TMI Blog1995 (9) TMI 34X X X X Extracts X X X X X X X X Extracts X X X X ..... ing period ending June 30, 1984, appellant No. 1 was assessed under the Income-tax Act by the Inspecting Assistant Commissioner, Assessment Range-II, Guwahati, by order dated February 29, 1988. In the said assessment order, the Inspecting Assistant Commissioner first allowed deduction of Rs. 44,98,378 under section 80HHC of the Income-tax Act and thereafter applied rule 8 of the Income-tax Rules, 1962 (for short, the Income-tax Rules"), and took 40 per cent. of the income from tea as business income. On the basis of the said computation, appellant No. 1 filed a computation before the Agricultural Income-tax Officer, Assam, treating the balance 60 per cent. as income from agriculture and assessment was completed by him on the basis of such computation. For the assessment year 1986-87 pertaining to the accounting period ending June 30, 1985, the Deputy Commissioner of Income-tax (Assessment), Special Range-II, Guwahati, assessed appellant No. 1 under the Income-tax Act and in the assessment order dated August 23, 1994, as rectified under section 154, the Deputy Commissioner of Income-tax first applied rule 8 of the Income-tax Rules and determined 40 per cent. of the income from tea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it appears from the records that Rs. 44,98,373, Rs. 1,05,00,000 and Rs. 90,00,000 for the assessment years 1985-86, 1986-87 and 1987-88, respectively, have been allowed by the Indian income-tax authority under section 80HHC of the Income-tax Act before application of rule 8 of the Income-tax Rules, which was detrimental to the Revenue and that he had obtained permission from the appropriate authority to examine the records of appellant No. 1 under the proviso to section 49 of the Agricultural Income-tax Act for computing the agricultural income of appellant No. 1 for the said assessment years after refusing to accept the computation made by the Central income-tax authority. Since the power to refuse to accept the computation made by the Central Income-tax Officer is vested in the Agricultural Income-tax Officer, Assam, in the proviso to rule 5 of the Assam Agricultural Income-tax Rules, 1939 (for short, "the Agricultural Income-tax Rules"), the appellants moved this court under article 226 of the Constitution in Civil Rule No. 2094 of 1992 for a declaration that the proviso to rule 5 of the Agricultural Income-tax Rules to the extent it empowered the Agricultural Income-tax Off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the extent it empowered the Agricultural Income-tax Officer to refuse to accept the computation made by the Central income-tax authority is ultra vires the Constitution as well as the Agricultural Income-tax Act. His argument is that article 366(1) of the Constitution defines "agricultural income" to mean agricultural income as defined for the purposes of the enactments relating to Indian income-tax and accordingly "agricultural income" in entry 46 in List II of the Seventh Schedule to the Constitution in respect of which the State Legislature has powers under article 246(3) of the Constitution to enact laws imposing taxes would mean "agricultural income" as defined for the purposes of the enactments relating to Indian income-tax. Dr. Gauri Shankar submitted that it has now been decided by a series of decisions of the apex court that enactments relating to Indian income-tax would not only mean the Income-tax Act but also the Income-tax Rules. Section 2(1)(a) of the Income-tax Act defines "agricultural income" and rule 8 of the Income-tax Rules deals with income from tea which is partly business and partly agricultural income. Rule 8 specifically stipulated that income derived from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l income-tax authority. For appreciating the aforesaid contention of Dr. Gauri Shankar, the relevant portion of rule 5 of the Agricultural Income-tax Rules is extracted hereinbelow : " Rule 5.--In respect of agricultural income from tea grown and manufactured by the seller in the Province of Assam, the portion of net income worked out under the Indian Income-tax Act and left unassessed as being agricultural shall be assessed under this Act after allowing such deductions under the Act and the Rules made thereunder so far as they have not been allowed under the Indian Income-tax Act in computing the net income from the entire operation : Provided that the computation made by the Indian Income-tax Officer shall ordinarily be accepted by the Assam Agricultural Income-tax Officer who may, for his satisfaction under section 20 of the Assam Agricultural Income-tax Act, obtain further details from the assessee or from the Indian Income-tax Officer, but shall, not without the previous sanction of the Deputy Commissioner of Taxes or when there is no Deputy Commissioner of Taxes, the Assistant Commissioner of Taxes empowered by the Commissioner of Taxes in this behalf, require under the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upreme Court has taken a view that under the Kerala Agricultural Income-tax Act, 1950, and the Rules made thereunder, the Agricultural Income-tax Officer was bound to accept the computation made by the Central income-tax authority but the proviso to section 49 of the Assam Agricultural Income-tax Act and the proviso to rule 5 of the Assam Agricultural Income-tax Rules would show that although ordinarily the Agricultural Income-tax Officer is required to accept the computation made by the Central income-tax