TATA
Tea Ltd. & Anr Vs. State of West Bengal & Ors [1988] INSC 144 (5 May 1988)
Kania,
M.H. Kania, M.H. Pathak, R.S. (Cj)
CITATION:
1988 AIR 1435 1988 SCR (3) 961 1988 SCC Supl. 316 JT 1988 (2) 299 1988 SCALE
(1)867
CITATOR
INFO : R 1988 SC1450 (1)
ACT:
Bengal
Agricultural Income-tax (Amendment) Act, 1980- Challenging constitutional
validity of sections 3 and 5 of. Agricultural Income-tax (Amendment) Act, 1980
(Kerala Act No. 17 of 1980)-Challenging amendment made by-Resulting in deletion
of Explanation after clause (2) of section 2(a) of Agricultural Income-tax Act,
1950.
Whether
entire income of assessee from sale of tea grown and manufactured by him is
subject to levy of agricultural income-tax.
HEAD NOTE:
These
Writ Petitions, filed in this Court by Public Limited Companies growing,
manufacturing and selling tea in the States of West Bengal and Kerala raised
common questions of law.
The
Writ Petitions relating to the State of West Bengal challenged the
constitutional validity of sections 3 and 5 of the Bengal Agricultural
Income-tax (Amendment) Act, 1980, whereby sub-section (2) and (2A) of section 8
of the Bengal Agricultural Income-tax Act, 1944 were omitted and always deemed
to be omitted. The petitioners alleged that as a result of the omission of the
said Sub-sections (2) and (2A) of section 8, the State Legislature had sought
to assume the power, competence and jurisdiction to impose agricultural
income-tax on the entire income from the sale of tea grown and manufactured by
a seller and had thereby transgressed the constitutional limitations contained
in Article 246(3) of the Constitution of India. The petitioners contended that
the income derived from the sale of tea grown and manufactured by them was
derived partly from agriculture and partly from manufacture by elaborate
processes through valuable machinery. Prior to the said amendment Act, the
position was that the income of an assessee who grew, manufactured and sold tea
in West Bengal, was computed under the Indian Income-tax Act, 1922 (the Act of
1922) read with the Income-tax Rules, 1922, and agricultural income-tax was
levied only in respect of 60 per cent of that income. After the coming into
force of the Income-tax Act, 1961 and the Income-tax Rules, 1962 also a State
Legislature 962 could only legislate in respect of 60 per cent of the income,
treated as agricultural income. The object of the impugned amendment Act, was
to subject to the levy of agricultural income-tax, the entire income derived by
an assessee from the sale of tea grown and manufactured by him.
The
writ petition relating to Kerala State challenged the amendment made by the
Agricultural Income-tax (Amendment) Act, 1980 (Kerala Act No. 17 of 1980)
deleting the Explanation after clause (2) of section 2(a) of the Agricultural
Income-tax Act, 1950, with a view to making the entire income from sale of tea
earned by an assessee who grew and manufactured tea in that State subject to
the levy of agricultural income-tax.
The
petitioners urged that these amendments, in so far as they purported to confer
power on the respective legislatures of the States of West Bengal and Kerala to
legislate regarding taxes on the income from the sale of tea grown and
manufactured by the assessees in excess of 60 per cent of such income computed in
the manner prescribed under the law relating to income-tax were void and beyond
the legislative competence of the legislatures of the States of West Bengal and
Kerala in view of the provisions of Article 246 of the Constitution of India
read with the entry 82 in List I and Entry 46 in the List II of the Seventh
Schedule to the Constitution and the relevant provisions of the law relating to
income-tax.
The
respondents contended that Article 366(1) of the Constitution merely stated
that the term "agricultural income" had the same meaning as given to
it in the enactments relating to income-tax and the definition of the said term
in Act of 1922 and the Act of 1961 did not prescribe that only a particular
part of the income derived by an assessee from the sale of tea grown and
manufactured by him could be regarded as agricultural income, and it was open
to the State Legislatures concerned to levy agricultural income-tax on such
entire income.
Disposing
of the petitions, the Court, ^
HELD:
The main question to be considered was whether the impugned provisions in the
Bengal Amendment Act of 1980 were in excess of the legislative competence of
West Bengal State Legislature, and whether by deletion of the Explanation
effected by the Kerala Amendment Act of 1980, the definition of the term
"agricultural income" in sub- section (a) of Section 2 of the Kerala
Agricultural Income- tax Act 963 became void as in excess of the legislative
competence of the State Legislature. [978D-E] A perusal of Entry 82 of the List
I in the Seventh Schedule and Entry 46 in the List II makes it clear that the
Legislatures of the States of West Bengal and Kerala can pass laws imposing
taxes only in respect of agricultural income, and in respect of income other
than the agricultural income, it is only the Parliament which has the power to
legislate in respect of taxes on such income. Sub-article (1) of Article 366 of
the Constitution states that "agricultural income" means such income
as is defined as "agricultural income" for the purposes of the
enactments relating to Indian income-tax. It is significant that the words used
are not "as defined by the enactments relating Indian Income-tax" but
are "as defined for the purposes of the enactments relating to Indian
Income-tax"(emphasis supplied).[978F-G] Although the Explanation has been
deleted from clause (2) of Sub-section (a) of Section 2 of the Kerala
Agricultural Income-tax Act, and in spite of the amendments carried out by the
Amendment Act of 1979 and the Amendment Act 1980 in the case of the West Bengal
Agricultural Income- tax Act, an Agricultural Income Tax Officer acting under
the Kerala Agricultural Income-tax Act or the Bengal Agricultural Income tax
Act has no power to levy agricultural income tax except in respect of 60 per
cent of the income derived by an assessee from the sale of tea grown and
manufactured by him and computed in the manner leid down under the relevant
Income-tax Act and the rules framed thereunder. [984B-C] The decision of this
Court in Commissioner of Sales Tax, Lucknow v. D.S. Bist, [1979] 44 S.T.C. 392,
relied upon by the State of Kerala and the State of West Bengal was of no
assistance to them as the ratio of that decision had no application to present
cases. [986A] Article 366(1) of the Constitution provides that the term
"agricultural income" has the same meaning as attributed to it for
the purposes of enactments relating to Indian income-tax, and Rule 8 of the
Income-tax Rules, 1962 as well as Rule 24 of the Income-tax Rules 1922, pertain
to and are bound up with the definition of the term "agricultural
income" for the purposes of laws or enactments pertaining to Indian
Income-tax and the provisions of those rules have to be taken into account in
considering the meaning of the term "agricultural income" under
sub-article (1) of Article 366 of the Constitution. [987B-D] 964 Clause (b) of
sub-section (2) of Section 295 of the Income-tax Act, 1961 specifically confers
power on the rule- making authority to make rules relating to the manner in
which and the procedure by which income for the purposes of the Act of 1961
would be arrived at in the case of income derived in part from agriculture and
in part from business and Rule 8 clearly provides for the manner in which
computation of income for the purposes of the Act of 1961 is to be made in the
case of income derived from the sale of tea grown and manufactured by a seller
and it cannot be said that the said rule goes beyond the scope of the
rule-making power conferred under section 295, as contended by counsel for the
two States. [987E-F] Although the Explanation to Section 2(a) (2) of the Kerala
Agricultural Income-tax Act has been deleted by the Amendment Act of 1980, the
result would still be the same that the Kerala State Legislature can impose tax
only in respect of 60 per cent of the income derived by an assessee who sells
tea grown and manufactured by him in India and such income has to be computed
in the manner laid down in the Act of 1922 and thereafter in the Act of 1961
for computation of the business income.
