COMMISSIONER OF INCOME TAX v. MADDI VENKATASUBBAYYA & ANR
[Citation -1951-LL-0316]

Citation 1951-LL-0316
Appellant Name COMMISSIONER OF INCOME TAX
Respondent Name MADDI VENKATASUBBAYYA & ANR.
Court HC
Relevant Act Income-tax
Date of Order 16/03/1951
Judgment View Judgment
Keyword Tags agricultural operation • transfer of property • agricultural produce • construction company • agricultural income • right of occupancy • immovable property • trading operation • source of income • arrears of rent • land revenue • cost price
Bot Summary: Agricultural income has been held not to be assessable as business profits merely because the recipient of the income is a moneylender who has lent monies on a mortgage with possession and is receiving the rents and profits of agricultural land in lieu of interest on the loan. The owner of the land, or of an interest therein, be he the landlord, ryot, lessee or usufructuary mortgagee, has an interest in the land and derives his income from the land. Section 2(1)(a),(ii) and and of the Act clearly indicate that the persons entitled to exemption are the persons falling within the following categories:-The owner who lets agricultural land to cultivating tenants for a stipulated rent; the owner of agricultural land in which the tenant has a permanent right of occupancy with liability to pay a fixed rent or revenue; the owner of agricultural land who cultivates it himself; the lessee of such land; an occupancy tenant of such land having a permanent tenancy with liability for a fixed rent; a usufructuary mortgagee of the interest of the owner, landholder or tenant of such land as the case may be; a sub-lessee; and persons occupying a similar position. A cultivating owner or tenant of land who sells a standing crop or the produce after harvest, derives his income from his land by agriculture. A profit accruing to a firm of merchants having no interest in land but having a mere licence to enter upon land and gather the produce as incidental to a transaction of purchase of standing crops, by a sale of the crops after harvest, differs radically in its character from income derived by way of rent or revenue or by the performance of agricultural operations by a person having an interest therein as owner, tenant or mortgagee with possession etc. In these cases he gets the right to gather the fruits or the timber on the land but the profit realised by the merchant on a sale of the commodity is not agricultural income derived from land but is business profit. Land used for agricultural purposes was not agricultural income within Section 2(1) of the Income-tax Act.


JUDGMENT STATEMENT OF CASE. This is application by Commissioner of Income-tax, Madras, under Section 66(1) for reference of following questions of law to Honourable High Court:- " (1) Whether, in circumstances of this case, operations of pruning leaves and turning soil performed by respondent firm were sufficient to constitute' agriculture' within meaning of clause (1) of Section 2(1)(b) of Indian Income-tax Act, 1922? " (2) Whether, by reason of performance of these operations or otherwise, respondent firm can properly be described as' cultivators' within meaning of clauses (ii) and (iii) of said Section 2(1)(b)? " (3) Whether, in circumstances of this case, either whole of profit of Rs. 12,000 derived by respondent firm from sale of tobacco leaves, or such portion thereof as is attributable to operations of pruning, turning soil and plucking leaves, or such portion as is attributable to flue-curing operations, could be regarded as' agricultural income' within meaning of Section 2(1)(b) of Indian Income-tax Act, 1922? " 2. respondents in their reply have agreed that questions of law do arise and have accepted last two questions as framed by applicant. With regard to first question, however, they have requested Tribunal to alter it in following form:- " Whether, in circumstances of case, operations of pruning leaves, turning soil and harvesting crop performed by respondent firm, lessee of land on which crop was already raised, were sufficient to constitute' agriculture' within meaning of clause (i) of Section 2(1)(b) of Indian Income-tax Act, 1922? " 3. This question presupposes that respondents were lessees of land on which plants grew. Appellate Assistant Commissioner in his order has held that respondents had purchased standing crop of tobacco. No question of respondents being lessees was evidently pressed before him. When they came up on appeal against decision of Appellate Assistant Commissioner to Tribunal they did not demur to that fact in their grounds of appeal. decision of Tribunal was arrived at on basis that respondents had purchased standing crop of tobacco. In circumstances, we think that it is too late for respondents to ask us to alter fact and state that respondents were lessees of lands. 