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PETITIONER: THE KARIMTHARUVI TEA ESTATES LTD., KOTTAYAM & ANR.

       Vs.

RESPONDENT: STATE OF KERALA & ORS.

DATE OF JUDGMENT: 01/11/1962

BENCH: DAYAL, RAGHUBAR BENCH: DAYAL, RAGHUBAR DAS, S.K. KAPUR, J.L. SARKAR, A.K. HIDAYATULLAH, M.

CITATION:  1963 AIR  760            1963 SCR  Supl. (1) 823  CITATOR INFO :  D          1964 SC 572  (10)  F          1968 SC1213  (3,4)  R          1976 SC1790  (18)  R          1977 SC 489  (22)  F          1988 SC1435  (32)

ACT: Agricultural   Income  Tax-Tea  Plantations-Computation   of agricultural  income-Deductions-State  Statute   disallowing expenditure  on  immature  plants-Validity   of-Agricultural Income-Tax  (Amendment) Act, 1961 (Ker.  IX of 1961)  s.  2- Indian  Income-tax  Act, 1922 (11 of 1922),  s.  2(1)-Indian Income-tax  Rules, 1922, rr. 23, 24-Constitution  of  India, Art. 366, Seventh Schedule, List II Item No. 46.

HEADNOTE: Entry  46,  List II of the Seventh Schedule to  the  Consti- tution empowers the State to legislate with respect to taxes on  agricultural income.  Article 366(1) provides  that  the expression  "agricultural income" in the Constitution  means agricultural income as defined in the Indian Income-tax Act. Under  the Agricultural Income-tax Act,  1950,  agricultural income  from tea plantations was to be computed in the  same manner as it was done under the Indian Income-tax Act,  1922 read  with  rr. 23 and 24 of the  Indian  Income-tax  Rules. Section 5 of the 824 Agricultural Income-tax Act provided for certain  deductions and  cl.  (j) provided for deductions  corresponding  to  s. 10(2)(xv)  of the Income-tax Act.  The Agricultural  Income- tax (Amendment) Act, 1961, introduced Explanation 2 to s.  5 which provided that no deduction shall be allowed of any ex- penditure laid out or expended for the cultivation,  upkeep, or maintenance of immature plants from which no agricultural income   war   derived  during  the  previous   year.    The petitioner, an owner of certain tea estates, contended  that the  amendment  was  beyond  the  competency  of  the  State Legislature. Held, that Explanation 2 to s. 5 of the Agricultural Income-

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tax  Act  added by the Amendment Act did not extend  to  the computation   of  agricultural  income  derived   from   tea plantations.   If Explanation 2 was applied to  agricultural income from tea plantations it would make such income diffe- rent  and higher than such income calculated  in  accordance with  Income-tax Act and r. 24 and would make it void.   For the  purpose  of  agricultural income one had  to  look  not merely  to the definition in the Income-tax Act but also  to the rules made thereunder.  The rules were in existence 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.

JUDGMENT: ORIGINAL  JURISDICTION : Petitions Nos. 234 to 236 of 1961. Petition  under  Art. 32 of the Constitution  of  India  for enforcement of Fundamental Rights. M.   C. Setalvad, Attorney-General for India, C.K.  Daphtary , Solicitor General of India, S. T. Desai, Vellapaly, J.  B. Dadachanji,   0.   C.  Mathur  and  Ravinder   Narain,   for petitioners. V.   P.  G.  Nambiar,  Advoeate-General  for  the  State  of Kerala,  A. V. Viswanatha Sastri and V. A.  Seyid  Muhammed, for respondents. 1962.  November 1. The judgment of the Court was  delivered by RAGHUBAR  DAYAL, J.-These are three petitions under Art.  32 of the Constitution by the Karimtharuvi  825 Tea  Estates  Ltd., Kottayam and one of  its  directors  and members  praying  for a declaration  that  the  Agricultural Income  Tax  (Amendment)  Act,  1961  (Ker.   IX  of  1961), hereinafter called the Amendment Act, enacted by the  Kerala State  Legislature,  is null and void and that  the  State’s power  to tax income from tea to agricultural income-tax  is limited to taking 60% of the income computed for the purpose of the Indian Income-tax Act (hereinafter referred to as the Income-tax  Act) as if it were income derived from  business and  for the issue of appropriate orders to the  respondents viz.,  the  State of Kerala, the Assistant  Commissioner  of Agricultural   Income-tax,   Kottayam,   and   the    Deputy Commissioner of Agricultural Income-tax, Quilon, restraining them,  their  agents and servants from enforcing  or  acting upon  the provisions of the aforesaid Amendment Act  against the petitioner company.  The Karimtharuvi Tea Estates Ltd., Kottayam, petitioner No. 1,  hereinafter  called the petitioner, are the  owners  and managers  of the Karimtharuvi and the Penshurst Tea  Estates situate at Peermade in Kerala State.    The     Agricultural Income-tax Act, 1950 (originally   the     Travancore-Cochin Agricultural Income-tax  Act  XXII of 1950, amended  as  the Agricultural Income-tax Act, 1950 by Act VIII of 1957 of the Kerala  Legislature),  hereinafter called  the  Agricultural Income-tax  Act,  has been in force in the State  of  Kerala during the assessment years 1958-59, 1959-60 and 1960-61 for which the accounting years of the petitioner were 1957, 1958 and  1959  ending  on  December  31  of’  each  year.,   The petitioner was assessed to agricultural income-tax under the provisions  of the Agricultural Income-tax Act during  those years.  The grievance of the petitioner is that in computing the  taxable income in the accounting years for the  purpose of assessment of tax under the Agricultural Income-tax  Act, the assessing authority did not allow deduction

