ANGLO AMERICAN DIRECT TEA TRADING CO LIMITED IN ALL APPEALS Vs. COMMISSIONER OF AGRICUTURAL INCOME TAX KERALA IN ALL APPEALS

JUDGEMENT

(1.) The appellant carry on the business of cultivation, manufacture and sale of tea. They own tea plantations in the State of Kerala. Some of them own tea plantations both within and outside the State. They are assessed to non-agricultural as well as agricultural incometax.

(2.) Before answering the aforesaid question it is necessary to refer to the relevant constitutional and statutory provisions. Under Entry 46, List II, Seventh Schedule to the Constitution, the State Legislature is competent make laws with regard to "taxes on agricultural income" Under Entry 82, List I, Parliament is competent to make laws with respect to taxes on income other than agricultural income' In view of Article 366 (1) agricultural income means "agricultural income as defined for the purposes of the enactments relating to Indian Income-tax." Article 274 (I) provides that a bill which seeks to vary this meaning requires the prior recommendation of the President. These provisions of the Constitution correspond to Sections 141(1), 311 (2), Sch. VII, List I, Entry 54, List II, Entry 41 of the Government of India Act, 1935. Section 2 (1) of the Indian income-tax Act, 1922 defined agricultural income. Section 10 provided for computation of income derived from business. Section 59 empowered the Central Board of Revenue to make rules which took effect as if enacted in the Act. Rules 23 and 24 of the Indian Income-tax Rules, 1922 framed under Section 59 provided for computation of the business profits where the income WAS derived partly from agriculture and partly from business. Under Rule 23, the market value of the agricultural produce used as raw material in the business was deducted in computing the business profits. Rule 24 provided that "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, 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." These pro-visions correspond to Sections 2 (1), 28 to 44 and 295 of the Income-lax Act, 1961 and rules 7 anti 8 of the Income-tax Rules, 1962. Section 2 (a) of the Kerala Agricultural Income-tax Act, 1950 defines agricultural income. The Explanation to Section 2 (a) (2) provides that "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," Section 3 is the charging section. Section 2 (s) read with Sections 4, 5, 9 and 10 define total agricultural income. Section 5 provides for computation of agricultural income after making certain deductions. The proviso to S. 5 lays down that "no deduction shall be made under this Section if it has already beer; made in the assessment under the Indian Income-tax Act, 1922." Section 6 provides for assessment of income derived from lands partly within the State and partly without. Section 7 relates to the method of accounting Section 17 deals with return of income. Section 18 provides for assessment of income. Sections 21 to 29 provide for assessments in special cases. Section 35 provides for assessment of income escaping assessment. Section 36 provides for rectification of mistakes. Section 67 empowers the Government to make rules. Rule 9 of the Kerala Agricultural Income-tax Rules, 1951 prescribes the deductions allowable under Section 5 (1) for depreciation of buildings, machinery plant and furniture in respect of tea factories Rule 15 prescribes the method of apportionment of income derived from lands partly within the State and partly without.

(3.) In Karimtharuvi Tea Estates Ltd., Kottayam v. State of Kerala, 1963 Supp 1 SCR 823= (AIR 1963 SC 760), this Court held that Explanation 2 to Section 5 of the Kerala Agricultural Income-tax Act added in 1961 disallowing certain deductions in the computation of agricultural income did not apply to computation of agricultural income derived from tea plantations. The reasons for this conclusion may be summarised thus: The definition of agricultural income in the Constitution and the Indian Income-tax Act 1922 is hound up with Rule 24 of the Income-tax Rules 1922. Income derived from the sale of tea grown and manufactured by the seller is to be computed under R. 24 as if it were income derived from business in accordance with the provisions of S. 10 of the Indian Income-tax Act. The Explanation to S. 2 (a) (2) of the Kerala Act adopts this rule of computation. Of the income so computed, 40 percent is to be treated as income liable to income-tax and the ether 60 per cent only is deemed to be agricultural income within the meaning of that expression in the Income-tax Act. The power of the State legislature to make a law in respect of taxes on agricultural income arising from tea plantation is limited to legislating with respect to the agricultural income so determined. The legislature cannot add to the amount of the agricultural income so determined by disallowing any item of deductions allowable under R. 24 read with S. 10 (2) (xv) of the Indian Income-tax Act. Explanation 2 to S. 5 of the Kerala Act if applied to income from tea plantations would create an agricultural income which is not contemplated by the Income-tax Act and the Constitution and would be void, and it should therefore be construed not to apply to the computation of income from tea plantations.