Bombay High Court
The Forest Development Corportion ... vs The Addtional Commissioner & 2 Others on 3 August, 2017
Author: M.S.Sanklecha
Bench: M.S.Sanklecha, Manish Pitale
1 itl77.04.odt
IN THE HIGH COURT OF JUDICATURE AT BOMBAY,
NAGPUR BENCH, NAGPUR
INCOME TAX APPEAL NO.77 OF 2004
The Forest Development Corporation of
Maharashtra Limited, through its
Managing Director, Shri J.N.Saxena,
Rawel Plaza, Plot No.12, Kadbi
Chouk, Kamptee Road, Nagpur........... APPELLANT
// VERSUS //
1. The Additional Commissioner of
Income Tax, Special Range-I,
Nagpur.
2. The Deputy Commissioner of Income Tax,
Circle No.II, Nagpur.
3. The Commissioner of Income Tax
(Appeals) I, Nagpur. ........... RESPONDENTS
::: Uploaded on - 03/08/2017 ::: Downloaded on - 06/08/2017 00:43:17 :::
2 itl77.04.odt
-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-
Mr.K.H.Deshpande, Senior Counsel with Mr.Ashwin Deshpande,
Advocate for the Appellant.
Mr.Anand Parchure, Senior Counsel with Mr.Bhushan Mohta,
Advocate for Respondent Nos. 1 to 3.
-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-
***********
Date of reserving the Judgment : 24.7.2017.
Date of pronouncement of the Judgment : 3.8.2017.
***********
CORAM : M.S.SANKLECHA
& MANISH PITALE, JJ.
JUDGMENT (Per M.S.Sanklecha, J) :
1. This appeal under Section 260A of the Income Tax Act, 1961 ("the Act") assails the order dated 23.4.2004 passed by the Income Tax Appellate Tribunal ("the Tribunal"). The impugned order is a common order relating to Assessment Years 1998-99 and 1999- 2000. The appellant has, as undertaken by them on 24.7.2017, paid the additional court fee. Thus, this appeal is being treated as a common appeal for the two Assessment Years.
::: Uploaded on - 03/08/2017 ::: Downloaded on - 06/08/2017 00:43:17 :::
3 itl77.04.odt
2. This appeal was admitted on 19th April, 2005 on the following two substantial questions of law :
1)Whether in the facts and circumstances of the case and in law the ITAT and the Authorities below were right in splitting the income derived from the turn key contract of plantation in two different stages to determine whether such income is from the Agricultural operations ?
2)Whether in the facts and circumstances of the case and in law the ITAT and the Authorities below erred in holding that the income derived by the appellant from the turn-key contract of plantation is not the agricultural income as defined under Section 2(1A)(b)(ii) and (iii) of the Income Tax Act, 1961 ?
3. For the sake of convenience, we will refer to the facts relating to Assessment Year 1998-99. It is an agreed position between the parties that the facts for both the Assessment Years are similar. ::: Uploaded on - 03/08/2017 ::: Downloaded on - 06/08/2017 00:43:17 :::
4 itl77.04.odt Therefore, the facts in one year can be conveniently referred to for answering the above substantial questions of law.
4. Briefly stated, the facts are as under :
(a) The appellant/assessee is a company incorporated under the Companies Act wholly owned by the Government of Maharashtra.
The appellant is inter alia engaged in the activity of turn-key plantation i.e. to create and develop plantations, rock gardens etc. for companies/institutions such as Western Coal fields Ltd. (WCL Ltd.), ONGC etc. in terms of a contract entered into with them.
(b) Typically, as reflected in the contract dated 23.7.1999 entered into by M/s. WCL Ltd. with the appellant, the activity carried out is as under :-
(i) Appellant undertakes the work of sowing seeds and developing Nurseries on its own land. The appellant tend to these plants till they achieve a certain height and health.
