1. The challenge in this writ petition is whether the receipts by the assessee derived from latex in slaughter tapping and yield of coconut will come under Agricultural Income Tax Act, 1991 and as such assessee exempt from the Income Tax Act, 1961?.
2. This writ petition is filed under Article 226 of the Constitution of India by the petitioner challenging the assessment order of the year 2002-2003 for slaughter tapping and yield from coconut and consequent imposition of interest by the Assistant Commissioner of the Income Tax Circle I, Kottayam. The petitioner, being a limited company engaged in the business of growing and selling rubber produce and other agricultural product in its estates in Kerala and Tamil Nadu State, is an assessee under the Kerala Agricultural Income-tax Act, 1991 (hereinafter referred to as the (KAIT Act) and under Tamil Nadu Agricultural Income Tax Act, 1955 (hereinafter referred to as the 'TNAIT Act'). The company has also income from dividends and interest which were taxable under the Income Tax Act, 1961 and in respect of such income the company is an assessee under the Income Tax Act, 1961. It is contended that as per Ext.P11 assessment order, the first respondent on one hand and 2nd and 3rd respondents on the other hand, cannot simultaneously assess the income from the slaughter tapping of the rubber trees and yield from the coconut trees under the Income Tax Act and KAIT Act, 1961 and TNAIT Act, 1955.
3. The first respondent in their statement contended that the petitioner is liable to pay income tax under the Act, notwithstanding the fact that it has wrongly taxed under any other legislation. The assessee has not performed any agricultural operation in support of his claim, but the operations have been performed by the lessee alone. Since the lessor has not carried out any slaughter tapping, it is difficult to hold that the owner himself had undertaken slaughter tapping and it will not come within the purview of agricultural income.
4. In the counter affidavit 3rd respondent contended that the petitioner is having properties in Kerala and Tamil Nadu and is liable to pay Agricultural Income Tax in both States and that the petitioner is also an assessee under the Central Income Tax Act, 1961. During the assessment year 2002-2003, the assessments under KAIT Act 1991 has been completed on 10.12.2004 by fixing a loss of Rs.3,56,986/-. While finalizing the assessment, the income received by the company from slaughter tapping of rubber trees was also included. The Central Income Tax Assessment of the company have been revised on the ground that lease income from rubber and coconut is to be assessed under Central Income Tax. Hence the question now arises is whether the income received from slaughter tapping is agricultural income or not. The above income is purely agricultural income.
5. Brief history summarized by both parties is that the assessee, who is the owner of the rubber trees entered into an agreement with 3rd person for slaughter tapping of the trees for valid consideration. Exts. P9, P10 and P12 are the various agreements entered into by the petitioner with different parties. Those agreements were executed only to extract latex from the rubber trees. Therefore the question under challenge is whether the consideration received by the owner of the rubber tree will come under agricultural income or not. There are also situations where the owner of rubber trees enters into an agreement for slaughter tapping, cutting and removing of trees by a composite agreement. In such a situation the party who has got right to slaughter tapping of the trees for a specified period has a right to pay certain amount to the owner of the tree which will not come under capital receipt. In certain cases there was composite agreement with 3rd party to extract latex and also to cut and remove rubber trees. Such amount received as per the composite agreements are not agricultural income which is to be bifurcated. Here agreement is only for taking latex from slaughter tapping and to take yield from the coconut trees. Before answering the question whether the income derived from slaughter tapping will come under the agricultural income or income liable to be taxed under the Income Tax Act, it is better to extract the relevant statutory provision.
6. The word 'agricultural income' has been defined under Section 2(1) of the Kerala Agricultural Income Tax Act, 1991 as follows:
'2. Definitions.- In this Act, unless the context otherwise requires,
(1) 'agricultural income' means-
(a) any rent or revenue derived from land which is used for agricultural purposes;
(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 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 subclause (ii);
any income derived from any building owned and occupied by the receiver of the rent or revenue of such land, or occupied by the cultivator or the receiver of rentin- kind, of any land with respect to which, or the produce of which any operation mentioned in sub-clauses (ii) and (iii) of clause (b) is carried on:
i) the building is on or in the immediate vicinity of the land, and is a building which the receiver of the rent or revenue or the cultivator, or the receiver of rent-in-kind, by reason of his connection with the land, requires as a dwelling house, or as a store-house, or other out-building, and
(ii) the land is either assessed to land revenue or is subject to a local rate assessed and collected by officers of the Government as such or, where the land is not so assessed to land revenue or subject to a local assessed and collected by officers of the Government as such or, where the land is not so assessed to land revenue or subject to a local rate it is not situated-
(A) in any area, which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area Committee, town area Committee, town Committee or by any other name) or a contonment board and which has a population of not less than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year: or
(B) in any area within such distance, not being more than eight kilometers, from the local limits of any municipality or contonment board referred to in item (A), as may be specified by the Central Government under the proviso to subclause of clause (1) of Section 2 of the Income Tax Act, 1961 (Central Act 43 of 1961):'
7. In the Income Tax Act, 1961, 'agricultural income' is defined under Section 2(1A) as follows:
'(IA) agricultural income' means-
(a) any rent or revenue derived from land which is situated in India and is used for agricultural purposes'.
