TMI Blog1984 (4) TMI 54X X X X Extracts X X X X X X X X Extracts X X X X ..... ers say that they are aggrieved by the deletion of the Explanation to s. 2(a)(2) of the State Act by s. 2 of the Agrl. I.T. (Amend.) Act, 1980. Section 2 of this Amendment Act reads: " 2. Amendment of section 2.-In section 2 of the Agricultural Incometax Act, 1950 (XXII of 1950) (hereinafter referred to as the principal Act), in clause (a), the Explanation shall be omitted. " The reason for the omission of the Explanation, as it emerges from the Statement of Objects and Reasons as well as from the counter-affidavit filed on behalf of the State, is that subsequent to the decision of the Supreme Court in Commissioner of Sales tax v. D. S. Bist [1979] 44 STC 392; AIR 1980 SC 169, the legislative competence of the State is wide enough to " assess the whole income from tea as agricultural income "-see para. (d) of the counter-affidavit). The Minister of Finance in his budget speech made on March 21, 1980, stated: ".. ...... the whole income from tea would be assessed for agricultural income-tax by suitably amending the Act in the light of the judgment of the Supreme Court in Commissioner of Sales Tax v. D. S. Bist [1979] 44 STC 392; AIR 1980 SC 169. (See the Statement of Object ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ordinarily employed to render the produce marketable, or by the sale of such produce. This definition excludes from the concept of agricultural income any income derived from the sale of agricultural produce which has undergone a process of manufacture. Section 295 of the Central Act, in so far as it is material, says; " 295. (1) The Board may, subject to the control of the Central Government, by notification in the Gazette of India, make rules for the whole or any part of India for carrying out the purposes of this Act. (2) In particular, and without prejudice to the generality of the foregoing power, such rules may provide for all or any of the following matters (a) the ascertainment and determination of any class of income; (b) the manner in which and the procedure by which the income shall be arrived at in the case of (i) income derived in part from agriculture and in part from business;... " These provisions give the Board the power to make rules to prescribe the manner in which and the procedure by which income is arrived at in the case of income derived in part from agriculture and in part from business. It is only in respect of the latter, namely, income fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing forty per cent. It is by this method of exclusion from total income, as computed by recourse to the machinery of the Central Act, that agricultural income has been defined. It is that income alone which falls within the legislative competence of the State for the purpose of levying tax on agricultural income. It is by virtue of the constitutional authority to levy tax on agricultural income, as defined under the Central Act and Rules, that the State law has been made. Section 2(a) of the State Act defines agricultural income in identical terms as s. 2(1) of the Central Act. Section 2(a) of the State Act also contained an Explanation which has now been omitted by the Amendment Act of 1980. The Explanation was as follows: "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. " This Explanation was in substance in harmony with the concept of mixed income contemplated by s. 295(2)(b) of the Central Act and r. 8, which speak of income derived in part from agricultu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nner prescribed by r. 8. The remaining portion alone can be taxed under the State Act, whether or not the Explanation to s. 2(a)(2) is retained or deleted from the State Act. This is because the State has no constitutional authority to bring to tax any income other than income specifically defined under the Central Act and the Rules made thereunder as agricultural income. The Central Act, having defined agricultural income by a process of exclusion from the total income, it is only that portion which is so excluded by the Central Act, that is available to the State (for taxation). By the insertion or deletion of any provision in the State Act, the legislative competence of the State cannot be expanded beyond constitutional limitations. The omission of the Explanation thus makes no difference to the legislative competence of the State. A Constitutional bench of the Supreme Court composed of five judges considered in two cases the legislative competence of the State to levy tax on agricultural income. Both in Karimtharuvi Tea Estates Ltd. v. State of Kerala [1963] 48 ITR 83 (SC) and in Anglo-American Direct Tea Trading Co. Ltd. v. Commr. of Agrl. LT. [1968] 69 ITR 667 (SC), the Sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icultural income taxable under the Kerala Act ........" This observation shows that the