::: Uploaded on - 03/08/2017 ::: Downloaded on - 06/08/2017 00:43:17 :::
5 itl77.04.odt
(ii) Thereafter, the appellant transplants the plants grown on its land in the areas identified by WCL Ltd. Thereafter, the appellant maintains the plant using its own men and material for a period of 2-3 years. This, according to the appellant, is sufficient period for transplanted plants to reach the desired health and height not requiring professional care. At that time, the care of the transplanted plants on the land of WCL Ltd. is handed over to WCL Ltd.
(iv) The payments/consideration under the contract received by the appellant was as under :-
"16.The payment for plantation and maintenance will be made by WCL to FDCM Ltd. in the following manner :
Date of payment of instalment Amount
Ist instalment on start of work (50%) Rs.12.435 Lacs
(Mobilisation advance) after
execution of agreement.
2nd Instalment on or before
31 October, 1996. (20%) Rs.4.974 -do-
::: Uploaded on - 03/08/2017 ::: Downloaded on - 06/08/2017 00:43:17 :::
6 itl77.04.odt
3rd Instalment on or before
31st March, 1997. (10%) Rs.2.487 -do-
4th Instalment on or before
31st October, 1997 (10%) Rs.2.487
-do-
5th Instalment on or before
completion of contract period (10%) Rs.2.487 -do-
Payments will be released by the company within one month of submission of bills."
(b-1) The appellant was of the view that the above income received by it was agricultural income. Therefore, not exigible to Income tax under the Act.
(c) On 27.1.1999, the appellant filed its return of income for the Assessment Year 1998-99 declaring the income of Rs.31.52 Lakhs. The appellant did declare gross receipts of Rs.1,28,57,580/- from turn-key contract of plantation and after deducting direct expenses of Rs.71,82,523/- had earned an income of Rs.56,75,348/-. However, the same was not offered for tax on the ground that it was an ::: Uploaded on - 03/08/2017 ::: Downloaded on - 06/08/2017 00:43:17 ::: 7 itl77.04.odt agricultural income as defined under Sections 2(1A) of the Act and thus, not exigible to tax under Section 10 of the Act.
(d) However, the Assessing Officer, by an order dt.29.12.2000 passed under Section 143(3) of the Act, held that the amount of Rs.1.28 Crores received on account of its activity of turn- key plantation cannot be considered to be receipts on account of agricultural activity. This on the basis that the appellant is neither the owner of the land nor of the plantation raised on it but has merely executed the work and provided Services in terms of contract. Thus, it had received contractual payment for providing Services. However, the Assessing Officer did not bring the entire gross receipt of Rs.1.28 Crores to tax, but reduced the direct expenses of Rs.71.82 Lakhs and proportionate common expenses of Rs.7.46 Lakhs incurred to carry out the activity of turn-key plantation and added the amount of Rs.49.29 Lakhs to its business income bringing it to tax.
(e) Being aggrieved, the appellant/assessee filed an appeal to the Commissioner of Income Tax (Appeals) [CIT(A)]. By an order dated 21.11.2002, the CIT(A) dismissed the appellant/assessee's ::: Uploaded on - 03/08/2017 ::: Downloaded on - 06/08/2017 00:43:17 ::: 8 itl77.04.odt appeal holding that the income attributable to the contract for plantation on turn-key basis could not be said to be an agricultural income, as it is not an income derived from land. Further the consideration received by the appellant was for the work executed in terms of the contract i.e. to provide Services as held by the Assessing Officer. Moreover, the CIT (A) also drew support from the fact that the amounts received under the contract for turn-key plantation were subjected to deduction of tax under the Act by the payer of the consideration.
(f). Being aggrieved with the order dated 21.11.2002 of the CIT (A), the appellant/assessee filed a further appeal to the Tribunal. The impugned order of the Tribunal, after examining the process by which the turn-key plantation contracts are executed by the appellant, held that the entire activity of turn-key plantation executed by the appellant could be divided into two stages/parts as under :-
(i) Stage-I was where the appellant sows seeds and develops the plants (in nurseries) on lands belonging to it, with its own men and material. These plants, after they reach a certain height and/or health, are transplanted ::: Uploaded on - 03/08/2017 ::: Downloaded on - 06/08/2017 00:43:17 :::
9 itl77.04.odt (after about one year) to the land belonging to the companies/institutions for further care.