The
same is the position in respect of the powers of the legislature of the State
of West Bengal in spite of the amendments made by
the legislature by the Amendment Act of 1980 and earlier under the amending Act
of 1979 which was in force for one year. It is not necessary to strike down the
said amendments because they do not directly conflict with the definition of
the term "agricultural income" under the Constitution, but they do
not confer any wider power on the State Legislature to impose taxes on the
agricultural income then what is stated earlier. [987G-H;988A-B] The validity
of the amendments to the Bengal Agricultural Income-tax Act made in 1980 and
the deletion of the Explanation in Section 2(a)(2) of the Kerala Agricultural
Income-tax Act were challenged as being ultra vires and invalid in law on
several other grounds but the Court did not go into those grounds in view of
what it held as set out above. [988C-D] Although none of the prayers in the
petitions was granted in terms, the petitioners substantially succeeded in the
petitions.[988E] Karimtharuvi Tea Estates Ltd. & Anr. v. State of Kerala
Trading Co. Ltd. etc. v. Commissioner of Agricultural Income-tax, Kerala,
[1968] 69 ITR 667; State of Tamil Nadu v. Kannan Devan Hills Produce Co. Ltd.,
965 [1972] 84 I.T.R. 475; Tea Estate India P. Ltd. v. Commissioner of
Income-tax, West Bengal II, [1976] 103 I.T.R. 785; Commissioner of Income-tax, Madras v. R.M. Chidambaram Pillai etc.,
[1977] 106 I.T.R. 292; Commissioner of Sales Tax, Lucknow v. D.S. Bist & Ors., [1979] 44
S.T.C. 392; and High Land Produces Co. Ltd. & Anr. etc. v. Inspecting Asstt.
Commr. of Agricultural Income-tax & Sales Tax (Special), Kottayam and Ors.
etc., [1984] 148 I.T.R. 746, referred to. & ORIGINAL JURISDICTION: Writ
Petitions Nos. 5409-10, 5411-12/80, 358 & 12807-12808/84.
(Under
Article 32 of the Constitution) Dr. Devi Paul, Ms. M. Seal, H.K. Dutt for the
petitioners in WP. Nos. 5409-12/80, 12807-12808/84.
Dr. V.
Gauri Shankar, P.N. Tiwari, Manoj Arora, S. Rajappa and S.R. Srivastava for the
petitioners in WP. No. 358/84 P.S. Poti, V.J. Francis and N.M. Popli, for
Respondents in WP. Nos. 5411-12/80 S.C. Manchanda, B.B. Ahuja and Ms. A. Subhashini
for the U.O.I. Tapas Ray, H.K. Puri, G.S. Chatterjee and Dalip Sinha for Respondents
in 12807-08, 5409-10/80 D.P. Mukherjee, for the Intervenor.
The
Judgment of the Court was delivered by KANIA, J. These writ petitions are filed
by Public Limited Companies growing and manufacturing tea in the States of West
Bengal and Kerala respectively. Although, there are some differences in the
facts, the material facts are largely common and the questions raised in the
petitions can be fairly regarded as common questions of law. They are,
therefore, being disposed of together by this common judgment.
The
Petitioners in Civil Writ Petitions Nos. 5409-10 of 1980 are the TATA Tea
Limited and a shareholder of the said Company. These petitions are directed
against the State of West
Bengal, Commissioner
of Agricultural Income-tax of West Bengal,
West Bengal Agricultural 966 Income-tax Officer, Calcutta Range-I, Union of India and Income-tax
Officer, O-Ward, Companies District-II, Calcutta.
The
Petitioners in Civil Writ Petitions Nos. 5411-12 of 1980 are also the TATA Tea
Limited and a shareholder thereof. The Respondents are State of Kerala, Commissioner and Assistant
Commissioner of Agricultural Income-tax at Kerala, Union of India and the
concerned Income-tax Officer. The Petitioners in other writ petitions are Tea
Companies and shareholders thereof and the Respondents are ranged on similar
lines as above.
The
Petitioners are Public Limited Companies growing as well as manufacturing tea
and selling the same. As far as the petitions directed against the State of West Bengal are concerned, the challenge
therein is to the constitutional validity of Sections 3 & 5 of the Bengal
Agricultural Income-tax (Amendment) Act, 1980. The Bengal Agricultural
Income-tax Act, 1944 provides for the levy and collection of agricultural
income-tax in the then Province of Bengal, the predecessor Province to the
present State of West Bengal and, after the coming into force of the
Constitution, the State of West Bengal. By the said amending Act, for the first
time, sub-sections (2) & (2A) of Section 8 of the Bengal Agricultural
Income-tax Act were omitted and always deemed to have been omitted. It is
alleged by the Petitioners that as a result of the omission of sub-sections (2)
& (2A) of Section 8 of the Bengal Agricultural Income- tax Act, 1944, the
State Legislature has 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 a seller and has thereby transgressed the
constitutional limitations contained in Article 246(3) of the Constitution of
India read with Entry 46 of List II of the Seventh Schedule to the Constitution
of India.
In the
aforesaid Writ Petitions Nos. 5409-10 of 1980 the process of manufacturing tea
has been described in some detail. To put it very briefly, the green tea grown
by the tea growers is withered by exposure to air under natural or controlled
conditions. Certain machinery and equipment is required for the aforesaid
process. The object of withering is partial dehydration of shoots to make them
leathery and flaccid for rolling and chemical changes. The change brounght
about is the increase in caffeline, soluble sugars and amino acids. The second
process involves rupture and distortion of tea shoots into smaller sizes to
allow mixing of enzymes and substrates. This is known as rolling. The process
of rolling is carried out by mechanical bruising, tearing, cutting, crushing
breaking and twisting tea leaves for which crank roller/ 967 rotorvane/C.T.C.
machines are employed. The third process is of fermentation which involves
exposure to air under controlled temprature. For this the equipment required is
fermentation chamber/trags/floor/troughs. As a result of this process, the colour
of tea changes from green to coppery. The next process is of drying or roasting
for stoppage of fermentation: dehydration to ensure keeping the quality of the
product. Drying or roasting has to be done at a temperature of 30 degree celsius
and humidity exposure to blast of hot air in a counter current dryer. The
equipment required for this is a conventional tea dryer. As a result of this
process, the moisture in the tea is reduced to 4 per cent and it becomes black
in colour. This manufacturing process is applied to tea leaves in a factory
which is situated within the garden area owned by the Petitioner and licensed
under the Factories Act. It is averred that the carrying out of the aforesaid
processes is a specialised operation involving the application of modern
methods of bio-chemical engineering. The cleaning of the tea is then done with
machines according to various sizes like broken pekoe, broken orange pekoe,
pekoe dust, dust, churmani dust and so on. There are other also other brands of
tea produced by the aforesaid process. It is needless to consider these
processes in detail except to state that they are quite elaborate and, in the
cases before us, valuable machinery is being used for carrying out these
processes which are carried out in factories.
