Kerala High Court
K.T. Thomas vs Agricultural Income-Tax Officer And ... on 21 April, 1989
Equivalent citations: [1990]184ITR561(KER)
JUDGMENT
ASSESSMENT--Not to be capricious or vindictive Held:
As per the charging provision under s. 3 of the Agricultural IT Act, tax is charged for each financial year on the total agricultural income of the previous year of the assessee. In the present case, the estimate of agricultural income from tea for the purpose of assessment is not of the income during the previous year, but the taxable turnover on sal of tea during the relevant assessment year itself. The assessment accordingly is not in conformity with s. 3. The admissible deductions under the Act for expenses of cultivation, maintenance etc. are not allowed in accepting the taxable turnover as the agricultural income from tea for the relevant assessment year. The estimation of agricultural income from tea as equal to the taxable turnover on the sale of tea for the relevant assessment year is clearly wrong and hte orders of assessment are vitiated by these errors apparent on the face of the record.
AGRICULTURAL INCOME TAX Assessment--JURISDICTION OF AGRL. ITO--Levying tax on that portion of income from sale of tea which, as per r. 8 of IT Rules, is to be treated as income under IT Act Held:
Levy of tax by the State under the Agrl. IT Act can relate only to sixty per cent of the income derived from the slae of tea after allowing also admissible deductions under s. of the Agrl. IT Act. In the present case, the taxable turonver on the sale of tea for the respective assessment years is taken as the agricultural income from tea and the entire income is seen assessed in total idsregard of the constitutional provisions. The Agrl. ITO has no jurisdiction to levy tax on that portion of income from the sale of tea which as per r. 8 of the IT Rules is to be treated as income for the purpose of levy of tax under the IT Act, 1961.
JUDGMENT P.C. Balakrishna Menon J.
1. A learned single judge of this court dismissed O. P. No. 6985 of 1984 declining to exercise jurisdiction under Article 226 of the Constitution for the reason of the petitioner's default at all stages of the impugned assessment proceedings and also for his default in discharge of his other liabilities. The petitioner appeals.
2. The original petition as amended is for the issue of a writ of certiorari to quash the assessment orders, exhibit P-8 series, five in number, for the years 1977-78 to 1981-82 passed by the first respondent, the Agricultural Income-tax Officer, the revisional order, exhibit P-13, and also the revenue recovery proceedings culminating in the sale notice, exhibit P-7. Exhibit P-7 is a publication dated May 29, 1984, in the Malayala Manorama for the sale of the "Ponmudi Estate" and accessories for recovery of Rs. 2,08,51,230.98 with interest being the arrears of sales tax, agricultural income-tax, employees' provident fund, etc., due from the petitioner.
3. The petitioner owns the Ponmudi Estate measuring about 892 acres out of which an extent of 600 acres is a tea plantation. The counter-affidavit of the third respondent, Tahsildar, shows the break-up of the tax liability as follows :
Rs.
Sales tax :
23,37,825.03 Bank arrears due to Small Scale Development Corporation :
41,618.93 Emergency risk :
8,792.77
-do-
:
5,206.00 Agricultural income-tax :
1,75,98,366.62 Employees' provident fund :
7,20,936.15 Basic tax :
5,237.46 Plantation tax :
1,33,248.02 2,08,51,230.98
4. The arrears of agricultural income-tax and surcharge for the years 1977-78 to 1981-82 due from the petitioner are as follows as can be seen from the counter-affidavit filed on behalf of the respondents :
Year Agrl. income-tax Surcharge Total Rs.
Rs.
Rs.
1977-78 22,64,821.40 2,26,482.14 24,91,303.54 1978-79 13,71,664.80 1,37,166.48 15,08.831.28 1979-80 6,63.618.30 66,361.83 7,29,980.13 1980-81 47,49,694.80 4,74,969.48 52,24,664.28 1981-82 52,81,323.80 6,28,132.38 58,09,456.18 1,57,64,235.41
5. Exhibits P-8(a) to P-8(e) orders of assessment for these years were under Section 18(4) of the Agricultural Income-tax Act and were ex parte assessments against the petitioner. The petitioner did not respond to the notices issued under Section 35 of the Act. He did not file any return nor did he produce accounts and records relating to the agricultural income derived by him during the relevant accounting periods. The learned single judge has found that the petitioner did not co-operate with the assessing authority in finalising the assessments. The assessments for all these years were accordingly completed on best judgment under Section 18(4) of the Act. The assessment orders, exhibit P-8, series refer to a pre-assessment notice issued to the petitioner on February 1, 1983, proposing assessment "based on the details available from previous assessments and enquiry and the details of sales of tea gathered from concerned sales tax authority". Since no objections were received within the time allowed, the assessments were completed under Section 18(4) of the Act treating the assessee as a defaulter. Thus, the estimate of income from tea is based on the details of sales of tea gathered from the sales tax authorities.