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826 of the expenses incurred by it in the upkeep and maintenance of immature tea plants from which no agricultural income had been  derived during those years, though such expenses  were deducted by the Income-tax Department in connection with the assessment  of income-tax with respect to  the  non-agricul- tural portion of the income from the petitioner’s tea estate in  those years.  The petitioner filed appeals  against  the three   assessment  orders  dated  August  12,   1960,   for assessment  years 1958-59 and 1959-60 and dated October  11, 1960,  for  assessment  year  1960-61,  before  the   Deputy Commissioner  of  Agricultural  Income-tax,  Quilon.   Those appeals are still pending. On  March 30, 1961, the Agricultural Income-tax  (Amendment) Act, 1961, received the assent of the Governor of the  State of  Kerala.  Sub-section (2) of s. 1 provides that this  Act would  be deemed to have come into force with effect on  and from April 1, 1951.  Section 2 provides for the addition  of Explanation  2 to s. 5 of the Agricultural  Income-tax  Act, 1950.  This Explanation reads               "Nothing  contained in this section  shall  be               deemed   to   entitle   a   person    deriving               agricultural   income  to  deduction  of   any               expenditure  laid  out  or  expended  for  the               cultivation, upkeep or maintenance of immature                             plants  from which no agricultural  income  ha s               been derived during the previous year." The petitioner challenged the validity of the Amendment  Act stating  that it was not within the competence of the  State Legislature   and  that  its  provisions   contravened   the provisions  of  Arts.  14, 10(1)(f) and (g) and  31  of  the Constitution.   At  the hearing,  however,  the  contentions about the Act contravening Arts. 19(1) (f) and (g) and  Art. 31  were  not  raised.  The main contention  raised  at  the hearing is that the 827 Legislature  of  the  State of Kerala cannot  enact  such  a provision  which  would make agricultural  income  under  it different  from  ’agricultural  income’ as  defined  in  the enactments  relating  to  the Income-tax Act  and  that  the impugned Explanation 2 to s. 5, if applicable to the  income from  tea  plantations,  would make  the  income  from  such plantations, for the purpose of the Agricultural  Income-tax Act, higher than what it would be if computed in  accordance with  the  definition  in the  Income-tax  enactments.   The contention is well-founded. Entry   46,  List  11,  of  the  Seventh  Schedule  to   the Constitution  relates to taxes on agricultural  income.   In view of cl. (1) of Art. 246 the State Legislature can  enact laws  about these taxes.  Art. 366 provides that unless  the context.  otherwise requires, the  expression  ’agricultural income’  in  the Constitution means agricultural  income  as defined  for  the  purposes of the  enactments  relating  to Indian income-tax.  Therefore, the agricultural income about which  a State Legislature may enact under Entry 46 of  List II would be such income as defined in the Indian  Income-tax Act.    The   relevant   portion  of   the   definition   of ’agricultural income’ in the Income-tax Act, 1922, reads :               "(1)  ’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

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             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               828               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" The   income  derived  from  the  sale  of  tea  grown   and manufactured  by  the  seller is  not  solely  derived  from agriculture.   It  is an income which is  derived  partially from    agricultural   operations   and    partially    from manufacturing processes.  The income is partly derived  from land  by agriculture and partly from business.   It  becomes necessary to determine the proportions of the two incomes in the  entire  income.   Section  59  of  the  Income-tax  Act provides for the making of rules for such determination. The  relevant  portion  of  s.  59  of  the  Income-tax  Act empowering the Central Board of Revenue to make rules reads:               "    x         x       x         x       x               (2)   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                                    829               (3)   In cases coming under clause (a) of sub-               section  (2),  where the income,  profits  and               gains  liable  to  tax  cannot  be  definitely               ascertained or can be ascertained only with an               amount of trouble and expense to the  assessee               which, in the opinion of the Central Board  of               Revenue, is unreasonable, the rules made under               that sub-section may-               (a)   prescribe  methods by which an  estimate               of such income, profits and gains may be made,               and               (b)   in cases coming under sub-clause (1)  of               clause  (a) of sub-section (2), prescribe  the               proportion of the income which shall be deemed               to be income, profits and gains liable to tax;               and  an assessment based on such  estimate  or               proportion shall be deemed to be duly made  in               accordance with the provisions of this Act.               x        x       x        x       x               (5)   Rules  made under this section shall  be               published  in the official Gazette, and  shall               thereupon  have effect as if enacted  in  this               Act." Rules 23 and 24 of the Indian Income-tax.  Rules, 1922, made under   the   above-quoted   section,   provide   for    the determination of income for the purposes of income-tax  when the  entire  income  is partially  agricultural  income  and partially  income  chargeable to income-tax under  the  head