The
case of the Petitioners is that the income derived from the sale of tea grown
and manufactured as aforesaid is derived partly from agriculture and partly
from manufacture.
Under
the Indian Income-tax Act, 1922 (referred to hereinafter as "the Act of
1922") and the Rules framed thereunder the income derived from the sale of
tea grown and manufactured by a seller, has to be computed in the manner laid
down in Rule 24 of the Income-tax Rules, 1922 and 40 per cent of the income so
computed is treated as income other than agricultural income and the remaining
60 per cent is treated as agricultural income. In respect of the income other
than agricultural income, it is the Union Parliament which has and before the
coming into force of the Constitution the Centre Legislature which had the
power to legislate in respect of taxes; and in respect of the agricultural
income, the legislative power in respect of taxation was left to the Provinces
under the Government of India Act, 1935 and to the States under the
Constitution.
The
Bengal Agricultural Income-tax Act, 1944 enacted by the Provincial Legislature
of Bengal defined agricultural income in identical terms as contained in
Section 2(1) of the Act of 1922. The Bengal Agricultural Income-tax Act further
provided by sub-section (2) of 968 Section 8 that notwithstanding anything contained
that Act, in the case of tea grown in West Bengal and sold by the grower
himself or his agents after manufacture, the agricultural income derived therefrom
shall be deemed to be that portion of the income computed as aforesaid under
the Act of 1922 on which income-tax was not payable under the Act of 1922 and
agricultural income-tax was levied on the whole of such agricultural income. As
a result of this, the position was that the income of an assessee who grew,
manufactured and sold tea in West Bengal was
computed in the manner laid down in the Act of 1922 read with Income-tax Rules,
1922 and agricultural income-tax was levied only in respect of 60 per cent of
that income. On coming into force of the Income-tax Act, 1961 which replaced
the Act of 1922, the position remained the same. The Income-tax Act, 1961
(referred to hereinafter as "the Act of 1961") came into effect from 1st April, 1962. The definition of agricultural
income in the Act of 1961 is contained in sub-section (1) of Section 2 of that
Act and is in pari materia with the definition of the said term in the Act of
1922. Rule 8 of the Income-tax Rules, 1962 is in pari materia with Rule 24 of
the Income-tax Rules, 1922. As a result of this even after the Act of 1961 and
the Income-tax Rules, 1962 came into force, a State Legislature could only
legislate in respect of taxes regarding that part of the income computed by the
Income-tax Officer concerned as aforesaid which is treated as agricultural income,namely,
60 per cent of it.
In
1979, the Legislature of the State of West Bengal enacted the Bengal Agricultural Income-tax (Amendment) Act,
1979. By the said Amendment Act, sub-section (2A) was added after sub-section
(2) in Section 8 of the Bengal Agricultural Income-tax Act, 1944. Very briefly
put, the said sub-section (2A) gave powers to the Agricultural Income-tax
Officer to make the computation of income derived from tea in cases where it
had not been computed for the purposes of assessment of income-tax under the
Act of 1961 or, although computed, the assessment under the Act of 1961 had
been annulled or set aside under that Act and no order of assessment under
Section 25 had been made within six years from the end of the year in which the
agricultural income was first assessable in the manner and subject to the
limitations and conditions set out in the said sub-section.
It is
not really necessary for us to consider this provision further in the view
which we have taken. Moreover, this Amendment Act remained in force only for
the period 1979-80 after which it was replaced by the Amendment Act of 1980.
The
West Bengal Legislature in 1980 amended the Bengal Agricultural Income-tax Act
by the Bengal Agricultural Income-tax (Amendment) Act, 1980. By the said
Amendment Act, sub-sections 969 (2) and (2A) of Section 8 of the Bengal
Agricultural Income- tax were deleted and always deemed to have been deleted as
already pointed out and Section 25(4) of that Act was omitted. Section 7 of the
Amendment Act provided for cases where the asessment under the Act of 1961 of
any agricultural income derived from tea was made before coming into force of
the Amendment Act but we are not concerned with that section. Under the
petition, the challenge is to the validity of Sections 3 and 5 of the Amendment
Act whereby the aforesaid sub-sections (2) and (2A) of Section 8 were omitted
with retrospective effect and Section 25(4) was omitted. It is submitted in the
petition that, from the speech of the Finance Minister at the time of
introducing the Bill for carrying out the amendments, as well as from the
affidavit in reply filed by the State of West Bengal, it is clear that the
entire object of the amendments was to subject to the levy of agricultural
income-tax, the entire income derived by an assessee from the sale of tea grown
and manufactured by him.
We
come next to the petitions against the State of Kerala. Under the Agricultural Income-tax Act, 1950 passed by the
Legislature of the State of Kerala, "agricultural income" is defined
in the same maner as under the Act of 1922 and there was an Explanation after
clause (2) in Section 2 (a) stating that agricultural income derived from land
used for agricultural purposes by the cultivation of tea leaves 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 enactments relating
to the Indian Income-tax Act. By an Act called "The Agricultural
income-tax (Amendment) Act, 1980" (Kerala Act No. 17 of 1980), the Kerala
Agricultural Income-tax Act was amended and the said Explanation was deleted.
It was submitted that this deletion was made with a view to make the entire
income earned by an assessee who grew and manufactured tea from the sale of tea
subject to the levy of agricultural income-tax. Here again, it was pointed out
that, from the speech of the Finance Minister at the time of introducing the
Bill concerned and the stand taken in Court by the State of Kerala, it was
clear that the entire object of the amendment was to make the entire income
derived by an assessee as aforestated liable to the levy of agricultural
income-tax. These submissions were adopted by the learned Counsel who appeared
for the other Petitioners and by Mr. Manchanda who appeare for the Union of
India. It is submitted by Dr. Paul, learned Counsel for the TATA Tea Company
that the aforesaid amendments, in so far as they purport to confer power on the
respective legislatures of the State of West Bengal and the State of Kerala to
legislate regarding taxes on the income from the sale of tea 970 grown and
manufactured by an assessee in excess of 60 per cent of such income computed in
the manner prescribed under the law relating to income-tax are void and of no
legal effect as they are beyond the legislative competence of the respective
legislatures of the States of West Bengal and Kerala respectively in view of
the provisions of Article 246 of the Constitution read with Entry 82 in List I
and Entry 46 in List II in the Seventh Schedule to the Constitution and the relevant
provisions of the law relating to income- tax.