(ii) Stage-II is where the trees/plants transplanted on lands belonging to the companies/institutions i.e. appellant's customers from its nurseries. On such transfer, ownership of the trees also stands vested in the customers by virtue of notional sale. Thereafter also the respondent carries out operation necessary for survival and growth of the trees upto certain height for a period of 2 to 3 years. The impugned order holds that, so far as the first stage is concerned, the activity carried out by the appellant would be an agricultural activity and the income arising therefrom would be an agricultural income outside the ambit of the Act. However, so far as the receipt attributable to second stage is concerned, it held that income is not derived from land but on account of Services rendered under the Contract. Thus, on the aforesaid bifurcation, the impugned order holds that no tax is payable on the income attributable to the first stage, as it is agricultural income. However, as there was no ::: Uploaded on - 03/08/2017 ::: Downloaded on - 06/08/2017 00:43:17 ::: 10 itl77.04.odt bifurcation of income as between the first and the second stage, it being a consolidated contract, the entire amount which was expended at stage I was reduced from the gross income earned under the contract and only the balance was held to be taxable under the Act. Accordingly, the appeal of the assessee was dismissed on 23.4.2004.
5. Being aggrieved with the impugned order dated 23 April 2004 of the Tribunal, the assessee is in appeal before us.
6. Mr.Deshpande, learned Senior Counsel appearing in support of the appeal submits :
a) The entire operation carried out in execution of the plantation contract by the appellant is an agricultural operation.
Thus, the income arising therefrom is agricultural income. Thus, this artificial division of holding that stage I income is agricultural income and Stage-II is not, is uncalled for, as the entire operation is an indivisible. In any event, once Stage-I is considered to be an agricultural operation, Stage-II also becomes so, in view of the ::: Uploaded on - 03/08/2017 ::: Downloaded on - 06/08/2017 00:43:17 ::: 11 itl77.04.odt Supreme Court decision in CIT vs. Raja Benoy Kumar Sahas Roy, 32 ITR 466 ;
(b) Ownership of land and/or interest therein is irrelevant for the purposes of determining whether the operation carried out by the appellant is an agricultural activity or not. This alone has been the basis of the holding part activity as agricultural (Stage-I) and part i.e. Stage-II is not agricultural. The ownership and/or interest in land is irrelevant consideration to determine whether the income is derived from land. The ownership of land is irrelevant test. The only test is whether the activity carried out by the appellant is agricultural operation or not ;
c) In any event, without prejudice to the above, the contract itself indicates an area in which the plantation program is to be carried out by the appellant at the stage II would be earmarked in terms of the contact by WCL. This area is given to the appellant for exclusive use to enable the successful implementation of the plantation project. Therefore, the appellant has an interest in the land ::: Uploaded on - 03/08/2017 ::: Downloaded on - 06/08/2017 00:43:17 ::: 12 itl77.04.odt and its income is, therefore, derived from the land on which agricultural activity is carried out;
(d) In any view of the matter, the activity at the so called stage II of the contract carried out by the appellant is an activity which would be performed by any cultivator to render the produce received or raised marketable. Thus falling under Section 1A(b)(ii) of the Act as agricultural income. Alternatively, it is submitted that the activity is of a nature (other than those specified under Section 1A(b)(i) of the Act) which the cultivator sells. This is the mandate of Section 1A(b)
(iii) of the Act. Thus, it is agricultural income.