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’business’.  Rule 23 deals with such cases in general.  Rule 24 deals with the case of tea grown and manufactured by  the seller, and reads : 830               "24.   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." The  result of rule 24 is that the income derived  from  the sale  of tea grown and manufactured by the seller is  to  be computed  in the first instance as if it was income  derived from  business.  Consequently, the income would be  computed in accordance with the provisions of s. 10 of the Income-tax Act.   Clause (xv) of sub-s. (2) of s. 10 provides  that  in computing  the  income any expenditure by  an  assessee  not being  an  allowance of the nature described in any  of  the clauses  (i) to (xiv) inclusive and not being in the  nature of  capital expenditure or personal expenses of the  assesee laid out or expended wholly and exclusively for the  purpose of  such  business,  would be deducted   of  the  income  so computed,  40 per cent is, under rule 24, to be  treated  as income  liable  to income-tax and it would follow  that  the other  60 per cent only will be deemed to  be  ’agricultural income’ within the meaning of that expression in the Income- tax Act.  It follows, therefore, that the power of the State Legislature   to  make  a  law  in  respect  of   taxes   on agricultural  income  arising from tea plantations  will  be limited  to  legislating with respect  to  the  agricultural income so determined.  The, State Legislature is free in the exercise  of its plenary legislative power to allow  further deductions  from  such computed agricultural  income  as  it considers                             831 fit,  but  it cannot add to the amount of  the  agricultural income  so  computed  by providing  that  certain  items  of expenditure deducted in the computation of the income from a business  under the provisions of the Income-tax Act be  not deducted  and  be  considered to be a part  of  the  taxable agricultural income. The  relevant  portion of the  definition  of  ’agricultural income’ in the Agricultural Income-tax Act reads :               "2. In this Act, unless there is anything  re-               pugnant in the subject or context-.               (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 in the               State 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

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             by  him,  in respect of which no  process  has               been  performed  other than a process  of  the               nature described in sub-clause (ii);               Explanation.-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 pur-               832               poses  of  the enactments relating  to  Indian               Income-tax;               x           x         x          x          x" This  definition practically conforms to the  definition  of ’agricultural income’ in sub-cls. (a) and (b) of cl. (1)  of s.  2 of the Income-tax Act.  The Explanation added  in  the definition  of  "agricultural income’  in  the  Agricultural Income-tax Act in substance adopts what has been provided in rule  24  of the Income-tax Rules about  the  proportion  of agricultural  income  from  tea  plantations.   It   follows therefore  that agricultural income from tea plantations  is to  be computed in the same manner as it is  computed  under the provisions of the Income-tax Act. Section 5 of   the Agricultural Income-tax Act    provides for  certain  deductions to be made in  the  computation  of the  agricultural      income’ of a person  and  its  clause (j)provides  for the deduction of any expenditure not  being in the nature of capital expenditure or personal expenses of the assessee laid out or expended wholly or exclusively  for the  purpose  of  deriving the  agricultural  income.   This clause corresponds to cl. (xv) of sub-s. (2) of s. 10 of the Income-tax  Act.   The  proviso at the end  of  the  various clauses of s. 5 states that no deduction shall be made under that  section if it has already been made in the  assessment under the Income-tax Act.  This avoids a double deduction. Now, explanation 2 added to s. 5 by the Amendment Act  takes away the advantage of the provisions of cl. (j) of s. 5 with respect   to  the  expenses  incurred  in  the  upkeep   and maintenance  of immature plants from which  no  agricultural income has been derived during the accounting year.  We  are not  concerned  in  this case With  the  ’validity  of  this provision so far as agricultural income from land 833 in  which  crops  other than tea are raised.   Here  we  are concerned with its validity with respect to its  application to  the income from tea plantations.  Explanation 2 in s.  5 of   the  Agricultural  Income-tax  Act  is  obviously   not consistent with the Explanation to sub-cl. (2) of cl. (a) of s.  2 of the Agricultural Income-tax Act and also  the  rule for computing agricultural income made under the  Income-tax Act  and results in making the agricultural income from  tea plantations, for the purpose of the Agricultural  Income-tax Act,  to  be  different and higher  than  such  agricultural income when calculated in accordance with the provisions  of the Income-tax Act and rule 24.  The different provisions of an  Act are to be construed in such manner as to  make  them harmonious.  Explanation 2 to s. 5 should be so construed as makes  it harmonious with Explanation to subcl. (2)  of  cl. (a) of s. 2 of the Agricultural Incometax Act which provides a  special  definition  for  agricultural  income  for   tea plantations,  such income being that portion of the income derived  from land by 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. Explanation 2, if applied to income from tea, would,  create an  agricultural  income which is not  contemplated  by  the