Dr.
Paul, learned Counsel for TATA Tea Company and TATA Finlay Company further
submitted that, if the entire income derived from the sale of tea grown and
manufactured by an assessee were to be regarded as agricultural income, the
result would be that the Parliament would not have any competence to legislate
in respect of taxes on the same with the result that the provisions of the Act
of 1922 and the Act of 1961 imposing the levy of income-tax on any part of such
income would become ultra vires. This particular submission was not supported
by Dr. Gauri Shankar who appeared for Petitioner in W.P. No. 358 of 1984 and
was opposed by Mr. Manchanda who appeared for the Union of India.
As far
as the State of West
Bengal and the State
of Kerala are concerned, they are represented
by learned Counsel, Mr. Potti and Mr. Tapas Ray respectively. It was urged by
Mr. Potti and Mr. Ray that Article 366(1) of the Constitution merely states
that the term 'agricultural income" has the same meaning as given to it in
the enactments relating to income-tax, that the definition of the said term in
the Act of 1922 and the Act of 1961 did not prescribe that only a particular
portion of the income derived by an assessee from the sale of tea grown and
manufactured by him can be regarded as agricultural income and hence it was
open to the State Legislatures concerned to levy agricultural income-tax on
such entire income.
Alternatively,
it was submitted by them that, in any event, in law, the entire income derived
from the sale of tea by an assessee growing and manufacturing tea must be held
to be agricultural income in view of the decision of the Supreme Court in the
case of Bist & Co. (which we propose to refer to more particularly
hereinafter) and hence the State Legislature was entitled to levy agricultural
income-tax on the same. The Parliament had no power to legislate in respect of
such income.
In
order to examine the correctness of these contentions, certain relevant provisions
of law may be noted at this stage. Under Article 246(1) of the Constitution,
Parliament has exclusive power to legislate 971 with respect to any of the
matters enumerated in List I in the Seventh Schedule to the Constitution which
is referred to in the Constitution as the "Union List". Clause (3) of
that Article prescribes that a Legislature of a State has exclusive power to
make laws with respect to any of the matters enumerated in List II in the
Seventh Schedule (referred to in the Constitution as the "State
List").
Clause
(2) of the said Article provides that both Parliament and State Legislatures
have power to make laws with respect to any of the matters enumerated in List
III in the Seventh Schedule called the "Concurrent List". Entry 82 in
List I or the Union List reads "taxes on income other than agricultural
income." Entry 46 of List II (State List) reads "taxes on
agricultural income". Article 366 of the Constitution contains definitions
and sub-Article (1) thereof reads as follows:
"Agricultural
income means agricultural income as defined for the purposes of the enactments
relating to Indian Income-tax Act." The material portion of sub-section
(1) of Section 2 of the Act of 1922 (Indian Income-tax Act, 1922) defines
agricultural income as follows:
"Agricultural
income means:
(a)
any rent or revenue derived from land which is used for agricultural purposes,
and is either assessed to land-revenue in the taxable territories or 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-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 972 other than a process of the nature described
in sub-clause (ii);
x x x x"
Clause (c) of the said sub-section and the Proviso thereto are not material for
our purposes.
Section
59 of the Act of 1922 deals with the powers to make rules. Sub-section (1)
confers power on the Central Board of Revenue, subject to the control of the
Central Government, to make rules for carrying out the purposes of the Act of
1922 and for the ascertainment and determination of any class of income. The
material portion of sub-section (2) of that section runs as follows:
"Without
prejudice to the generality of the foregoing power, such rules may (a)
prescribe the manner in which, and the procedure by which, the income, profits
and gains shall be arrived at in the case of (i) incomes derived in part from
agriculture and in part from business;
x x x x"
Sub-section (5) of Section 59 reads as follows:
"Rules
made under this section shall be published in the Official Gazette, and shall
thereupon have effect as if enacted in this Act." Rule 24 of the
Income-tax Rules, 1922 deals with the computation of income derived from the
sale of tea grown and manufactured by the seller and that rule runs as follows:
"Income
derived from the sale of tea grown and manufactured by the seller in the
taxable territories shall be computed as if it were income derived from
business, and 40 per cent of such income shall be deemed to be income, profits
and gains liable to tax:
973
Provided that in computing such income an allowance shall be made in respect of
the cost of planting bushes in replacement of bushes that have died or become
permanently useless in an area already planted, unless such area has previously
been abandoned." Sub-section (1) of Section 2 of the Act of 1961
(Income-tax Act, 1961) defines the term "agricultural income". The material
portion of that definition is similar to the definition contained in the Act of
1922 and runs as follows:
"(1)
"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 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 paragraph (ii) of this sub-clause".
Clause
(c) of the said sub-section is not material for our purpose. Section 295 of the
Act of 1961 deals with the power to make rules. The relevant portion of that
section runs as follows:
"(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 974 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;
x x x x
x" The Board referred to in Section 295(1) is the Central Board of Direct
taxes.
Section
296 provides inter alia that a rule framed under Section 295 shall be laid, as
soon as may be after the rule is made, before each House of Parliament and
shall have effect subject to any modification or deletion made by both Houses
of Parliament. Rule 7 of the Incometax Rules, 1962 made under Section 295 of
the Act of 1961 deals with income which is partially agricultural and partially
from business.
Rule 8
deals with income from the manufacture of tea and the said rule runs as
follows:
"(1)
Income derived from the sale of tea grown and manufactured by the seller in India shall be computed as if it were
income derived from business, and forty per cent of such income shall be deemed
to be income liable to tax.
(2) In
computing such income an allowance shall be made in respect of the cost of
planting bushes in replacement of bushes that have died or become permanently
useless in an area already planted, if such area has not previously been
abandoned, and for the purpose of determining such cost, no deduction shall be
made in respect of the amount of any subsidy which, under the provisions of
clause (30) of Section 10, is not includible in the total income." Section
7 of the Bengal Agricultural Income-tax Act, 1944 deals with the computation of
tax and allowances under the head "AGRICULTURAL INCOME FROM
AGRICULTURE". Section 8 of that Act deals with the computation of tax on
mixed income. Sub-section 975 (1) of Section 8, very briefly stated, prescribes
that in case of such mixed income which is partly agricultural and is
assessable under the said Bengal Act and partly chargeable under the Indian
Income-tax Act of 1922 under the head "Business", agricultural
income-tax would be payable by an assessee in respect of the market value of
agricultural produce which has been raised by the assessee or received by him
as rent-in-kind and which has been utilised by him as raw material in such
business or the sale receipts of which are included in the accounts of the
business subject to allowances permissible under that Act. Clause (a) of the
Proviso to that sub-section makes it clear that if, for the purposes of
assessment of income-tax under the Act of 1922, the market value of the produce
had been determined that would be accepted as market value also for the said
Bengal Act. Clause (b) of the Proviso deals with common charges on agricultural
income and income chargeable under the Act of 1922. The material portion of
sub-sections (2) and (3) of the said section ran as follows:
"(2)
Notwithstanding anything contained in this Act, in the case of tea the plant
Camellia The a (Linn.) grown in West Bengal and sold by the grower himself or
his agent after manufacture, the agricultural income derived there from shall,
as long as for the purposes of assessment of income- tax under the Indian
Income-tax Act, 1922, the income derived there from is computed under that Act
in such manner as to include agricultural income, be deemed to be that portion
of such income as so computed on which income-tax is not payable under that
Act, and agricultural income- tax at the rates specified in the Schedule shall
be payable on the whole of such agricultural income as so computed.