authority for the purpose of computing the agricultural income from tea grown and manufactured by a seller in the State of Assam, such computation as made by the Central income-tax authority was not binding on the Agricultural Income-tax Officer. Before dealing with the aforesaid rival contentions of learned counsel for the parties, it is necessary to discuss the decisions of the apex court on which reliance has been placed by Dr. Gauri Shankar, learned counsel for the appellants. In the case of Karimtharuvi Tea Estates Ltd. [1963] 48 ITR 83 (SC), the grievance of the petitioner in that case was that in computing the taxable income in the relevant accounting years for the purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was binding on the Agricultural Income-tax Officer for the purpose of assessment of agricultural income under the Kerala Agricultural Income-tax Act did not arise for decision. With regard to the power of the State Legislature to make law relating to taxes on agricultural income, the Supreme Court observed (at page 90) : " It is true, as urged for the respondents, that the State Legislature has full freedom to enact such provisions as it considers fit in respect of tax on agricultural income and that such power includes the power to enact for matters subsidiary and incidental to the taxation of agricultural income. We also agree that the State Legislature is free to provide the method of computation of the taxable agricultural income and is free to allow any particular deductions from the gross income as it considers fit. It is not disputed for the respondent that the power of the State Legislature to enact a law in respect of agricultural income relates only to such agricultural income as is defined in article 366 of the Constitution. " In the case of Anglo-American Direct Tea Trading Co. Ltd. [1968] 69 ITR 667 (SC) cited by Dr. Gauri Shankar, the grievance of the appellants ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iew that the Agricultural Income-tax Officer under the Kerala Act was bound to accept the computation of income from tea already made by the Central income-tax authority and to assess only the balance 60 per cent. of the income to agricultural income-tax. But in the aforesaid case, the Supreme Court also noticed that under some Acts and Rules of some other States, the Agricultural Income-tax Officer was authorised in special cases to disregard the assessment made by the Central income-tax authority and make fresh computation of the tea income and cautioned that it should not be understood to have said that the assessment made by the Central Income-tax Officer was in any way binding on the Agricultural Income-tax Officer. The relevant observations of the Supreme Court in the said case are quoted hereinbelow (pages 673 and 674 of 69 ITR) : " Under some Acts and Rules, the Agricultural Income-tax Officer is bound to adopt the assessment of the tea income made by the Central income-tax authorities. But under some other Acts and Rules, he is authorised in special cases to disregard this assessment and to make a fresh computation of the tea income. We express no opinion on the construc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Income-tax Act, 1944, providing for assessment in cases where assessments under the Income-tax Act had not been completed or had been annulled or set aside. But by the Bengal Agricultural Income-tax (Amendment) Act, 1980, the said sub-sections (2) and (2A) of section 8 were sought to be deleted. The contention of the petitioners before the Supreme Court was that by the said two impugned amendments, the State Legislatures of Kerala and West Bengal sought to assume the power, competence and jurisdiction to impose agricultural income-tax on the entire income derived from the sale of tea grown and manufactured by seller and thereby transgressed the constitutional limitation contained in article 246(3) read with entry 46 of List II of the Seventh Schedule of the Constitution and the apex court after discussing the law laid down in the earlier two cases of Karimtharuvi Tea Estates Ltd. [1963] 48 ITR 83 (SC)) and Anglo-American Direct Tea Trading Co. Ltd. [1968] 69 ITR 667 held that notwithstanding the deletion of the Explanation to section 2(a)(2) of the Kerala Agricultural Income-tax Act, 1950, and the deletion of sub-sections (2) and (2A) of section 8 of the Bengal Agricultural Incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come-tax and enactments relating to Indian income-tax includes the Income-tax Act and the Income-tax Rules and rule 8 of the Income-tax Rules provides that income derived from the sale of tea grown and manufactured by the seller in India shall be computed as income derived from business and 40 per cent. of such income shall be deemed to be liable to tax under the Income-tax Act, only the balance 60 per cent. of such income would be deemed to be agricultural income on which the State Legislature would have powers to levy agricultural income-tax under the said article 246(3) read with entry 46 of List II of the Seventh Schedule of the Constitution. The State Legislature would have plenary powers to make law in respect of taxes in relation to the aforesaid 60 per cent. of the income derived from manufacture and sale of tea deemed to be agricultural income, which would include all subsidiary and incidental matters such as method of computation of agricultural income and the deductions that would be permissible from such agricultural income. But the State Legislature would have no power to make any