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PETITIONER: ANGLO AMERICAN DIRECT TEA TRADING CO.LTD.

       Vs.

RESPONDENT: COMMISSIONER OF AGRICULTURAL INCOME-TAX,KERALA STATE, TRIVAN

DATE OF JUDGMENT: 10/01/1968

BENCH: BACHAWAT, R.S. BENCH: BACHAWAT, R.S. WANCHOO, K.N. (CJ) SHELAT, J.M. MITTER, G.K. VAIDYIALINGAM, C.A.

CITATION:  1968 AIR 1213            1968 SCR  (2) 745  CITATOR INFO :  RF         1972 SC 375  (4)  R          1976 SC1790  (18)  R          1977 SC 489  (22)  F          1988 SC1435  (32)

ACT: Kerala  Agricultural Income-tax Act (20 of 1950), ss. 2  and 5-Income-tax  Act (11 of 1922), s. 10 and Income-tax  Rules, 1922,  r. 24-Income derived by cultivation, manufacture  and sale of tea-Nonagricultural income determined under s. 10 of the Income-tax Act and r. 24 of the Income-tax Rules-Whether computation binding on Agricultural Income-tax Officer. Kerala  Surcharge  on Taxes Act (11 of 1957),  Surcharge  on agricultural  income for assessment year 1957-58-If  can  be levied.

HEADNOTE: The appellants were carrying on the business of cultivation, manufacture  and  sale  of  tea.  Some  of  them  owned  tea plantations  both  within and outside the State  of  Kerala. Income  derived from the sale of tea grown and  manufactured by  the  seller is derived partly from business  and  partly from agriculture, and, has to be computed under r. 24 of the Indian Income-tax Rules, 1922 (corresponding to r. 8 of  the 1962  Rules) as if ’it were income derived from business  in accordance  with the provisions of s. 10 of  the  Income-tax Act,  1922.  On the basis of r. 24, the  central  income-tax authorities computed the total tea income of the  appellants and  40% thereof, representing the non-agricultural  income, was assessed to non-agricultural income-tax and the  balance 60%   was  left  unassessed  as  agricultural   income.   in proceedings  under the Kerala Agricultural  Income-tax  Act, 1950,   the  agricultural  income  of  the  appellants   was determined  on  an  independent  computation  of  their  tea income.   The agricultural income so determined  was  higher than that arrived at by the central income-tax authorities. In some of the appeals, the Agricultural Income-tax  Officer levied  a  surcharge of 5% for the assessment  year  1957-58 under the Kerala Surcharge on Taxes Act, 1957.

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On  the questions : (1) whether the Agricultural  Income-tax Officer  was bound to follow the computation of income  from tea made by the Central Income-tax Officer; and (2)  whether the  surcharge could be levied, the High Court held  against the appellants. In appeal to this Court, HELD  : There is no provision in the Kerala Act  authorising the   Agricultural  Income-tax  Officer  to  disregard   the computation of the tea income made by the Central income-tax authorities   acting  under  the  Central  Act,   and,   the Agricultural Income-tax Officer, in making an assessment  of agricultural  income is bound to accept the  computation  of tea   income   already  made  by  the   central   income-tax authorities  and  to  assess  only  60%  of  the  income  so computed, less allowable deductions, as agricultural  income taxable under the Kerala Act. [751 B-C] 746 (a)  In view of Arts. 274(1) and 366(1) of the Constitution, 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  determined under s. 10 of the Income-tax Act and  r. 24 of the Income-tax Rules.  In fact, the Explanation to  s. 2(a)  (2) of the Kerala Act adopts this rule of  computation and  therefore,  the agricultural income taxable  under  the Kerala Act is 60% of the income so computed after  deducting therefrom  the allowances authorised by s. 5 of  the  Kerala Act, in so far as the same has -not already been allowed  in the assessment under the Central Income-tax Act.  Where  the agricultural income is derived from lands partly within  and partly   without  the  State  the  portion  of  the   income attributable  to lands within the State is determined  under s.  6  of  the  Kerala Act read with r.  15  of  the  Kerala Agricultural Income-tax Rules. [750 B-D; 751 A, C-D] Karimtharuvi Tea Estates Ltd.  Kottayam v. State of  Kerala, [1963] Supp.  1 S.C.R. 823, followed. (b)  It  may be difficult to make an assessment under s.  22 of the Kerala Act or     on  the basis of the previous  year under  s.  2A of the Kerala Act in the absence of  any  rule fixing  the  income  for  a broken part  of  the  year  with reference to an assessment made under the Indian  Income-tax Act.   In  spite  of these and  other  difficulties  in  the working  of  the Act, the  Agricultural  Income-tax  Officer cannot ignore the assessment of the tea income already  made by the central income-tax authorities. [752 B-D] Commissioner  of Agricultural Income-tax, Kerala v.  Perunad Plantations, (1965) 56 I.T.R. 193, overruled. (2)  No surcharge on agricultural income can be levied under the  Kerala  Surcharge  on  Taxes  Act  in  respect  of  the assessment year 1957-58. (753 DI Karimtharuvi  Tea Estates Ltd. v. State of Kerala, (1966)  3 S.C.R. 93 (1965) 60 I.T.R. 262 (S.C.), followed.