7. As against the above, Mr.Anand Parchure, learned Senior Counsel appearing for the Revenue in support of the order submits as under :
(A) The impugned order has correctly split the entire transaction arising out of the contract dated 23.7.1993 into two stages/parts. Stage I is where the appellant carries on operations which are agricultural on its own land and therefore, the income is ::: Uploaded on - 03/08/2017 ::: Downloaded on - 06/08/2017 00:43:17 ::: 13 itl77.04.odt derived from land. At stage II is the activity not carried by the appellant on its land. Thus, the income is received by the appellant for rendering of services under the contract. Therefore, derived from rendering of Service and not from land ;
(B) Section 2(1A)(b)(ii) of the Act would only have application where agricultural activity is carried out by a Cultivator. Admittedly, in this case, the appellant/assessee is not a Cultivator and therefore, Section 2(1A)(b)(ii) of the Act will have no application ; (C) The test for income to be treated as agricultural income is only whether income is derived from land and on which land the person claiming the income to be agricultural income has interest. In this case, the income is derived from rendering of Service. Further also the appellant has no interest in the land belonging to the company/institution to whom it renders Service ; (D) The immediate and effective source of income in this case is amounts received under the contract dated 23.7.1999. That 80% of the consideration received by the appellant is within a period of one ::: Uploaded on - 03/08/2017 ::: Downloaded on - 06/08/2017 00:43:17 ::: 14 itl77.04.odt year when the appellant has carried out activity only on its land and developed the plants before transposing it on the land belonging to the company/institution. Thus, the impugned order of the Tribunal correctly holds that the consideration for the sale has been received when the plants are transposed on to the land belonging to company/institution, thereafter it is only Service carried out stage-II by the appellant.
8. Before we consider the rival submissions, it would be useful to refer to Sections 2(1A) and 10 of the Act which defines the meaning of 'agricultural income" and incomes which are excluded from total income respectively as under :
Definitions :
In this Act, unless the context otherwise requires:-
(1) ...............
(1A) "Agricultural income" means :-
(a) any rent or revenue derived from land which is situated in India and is used for agricultural purposes ;
(b) any income derived from such land by -::: Uploaded on - 03/08/2017 ::: Downloaded on - 06/08/2017 00:43:17 :::
15 itl77.04.odt
(i) agriculture, or
(ii)the performance by a cultivator or receiver or rent-in- kind of any process ordinarily employed by cultivator or receiver or rent-in-kind to render the produce raised or received by him fit to be taken into market; or
(iii)the sale by a cultivator or receiver or rent-in-kind of the produce raised or received by him, in respect of which no process has been performed other than a process or the nature described in paragraph (ii) of this sub-clause.
(c) ............."
Incomes not included in total income.-
10. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included--
(i) agricultural income ;
(2) ...............;
(3) to (50) ........;
::: Uploaded on - 03/08/2017 ::: Downloaded on - 06/08/2017 00:43:17 :::
16 itl77.04.odt
From the above sections, it is clear that agricultural income cannot be subjected to tax under the Act. This, ofcourse, subject to the income satisfying definition of agricultural income as provided in Section 2(1A) of the Act.
9. A bare reading of the aforesaid definitions clearly indicates that Section 10(1) of the Act excludes agricultural income from the total income under the Act. However, the agricultural income which is to be excluded under the aforesaid provision is not a popular or technical understanding of it but only of a nature as defined under Section 2(1A) of the Act.
10. A plain reading of the definition of agricultural income under Section 2(1A) of the Act would indicate that it is a restrictive definition as indicative from it being defined by word "means". It is a settled position that the definition clause using the word "mean" is to be read in restrictive sense and therefore, has to be construed strictly unless the context otherwise requires. Nothing has been shown to us that the context requires it to be read as inclusive or differently from ::: Uploaded on - 03/08/2017 ::: Downloaded on - 06/08/2017 00:43:17 ::: 17 itl77.04.odt restrictive. Thus, agricultural income as defined under clause (a) of Section 2(1A) of the Act would mean :
(I) any rent/revenue derived from land; (II) the land is used for agricultural purposes and (III) the land is situated in India.