X X X X
X (3) For the purpose of the assessment of agricultural income-tax under this
section or any rule made there under a certified copy of an order of an
assessment under the Indian Income-tax Act, 1922, or a certified copy of an
order of any appellate or revising authority or of the High Court or of the
Supreme Court altering or amending such order of assessment under the
provisions of that Act shall be conclusive evidence of the contents of such
order." The Bengal Agricultural Income-tax (Amendment) Act,1980 976
(referred to hereinafter as "the Bengal Amendment Act of 1980") was
passed by the Legislature of the State of West Bengal and published in the Gazette on 31st March, 1980. By Section 2 of that Act, Section 7A was inserted into the
Bengal Agricultural Income-tax Act, 1944 and that section runs as follows:
"7A:
Notwithstanding anything to the contrary contained in this Act, in the case of
an assessee being a company or a firm or other association of persons, the
agricultural income of such assessee shall be computed in accordance with the
method of accounting regularly employed by such assessee for such computation:
Provided
that if, in any case, the method of accounting as aforesaid is such that, in
the opinion of the Agricultural Income-tax Officer, the agricultural income
cannot be computed, the computation shall be made on such basis and in such
manner as the Agricultural Income-tax Officer may determine." Section 3 of
the Amendment Act of 1980 provides that subsections (2) and (2A) of Section 8
of the Bengal Act of 1944 shall be omitted and shall be always deemed to have
been omitted. Section 7 of the Bengal Amendment Act of 1980 runs as follows:
"(7)
Notwithstanding any judgment, decree or order of any court, tribunal, or
authority to the contrary, where any assessment under the Income- tax Act, 1961
of any agricultural income derived from tea has been made before the coming
into force of this Act, the proceeding relating to such assessment may be taken
and continued under the principal Act as if this Act had not been passed."
It may be mentioned here that by the Bengal Agricultural Income-tax (Amendment)
Act, 1979, sub-section (2A) was inserted after sub-section (2) in Section 8 of
the Bengal Act of 1944. That Act remained in force only for a period of one
year. The material portion of sub-section (2A) ran as follows:
"(2A)
Where the computation of the income derived from tea has not been completed for
the purposes of assessment of income-tax under the Income-tax Act, 1961, or
where such computation has been completed but the 977 assessment under the
Income-tax Act, 1961, has been annulled or set aside under that Act and no
order of assessment under Section 25 has been made within six years from the
end of the year in which the agricultural income was first assessable, the
Agricultural Income-tax Officer shall, notwithstanding anything to the contrary
contained in this Act, assess the agricultural income derived from tea in such
manner and within such period as may be prescribed and shall determine the sum
payable by the assessee on the basis of such assessment:
X X X X
X" In the State of Kerala, agricultural income-tax was sought to be
imposed by the Agricultural Income-tax Act, 1950 passed by the Legislature of
the State of Kerala. The definition of the term "agricultural income"
is contained in sub-section (a) of Section 2 of the Kerala Agricultural
Income-tax Act. The said definition is in line with the definition of the said
term under the Act of 1922. There was an Explanation after clause (2) of
sub-section (a) of Section 2. The material part of sub-section (a) runs as
follows:
"2(a)
"agricultural income" means- (1) any rent or revenue derived from
land which is used for agricultural purposes;
(2)
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 sub-clause (ii);
x x x x
x" 978 The Explanation referred to above, which followed clause 2 ran 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" By Section 2 of the Agricultural Income-tax
Amendment Act, 1980 (Kerala Act 17 of 1980), the said Explanation was omitted
with effect from 1.4.1980. The affidavit in reply filed on behalf of the State
of Kerala as well as the speech of the Finance Minister of the said State at
the time of introducing of the Bill which was passed as the Kerala Amendment
Act of 1980, make it clear that the intention behind deleting of Explanation
was to make the entire income earned by a person from the sale of tea grown and
manufactured by him in the State liable to the levy of agricultural income-tax.
The
main question which we have to consider is whether the aforesaid provisios in
the Bengal Amendment Act of 1980 are in excess of the legislative competence of
the West Bengal State Legislature. It will also have to be considered whether
by reason of the deletion of the aforesaid Explanation effected by the Kerala
Amendment Act of 1980 the definition of the term "agricultural
income" in sub-section (a) of Section 2 of the Kerala Agricultural
Income-tax became void as in excess of the legislative competence of the State
Legislature.
A
perusal of Entry 82 of List I in the Seventh Schedule and Entry 46 in List II
makes it clear the respective Legislatures of the State of West Bengal and the
State of Kerala could pass laws imposing taxes only in respect of agricultural
income; and in respect of income other than agricultural income, it is only
Parliament which has the power to legislate in respect of taxes on such income.
sub- article (1) of Article 366 of the Constitution states that
"agricultural income" means such income as is defined as
"agricultural income" for the purposes of enactments relating to
Indian income-tax. It is significant that the words used are not "as
defined by the enactments relating to Indian income-tax" but "as
defined for the purposes of the enactments relating to Indian income-tax."
(emphasis supplied). We have already set out the definition of the term
"agricultural income" under the Act of 1922 as well as that in the
Act of 1961 which replaced the Act of 1922. If these definitions are read by
themselves, it would be difficult to say 979 that there is any conflict between
them and the definition of the term "agricultural income" contained
in the Bengal Agricultural Income tax Act, 1944 after its amendment in 1980 or
the definition of the said term in the Kerala Agricultural Income-tax Act of
1950, even after the deletion of the aforesaid Explanation. However, it must be
realised that Section 59 of the Act of 1922 and Section 295 of the Act of 1961
both deal with rule making powers. Under the Act of 1922 that power is given to
the Central Board of Revenue and under the Act of 1961 that power is given to
the Central Board of Direct Taxes. Clause (a) of sub-section (2) of Section 59
of the Act of 1922 specifically confers powers on the Central Board of Revenue
to make rules prescribing the manner in which and the procedure by which
income, profits and gains shall be arrived at in the case of income derived in
part from agriculture and in part from business. A similar power is conferred
under Section 295 of the Act of 1961 on the Central Board of Direct Taxes to
make rules in respect of income derived in part from agriculture and in part from
business.