JUDGMENT: CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 936-39  of 1966. Appeals  by special leave from the judgment and order  dated July  16,  1965  of  the Kerala  High  Court  in  Income-tax Referred Cases Nos. 53 to 56 of 1964.                             AND Civil Appeals Nos. 585 to 588 of 1966. Appeals  by special leave from the judgment and order  dated August  18,  1964  of the Kerala High  Court  in  Income-tax

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Referred Cases Nos. 52 to 55 of 1953 (Agrl.).                             AND Civil Appeals Nos. 589 to 591 of 1966. Appeals by special leave from the judgment and orders  dated August  14, 1964 and July 17, 1964 of the Kerala High  Court in  Income-tax  Referred Cases Nos. 50, 51 and  49  of  1963 (Agrl.) respectively. 747 M.   C.  Setalvad,  S.  K. Dholakia, Joy  Joseph  and  O.  C Mathur, for the appellant (in C.As. Nos. 936-939, of 1966). M.   C.  Setalvad,  Joy Joseph, O. P., Malhotra  and  O.  C. Mathur,.  for  the appellant (in C.As. Nos. 595  to  588  of 1966). S.   T.  Desai, Joy Joseph, P. C. Bhartari and O. C.  Mathur for the appellant (in C.As. Nos. 599 to 591 of 1966). H.   R. Gokhale and M. R. K. Pillai, for the respondent (in C.As.     Nos. 936 to 939 of 1966). M.   R. K. Pillai, for the respondent (in C.As. Nos. 595 to. 591 of 1966). The Judgment of the Court was delivered by Bachawat, J. The appellants carry on the business of  culti- vation,   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 income- tax.  Civil Appeals Nos. 936 to 939 of 1966 arise out of the agricultural  income-tax, assessments of the Anglo  American Direct  Tea Trading Co., Ltd. under the Kerala  Agricultural Income-tax Act, 1950 for the years 1959-59, 1959-60, 1960-61 and  1961-62.  Civil Appeals Nos. 585 to 589 of  1966  arise out  of  the  agricultural  income-tax  assessments  of  the Travancore Tea Estates Co. Ltd. for the years 1957-58, 1959- 59,  1959-60 and 1960-61.  Civil Appeals Nos. 589 to 591  of 1966 arise out of the agricultural income-tax assessments of the Southern India Tea Estates Co., Ltd. for the years 1957- 58, 1958-59 and 1959-60.  For all the assessment years,  the central income-tax authorities computed the total tea income of  the appellants and 40 per cent thereof representing  the non-agricultural  income  was  assessed  to  nonagricultural income-tax and the balance 60 . per cent was left unassessed as agricultural income.  The appellants produced before  the Agricultural Income-tax Assistant Commissioner, Kerala,  the central  income-tax assessment orders, and requested him  to take  60 per cent of the tea income computed by the  central income-tax  authorities  as the gross  income  derived  from agriculture.    The   Agricultural   Income-tax    Assistant Commissioner disregarded the central income-tax assessments, and on independent computation of the tea income  determined the agricultural income of the appellants.  The agricultural income   so  determined  by  the   Agricultural   Income-tax Assistant  Commissioner was much higher than 60 per cent  of the  total  tea income assessed by  the  central  income-tax authorities.  On appeal, the Deputy Commissioner of Agri- 748 cultural  Income-tax and Sales Tax, South Zone, Quilon  held that  the  Agricultural Income-tax Office r  could  make  an independent computation of the tea income and was not  bound to  adopt  the  assessment made by  the  central  income-tax officer.  On further appeal, the Kerala Agricultural Income- tax   Appellate   Tribunal,   Trivandrum   held   that   the Agricultural  Income-tax  Officer was bound  to  accept  the computation   of  tea  income  by  the  central   income-tax authorities.   On  the application of the  respondents,  the Appellate  Tribunal, referred the following question of  law to the High Court under s. 60(q) of the Kerala  Agricultural