Clause (b) of Section 2(1A) of the Act seeks to include any income (other than rent or revenue) derived from such land either by :-
(i) agriculture; or
(ii) the performance by a cultivator/receiver of rent in kind of any process ordinarily carried out by a cultivator to make agricultural product/produce fit to be taken into market; or
(iii) sale by a cultivator of any agricultural produce in respect of which the process is carried out other than the process indicated in (ii) above. Clause (b) of the above definition restricts the three classes of income as specified in sub-clauses (i), (ii) and (iii) thereof only to any income derived from such land. Such land would indicate the land which has been described in clause (a) of Section 2(1A) of the Act i.e. the land which is situated in India, used for agricultural purposes and ::: Uploaded on - 03/08/2017 ::: Downloaded on - 06/08/2017 00:43:17 :::
18 itl77.04.odt the income derived from such land should be other than rent or revenue indicated in Section 2(1A)(a) of the Act. However, the sine qua non for any income to be considered as an agricultural income is that it should be derived from land situated in India and used for agricultural purposes. The words 'derived from' as held by the Apex Court in Liberty (I) Ltd. vs. CIT, 317 ITR 218 is narrower than the words "attributable to". The use of the words "derived from' indicates that it does not cover sources beyond the first degree.
11. Keeping the above position of law in mind, we shall now deal with the two substantial question of law arising in this appeal.
12. Regarding Question No.1 :
(a) In the present case, the activity carried out by the appellant as set out hereinabove under the contract dt.23.7.1999 entered into with M/s.WCL requires it to undertake the work of sowing seeds and developing plants on it's own land by tending to them till such time as it achieves a certain health and height normally i.e. within a period of one to two years. Thereafter, these very plants ::: Uploaded on - 03/08/2017 ::: Downloaded on - 06/08/2017 00:43:17 ::: 19 itl77.04.odt are transplanted to the areas identified by WCL on land owned by WCL (end of Stage I as held by Tribunal).
(b) After transplanting the plants on the land owned by the WCL, the appellant tends to the same using its own men and material for a period of two to three years i.e. till the plants would have reached the desired health and height. The care of the plants is thereafter handed over to M/s. WCL (end of stage II as held by Tribunal).
(c) So far as stage I is concerned, the impugned order of the Tribunal holds it is an agricultural income as it is derived from it's own land on agricultural operations carried thereon. The consideration relating to this part of the activity is in fact income derived from land as the plants obtained from land are handed over by transplantation to WCL. Therefore, agricultural income.
(d) However, so far as the stage II is concerned, the appellant has no interest in the land where the plants have been transplanted. The appellant does not derive any income from the land but receive ::: Uploaded on - 03/08/2017 ::: Downloaded on - 06/08/2017 00:43:17 ::: 20 itl77.04.odt consideration for taking care of the plants after transplantation of the same on the land belonging to WCL. Thus, the obligation is to render Service under the contract i.e. to take care of the plants belonging to the WCL Ltd. and on the lands of WCL. Therefore, the income attributable to Stage-II of the contract would not fall under the definition of agricultural income. Therefore, includable in the total income of the appellant/assessee as business income.
(e) Mr.K.H.Deshpande, learned Senior Counsel appearing for the appellant submits that this artificial split/division in the integrated process of turn-key project is not called for. It is submitted that in case Stage-I is concerned with agricultural operation then Stage-II must also be considered to be agricultural operation. In support, reliance is placed upon the decision of the Apex Court in Raja Binoy Kumar Sahas Roy (supra) to contend that where the basic operation is agricultural operation then subsequent operations even if by themselves they may not constitute agricultural operations, if it is an integrated activity.