4. facts of case are that respondents purchased standing crop of tobacco on area of 93 acres and 12 cents for Rs. 13,833 in January, 1943. After purchase they attended to pruning of plants which, it was stated, was necessary to promote luxurious growth of leaves, as otherwise they would be stunted. They also turned soil between rows of plants and harvested them by plucking ripe leaves, as and when they became ripe. It is stated that harvesting is usually completed by end of March. Thereafter they cured tobacco by process known as' flue-curing' and sold it in market for Rs. 33,498. total expenses for pruning came to about Rs. 547-12- 0 and expenses for turning soil came to about Rs. 6 per acre. After deducting other expenses amount received by them in excess of all their expenditure came to Rs. 12,000. 5. Income-tax Officer thought that some process of agricultural operations was no doubt employed; yet, whole of these Rs. 12,000 was not derived from agriculture. He, therefore, divided this sum into two parts. He thought that proportion of Rs. 4,500 could be attributable to agricultural income, and, therefore, not taxable, whereas balance of Rs. 7,500 was taken by him as business income and was taxed in hands of respondents. 6. Appellate Assistant Commissioner, on appeal, also took same view. Tribunal, however, held that operations carried on by respondents, viz., pruning of leaves, turning soil, plucking of ripe leaves and also flue-curing for marketing, amounted to agricultural operations and reversed order of Department. Against that decision Commissioner of Income-tax has filed this application for reference. We think question of law does arise, but questions of law as framed by applicant, in our opinion, are not to point. only point that Tribunal decided was with regard to sum of Rs. 7,500 which Income-tax Officer held was respondents' business income. With regard to balance of Rs. 4,500 Income-tax Officer came to conclusion that it was agricultural income. We, therefore, refer following question of law:- " Whether, in circumstances of case, Tribunal was right in holding that sum of Rs. 7,500 was' agricultural income' within meaning of Section 2(1)(b) of Act and exempt from taxation under Section 4(3)(viii) of Indian Income-tax Act? " 7. draft statement of case was placed on table. None was present on behalf of respondents. C. S. Rama Rao Sahib, for Commissioner. M. Subbaraya Ayyar, for assessee. JUDGMENT. (The Judgment of Court was delivered by VISWANATHA SASTRI, J.) question referred to us is as follows:- " Whether, in circumstances of case, Tribunal was right in holding that sum of Rs. 7,500 was' agricultural income' within meaning of Section 2(1)(b) of Act and exempt from taxation under Section 4(3)(viii) of Indian Income-tax Act? " facts are briefly these. assessee, firm of merchants, purchased standing crop of tobacco on area of 93 acres 12 cents for Rs. 13,833 in January, 1943, from person who had raised tobacco on land. tobacco was harvested, cured and sold in market by assessee before 21st March, 1943, for Rs. 33,498. plucking of ripe leaves, pruning and flue-curing of harvested tobacco were all done by assessee firm. It is also stated that there was some sort of ploughing on land, by assessee. curing of tobacco is said to be process which is ordinarily employed by cultivator of tobacco to render it fit for sale in market. assessee was not landholder or ryot or lessee of land on which tobacco crop stood. tobacco plants had been raised on land by its owner or lessee and they had reached such degree of maturity as to render them saleable as standing crops to tobacco merchants in locality. We may observe that it is not uncommon for merchants and traders in agricultural produce to purchase standing crops of tobacco, sugarcane, groundnut, etc., when crop is ready or nearly ready for harvest. purchaser in such case may have to do some pruning work with reference to crops as in this case and then cut crops and market produce. operations said to have been performed by purchaser in present case were evidently performed with consent of person who raised standing crop. They are incidental to reaping fruits of purchase. Income-tax Officer and Appellate Assistant Commissioner held that part of profit of assessee realised by sale of tobacco, namely Rs. 7,500, was derived from non-agricultural sources or operations and therefore liable to income-tax. Appellate Tribunal held that entire profits of assessee from tobacco dealer calculated in sum of Rs. 12,000 was agricultural income and was exempt from income-tax under Section 4(3)(viii) of Income-tax Act. Commissioner of Income-tax disputes correctness in law of decision of Appellate Tribunal. Hence this reference. burden is upon assessee who claims exemption from tax under Section 4(3)(viii) of Income-tax Act to prove that income is " agricultural income " as defined in Act: see Raja Mustafa Ali Khan v. Commissioner of Income-tax (1). It is true, as pointed by learned advocate for assessee, that exemption is conferred by Act upon particular kind of income and it does not depend on character of recipient. " Agricultural income " as defined in Act is exempt from tax even though it can be brought under one or other of heads of income set out in Section 6 of Act. Agricultural income has been held not to be assessable as business profits merely because recipient