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Income-tax,  1950  : "Whether  the  Agricultural  Income-tax Officer is to follow the computation of income from tea made by the Central Income-tax Officer or whether he can find out the  income from tea plantations applying the provisions  of the  Income-tax Act and make the assessment  exercising  his powers under the Agricultural Income-tax Act ?".   Following its earlier decision in Commissioner of Agricultural Income- tax,  Kerala v. Perunad Plantations Ltd.(1), the High  Court held  that  the  agricultural  Income-tax  Officer  was  not obliged to accept the computation of the tea income made  by the Income-tax Officer acting under the Income-tax Act,  and it  was  open  to him to compute  the  income  independently applying  the relevant provisions of the Income-tax Act  and the  Agricultural  Income-tax Act.  From these  orders,  the present appeals have been filed by special leave. Before answering the aforesaid question, it is necessary  to refer   to   the  relevant  constitutional   and   statutory provisions.   Under Entry 46, List 11, Seventh  Schedule  to the Constitution, the State Legislature is competent to make laws  with regard to "taxes on agricultural income".   Under Entry 82, List 1, Parliament is competent to make laws  with respect to "taxes on income other than agricultural income". In   view   of  Art.  366(q),  agricultural   income   means "agricultural  income  as defined for the  purposes  of  the enactments  relating to Indian income-tax."  Article  274(1) provides  that  a  bill which seeks  to  vary  this  meaning requires  the prior recommendation of the President.   These provision  of  the Constitution correspond  to  ss.  141(1), 311(2), Sch.  VII, List 1 Entry 54, List 11, 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 s. 59 provided for computation of (1)  (1965) 56 I.T.R. 193. 749 the  business  profits where the income was  derived  partly from agriculture and partly from business.  Under r. 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 provisions correspond  to ss.  2(1), 28 to 44 and 295 of the Income-tax Act, 1961  and rules  7 and 8 of the Income-tax Rules, 1962.  Section  2(a) of  the  Kerala Agricultural Income-tax  Act,  1950  defines agricultural income.  The Explanation to s. 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 ss. 4, 5, 9 and 10 defines  total agricultural income.  Section 5 provides  for computation  of  agricultural income  after  making  certain deductions.   The  proviso  to  s.  5  lays  down  that  "no

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deduction shall be made under this section if it has already been 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  s. 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. In  Karimtharuvi  Tea  Estates Ltd., Kottayam  v.  State  of Kerala(1), this Court held that Explanation 2 to s. 5 of the Kerala Agricultural Income-tax Act added in 1961 disallowing certain deductions in the computation of agricultural income did not apply (1) [1963] Supp.  1 S.C.R. 823. L3 Sup CI/68-4 750 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 bound  up with r. 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 per cent is to be treated  as income  liable to income-tax and the other 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. The  question  arising  in  these  appeals  is  whether  the agricultural  Income-tax  Officer making  an  assessment  of agricultural income under the Kerala Agricultural Income-tax Act  is bound to accept the assessment of the  income  which has already been made by the central income-tax  authorities under r. 24 of the Income-tax Rules, 1922 read with S. 10 of the Indian Income-tax Act, 1922 or under r. 8 of the Income- tax  Rules,  1962 read with ss. 28 to 44 of  the  Income-tax Act,  1961.  We think that this question should be  answered in  the  affirmative.   Income from sale of  tea  grown  and manufactured  by the seller is derived partly from  business and partly from agriculture.  This income has to be computed as if it were income from business under the Central Income- tax Act and Rules. 40 per cent of the income so computed  is

