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March 2009

Agricultural income — Even in case of an assessee having composite business of growing and manufacturing tea, income from sale of green tea leaves is purely income from agricultural products and is liable to be entirely taxed under the State Act and canno

By Kishor Karia, Chartered Accountant
Atul Jasani, Advocate
Reading Time 5 mins

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16 Agricultural income — Even in case of an
assessee having composite business of growing and manufacturing tea, income from
sale of green tea leaves is purely income from agricultural products and is
liable to be entirely taxed under the State Act and cannot be taxed under
Income-tax Act, 1961.


[Union of India v. Belgachi Tea Co. Ltd. & Ors.,
(2008) 304 ITR 1 (SC)]

The assessee, a public limited company carrying on the
composite business of growing and manufacturing tea in the district of
Darjeeling, has tea gardens known as Belgachi Tea Estate, which consists of the
gardens and a factory for manufacture of tea. The asseessee-company sells the
tea grown and manufactured in the said tea gardens. The factory in the said tea
gardens is licensed under Factories Act. The assessee-company is also selling
tea leaves produced in its tea gardens which are agricultural produce. The
assessee is also involved in manufacturing of tea. The income from such business
has been assessed all along under the provisions of the Income-tax Act, 1961.
The claim of the assessee-company is that the entire income should be assessed
under the provisions of the 1961 Act and after the income is assessed, tax
should be charged on 40% of such income under the 1961 Act and on the balance
60%, the State can tax under the Bengal Agricultural Income-tax Act, 1944.
According to the assessee, in view of the scheme of the 1961 Act read with Rule
8 of the Income-tax Rules, 1962, the income derived from the sale of the tea
grown and manufactured by a seller in India should be computed under the
provisions of the Act by the Income-tax Officer on the basis of the
aforementioned formula and that the sale proceeds of green tea leaves should be
treated as incidental to business and its income should also be computed on the
basis of aforementioned formula.

 

The Supreme Court observed that :

(i) There was no dispute on the fact that from the income
assessed, 60% is taxable by the State under the 1944 Act and 40% is taxable by
the Centre under the 1961 Act.

(ii) The object behind taxing the 60% and 40%
shares of the income assessed appears that there
are common expenses on establishment and staff for the two different
activities that is tea grown and tea manufactured. There can be independent
income from the sale of green tea leaves and by sale of tea, that is, after
processing of green tea leaves when green tea leaves become tea for use.
Income from agriculture is taxable by the State and sale of tea after
manufacturing is taxable by the Union of India as business income. To
segregate income and expenses from the two combined activities of the assessee
is not possible, but at the same time there cannot be two assessments of
income by two different authorities. Therefore, there can be only one
assessment of income from the tea business.

(iii) For the purpose of tax on agriculture income, the
Agriculture Income-tax Officer will go by the assessment order made under the
provisions of the 1961 Act and the contents of the assessment for the year
made by the Assessing Officer under the 1961 Act shall be conclusive evidence
of the contents of such order and he has to go by the assessment and tax only
60% income made under the assessment for the purpose of the 1944 Act. If there
is any apparent mistake in the order of the Income-tax Officer, he can bring
it to the notice of the Income-tax Officer and that can be rectified by the
Income-tax Officer, but no separate assessment of the income from ‘tea grown
and manufactured’ business can be made by the Agricultural Income-tax Officer
under the 1944 Act. He cannot once again assess that business income under the
1944 Act.

 


According to the Supreme Court, the question which however
required to be considered was whether the agriculture income be taxed under the
1961 Act. The Supreme Court noted that both Rule 8 of the Income-tax Rules,
1962, and S. 8 of the 1944 Act provide how the mixed income from the growing tea
leaves and manufacturing can be taxed. ‘Mixed income’ means the income derived
by an assessee from the combined activities, i.e., growing of tea leaves
and manufacturing of tea. Therefore, for purpose of computation of income under
the 1961 Act, it should be the mixed income from ‘tea grown and manufactured’ by
the assessee. The Supreme Court observed that if the income is by sale of green
tea leaves by the assessee, it cannot be called income assessable under the 1961
Act for the purpose of 40 : 60 share between the Centre and the State. In both
the provisions, i.e., Rule 8 of the Income-tax Rules, 1962, and S. 8 of
the 1944 Act, the words used are income derived from the sale of ‘tea grown and
manufactured’. The Supreme Court held that the income from sale of green tea
leaves is purely income from the agricultural products. There is no question of
taxing it as incidental income of the assessee when there is a specific
provision and authority to tax that income, i.e., the State under the
1944 Act. In that view of the matter, the agricultural income could not be tax
under 1961 Act.

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