of income is moneylender who has lent monies on mortgage with possession and is receiving rents and profits of agricultural land in lieu of interest on loan. This is settled by decision of Judicial Committee in Commissioner of Income-tax v. Sir Kameswar Singh (2) and Raja Mustafa Ali Khan v. Commissioner of Income-tax (1). But it has to be observed that rent of agricultural income received by usufructuary mortgagee is agricultural income not because he is usufructuary mortgagee but because being usufructuary mortgagee he has gone into possession of land and received rent as such. mortgagee who receives rent receives it in character of person who has interest in land and (1) [1948] 16 I. T. R. 330 (P. C.) (2) [1935] 3 I. T. R. 305 (P. C.) who is entitled to possession thereof. Therefore income he receives in lieu of interest on loan is considered to be agricultural income. We, however, consider that this line of argument is not of assistance to assessee in present case. It is agreed that land on which tobacco crop was raised was assessed to land revenue and was used for agricultural purposes. income of assessee was obviously not " rent " or " revenue " derived from such land within meaning of Section (2)(1)(a) of Act. only question is whether it is " income derived from such land by agriculture " within meaning of Section 2(1)(b)(i) of Act. owner of land, or of interest therein, be he landlord, ryot, lessee or usufructuary mortgagee, has interest in land and derives his income from land. He may actually cultivate land or he may receive rent from cultivating tenants. In either case, rent is immediate and effective source of income and if rent is derived from agriculture, exemption from tax is attracted. Section 2(1)(a), (b)(ii) and (iii) and (c) of Act clearly indicate that persons entitled to exemption are persons falling within following categories:-The owner who lets agricultural land to cultivating tenants for stipulated rent; owner of agricultural land in which tenant has permanent right of occupancy with liability to pay fixed rent or revenue; owner of agricultural land who cultivates it himself; lessee of such land; occupancy tenant of such land having permanent tenancy with liability for fixed rent; usufructuary mortgagee of interest of owner, landholder or tenant of such land as case may be; sub-lessee; and persons occupying similar position. argument of assessee's learned counsel is that Section 2(1)(b)(i) which alone falls to be considered in present case is so wide in its scope as to be applicable to profits derived by merchant who purchases standing crop and sells produce after harvesting it. It is said that such profits constitute income " derived from land by agriculture ". cultivating owner or tenant of land who sells standing crop or produce after harvest, derives his income from his land by agriculture. landholder or lessor who receives his rent either in kind or in cash from his tenant, derives income from his land by agriculture, though person who actually ploughs and tills land is tenant. merchant who purchases standing crop derives profit from his contract of purchase at advantageous price and resale of produce at higher price. land is not direct or immediate or effective source of his income. Agricultural income cannot be said to accrue to every person into whose hands produce of land passes. It is only owner, landlord or ryot, or persons having derivative interest in land from these persons that can be said to " derive " income from land by performance of agricultural operations on it. merchant who purchases standing crop appears on scene when crop is ripe or very nearly ripe for harvest, and pays price for commodity in which he is trading. No doubt he has right to enter upon land to preserve crop, to tend it and to harvest it but he has no right or interest of any kind in land itself nor has he any right to exclusive possession of land for any period. Growing crops are movable property under Section 3 of Transfer of Property Act and Section 2, clause (6), of Registration Act. See also definition of immovable property in General Clauses Act. In English law sale of growing crops is regarded as sale of chattels. purchaser of standing crop differs from purchaser of harvested crops only in this, that former has right to enter upon land to attend to crop and cut it when it is ripe for harvesting. He is in position of holder of " licence " within definition of that term in Section 52 of Indian Easements Act. purchaser whether of standing crop or of harvested produce derives his profits as trader or merchant from purchase and resale of produce in market and does not derive profit from land in which ex concessi he has no interest. In Premier Construction Company Ltd. v. Commissioner of Incometax (1), Judicial Committee observed:- " In their Lordships " view principle to be derived from consideration of terms of Income-tax Act and authorities referred to is that where assessee receives income, not itself of character to fall within definition of agricultural income contained in Act, such income does not assume character of