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deemed to be income derived from business and assessable  to non-agricultural income-tax.  Having regard to the  decision in  Karimtharuvi’  Tea Estates Ltd., Kottayam  v.  State  of Kerala(1), we are bound to hold that (a) the Explanation  to S.  2  (a)  (2) of the Kerala  Agricultural  Income-tax  Act adopts  this rule of computation and (b) the balance 60  per cent of the income so computed is agricultural income within the   meaning  of  the  Central  Income-tax  Act   and   the Constitution. (1)  [1963] Sup.  1 S.C.R. 823. 751 The  agricultural income taxable under the Kerala Act is  60 per cent of the income so computed after deducting therefrom the  allowances authorised by s. 5 of the Kerala Act  in  so far  as  the  same  has not  already  been  allowed  in  the assessment  under the Central Income-tax Act.  There  is  no provision  in  the Kerala Act authorising  the  Agricultural Income-tax  Officer to disregard the computation of the  tea income  made by the income-tax authorities acting under  the Central   Income-tax  Acts.   The  Agricultural   Income-tax Officer  in making an assessment of agricultural  income  is 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  allowable deductions  as agricultural income taxable under the  Kerala Act.   Where the agricultural -income is derived from  lands partly  within  the State of Kerala and partly  outside  the State,  the  portion  of the income  attributable  to  lands within  the  State is determined under s. 6  of  the  Kerala Agricultural  Income-tax Act read with r. 15 of  the  Kerala Agricultural Income-tax Rules. Our  attention was drawn to the provisions of (a) ss.  8(2), 24(1) proviso, 24(2) proviso, 25(4) and 25(5) of the  Bengal Agricultural  Income-tax Act, 1944 and rules 7 and 8 of  the Bengal Agricultural Income-tax Rules, 1944, (b) s. 8 of  the Mysore  Agricultural Income-tax Act, 1957 and rule 6 of  the Mysore Agricultural Income-tax Rules, 1957, (c) s. 8 of  the Coorg  Agricultural  Income-tax Act, 1951,  (d)  the  second proviso  to s. 8 of the Assam Agricultural  Income-tax  Act, 1939 and rule 5 of the Assam Agricultural Income-tax  Rules, 1939,  (e)  Explanation  1 to s. 2 (a)  (2)  of  the  Madras Plantations Agricultural Income-tax Act, 1955 and r. 7(1) of the  Madras Plantations Agricultural Income-tax Rules,  1955 and  (f)  r. 5 of the Bihar Agricultural  Income-tax  Rules, 1949.   Under some Acts and Rules, the Agricultural  Income- tax  Officer  is bound to adopt the assessment  of  the  tea income  made  by the central  income-tax  authorities.   But under some other Acts and Rules, he is authorised in special cases to disregard this assessment and to make a fresh computation  of the tea income.We express no opinion on  the construction  of  these Acts and Rules For  the  purpose  of these  appeals,  it  is sufficient to say  that  the  Kerala Agricultural Income-tax Act and Rules do not confer upon the Agricultural  Income-tax Officer the power to disregard  the assessment  of  the tea income already made by  the  central income-tax  authorities.  We are unable to introduce by  way of  implication  in  a  taxing  statute  a  provision  which ’requires explicit statement. Difficulties   may   arise  in  making  an   assessment   of agricultural income under the Kerala Agricultural Income-tax Act on the basis 752 of  the  assessment of the tea income made  by  the  Central income-tax  authorities.  The previous year under s.  2  (o) (i)  of  the Kerala Act may be different from  the  previous