8. The main difference of opinion of first respondent after referring various judicial opinion is that the lease rent derived by the assessee is not 'agricultural income' in view of the test laid down by the Apex Court in Raja Binoy Kumar's case. The Apex Court in Commissioner of Income-Tax v. Raja Benoy Kumar Sahas Roy (1957) 32 ITR 466) explained the meaning and scope of the word 'agricultural purposes' which reads as follows:
'Only if this integrated activity which constitutes agriculture is undertaken and performed in regard to any land can that land be said to have been used for 'agricultural purposes' and the income derived therefrom be said to be 'agricultural income' derived from the land by agriculture, under section 2(1) of the Indian Income-tax Act, 1922'.
9. The discussions in the Raja Benoy Kumar's case was that the respondent owns an area of 6,000 acres of forest land grown with sal and piyasal trees demanded that the income derived by the assessee from the sale of trees, which is to be assessed under land revenue. Actually, the forest was originally of spontaneous growth, 'not grown by the aid of human skill and labour' in existence for about 150 years. A considerable income has been derived by the assessee from sale of trees from this forest. The forest income last taxed under the Indian Income-tax Act was in the assessment year 1923-24, but, thereafter and till 1944- 45, it was always left out. The assessment for 1944-45 also was first made without including therein any forest income, but the assessment was subsequently reopened under section 34 of the Act. The respondent submitted a return showing the gross receipt of Rs.51,798/- from the said forest. A claim was, however, made that the said income was not assessable under the Act as it was agricultural income and was exempted under the Act. The Income-tax Officer rejected this claim and added a sum of Rs. 34,430/- to the assessable income as income derived from the forest after allowing a sum of Rs.17,548/- as expenditure. The Appellate Assistant Commissioner confirmed the assessment and the Income-tax Appellate Tribunal also was of opinion that the said income was not agricultural income but was income derived from the sale of jungle produce of spontaneous growth and as such was not covered by section 2(1) of the Act. At the instance of the assessee, the Tribunal referred the matter to the High Court. Subsequently, it came up before Supreme Court and the above dictum was laid. It is pertinent to note that the above question was referred not about agricultural product but about a forest product sal and piyasal trees. The question under challenge in this case is whether income from rubber tree under slaughter tapping and income from coconut are agricultural income or not. As I understood from the above decision, Lordships in their judgment discussed that if basic agricultural operations are performed for raising product from the land and all operation which foster growth and preservation then it amounts to agricultural operation. In this case they have no case that basic agricultural operations with regard to rubber trees and coconut plants were not made out by the grower of those trees.
10. A large number of decisions were cited on both sides but they did not help greatly, since the question in challenge never arise in those cases directly. A consistent view was taken by this Court with regard to income derived from slaughter tapping in E.J. John v. State of Kerala (I.T.R Nos.76 and 77 of 1965) and held that income from slaughter tapping is agricultural income. In E.J. John v. State of Kerala (I.T.R Nos.76 and 77 of 1965) the principles emerged are as follows:
'(i) The consideration paid by the purchaser allowed to 'slaughter-tap' represents payment for permission to take latex as well as for permission to cut and remove the trees.
(ii) there is an element of payment towards capital, namely, the value of the trees which are ultimately to be cut down;
(iii) There is also payment towards latex which represents agricultural income.
(iv) The amount of consideration received by the owner for the permission given by him to 'slaughter-tap' and cut and remove the trees is to be bifurcated into that pertaining to latex, and that which is attributable to the value of trees.
(v) The part pertaining to latex is agricultural income liable to tax, and the other part which is attributable to the value of the trees is not liable to tax.'