The
only difference between Section 59 of the Act of 1922 and Section 295 of the
Act of 1961 in this connection, to which our attention was drawn by Mr. Potti,
is that sub-section (5) of Section 59 provides that the rules made under the
said Section shall be published in the Official Gazette and shall thereupon
have effect as if enacted in the Act of 1922 whereas Section 296 of the Act of
1961 provides that the rules made under the Act of 1961 have to be laid before
each House of Parliament in the manner prescribed in Section 296 and both
Houses of Parliament are entitled to make such changes therein as they may
resolve or they might direct that the rule should not be given effect to. This,
however, does not make much difference. Rule 24 of the Income-tax Rules, 1922
and Rule 8 of the Income-tax Rules; 1962 framed under Section 295 of the Act of
1961 are in pari materia.
It may
be mentioned here that Rule 7 of the Income-tax Rules, 1962 deals with the
computation of income which is partially agricultural and partially from
business and Rule 8 is the specific rule dealing with income derived from the
sale of tea grown and manufactured by the seller in India.
Under
sub-rule (1) of Rule 8, it is provided that such income shall be computed as if
it were income derived from business and 40 per cent of such income is deemed
to be income liable to tax.
A
perusal of the aforesaid Rule 8(1) makes it clear that under the said rule,
income from the sale of tea grown and manufactured by a seller in India has to
be computed as if it were income derived from 980 business which would imply
that the deductions allowable under the Act of 1961 in respect of income
derived from business would be allowable in the case of income derived from the
sale of tea grown and manufactured by a seller and further allowance would be
granted as set out in Rule 8(2) 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
income 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. The question is whether Rule 24 of the Income-tax Rules, 1922 and Rule 8
of the Income-tax Rules, 1962 can be said to form part of the definition of the
term "agricultural income" under the Act of 1922 and the Act of 1961
respectively.
In Karimtharuvi
Tea Estates Ltd. & Anr. v. State of Kerala & Ors., [1965] 48 I.T.R. 85
a Bench comprising of five learned Judges of this Court was called upon to
consider the question of the power of a State Legislature to make a law in
respect of taxes on agricultural income arising from tea plantations and the
Bench took the view that the power of the State Legislatures in this connection
is limited to legislating with respect to agricultural income determined in
accordance with Rule 24 of the Indian Income-tax Rules, 1922, under which
income derived from the sale of tea grown and manufactured by the seller is
first to be computed under Section 10 of the Act of 1922, as if it were income
derived from business. Any expenditure by the assessee, not being an allowance
described in clauses (i) to (xiv) of Section 10(2) of the Act of 1922 and not
being in the nature of capital expenditure or personal expenses of the
assessee, laid out or expended wholly and exclusively for the purposes of such
business would be deductible. Of the income so computed, 40 per cent, being
under Rule 24 of the Indian Income-tax Rules, 1922 treated as income liable to
income-tax, the other 60 per cent alone will be "agricultural
income". The State Legislature is free in the exercise of its plenary
legislative power to allow further deductions from such computed agricultural
income in the case of tea plantations as it considers fit but it cannot add to
the amount of agricultural income so computed by providing that certain items
of expenditure deducted in the computation of the income from business under
the provisions of the Indian Income-tax Act, 1922 be not deducted and be
considered to be a part of the taxable agricultural income.
The
State Legislature cannot enact such a provision which would make agricultural
income from tea plantations higher than what it would be if computed in
accordance with Rule 24 read with Section 10 of the Indian Income-tax Act. In
that case, the provision of the Kerala Agricultural Income-tax Act which had to
be considered was 981 Explanation 2 to Section 5 added by an amending Act in
1961 which deals with the computation of agricultural income. The provisions of
Section 2 of the Kerala Agricultural Income- tax Act which defines
"agricultural income" for the purposes of that Act and the
Explanation to clause (2) of sub-section (a) of that Section, which Explanation
has now been deleted by the impugned Amendment Act, were also considered. It
was pointed out (p. 91 of the Report) that:
"`Agricultural
income' as defined in the Constitution means 'agricultural income for the
purpose of the enactments relating to income-tax'.
One
such enactment is the Income-tax Act. Rule 24 of the Income-tax Rules 1922 has
been made under the power conferred by Section 59 of the Income- tax Act and
has effect as if enacted in that Act.
When
Section 59 of the Income-tax Act provides for the Rules made under that Act to
prescribe the proportions of income from business and income from agriculture
in the entire income derived in part from agriculture and in part from
business, the proportion so prescribed must be taken to be prescribed by the
Act. These rules were in existence in 1950 when the Constitution incorporated
the definition of "agricultural income" from the Income-tax Act by
reference. The definition of the term was bound up with the Rules." (emphasis
supplied).
It was
pointed out by Mr. Potti that there is a reference in the aforesaid judgment to
the said Explanation contained in Section 2(a)(2) of the Kerala Agricultural
Income-tax Act, which is now deleted, and which substantially incorporated the
provisions of Rule 24 of the Income-tax Rules, 1922 about the computation of
income derived by an assessee from the sale of tea grown and manufactured by
him and the respective proportions of the same which could be regarded as
agricultural income and other income respectively. It is, however, not possible
to say that the aforesaid decision is essentially based on the said Explanation
as contended by Mr. Potti.
The
question whether computation of income by the Central Income-tax authorities
could be disregarded by an Agricultural Income-tax Officer acting under the Kerala
Agricultural Income-tax Act came up for consideration before another Bench of
five learned Judges of this Court in Anglo- American Direct Tea Trading Co.
Ltd. etc. v. Commissioner of Agricultural Income-tax, Kerala, [1968] 69 I.T.R.
667. In that case the year in question were 1958-59 to 1961-62, 982 with the
result that the provisions of the Act of 1922 as well as the Act of 1961 and of
the Income-tax Rules, 1922 as well as the Income-tax Rules, 1962 had to be
taken into account. This Court followed its decision in the case of Karimtharuvi
Tea Estates Ltd. & Anr. v. State of Kerala & Ors., [1965] 48 I.T.R. 85
and held that income from the sale of tea grown and manufactured by an assessee
is derived partly from business and partly from agriculture. This income is
computed as if it were income from business under the Central Income-tax Act
and the Rules made there under. Of the income so computed as aforesaid, 40 per
cent is deemed to be income derived from business and assessable to non-
agricultural income-tax. The balance of 60 per cent of the income so computed
is agricultural income within the meaning of the Central Income-tax Act and the
Constitution of India and the power of the State Legislature to make a law in
respect of taxes on agricultural income arising from tea plantations is limited
to legislating with respect to the agricultural income so determined. It was
also pointed out that the Explanation to Section 2(a)(2) of the Kerala
Agricultural Income-tax Act, 1950 adopted this rule of computation. It was held
in that case that the Agricultural Income-tax Officer acting under the Kerala
Act was bound to accept the computation of the tea income already made by the
Central Income-tax authorities and to assess only 60 per cent of the income so
computed, less deductions allowable under Section 5 of the Kerala Act in so far
as the same had not been allowed in the assessment under the Central Income-
tax Act. The Court also held that if, before Agricultural Income-tax Officer
proceeds to make the assessment under the Kerala Act, an assessment of income
by the Income-tax Officer under Rule 24 of the Income-tax Rules, 1922 or Rule 8
of the Income-tax Rules, 1962 had been made, then the Agricultural Income-tax
Officer acting under the Kerala Act is bound to accept the computation of the
tea income already made by the Central Income-tax Authorities as aforesaid. In
the case of State of Tamil Nadu v. Kannan Devan Hills Produce Co. Ltd., [1972]
84 I.T.R. 475 a Division Bench comprising of two learned Judges of this Court
followed the aforesaid decisions.