::: Uploaded on - 03/08/2017 ::: Downloaded on - 06/08/2017 00:43:17 :::
21 itl77.04.odt
(f) According to us, the above submission on the part of the appellant overlooks the basic fact in the present case that the operations which are carried out on the land belonging to WCL after transplanting the plants is an activity different and not an activity in continuation of Stage-I activity of sowing the seeds and developing plants on it's own land and thereafter, transplanting those plants on the land of WCL Ltd. It is not one continuous seamless integrated operation. The activity carried out at Stage-I and II are two different processes. The appellant could in a given case not take up the activity at Stage-II, as it is not necessary that the same agency should do both Stages. In fact, Stage-II could be carried out by some other agency. Therefore, the activity at Stage-II is not so linked in the present facts with the agricultural operation carried out at Stage-I. We may also refer to Raja Binoy Kumar Sahas Roy (supra), where the Apex Court observed that the income received from the sale of forest growth could be ideally divided into those arising out of spontaneous growth and that arising from human effort of planting trees etc. and it rued the fact that the bifurcation exercise had not been done by the Tribunal. In this case, the impugned order of the Tribunal has done the bifurcation exercise.
::: Uploaded on - 03/08/2017 ::: Downloaded on - 06/08/2017 00:43:17 :::
22 itl77.04.odt
(g) Further the contract dt.23.7.1999 is also indicative of the fact that over 80 % of the consideration payable under the contract is made available to the appellant within one year of starting the work on its own land by sowing seeds. Thus, the consideration which is paid for the agricultural produce is what is payable at the ends of Stage-I. So far as the balance 20% of the consideration is concerned, it is paid after Stage-I on account of Service rendered under the contract dated 23.7.1999 and cannot be said to be for agricultural income. The test is not the nature of activity but the primary/immediate source of income.
(h) In any case, the income received at the second stage i.e. Stage-II cannot even remotely be said to be derived from land. Therefore, the splitting of the entire activity by the Tribunal into two stages cannot be found fault with.
(i) Further without prejudice to the above, in this case, during stage II, the appellant takes care of plants and receives consideration for the same. The contract itself is indicative of the fact that the appellant has to provide service to WCL Ltd. by taking care of ::: Uploaded on - 03/08/2017 ::: Downloaded on - 06/08/2017 00:43:17 ::: 23 itl77.04.odt the plants which have been transplanted on its premises for a period of two to three years till such time as it is of required height and/or health. Thereafter, care of plants is taken over by WCL Ltd. Therefore, the income which is received by the appellant is not derived from the land but is derived from service which the appellant renders to WCL in taking care of its plants.
(j) The learned Counsel for the appellant placed reliance upon the decision of Privy Council in CIT .vs. Kameshwar Singh, 2 ITR 305 wherein the money lender, to whom agricultural property had been mortgaged by lease for a period of 15 years, was entitled to hold and enjoy the leased properties which gave rise to agricultural produce. The mortgagee-leasee received some portion of the agricultural produce as thika rent and the balance was received as consideration for the loan. The Revenue contended that thika rent is not agricultural income as it is received by a money lendor. The Privy Council negatived the contention of the Revenue in view of the fact that Section 2(1)(a) of the Act confers exemption to a kind of income i.e. agricultural income and it has no relation with the character of the recipient. Therefore, in the facts before it, the Privy Council held that ::: Uploaded on - 03/08/2017 ::: Downloaded on - 06/08/2017 00:43:17 ::: 24 itl77.04.odt if business of money lending brings in income which has been derived from land then it is exempt from income tax. The aforesaid decision is completely distinguishable from the facts herein. In the present case, the appellant/assessee does not receive any income out of agricultural produce derived from the land. The income received by the appellant/assessee is for providing Services under the contract dated 23.7.1999. It is not an income which has been derived from the land. In this case, primary source of the appellant's income is the rendering of Service under the contract and not from any land. Therefore, the aforesaid decision being completely distinguishable is of no assistance to the appellant.