11. The challenge in the decision reported in Kanthimathi Plantations Limited v. State of Tamil Nadu (S.C) (2002) 254 ITR 785) was with regard to fuel value of the rubber trees and the latex derived from the rubber trees. The Apex Court held that consideration for latex was income and that for the fuel value was a capital receipt. Further it observed as follows:
'...In this light, the view taken by the Commissioner of Agricultural Income-tax, that a portion of the amounts realized under the two agreements by the assessee should relate, in some measure, to the value of latex and scrap realised from the standing rubber trees, appears to be tenable. In this case the Commissioner has remitted the matter to the assessing authority for the purpose of determining the value of the latex and scrap and for assessing such value as agricultural income....'
12. The point discussed in Thirumbady Rubber Co. Ltd. v. Commissioner of Agrl.Inc.-Tax (Ker.) (110 I.T.R.639) is more relevant to the facts of the case because similar facts were discussed not in a narrow sense. This Court held as follows:
'the principles emerging from the above decision of M.S.Menon C.J. and Govindan Nair J. have been set out in another case decided by us today (I.T.R.No.16 of 1972 - K.C. Jacob v. Agricultural Income-tax Officer (1977) 110 ITR 402 (Ker) as follows:
(i) The consideration paid by the purchaser allowed to 'slaughter-tap' represents payment for permission to take latex as well as for permission to cut and remove the trees.
ii) There is an element of payment towards capital, namely, the value of the trees which are ultimately to be cut down.
iii) There is also payment towards latex which represents agricultural income
iv) The amount of consideration received by the owner for the permission given by him to 'slaughtertap' and to cut and remove the trees is to be bifurcated into that pertaining to latex, and that which is attributable to the value of trees.
v) The part pertaining to latex is agricultural income, liable to tax, and the other part which is attributable to the value of the trees is not liable to tax'.
The documents are composite ones. The entire amounts received as per the agreements, Annexures 'D' and 'D-1', are not liable to agricultural income-tax. These amounts must be bifurcated, that pertaining to latex and that which is attributable to the value of the trees. The former will be income liable to tax and the latter cannot be taken into account for the purpose of imposing agricultural income-tax'.
13. In Vaniampara Rubber Co. Ltd. v State of Kerala (1998) 230 ITR 449) the court considered in length the position when there was an agreement to uproot and remove the trees within a period of 3 years and for slaughter tap. In that case the assessing officer viewed that the agreement was of a composite nature and the income from slaughter tapping and the value of the timber were bifurcated. In that case this Court held as follows:
'.......Accordingly, considering all the aspects of the case, the Tribunal said that 60 per cent, of the receipts shall be treated as sale value of the rubber trees and the balance 40 per cent. as income from slaughter tapping, which is exigible to agricultural income-tax. The tribunal further ordered that apportionment shall be made for every year and the same cannot be deferred and fastened to the third year of the agreement. In other words, the assessing authority shall take only 40 per cent of the receipt of the particular year as income of that year. We feel that the conclusion arrived at by the Tribunal is reasonable and fair in the circumstances of the case. What is involved is satisfaction of relevant material by the Tribunal and its reasonable conclusion therefrom. We do not see any warranting circumstances to hold that the Tribunal has acted erroneously. That being the position, we confirm the order passed by the Tribunal in respect of the assessment years in question.'
14. In another case it was held that the income from trees which were permitted to be slaughtertapped, cut and removed, does not come under agricultural income. This was discussed in the decision reported in Commissioner of Agricultural Income- Tax, Kerala v. George Varghese and Co. (1973) 90 ITR 496) the assessee entered into a contract with a rubber estate to uproot rubber trees of 303 Acres of land, the vendor had agreed to sell and the purchaser had agreed to purchase all the trees with roots with right to slaughter tap. This court held as follows:
'We think that in substance what the Tribunal has held is that under the agreement there has been no intention on the part of the contracting parties that the trees which were permitted to be slaughter-tapped, cut and removed, should derive sustenance from the land and continue to afford income to the transferee, the assessee before us. The provisions in the agreement that we have read would clearly show that the definite intention was to have the trees annihilated. There was an out and out sale of the trees and considering the extent of the land on which the trees stood, 303 acres, it is quite conceivable that the removing of the trees would take considerable time and the provisions in the agreement that the assessee had three years time to remove them does not at all imply any intention that the trees should continue to receive nourishment from the land and afford agricultural income to the assessee. The most apt passage that we have been able to find which can be applied to the facts of the case is that contained in Marshall v. Green. The passage is in these terms:
The principle of these decisions appears to be this, that wherever at the time of the contract it is contemplated that the purchaser should derive a benefit from the further growth of the thing sold, from further vegetation and from the nutriment to be afforded by the land, the contract is to be considered as for an interest in land; but where the process of vegetation is over, or the parties agree that the thing sold shall be immediately withdrawn from the land, the land is to be considered as a mere warehouse of the thing sold, and the contract is for goods'.