law which would have the effect of levying tax on the aforesaid 40 per cent. of such inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Indian income-tax. 8. Determination of agricultural income mentioned in sub-clause (2) of clause (a) of section 2 .... : Provided further that in cases of agricultural income from cultivation and manufacture of tea the agricultural income for the purposes of this Act shall be deemed to be that portion of the income from cultivation, manufacture and sale which is agricultural income within the meaning of the Indian Income-tax Act and shall be ascertained by computing the income from the cultivation, manufacture and sale of tea as computed for Indian Income-tax Act from which shall be deducted any allowances by this Act authorised in so far as the same shall not have been allowed in computation for the Indian Income-tax Act. 49. Powers of income-tax authorities to call for papers or documents..... : Provided that for the purposes of ascertaining agricultural income in regard to tea, the aforesaid taxing authorities may call for any p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t clear that in respect of agricultural income from tea grown and manufactured by the seller in Assam, the portion of the net income worked out under the Income-tax Act and left unassessed as agricultural income shall only be assessed under the Agricultural Income-tax Act and the first limb of the proviso to the said rule 5 further clarifies that the computation made by the Indian Income-tax Officer shall ordinarily be accepted by the Assam Agricultural Income-tax Officer. On a reading of the aforesaid provisions of the Agricultural Income-tax Act and rule 5 as a whole, we are of the view that the Assam Agricultural Income-tax Officer can reject a computation made by the Indian Income-tax Officer only where the computation of income has not been made in accordance with the Income-tax Act or the Income-tax Rules, and where the Agricultural Income-tax Officer rejects the computation made by the Central income-tax authority on the ground that he has not computed the income from cultivation, manufacture and sale of tea in accordance with the provisions of the Income-tax Act and the Income-tax Rules, he does not transgress the constitutional limits set out in article 246(3) read with un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in any way binding on the Agricultural Income-tax Officer. This decision of the Supreme Court in the case of Anglo-American Direct Tea Trading Co. Ltd. [1968] 69 ITR 667 cited by Dr. Gauri Shankar, therefore, does not support the appellants. The next contention of Dr. Gauri Shankar was that assuming that the last limb of the proviso to rule 5 of the Agricultural Income-tax Rules was valid in law, an assessment made by the Central income-tax authority under the Income-tax Act has to be respected by the Agricultural Income-tax Officer because of article 261(1) of the Constitution which states that full faith and credit shall be given throughout the territory of India to public acts, records and judicial proceedings of the Union and every State. In support of this contention, he relied on the decision of the Madras High Court in Kannam Devan Hills Produce Co. Ltd. v. State of Madras [1966] 59 ITR 184 as well as the decision of the Supreme Court reported in State of Tamil Nadu v. Kannan Devan Hills Produce Co. Ltd. [1972] 84 ITR 475 con firming the said decision of the Madras High Court. He also relied on the judgment of the Madras High Court in the case of Kishinchand Chellaram v. J ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion adopted by the Central income-tax authority for computing the proportion of income under the Indian Income-tax Act attributable to 36.40 acres of the Chittuvarrai Estate situated in the Madras Estate was incorrect and substituted a different computation for the purpose of calculating the income and after such a computation, he took 60 per cent. of it as agricultural income assessable in the Madras State. For the assessment years 1956-57 to 1958-59, the Agricultural Income-tax Officer also issued notices under section 35 of the Madras Agricultural Income-tax Act for reassessment. The petitioner moved the Madras High Court and contended that the computation made by the Central Income-tax Officer was binding on the Agricultural Income-tax Officer for computing agricultural income from tea. In support of this contention, the petitioner, inter alia, relied on article 261(1) of the Constitution. The High Court took the view that in the facts of that case the Agricultural Income-tax Officer had refused to accept the computation made by the Central Income-tax Officer for totally unsatisfactory and unjustifiable reasons and set aside the order of assessment, but did not give any findin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the impugned notices. According to him, the actual reason is that the action of the Indian income-tax authority in allowing the aforesaid deduction under section 80HHC of the Income-tax Act before application of rule 8 of the Income-tax Rules was contrary to law and the circular issued by the Central Board of Direct Taxes was only cited in the impugned notices in support of the said reason. We find full force in the said submission of Mr. Bhuyan, the learned Advocate-General. Bereft of all superfluity, the reason given by the Agricultural Income-tax Officer, Assam, in the three impugned notices for proposing to compute the agricultural income of the appellant for the three assessment years