agricultural income by reason of source from which it is derived ". If contention in present case is to prevail, trader in grains, cereals or other produce who purchases standing crop ready to be harvested and sells standing crop at profit to another merchant, his profit is exempt from income-tax, even though he has no interest of any kind in land on which crops stand. Neither he nor his tenants or servants ever performed any agricultural operation on land. assessee earned profit by sale of tobacco at price over and above cost price paid for standing crop and expenses incurred in harvesting and curing tobacco. pruning and ploughing operations were ancillary operations of unsubstantial character and were conducted under arrangement with person who raised crop. Once standing crop passed (1) [1948] 16 I. T. R. 380 at 384. from ownership of cultivating tenant to that of trader who purchased it, it lost quality of agricultural income at that point and any profit made by trader thereafter by sale of produce at higher price than his cost price would, in our opinion, be business profit. direct source of assessee's income was purchase and sale of produce at advantageous price. mere fact that thing purchased was standing crop rather than any other chattel would not make profit derived from operation of buying and selling anything else than business profit. Rent, revenue or income derived from land by agriculture in Section 2 has reference to rent, revenue or income derived by person having some interest in land and by virtue of fact that he is owner of that interest. profit accruing to firm of merchants having no interest in land but having mere licence to enter upon land and gather produce as incidental to transaction of purchase of standing crops, by sale of crops after harvest, differs radically in its character from income derived by way of rent or revenue or by performance of agricultural operations by person having interest therein as owner, tenant or mortgagee with possession etc. profit in this case is derived, as we have already stated, by entering into contracts for purchase of commodity and by resale of that commodity for higher price. fact that movable property now in question springs from or is product of, agricultural operations carried out by owner or tenant of agricultural land, does not lead to conclusion that profit of trader who has no interest in land but who buys and sells movable property in course of his trade is " agricultural income " as defined in Act. fruit merchant may purchase only produce of orchard belonging to another and timber merchant may purchase only trees planted by owner of grove. In these cases he gets right to gather fruits or timber on land but profit realised by merchant on sale of commodity is not agricultural income derived from land but is business profit. In Yagappa Nadar v. Commissioner of Income-tax (1), this Court held that income earned by person who had licence to tap toddy from trees belonging to licensors and who sold toddy extracted by him at profit was non- agricultural income, though if same income was earned by owner or lessee of land on which trees grew, it would be agricultural income. learned counsel for Commissioner of Income-tax referred us to decision of Judicial Committee in Commissioner of Income-tax v. Kamakshya Narain Singh (2) which decided that interest on arrears of rent payable in respect of (1) (1927) I. L. R. 50 Mad. 923. (2) [1948] 16 I. T. R. 325. land used for agricultural purposes was not agricultural income within Section 2(1) of Income-tax Act. It was held that interest was neither rent nor revenue derived from land. relationship between tenant who executed bond for arrears of rent with interest and landlord was held to be that of debtor and creditor. There is however one observation of Judicial Committee which might be helpful in connection with present case. Their Lordships while holding that interest on rent was revenue derived by landholder, went on to hold that it was not revenue " derived " from land. They observed:- " word' derived' is not term of art. Its use in definition indeed demands enquiry into genealogy of product. But enquiry should stop as soon as effective source is discovered. In genealogical tree of interest, land indeed appears in second degree, but immediate and effective source is rent, which has suffered accident of non-payment ". Here also land indeed appears in history of trading operations of assessee but it cannot be said to be immediate or effective source of income made by assessee firm. immediate and effective source was trading operation of purchase of standing crop and its resale in market after harvesting produce at advantageous price. For these reasons we hold that sum of Rs. 7,500 was not exempt from liability to assessment to income-tax and that answer to question referred to must be in negative and against assessee. assessee shall pay Rs. 250, costs of Commissioner of Income-tax on this reference. Reference answered in negative. *** COMMISSIONER OF INCOME TAX v. MADDI VENKATASUBBAYYA & ANR.
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