In the
case of Tea Estate India P. Ltd. v. Commissioner of Income-tax, West Bengal II,
[1976] 103 I.T.R. 785 a Bench comprising of two learned Judges of this Court
observed (at P. 795) as follows:
"Income
which is realised by sale of tea by a tea company which grows tea on its land
and thereafter subjects it to manufacturing process in its factory is an
integrated income. Such income consists of two elements or com- 983 ponents.
One element or component consists of the agricultural income which is yielded
in the form of green leaves purely by the land over which tea plants are grown.
The second element or component consists of non-agricultural income which is
the result of subjecting green leaves which are plucked from the tea plants
grown on the land to a particular manufacturing process in the factory of the
tea company." The decisions in the cases of Karimtharuvi Tea Estates Ltd.
& Anglo-American Direct Tea Trading Co. Ltd., [1968] 69 I.T.R. 667, [1965]
48 I.T.R. 85 referred to earlier have been cited with approval by a Division
Bench of this Court in Commissioner of Income-tax, Madras v. R.M. Chidambaram Pillai,
etc., [1977] 106 I.T.R. 292.
A
reading of Article 245 of the Constitution with Entry 82 of List I and Entry 46
of List II in the Seventh Schedule makes it clear that the State Legislature
has exclusive jurisdiction to legislate in respect of taxes on agricultural
income; and in respect of taxes on other income, it is Parliament alone which
can legislate.
The term
"agricultural income" used in that Entry has to be construed in
accordance with the definition of the said term in Article 366(1) of the
Constitution of India and that sub- article states that agricultural income
means "agricultural income as defined for the purposes of the enactments
relating to Indian Income-tax". A scrutiny of the aforesaid decisions of
this Court in Karimatharuvi Tea Estates Ltd. (supra) and Anglo-American Direct
Tea Trading Co. Ltd., [1968] 69 I.T.R. 667 shows that this Court has consistently
taken the view that the definition of the term "agricultural income"
for the purposes of the Act of 1922 and tha Act of 1961, being Acts pertaining
to the levy of income-tax, has to be considered in the light of Rule 24 of the
Income-tax Rules, 1922 in the case of the Act of 1922 and Rules 7 and 8 of the
Income-tax Rules, 1962 as far as the Act of 1961 is concerned. An analysis of
the said decisions shows that this Court has taken the view that, in case of
income from the sale of tea grown and manufactured by an assessee, Rule 24 of
the Income-tax Rules, 1922 and Rule 8 of the Income-tax Rules, 1962 although at
first glance they appear to be rules of apportionment and computation, must be
treated as incorporated in the definition of the term "agricultural
income" in the Act of 1922 and the Act of 1961 respectively.
It is
true that in both the cases, Karimtharuvi Tea Estates Ltd. (supra) &
Anglo-American Direct Tea Trading Co. Ltd., [1968] 48 I.T.R. 83 it has been
noticed by this Court that the said Explanation to Section 2(a)(2) to the Kerala
Agricultural Income-tax Act 984 was in line with the provisions of Rule 24 of
the Income-tax Rules, 1922 and Rule 8 of the Income-tax Rules, 1962 but that by
itself does not make any difference and the reading of the aforesaid decisions
makes it perfectly clear that even without that Explanation the position would
have been the same. The conclusion which must follow is that although the
Explanation has been deleted from clause (2) of sub- section (a) of Section 2
of the Kerala Agricultural Income- tax Act and in spite of the amendments
carried out by the Amendment Act of 1979 and thereafter the Amendment Act of
1980 in the case of the Bengal Agricultural Income-tax Act, an Agricultural
Income-tax Officer acting under the Kerala Agricultural Income-tax Act or the
Bengal Agricultural Income-tax Act has no power to levy agricultural income-tax
except in respect of 60 per cent of the income derived by an assessee from the
sale of tea grown and manufactured by him and computed in the manner laid down
under the relevant Central Incometax Act and the Rules framed thereunder.
It
was, however, contended by Mr. Potti on behalf of the State of Kerala and Mr. Tapas
Ray on behalf of the State of West Bengal that the position as emerging from
the aforesaid decisions of this Court has been altered by the decision of this
Court in the case of Commissioner of Sales Tax, Lucknow v. D.S. Bist &
Ors., [1979] 44 S.T.C. 392. In that case the assessee owned some tea gardens in
the State of U.P. and sold the tea-leaves grown by
him in his gardens after processing and packing the same. A question arose
whether the tea leaves sold by the assessee were agricultural produce grown by himself
and the sales were, therefore, not exigible to sales tax under the Proviso to
Section 2(i) of the U.P. Sales Tax Act, 1948. The contention of the revenue was
that the goods in question, namely, tea leaves grown and processed as aforestated
had ceased to be an agricultural produce after processing and were, therefore, exigible
to sales tax. The processes to which tea-leaves were subjected by the assessee was
described by the Revising Authority as follows (p. 394):
"(1)
The tea-leaves were first of all subjected to withering in shadow in rooms on a
wooden floor for about 14 hours.
(2)
Then they were crushed by hand or foot and were then roasted for about 15
minutes.
(3)
Later they were roasted on mats for about 15 minutes.
985
(4) And then they were covered by wet sheets for generating fermentation.
During this process the colour of leaves was changed from green to yellowish.
(5) he
leaves were then subjected to grading with sieves of various sizes. Fanning
machines are also used in completing the grading process.
(6)
The produce was then finally roasted with charcoal for obtaining suitable flavour
and colours.
(7) It
is this final product which was eventually sold by the assessee." It was
observed by the Supreme Court that if the tea- leaves sold by the assessee
substantially retained the character of being an agricultural produce, the assessee's
sales would not be exigible to sales tax. If, on the other hand, the leaves had
undergone such vital changes by processing that they lost their character of
being an agricultural produce and became a different commodity, then the sales
made by the assessee were exigible to sales tax.