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year  under the Indian Income-tax Act.  This difficulty  may be  resolved by fixing the previous year for this  class  of income  under s. 2 (o) (ii) in conformity with the  previous year  under the Indian Income-tax Act.  But  the  artificial previous year under S. 2-A is not subject to the  provisions of S. 2(o) (ii).  Moreover, S. 22 authorises the  assessment of income for the period from the expiry of a previous  year to  the probable date of the departure of the assessee  from the State.  It may be difficult to make an assessment  under s.  22 or on the basis of the previous year under S. 2-A  in the absence of any rule fixing the income for a broken  part of  the year with reference to an assessment made under  the Indian  Income-tax  Act.   In  spite  of  these  and   other difficulties  in  the working of the Act, we are  unable  to agree  with  the decision in  Commissioner  of  Agricultural Income-tax Kerala v. Perunad Plantations Ltd. (1) or to hold that  the  Agricultural Income-tax Officer  can  ignore  the assessment  of  the tea income already made by  the  central income-tax authorities. On behalf of the appellants, it was argued that the power to compute  business income under r. 24 read with s. 10 of  the Indian Income-tax Act having regard particularly to  proviso (a)  to sub-s. (2)(vi), the proviso to sub-s.  2(vi-b)  sub- clause  (g) of the second proviso to sub-s.  2(xiv),  sub-s. (4-A) and the first proviso to sub-s. 5(a) of S. 10 must  be exercised  by  the Central Income-tax  Officer  alone,  that there  is  no provision in the Kerala  Act  conferring  this power  on  the  Agricultural  Income-tax  Officer  and  that therefore  the assessment of agricultural income  must  wait until the assessment by the Central Income-tax Officer under r.  24 read with S. 10.  This wider question does not  arise for decision and is left open.  In all the cases before  us, the assessments by the Central Income-tax Officer were  com- pleted before the Agricultural Income-tax Officer  proceeded to assess the agricultural income.  For the purpose of these appeals,  it  is  sufficient to say  that  the  Agricultural Income-tax  Officer  acting under  the  Kerala  Agricultural Income-tax  Act, 1950 is bound to follow the  assessment  of income by the Central Income-tax Officer under r. 24 of  the Income-tax  Rules,  1922 and r. 8 of the  Income-tax  Rules, 1962  where  such  assessment ha,-.  been  made  before  the Agricultural   Income-tax  Officer  proceeds  to  make   the assessment  under the Kerala Act.  The question referred  to the  High  Court is answered accordingly.  We  must  not  be understood  to say that the assessment made by  the  Central Income-tax Officer under r. 23 of the Income-tax Rules, 1922 (1)  (1965) 56 I.T.R. 193. 753 or r. 7 of the Income-tax Rules, 1962 is in any way  binding on "lie Agricultural Income-tax Officer. In  Civil Appeals Nos. 585 to 588 of 1966 and 589 to 591  of 1966,  the Agricultural Income-tax Officer made a  surcharge of  5  per cent for the assessment year  1957-58  under  the Kerala Surcharge on Taxes Act, 1957.  On appeal, the  Deputy Commissioner  held that the surcharge was rightly made.   On further appeal, the Appellate Tribunal held that the levy of the  surcharge  was  illegal.   On  the  application-of  the respondent,  the Appellate Tribunal referred  the  following additional  question of law to the High Court : "Whether  on the  facts  and circumstances of the case  the  Tribunal  is justified in holding that surcharge on agricultural  income- tax  cannot  be levied for the assessment year  1957-58  ?". The  High  Court  answered this question in  favour  of  the Revenue and against the assessee.  This decision must be set aside.   In  Karimtharuvi  Tea  Estate  Ltd.  v.  State   of

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Kerala(’), this Court held that no surcharge on agricultural income  can  be levied under the Kerala Surcharge  on  Taxes Act,  ’1957 in respect of the assessment year 1957-58.   The second  question  is answered accordingly in favour  of  the assessee and against the Revenue. In  the result, the appeals are allowed with costs  and  the judgments  of the High Court are set aside.   The  questions referred  to  the High Court are answered in favour  of  the appellants and against the Revenue as indicated in the  body of this judgment.  There will be one hearing fee. V.P.S.                                               Appeals allowed. (1) [1966] 3 S.C.R. 93 : [1965] 60 I.T.R. 262. 754