(k) On the other hand, the Privy Council in Premier Construction Co. vs. CIT, 16 ITR 380 while dealing with the definition of agricultural income as defined in Section 2(i) of the Indian Income Tax Act, 1922, which is similar to that found under Section 2(1A) of the Act, had held that the remuneration earned by the Managing agent of a Company which is engaged in agricultural operations cannot be treated as agricultural income. The Court held that the assessee therein received remunertion for rendering of Service under ::: Uploaded on - 03/08/2017 ::: Downloaded on - 06/08/2017 00:43:17 ::: 25 itl77.04.odt the contract. The aforesaid decision would apply on all fours to the present dispute. However, Mr.Deshpande, learned Senior Counsel attempted to distinguish the aforesaid decision by pointing out that the contract dt.23.7.1999 between the WCL and the appellant is a comprehensive contract for plantation and at both stages i.e. on it's own land (stage I) and also on the land of the WCL (Stage-II), the appellant is carrying on agricultural operations. Even if we assume that the activity carried out at stage II are agricultural operations, yet the income which the appellant/assessee gets is not derived from the land but is derived from Service contract dt.23.7.1999 entered into between the WCL and the appellant. Consequently, the consideration received by the appellant at stage II does not have the character of agricultural income. Merely because the activity of serving WCL may have some relation to and/or be agricultural operations.
(l) Further in the case of Javed Ali vs. CIT, 18 ITR 95, the Allahabad High Court followed decision of the Privy Council in Premier Construction Co. Ltd. (supra) to hold that the remuneration received by the assesse who was a Mutawali of the waqf property for managing and supervising the agricultural activity of wafq, could not ::: Uploaded on - 03/08/2017 ::: Downloaded on - 06/08/2017 00:43:17 ::: 26 itl77.04.odt be treated as agricultural income. This on the basis that it was not derived from land but was in a nature of salary paid to the mutawali and not derived from the land. Mr.Deshpande tried to distinguish the aforesaid decision on the ground that the income in the present facts is derived from the agricultural operations. Thus, the income would be classified as agricultural income. However, this submission of the appellant does not address the basic question that the income in this case is not derived from land but derived from the contract for providing service and cannot be characterised as agricultural income.
(m) In E.C.Danby .vs. CIT, 12 ITR 351, the Patna High Court held that the payment received by an assessee as remuneration for managing agricultural properties of partnership firm could not be said to be derived from land so as to classify it as agricultural income. The remuneration received was in the nature of salary. Mere fact that the ultimate source of salary was agricultural property would not make any difference. This is because the income was not received out of profits or sale of agricultural produce but remuneration due to Manager as a salary for looking after the property. The distinction sought to be drawn by the appellant is that, in the above case, the income received in the hands of ::: Uploaded on - 03/08/2017 ::: Downloaded on - 06/08/2017 00:43:17 ::: 27 itl77.04.odt the Manager is for managing agricultural property where as in the present case the appellant is a cultivator performing only agricultural operations and therefore, the source of his income in his hands is agricultural income. This distinction overlooks the fact that no income has been derived from the agricultural land in which the agricultural produce has been generated. If agricultural produce has been sold the income which arose therefrom would be in the nature of agricultural income. In the present case, the appellant is only providing Services and it is assured of its income on rendering of the Services in terms of the contract dated 23.9.1999. Therefore, the decision of the Patna High Court would squarely apply to the present facts.
(n) Further before the Supreme Court in Maharajadhiraj Sir Kameshwar Singh .vs. CIT, 41 ITR 170 the assessee was an Executor of a Trust deed which inter alia included agricultural properties. Under the deed, the Executor had a right to receive remuneration for management of the trust and its properties. The Assessee's contention was that the income received by him is agricultural income was negatived by the Apex Court as it held that he had no interest in the land and what the Executor received was the salary/remuneration to take care of the ::: Uploaded on - 03/08/2017 ::: Downloaded on - 06/08/2017 00:43:17 ::: 28 itl77.04.odt properties of the trust. The source of income was provided in Trust deed i.e. right to receive remuneration to mange the property. The Court held that the Assessee therein did not have right to receive and/or appropriate to himself agricultural income which would arise from the agricultural properties belonging to the trust. The aforesaid decision is sought to be distinguished by the appellant on the ground that the appellant is deriving its income from actually cultivating the land. The income received is for agricultural activity and for no other activity. This distinction does not take note of the fact that the activity carried out by the appellant would not decide whether the remuneration received is agricultural income or not, but whether the income is derived from land. For any income to be classifiable as agricultural income, it has primarily to be derived from land. In the present facts, no agricultural income is derived by the appellant from the land. It receives consideration for providing Services under the contract dated 23.7.1999. For providing Services relatable to agricultural operations is still not income derived from the land. The words "derived from" would mean direct linkage/immediate source of income and not an indirect source of income.
