6. Agricultural income derived from manufacture and sale of tea – Decision of Supreme Court in CST v. D.S. Bist & Sons – Effect thereof on rule 8 of Income-tax Rules

1. Section 2(1 ) defines “agricultural income”, inter alia, to mean any rent or revenue derived from land which is situated in India and is used for agricultural purposes. Further any income derived from such land by the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by him to render the produce raised or received by him fit to be taken to market is also agricultural income.

2. The Board’s attention has been drawn to the decision of the Supreme Court in CST v. D. S. Bist & Sons AIR 1980 SC 169.  The question before the Supreme Court turned on the interpretation of section 3 of the U.P. Sales Tax Act, 1948.  The short facts of the case were that the assessee owned some tea gardens in the State of U.P. The tea leaves grown by him in his garden were sold in the market after being processed and packed.  It was contended on his behalf before the sales tax authorities that the tea leaves sold by him were agricultural produce grown by himself and, therefore, the sales were not exigible to sales tax.  It was common ground that tea leaves had been put through the process of withering, crushing, roasting and fermentation before being packed and sold by the assessee.  The Supreme Court held that the tea leaves did not cease to be an agricultural produce merely because of the performance by the assessee of the processes outlined above.

3. Reference has been received in this connection on the effect of the decision on rule 8 of the Income-tax Rules under which income derived from sale of tea grown and manufactured by the seller in India is to be computed as if it was income derived from business and 40 per cent of such income to be deemed as income liable to income-tax.

4. The Board have been advised that the Supreme Court’s decision in this case  deals only with the question whether tea manufactured and sold is “agricultural produce” for the purposes of law relating to sales tax in force in U.P. This case has no bearing on the question as to what constitutes agricultural income or upon the power of Parliament to levy income-tax on tea plantations and tea companies.

5. In this connection, it may be noted that the power of the State Legislature to levy agricultural income-tax is derived from entry 46 of List II of the Seventh Schedule to the Constitution which refers to “Taxes on agricultural income”.  The term “agricultural income” has been defined in article 366(1) of the Constitution as meaning “agricultural income” defined for the purposes of the enactments relating to “Indian income-tax”.  The legislative competence of the State Legislature is thus restricted by the definition of “agricultural income” and it is not open to the State Legislature to enlarge the definition of agricultural income so as to bring within its scope what would not be agricultural income for the purposes of the Income-tax Act.  This position has been recognised all along and is supported by the Supreme Court’s ruling in Karimtharuvi Tea Estates Ltd v. State of Kerala [1963] 48 ITR 83 and Anglo-American Direct Tea Trading Co. Ltd. v. CAIT [1968] 69 ITR 667.  Both these decisions are authority for the proposition that what is “agricultural income” insofar as tea estates are concerned has to be computed strictly in accordance with the scheme of the Income-tax Act.  Rule 8 makes 40 per cent of the income derived from the sale of tea grown and manufactured by the seller in India liable to tax under the Income-tax Act.  This is on the basis that this is not agricultural income and it is only the balance of 60 per cent which is agricultural income for the purposes of the Income-tax Act and also for the purposes of entry 46 of the State List.

6. In view of the foregoing, the income from tea grown and sold in India will continue to be computed in terms of rule 8.

Circular : No. 310 [F No. 164/15/80-IT(A-I)], dated 29-7-1981.

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