legislative competence of the State is limited to 60 per cent. of the income computed in terms of the provisions of the Central Act. This principle was re-stated by the Supreme Court in State of TamilNadu v. Kannan Devan Hills Produce Co. Ltd. [1972] 84 ITR 475 (SC) and in Tea Estate India P. Ltd. v. CIT [1976] 103 ITR 785 (SC). If this is the correct position that emerges from the above observation of the Supreme Court, which I think it is, the contention of the State that it is entitled to tax the whole income derived from the sale of tea grown and manufactured by the seller as agricultural income is wrong, and that, even without the Explanation under the State Act, the definition of agricultural income under s. 2(a) thereof must be understood consistently with the ratio prescribed under r. 8 of the I.T. Rules, 1962. The Advocate-General submits that both in Karimtharuvi Tea Estates Ltd. v. State of Kerala [1963] 48 ITR 83 (SC) and in Anglo-American Direct Tea Trading Co. Ltd. v. Commr. of Agri. LT. [1968] 69 ITR 667 (SC), the Supreme Court has referred to the Explanation to s. 2(a)(2) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so computed by providing that certain items of expenditure deducted in the computation of the income from a business under the provisions of the Income-tax Act be not deducted and be considered to be a part of the taxable agricultural income." The Supreme Court then, referring to the definition under s. 2 of the State Act, said (p. 89): " This definition practically conforms to the definition of 'agricultural income' in sub-clauses (a) and (b) of clause (1) of section 2 of the Income-tax Act. The Explanation added in the definition of 'agricultural income' in the Agricultural Income-tax Act in substance adopts what has been provided in rule 24 of the Income-tax Rules, 1922, about the proportion of agricultural income from tea plantations. It follows, therefore, that agricultural income from tea plantations is to be computed in the same manner as it is computed under the provisions of the Income-tax Act." Referring to Expln. 2 to s. 5 of the State Act, which was not consistent with either the Explanation to s. 2(a)(2) of the same Act, or with the mode of computation provided under the Central Act and the Rules, the Supreme Court stated (p. 90): " Explanation 2 (to s. 5), if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Bist [1979] 44 STC 392; AIR 1980 SC 169. As stated earlier, that was a case which arose under the Uttar Pradesh Sales Tax Act, 1948. The question which the court answered was : " Whether, on the facts and circumstances of this case, the article ceased to be an agricultural produce and whether the tea produced by the assessee would be exigible to sales tax ? " Dismissing the appeal by the Revenue, against the judgment of the High Court, which answered the question in favour of the assessee, the Supreme Court stated that the " turnover " as defined under the Act, excluded agricultural produce. The proviso to the definition of " turnover under the Uttar Pradesh Act stated as follows (p. 394 of 44 STC): "Provided that the proceeds of the sale by a person of agricultural or horticultural produce, grown by himself or grown on any land in which he has an interest ...... shall be excluded from his turnover." Referring to this definition, the Supreme Court stated (p. 394): " Indisputably and undoubtedly, the assessee was an agriculturist, the tea leaves grown by him in his land were agricultural produce, and he had sold them after processing and packing. In other words, the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch I have already stated, is unsustainable, for the State can tax only such agricultural income as is defined under the Central Act, to which the Constitution has made a specific reference. It is only with reference to the Central Act and the Rules can agricultural income be computed where the income has been derived in part from agriculture and in part from business. This result is not because of the State Act but because of the Constitution. If, however, the income derived is solely from agriculture, and no part of it is traceable to any process beyond the degree referred to in s. 2 of the State Act or the Central Act, i.e., the process ordinarily employed to render the produce fit to be taken to the market, in such cases, and in such cases alone, the income has to be computed solely with reference to the State Act, and the entirety of the income so computed is taxable solely under the State Act. Such cases may, however, seldom arise in regard to tea as tea leaves have little value when they have not been subjected to the necessary manufacturing process to produce the different brands. Where tea leaves which are grown and manufactured are sold, the relevant provisions of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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