::: Uploaded on - 03/08/2017 ::: Downloaded on - 06/08/2017 00:43:17 :::
29 itl77.04.odt
(o) In the above view, the substantial question of law at 1 above is answered in the affirmative i.e. in favour of the Revenue and against the appellant-assessee.
13. Regarding Question No.2 :
(a) From the question as urged by the appellant and admitted by this Court, it is not the appellant's case that the consideration received by it at stage II is classifiable under Section 2(1A)(b)(i) of the Act.
(b) It is the appellant's case that, in any case, the consideration received for activity carried out at stage II of the contact split by the Tribunal would still be agricultural income. This by virtue of Section 2(1A)(b)(ii) and (iii) of the Act.
(c) So far as Section 2(1A)(b)(ii) of the Act is concerned, the appellant submits that the consideration is received for the activity carried out by it at stage II is an activity which would be carried out ::: Uploaded on - 03/08/2017 ::: Downloaded on - 06/08/2017 00:43:17 ::: 30 itl77.04.odt by any cultivator ordinarily to render agricultural produce fit to be taken to the market.
(c) We note that activity carried out Stage-I is an agricultural activity and income at that stage is derived is from the land owned by the appellant. Thus, classified as agricultural income. So far as activity carried out at Stage-II is concerned, there is no evidence on record to indicate that taking care of the plants after they have been transplanted on the land owned by the WCL would be an activity ordinarily employed by a cultivator in taking care of the plants to render it to be fit to be taken to the market. On a bare reading of sub- section, the burden would be upon the appellant to show that it is a cultivator and similar activities are being carried out by cultivators or receiver on rent in kind and this activity of taking care of plants at Stage-II is to render the produce fit to be taken to the market.
(d) Therefore, in the present facts, even if one assumes that the appellant is a cultivator, yet, in absence of any evidence on record that the activity carried out by it at Stage-II is ordinarily carried out by a cultivator to render the produce fit to be taken to the market. ::: Uploaded on - 03/08/2017 ::: Downloaded on - 06/08/2017 00:43:17 :::
31 itl77.04.odt Therefore, the income cannot fall under Section 2(1A)(b)(ii) of the Act.
(e) Similarly, so far as Section 2(1A)(b)(iii) of the Act is concerned, the appellant claims that the consideration received by it for its activity would stand covered by the above clause.
(f) We note that for Section 2(1A)(b)(iii) of the Act to apply the income should be derived from land by the sale of agricultural produce. In this case, admittedly, the appellant/asseessee has not sold any agricultural produce even if one assumes agricultural produce has derived from the the land of WCL at stage II. The consideration received cannot be classified as agricultural income under 2(i)(a)(iii) of the Act.
(g) Moreover, the reasons indicated in para 11(i) to (n) while deciding question (1) would equally apply to the present question. The income received by the appellant is for rendering of Service and not for carrying out of operations as listed in Section 2(1A)(b)(ii) or (iii) of the Act.
::: Uploaded on - 03/08/2017 ::: Downloaded on - 06/08/2017 00:43:17 :::
32 itl77.04.odt
14. In the above view, the substantial question of law at no.1 is answered in the affirmative i.e in favour of the respondent/revenue and against the appellant/assessee. The substantial question of law at no.2 is answered in the negative i.e. in favour of the respondent/revenue and against the appellant/assessee.
15. The appeals relating to Assessment Years 1998-99 and 1999-2000 are dismissed. No order as to costs.
JUDGE JUDGE
jaiswal
::: Uploaded on - 03/08/2017 ::: Downloaded on - 06/08/2017 00:43:17 :::