in question after refusing to accept the computation made by the Central income-tax authority is that the Central income-tax authority had allowed deductions under section 80HHC before application of rule 8 of the Income-tax Rules which was not permissible under law. Dr. Gauri Shankar, learned counsel for the appellants, however, submitted that this view taken by the Agricultural Income-tax Officer, Assam, that deductions under Chapter VI-A of the Income-tax Act and in particular, section 8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness and liable for income-tax and 60 per cent. of the income deemed to be agricultural income liable for agricultural income-tax after allowing deductions permissible under the law relating to agricultural income-tax. In the said three decisions of the apex court, there was no discussion of deducting any allowances under the Income-tax Act such as those falling under Chapter VI-A of the said Act which were not of the nature of expenses incurred by an assessee for the purpose of earning such income from sale of tea grown and manufactured in India. This would be clear from the following observations of the Supreme Court in the case of Karimtharuvi Tea Estates Ltd. [1963] 48 ITR 83 (SC) : " The result of rule 24 is that the income derived from the sale of tea grown and manufactured by the seller is to be computed in the first instance as if it was income derived from the business. Consequently, the income would be computed in accordance with the provisions of section 10 of the Income-tax Act. Clause (xv) of sub-section (2) of section 10 provides that in computing the income any expenditure by an assessee not being an allowance of the nature described in any of the clauses (i) to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and 40 per cent. of the income so computed would be deemed to be income liable to the levy of income-tax and the balance of the incom e would be liable to tax as agricultural income subject to such further deductions as the law pertaining to the levy of agricultural income-tax might allow. " (emphasis supplied). Thus, deductions under the Income-tax Act which were in the nature of expenses incurred for the purpose of earning income derived from sale of tea grown and manufactured by the seller were only to be allowed in the computation of such income before application of rule 8 of the Income-tax Rules, 1962, and allowances which were not really in the nature of expenses were not to be deducted from the computation of such income before application of rule 8. This view is further reinforced by the provision in section 29 of the Income-tax Act to the effect that income from profits and gains of business shall be computed in accordance with sections 30 and 43D of the Income-tax Act. Dr. Gauri Shankar, however, submitted that a deduction does not cease to be an item of expenditure merely because it is not included in sections 28 to 43D of the Income-tax Act, 1961, and is included ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 1,05,00,000 and Rs. 90,00,000 under section 80HHC of the Income-tax Act for the assessment years 1985-86, 1986-87 and 1987-88 have been made before application of rule 8 of the Income-tax Rules and not from the 40 per cent. of the income after application of the said rule 8. It is, therefore, difficult for us to hold that the reason given in the impugned notices for proposing to compute the agricultural income after refusing to accept the computation of the Indian Income-tax Officer is totally unsatisfactory or unjustifiable. On the contrary, we find from the said reason given in the impugned notices that the computation made by the Indian Income-tax Officer is proposed to be rejected under the proviso to rule 5 of the Agricultural Income-tax Rules because the said computation has been made contrary to the provisions of the Income-tax Act and the Income-tax Rules and the last proviso to section 8 of the Agricultural Income-tax Act. Dr. Gauri Shankar lastly contended that so far as the assessment year 1985-86 is concerned, the assessment of agricultural income had been completed and the impugned notice dated August 3, 1992, for the said assessment year was for reopening such ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (2) of section 19, and may proceed to assess or reassess such income, and the provisions of this Act shall, so far as may be, apply accordingly as if the notice were a notice issued under that sub-section. " As per the aforesaid section, if for any reason any agricultural income chargeable to agricultural income-tax has escaped assessment for any financial year, the Agricultural Income-tax Officer may proceed to reassess the income. In the case of Maharajadhiraj Sir Kameshwar Singh v. State of Bihar [1959] 37 ITR 388 ; AIR 1959 SC 1303, section 26 of the Bihar Agricultural Income-tax Act, which is similarly worded as the aforesaid section 30 of the Assam Agricultural Income-tax Act, came in for interpretation before the apex court. It was contended that unless fresh information comes into the possession of the assessing authority, no reassessment can be done by the Assessing Officer and the decisions under section 34 of the Indian Income-tax Act, 1922, were cited in support of the aforesaid contention. The Supreme Court rejected the said contention and held (page 394) : " We may say at once that the words of section 26 of the Act do not involve possessing of or coming by some ..... X X X X Extracts X X X X X X X X Extracts X X X X
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