The
Court held that, on the findings recorded by the revising authority, it could
not be justifiably held in law that the tea-leaves lost their character of
being an agricultural produce and became something different. All the processes
applied by the assessee were necessary for the purpose of saving the tea-leaves
from perishing, making them fit for transporting and marketing them. It was
submitted by learned Counsel that this decision laid down that the processes
involved in producing marketable tea were only such as would be carried out by
an agriculturist to make his produce marketable and hence the entire income
derived from the sale of such tea leaves should be regarded as agricultural
income. In our view, it is impossible to accept this contention. In the first
place, the question before the Court in that case was not relating to
agricultural income- tax at all but relating to sales tax. Moreover, what the
Court was called upon to consider, and what it did to consider, was only
whether the tea-leaves after undergoing the processes set out earlier continued
to be agricultural produce or whether they became a different commodity which
could not be regarded as an agricultural produce. It is significant that the
aforesaid decisions rendered by Benches comparising five learned Judges of this
Court in Karimatharuvi and Anglo-American's, Cases, as well the other decisions
referred to earlier, have not been referred to in that decision at all, and
rightly so, because the Division Bench in Bist's Case was called upon to
consider 986 a question which was essentially a different question. The ratio
of the decision in Bist's Case has no application to the cases before us. That
decision is, therefore, of no assistance to learned Counsel for the State of Kerala and the State of West Bengal.
We
find that the judgment in Bist's Case referred to above has been distinguished
by a learned Single Judge of the Kerala High Court in High Land Produces Co. Ltd.
& Anr.
etc.
v. Inspecting Asstt. Commr. of Agricultural Income-tax & Sales Tax
(Special), Kottayam, and Ors. etc., [1984] 148 I.T.R. 746 in considering the
scope of the power of the State Legislature to tax agricultural income. That
case arose after the aforesaid amendment of Section 2(a) of the Kerala
Agricultural Income-tax Act, 1950 whereby the Explanation at the end of Section
2(a)(2) thereof was deleted. It has been pointed out by the learned Judge that
the Explanation to Section 2(a) of the Kerala Agricultural Income-tax Act, 1950
was, in substance, in harmony with the concept of mixed income contemplated by
Section 295(2)(b) of the Act of 1961 and Rule 8 of Income-tax Rules, 1962. The
Explanation specifically referred to that portion of the income from tea as was
defined by the Central Act and Rule 8 to be agricultural income by exclusion
from total income computed under the Central Act. This Explanation has been
omitted by the Amendment Act of 1980. The State Legislature is perfectly
competent to omit any provision which it has enacted. However, it cannot
thereby widen the ambit of the State Act so as to bring to tax the entire
income derived from the sale of tea grown and manufactured by an assessee.
It has
been pointed out by the learned Judge in his judgment that none of the
observations in Bist's Case could be read to mean that the entirety of the
income derived from the sale of tea grown and manufactured by the assessee
would be chargeable to agricultural income-tax, for such a construction would
not only be unwarranted by the facts and reasoning of that case, but would also
be directly in conflict with the Central statute and the principle laid down by
a larger Benches comprising five learned Judges of the Supreme Court in the
aforesaid two decisions.
It was
contended by Mr. Potti and Mr. Ray, learned Counsel for the Respondent States
that Rule 8 of the Income- tax Rules, 1962 was not a part of an enactment and
could not be regarded as an enactment and hence it need not be taken into
account in considering the definition of the term "agricultural
income" under the Constitution. It was pointed out by them that, unlike
sub-section (5) of Section 59 of the Act of 1922 which provided that the rules
made under the said section would have effect, after publication in the
Gazette, as if enacted in 987 that Act, Section 296 of the Act of 1961 merely
provided inter alia that a rule framed under Section 295 had to be laid, as
soon as may be, before each House of Parliament while it is in Session for a total
period of thirty days and unless it was directed to be deleted or amended by
both Houses of Parliament it would be given effect to. It was pointed out by
them that Rule 8, therefore, could not be said to be enactment and hence it
could not affect the definition of the term "agricultural income"
under Article 366(1) of the Constitution. We are unable to accept this
submission. What Article 366(1) provides is that the term "agricultural
income" has the same meaning as attributed to it for the purposes of
enactments relating to Indian incometax and in our view, it is quite clear that
Rule 8 of the Income-tax Rules, 1962 as well as Rule 24 of the Income- tax
Rules, 1922, pertain to and are bound up with the definition of the term
"agricultural income" for the purposes of laws or enactments
pertaining to Indian income- tax and hence the provisions of those rules have
to be taken into account in considering the meaning of the term
"agricultural income" under sub-article (1) of Article 366 of the Constitution.
It was
next contended by Mr. Potti & Mr. Ray that Rule 8 went beyond the scope of
the rule making power conferred by Section 295 of the Act of 1961 and hence was
ultra vires.
This
submission has to be rejected. Clause (b) of sub- section (2) of Section 295
specifically confers power on the rule making authority to make rules relating
to the manner in which and the procedure by which income for the purposes of
the Act of 1961 would be arrived at in the case of income derived in part from
agriculture and in part from business and Rule 8 clearly provides for the
manner in which computation of income for the purposes of the Act of 1961 is to
be made in the case of income derived from the sale of tea grown and
manufactured by a seller in India and hence we totally fail to see how it can
be said that the said rule goes beyond the scope of the rule-making power
conferred under Section 295.
In
view of what we have discussed above, it appears to us that although the
Explanation to Section 2(a)(2) of the Kerala Agricultural Income-tax Act, 1950
has been deleted by the Amendment Act of 1980, the result would still be the
same, namely, that the Kerala State Legislature can impose tax only in respect
of 60 per cent of the income derived by an assessee who sells tea grown and
manufactured by him in India and such income has to be computed in the manner
laid down in the Act of 1922 and thereafter in the Act of 1961 for computation
of business income. The same is the position in respect of the powers of 988
the legislature of the State of West Bengal in spite of the amendments made by
the said legislature by the Amendment Act of 1980 and earlier under the
amending Act of 1979 which was in force only for one year as we have stated
before. It is not necessary to strike down the said amendments because they do
not directly conflict with the definition of the term "agricultural
income" under the Constitution as we have pointed out earlier, but we may
make it clear that they do not confer any wider power on the State Legislature
to impose taxes on agricultural income than what we have set out earlier.
Before
parting with the matter, it must be mentioned that the validity of the
aforesaid amendments to the Bengal Agricultural Income-tax Act, 1944 made in
1980 and the deletion of the Explanation in Section 2(a)(2) of the Kerala
Agricultural Income-tax Act were challenged as being ultra vires and invalid in
law on several other grounds. We have not thought it necessary to go into these
grounds in view of what we have held, as set out above. Dr. Pal on behalf of TATA
Tea Co. and TATA Finlay Co. also challenged the amendment carried out in 1980
in the Bengal Agricultural Income-tax Act on the ground of being its
retrospective in operation. It also appears to us unnecessary to go into this
question in view of what we have already held.
In the
result, although none of the prayers in the petitions is granted in terms, the
Petitioners substantially succeed in the Petitions. There will be a declaration
in terms of the last but one paragraph in favour of the Petitioners.
Considering the facts and circumstances of the case, however, we feel that the
parties should bear and pay their own costs and we direct accordingly.
S.L.
Petitions disposed of.
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