15. It was conceded by the 1st respondent that when slaughter tapping was done by the owner himself, and the rubber obtained by him was by tapping of his trees by himself, the receipts obtained by him from the sale of such rubber obtained by such tapping was declared as income derived from agricultural income. This position was discussed in the decision reported in K.C.Jacob v. Agrl.I.T.O.(Ker 1977 (110 ITR 402) which held as follows:
'The question whether income received from 'slaughter-tapping' (we will conveniently use this term to mean the practice of rubber trees being ruthlessly tapped for getting as much latex as possible and ultimately felling down the trees for replanting the area) is agricultural income has come up for consideration of this court on prior occasions. This court considered the nature of the income received by the owner of the trees as well as the nature of the income received by the person 'slaughter-tapping'. In these cases there were agreements whereby the owner allowed another to 'slaughter-tap' for a consideration....'
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....Here the slaughter-tapping was by the owner himself. The rubber obtained by him, in whatever manner he tapped his trees, is his, and the receipts by him from sale of rubber obtained by such tapping is 'income derived from land which is used for agricultural purposes' ......
In substance the principles discussed in Commissioner of Agricultural Income-tax, Kerala v. George Varghese & Co. (1973) 90 ITR 496) have no application to the facts of the case in hand because the assessee in that case is a third party who has no connection with the agricultural operation.
16. The Assistant Commissioner (Spl) Agricultural Income Tax contended that if the argument of the 1st respondent is accepted, the law is too harsh, which deprives their right under Agricultural Income Tax Act. Therefore the main thrust of the argument can be answered in the light of the contract entered into between the owner of the estate and the 3rd party. The agreement period was only for 1 years. The provisions in the agreement clearly shows that after 1 years, the trees will be cut and removed. But there was no agreement for sale of the rubber trees given for slaughter tapping. In such a situation, I cannot observe that the land has to be considered as a warehouse of the things sold since there was no agreement for sale of trees. If lessor is getting any rent on the basis of slaughter tapping, I can say that it is an income derived from agriculture. If the lessee is concerned, it can be termed as income and that will come within the purview of Income Tax Act. The basic operation for those periods was restricted by Exts. P9, P10 and P12 agreements, which is only for taking the latex and coconut for a shorter period with the help of other labourers. If after taking these latex it is marketed by the lessee, it cannot be considered as an agricultural operation and he will not get the benefit on the basis of the above
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two decisions. 17. Agricultural income is defined in Article 366 of the Constitution of India as 'agricultural income means agricultural income as defined for the purpose of the enactments relating to Indian Income Tax.' At the same time, Section 2(1A ) of the Income Tax Act, 1961 defines agricultural income and the States have incorporated this definition in their Agricultural Income Tax Acts. The State's power to levy tax on agricultural income, is in accordance with Entry 82 of List `1 of the Seventh Schedule. Therefore, it is undisputed that the power is mutually exclusive and accordingly any income can either be agricultural or non-agricultural but not under both. 18. Therefore the controversy over the matter can be settled in the following way: (a) The revenue derived from the latex by the grower when the 'slaughter tap' of rubber trees is done by the owner himself is agricultural income. Like so the amounts received by the owner of the trees from third parties (lessee) for the right to take the latex during 'slaughter tap' continues to be agricultural income. (b) The income from latex in the hands of the lessee is not agricultural income but there is an element of payment towards capital. (c) The latex and coconuts are derived from the trees and the payment made by the lessee to the lessor for the said latex and coconuts, the receipts in the hands of the owner (lessor) in this case can only be agricultural income. (d) The income received from the lessee and the income received by the lessor on the basis of the rent agreement is to be bifurcated, in such cases when dispute arises. (e) In case of permission given by owner of the tree to 'slaughter tap' with agreement to cut and remove trees, then income derived from the latex and the value of trees must be bifurcated. (f) The part of income deducted by the owner from latex is agriculture income and the value of trees will not come under agricultural income. Here the agreements are made only to draw income from latex and coconut which will come under Agricultural Income Tax Act. In the circumstance Ext.P11 issued by the first respondent is hereby quashed by invoking the jurisdiction under Article 226 of the Constitution of India and this petition is allowed.