive remuneration for management of the trust and its properties. The Assessee's contention was that the income received by him is agricultural .....

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other activity. This distinction does not take note of the fact that the activity carried out by the appellant would not decide whether the remuneration received is agricultural income or not, but whether the income is derived from land. For any income to be classifiable as agricultural income, it has primarily to be derived from land - In the present facts, no agricultural income is derived by the appellant from the land. It receives consideration for providing Services under the contract d .....

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ter they have been transplanted on the land owned by the WCL would be an activity ordinarily employed by a cultivator in taking care of the plants to render it to be fit to be taken to the market. On a bare reading of subsection, the burden would be upon the appellant to show that it is a cultivator and similar activities are being carried out by cultivators or receiver on rent in kind and this activity of taking care of plants at Stage-II is to render the produce fit to be taken to the market. .....

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s case, admittedly, the appellant/asseessee has not sold any agricultural produce even if one assumes agricultural produce has derived from the the land of WCL at stage II. The consideration received cannot be classified as agricultural income under 2(i)(a)(iii) of the Act. - The income received by the appellant is for rendering of Service and not for carrying out of operations as listed in Section 2(1A)(b)(ii) or (iii) of the Act.- Decided in favour of revenue. - Income Tax Appeal No. 77 of .....

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Years 1998-99 and 1999-2000. The appellant has, as undertaken by them on 24.7.2017, paid the additional court fee. Thus, this appeal is being treated as a common appeal for the two Assessment Years. 2. This appeal was admitted on 19th April, 2005 on the following two substantial questions of law : 1)Whether in the facts and circumstances of the case and in law the ITAT and the Authorities below were right in splitting the income derived from the turn key contract of plantation in two different .....

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ition between the parties that the facts for both the Assessment Years are similar. Therefore, the facts in one year can be conveniently referred to for answering the above substantial questions of law. 4. Briefly stated, the facts are as under : (a) The appellant/assessee is a company incorporated under the Companies Act wholly owned by the Government of Maharashtra. The appellant is inter alia engaged in the activity of turnkey plantation i.e. to create and develop plantations, rock gardens et .....

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e plants grown on its land in the areas identified by WCL Ltd. Thereafter, the appellant maintains the plant using its own men and material for a period of 23 years. This, according to the appellant, is sufficient period for transplanted plants to reach the desired health and height not requiring professional care. At that time, the care of the transplanted plants on the land of WCL Ltd. is handed over to WCL Ltd. (iv) The payments/consideration under the contract received by the appellant was a .....

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completion of contract period (10%) ₹ 2.487 do Payments will be released by the company within one month of submission of bills. (b1) The appellant was of the view that the above income received by it was agricultural income. Therefore, not exigible to Income tax under the Act. (c) On 27.1.1999, the appellant filed its return of income for the Assessment Year 1998-99 declaring the income of ₹ 31.52 Lakhs. The appellant did declare gross receipts of ₹ 1,28,57,580/from turnkey co .....

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turnkey plantation cannot be considered to be receipts on account of agricultural activity. This on the basis that the appellant is neither the owner of the land nor of the plantation raised on it but has merely executed the work and provided Services in terms of contract. Thus, it had received contractual payment for providing Services. However, the Assessing Officer did not bring the entire gross receipt of ₹ 1.28 Crores to tax, but reduced the direct expenses of ₹ 71.82 Lakhs and .....

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to be an agricultural income, as it is not an income derived from land. Further the consideration received by the appellant was for the work executed in terms of the contract i.e. to provide Services as held by the Assessing Officer. Moreover, the CIT (A) also drew support from the fact that the amounts received under the contract for turnkey plantation were subjected to deduction of tax under the Act by the payer of the consideration. (f). Being aggrieved with the order dated 21.11.2002 of the .....

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they reach a certain height and/or health, are transplanted (after about one year) to the land belonging to the companies/institutions for further care. (ii) Stage-II is where the trees/plants transplanted on lands belonging to the companies/institutions i.e. appellant's customers from its nurseries. On such transfer, ownership of the trees also stands vested in the customers by virtue of notional sale. Thereafter also the respondent carries out operation necessary for survival and growth of .....