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Income-tax Act and the Constitution and would then be  void. Though wide in terms, Explanation 2 to s. 5 should therefore be   construed,   not  to  apply  to  the   computation   of agricultural income derived from land by the cultivation  of tea.  Such a construction would make it harmonious with  the Explanation  to  sub-cl.  (2)  of cl. (a) of  s.  2  of  the Agricultural Income-tax Act. It  is true, as urged for the respondents, that  the,  State Legislature has full freedom to enact such provisions as  it considers  fit in respect of tax on agricultural income  and that  such  power includes the power to  enact  for  matters subsidiary and incidental 834 to the taxation of agricultural income.  We also agree  that the  State  Legislature  is free to provide  the  method  of computation  of the taxable agricultural income and is  free to allow any particular deductions from the gross income  as it  considers  fit.  It is not disputed for  the  respondent that  the power of the State Legislature to enact a  law  in respect   of  agricultural  income  relates  only  to   such agricultural  income  as  is  defined in  Art.  366  of  the Constitution. It is however urged that for the purpose of this definition, one  has to look to the definition of ’agricultural  income’ in the Income-tax Act and not to the rules made  thereunder. We  do not agree.  ’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  has been made under the powers conferred by s. 59 of the Income- tax  Act and has effect as if enacted in that Act.  When  s. 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. It  has been further submitted for the respondents that  cl. (xv)  of  sub-s.  (2) of s. 10 of the Income-tax  Act  is  a general  provision  and  should  give  way  to  the  special provision of the Agricultural Income-tax Act with respect to the  deductions  from the gross income for  the  purpose  of computing  the agricultural income.  This cannot be,  as  we have  to  take the definition of agricultural  income’  from what it is in  835 the  Income-tax Act.  The provisions of the  Income-tax  Act and the rules made thereunder will control the provisions of the   Agricultural  Income-tax  Act  enacted  by   a   State Legislature. The  contention  that the amount spent for  the  upkeep  and maintenance  of the immature plants till they become  mature is in the nature of a capital expenditure is also not sound. It is a running expenditure and not of the nature of capital expenditure. It is further contended that if such expenditure be held  to be  deductible expenditure, the proviso to rule 24 would  be redundant.  Again, we do not agree.  The proviso allows  the deductions of the cost of planting bushes in replacement  of bushes  which died or became permanently useless in an  area already planted.  It deals with the cost of planting  bushes and  not  with  the  expenses incurred  in  the  upkeep  and

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maintenance of bushes already planted.  These petitions  are not with respect to the expenses incurred in the planting of immature  tea  bushes  but  are  with  respect  to  expenses incurred in the upkeep and maintenance of immature plants. We  therefore  construe  Explanation  2  to  s.  5  of   the Agricultural Income-tax Act not to extend to the computation of agricultural income derived from tea plantations and hold that  in computing such agricultural income for the  purpose of  taxation  under  the Agricultural  Income-tax  Act,  the Explanation to s. 2 of that Act must be kept in mind and the income  must be taken to be as defined for the  purposes  of the enactments relating to Indian income-tax. In  view of our opinion it is not necessary to consider  the other contention for the petitioner that Explanation 2 to s. 5  is discriminatory and contravenes the provisions of  Art. 14 of the Constitution. We  therefore allow these petitions to this extent  that  we declare that Explanation 2 to s. 5 of the 836 Agricultural Income-tax Act added by the Amendment Act  does not cover the expenses incurred in the upkeep or maintenance of immature tea plants from which no income has been derived during  an accounting year and that the agricultural  income derived from tea plantations will be computed in  accordance with the provisions of the Income-tax Act and the Income-tax Rules.   We order that a writ be issued to  the  respondents restraining  them, their agents and servants from  enforcing or  acting upon the provisions of Explanation 2 to s.  5  of the Agricultural Income-tax Act against the Karimtharuvi Tea Estate Ltd., Kottayam, viz.,  petitioner  No. 1.  We  direct the respondents to pay   the  costs of petitioner No. 1,  on eset.                     Petitions allowed in part.