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bifurcation, the impugned order holds that no tax is payable on the income attributable to the first stage, as it is agricultural income. However, as there was no bifurcation of income as between the first and the second stage, it being a consolidated contract, the entire amount which was expended at stage I was reduced from the gross income earned under the contract and only the balance was held to be taxable under the Act. Accordingly, the appeal of the assessee was dismissed on 23.4.2004. 5. .....

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for, as the entire operation is an indivisible. In any event, once StageI is considered to be an agricultural operation, StageII also becomes so, in view of the Supreme Court decision in CIT vs. Raja Benoy Kumar Sahas Roy, 32 ITR 466 ; (b) Ownership of land and/or interest therein is irrelevant for the purposes of determining whether the operation carried out by the appellant is an agricultural activity or not. This alone has been the basis of the holding part activity as agricultural (Stage-I) .....

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in terms of the contact by WCL. This area is given to the appellant for exclusive use to enable the successful implementation of the plantation project. Therefore, the appellant has an interest in the land and its income is, therefore, derived from the land on which agricultural activity is carried out; (d) In any view of the matter, the activity at the so called stage II of the contract carried out by the appellant is an activity which would be performed by any cultivator to render the produce .....

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order has correctly split the entire transaction arising out of the contract dated 23.7.1993 into two stages/parts. Stage I is where the appellant carries on operations which are agricultural on its own land and therefore, the income is derived from land. At stage II is the activity not carried by the appellant on its land. Thus, the income is received by the appellant for rendering of services under the contract. Therefore, derived from rendering of Service and not from land ; (B) Section 2(1A) .....

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rvice. Further also the appellant has no interest in the land belonging to the company/institution to whom it renders Service ; (D) The immediate and effective source of income in this case is amounts received under the contract dated 23.7.1999. That 80% of the consideration received by the appellant is within a period of one year when the appellant has carried out activity only on its land and developed the plants before transposing it on the land belonging to the company/institution. Thus, the .....

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In this Act, unless the context otherwise requires:( 1) …............ (1A) 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 or rentinkind of any process ordinarily employed by cultivator or receiver or rentinkind to render the produce raised or received by him fit to be taken into market; or ( .....

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.....; From the above sections, it is clear that agricultural income cannot be subjected to tax under the Act. This, of course, subject to the income satisfying definition of agricultural income as provided in Section 2(1A) of the Act. 9. A bare reading of the aforesaid definitions clearly indicates that Section 10(1) of the Act excludes agricultural income from the total income under the Act. However, the agricultural income which is to be excluded under the aforesaid provision is not a popular .....

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shown to us that the context requires it to be read as inclusive or differently from restrictive. Thus, agricultural income as defined under clause (a) of Section 2(1A) of the Act would mean : (I) any rent/revenue derived from land; (II) the land is used for agricultural purposes and (III) the land is situated in India. Clause (b) of Section 2(1A) of the Act seeks to include any income (other than rent or revenue) derived from such land either by : (i) agriculture; or (ii) the performance by a c .....

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cate the land which has been described in clause (a) of Section 2(1A) of the Act i.e. the land which is situated in India, used for agricultural purposes and the income derived from such land should be other than rent or revenue indicated in Section 2(1A)(a) of the Act. However, the sine qua non for any income to be considered as an agricultural income is that it should be derived from land situated in India and used for agricultural purposes. The words 'derived from' as held by the Apex .....

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s.WCL requires it to undertake the work of sowing seeds and developing plants on it's own land by tending to them till such time as it achieves a certain health and height normally i.e. within a period of one to two years. Thereafter, these very plants are transplanted to the areas identified by WCL on land owned by WCL (end of Stage I as held by Tribunal). (b) After transplanting the plants on the land owned by the WCL, the appellant tends to the same using its own men and material for a pe .....

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ed from land are handed over by transplantation to WCL. Therefore, agricultural income. (d) However, so far as the stage II is concerned, the appellant has no interest in the land where the plants have been transplanted. The appellant does not derive any income from the land but receive consideration for taking care of the plants after transplantation of the same on the land belonging to WCL. Thus, the obligation is to render Service under the contract i.e. to take care of the plants belonging t .....

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peration then StageII must also be considered to be agricultural operation. In support, reliance is placed upon the decision of the Apex Court in Raja Binoy Kumar Sahas Roy (supra) to contend that where the basic operation is agricultural operation then subsequent operations even if by themselves they may not constitute agricultural operations, if it is an integrated activity. (f) According to us, the above submission on the part of the appellant overlooks the basic fact in the present case that .....

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tageII, as it is not necessary that the same agency should do both Stages. In fact, StageII could be carried out by some other agency. Therefore, the activity at StageII is not so linked in the present facts with the agricultural operation carried out at StageI. We may also refer to Raja Binoy Kumar Sahas Roy (supra), where the Apex Court observed that the income received from the sale of forest growth could be ideally divided into those arising out of spontaneous growth and that arising from hu .....

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produce is what is payable at the ends of StageI. So far as the balance 20% of the consideration is concerned, it is paid after StageI on account of Service rendered under the contract dated 23.7.1999 and cannot be said to be for agricultural income. The test is not the nature of activity but the primary/immediate source of income. (h) In any case, the income received at the second stage i.e. Stage II cannot even remotely be said to be derived from land. Therefore, the splitting of the entire ac .....

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e of plants is taken over by WCL Ltd. Therefore, the income which is received by the appellant is not derived from the land but is derived from service which the appellant renders to WCL in taking care of its plants. (j) The learned Counsel for the appellant placed reliance upon the decision of Privy Council in CIT .vs. Kameshwar Singh, 2 ITR 305 wherein the money lender, to whom agricultural property had been mortgaged by lease for a period of 15 years, was entitled to hold and enjoy the leased .....

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the character of the recipient. Therefore, in the facts before it, the Privy Council held that if business of money lending brings in income which has been derived from land then it is exempt from income tax. The aforesaid decision is completely distinguishable from the facts herein. In the present case, the appellant/assessee does not receive any income out of agricultural produce derived from the land. The income received by the appellant/assessee is for providing Services under the contract .....

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me Tax Act, 1922, which is similar to that found under Section 2(1A) of the Act, had held that the remuneration earned by the Managing agent of a Company which is engaged in agricultural operations cannot be treated as agricultural income. The Court held that the assessee therein received remunertion for rendering of Service under the contract. The aforesaid decision would apply on all fours to the present dispute. However, Mr.Deshpande, learned Senior Counsel attempted to distinguish the afores .....

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.1999 entered into between the WCL and the appellant. Consequently, the consideration received by the appellant at stage II does not have the character of agricultural income. Merely because the activity of serving WCL may have some relation to and/or be agricultural operations. (l) Further in the case of Javed Ali vs. CIT, 18 ITR 95, the Allahabad High Court followed decision of the Privy Council in Premier Construction Co. Ltd. (supra) to hold that the remuneration received by the assesse who .....

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, this submission of the appellant does not address the basic question that the income in this case is not derived from land but derived from the contract for providing service and cannot be characterised as agricultural income. (m) In E.C.Danby .vs. CIT, 12 ITR 351, the Patna High Court held that the payment received by an assessee as remuneration for managing agricultural properties of partnership firm could not be said to be derived from land so as to classify it as agricultural income. The r .....

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present case the appellant is a cultivator performing only agricultural operations and therefore, the source of his income in his hands is agricultural income. This distinction overlooks the fact that no income has been derived from the agricultural land in which the agricultural produce has been generated. If agricultural produce has been sold the income which arose therefrom would be in the nature of agricultural income. In the present case, the appellant is only providing Services and it is .....

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e's contention was that the income received by him is agricultural income was negatived by the Apex Court as it held that he had no interest in the land and what the Executor received was the salary/remuneration to take care of the properties of the trust. The source of income was provided in Trust deed i.e. right to receive remuneration to mange the property. The Court held that the Assessee therein did not have right to receive and/or appropriate to himself agricultural income which would .....

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is derived from land. For any income to be classifiable as agricultural income, it has primarily to be derived from land. In the present facts, no agricultural income is derived by the appellant from the land. It receives consideration for providing Services under the contract dated 23.7.1999. For providing Services relatable to agricultural operations is still not income derived from the land. The words derived from would mean direct linkage/immediate source of income and not an indirect sourc .....

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for activity carried out at stage II of the contact split by the Tribunal would still be agricultural income. This by virtue of Section 2(1A)(b)(ii) and (iii) of the Act. (c) So far as Section 2(1A)(b)(ii) of the Act is concerned, the appellant submits that the consideration is received for the activity carried out by it at stage II is an activity which would be carried out by any cultivator ordinarily to render agricultural produce fit to be taken to the market. (c) We note that activity carri .....

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