6. These orders of assessment were confirmed in revision by the second respondent, Commissioner of Agricultural Income-tax, as per his common order, exhibit P-13, passed during the pendency of the original petition. The contention of the petitioner at the revisional stage that he does not own or possess any agricultural land in Puduppadi based on the certificate of the Village Officer produced as exhibit P-9 was rejected by the revisional authority on the ground that the address of the person shown in the certificate is not the same as in the assessment records, His contention that the estimated income from tea exceeds the statutory limit of 60% was also rejected on the ground that the assessee had not been able to prove the same. The revisional authority found that an assessment under Section 18(4) of the Act became necessary for the default of the petitioner in complying with the various notices issued by the assessing authority and rejecting all his contentions including the arbitrary nature of the assessment, the revisional authority confirmed the assessment orders, exhibit P-8 series.
7. The learned single judge, as already stated, has declined to interfere with these orders for the reason of the persistent default of the assessee in complying with the various notices issued by the assessing authority and his failure to file objections to the pre-assessment notice. The learned judge has also adverted to his default in complying with the orders of the Supreme Court for sale of a portion of the estate to discharge his liability under a decree obtained by the Indian Bank against him.
8. It is true that the, assessee is a defaulter. He has failed to submit returns in response to the notices issued under Section 35 of the Act. His case that he had not received any of those notices is not accepted by the revisional authority and the learned single judge. A best judgment assessment cannot, however, be capricious or vindictive. Following the decisions in CIT v. Laxminarain Badridas [1937] 5 ITR 170 (PC) ; AIR 1937 PC 133, Raghubar Mandal Harihar Mandal v. State of Bihar [1957] 8 STC 779 (SC) ; AIR 1957 SC 810, and State of Kerala v. C. Velukutty [1966] 60 ITR 239 (SC), the Supreme Court in Brij Bhushan Lal Parduman Kumar v. CIT [ 1978 ] 115 ITR 524, stated at page 530 :
"It will appear clear from what has been said above that the authority making a best judgment assessment must make an honest and fair estimate of the income of the assessee and though arbitrariness cannot be avoided in such estimate, the same must not be capricious but should have a reasonable nexus to the available material and the circumstances of the case."
9. The following passage from the judgment of the Privy Council in Laxminarain Badridas's case [1937] 5 ITR 170 is accepted as laying down the correct law on the subject (at p. 180) :
"The officer is to make an assessment to the best of his judgment against a person who is in default as regards supplying information. He must not act dishonestly or vindictively or capriciously because he must exercise judgment in the matter. He must make what he honestly believes to be a fair estimate, of the proper figure of assessment, and for this purpose he must, their Lordships think, be able to take into consideration local knowledge and repute in regard to the assessee's circumstances, and his own knowledge of previous returns by and assessments of the assessee, and all other matters which he thinks will assist him in arriving at a fair and proper estimate ; and though there must necessarily be guess-work in the matter, it must be honest guess-work. In that sense, too, the assessment must be to some extent arbitrary."
10. In State of Orissa v. Maharaja Shri B.P. Singh Deo [1970] 76 ITR 690, the Supreme Court observed at p. 691 :
"The mere fact that the material placed by the assessee before the assessing authorities is unreliable does not empower those authorities to make an arbitrary order. The power to levy assessment on the basis of best judgment is not an arbitrary power ; it is an assessment on the basis of best judgment. In other words, that assessment must be based on some relevant material. It is not a power that can be exercised at the sweet will and pleasure of the concerned authorities. The scope of that power has been explained over and over again by this court."
11. The assessment orders, exhibit P-8 series, show that agricultural income is assessed on the basis also of the sales tax assessment. The sales tax assessment, orders for the respective periods, therefore, form part of the records of the case. Some of these orders were produced by the petitioner as per C. M. P. No. 2097 of 1989. Exhibit P-8(e) is the order of assessment to agricultural income-tax for the assessment year 1977-78. The income from tea is estimated in exhibit P-8(e) at Rs. 27,79,000. The assessment order passed by the Assistant Commissioner of Sales Tax for the year 1978-79 is at page 164 of the paper book. This order shows that the petitioner was assessed to sales tax for the prior year 1977-78 on a total and taxable turnover of Rs. 27,79,900. Thus, the total taxable turnover for the year 1977-78 is taken as the agricultural income from tea for the said period in exhibit P-8(e) order of assessment. Exhibit P-8(d) is the order of assessment to agricultural income-tax for the year 1978-79. Income from tea is estimated in exhibit P-8(d) at Rs. 14,97,690, The sales tax assessment order for the said period is at page 164 of the paper book. The taxable turnover for the year 1978-79 for assessment of sales tax is determined at Rs. 14,97,690. Exhibit P-8(b) is the order of assessment to agricultural income-tax for the year 1980-81. Income from tea is estimated at Rs. 60,00,000. The order itself shows that the estimation is based on sale of tea gathered from the sales tax authorities. Exhibit P-8(a) is the order of assessment to agricultural income-tax for the year 1981-82. Net income from tea is estimated at Rs. 66,00,000. The appellate order against the order of provisional assessment to sales tax for the year 1981-82 is at page 172 of the paper book. It is seen from the appellate order that the taxable turnover for the year 1981-82 is assessed at Rs. 66,00,000. It is thus clear that for all these years 1977-78 to 1981-82, the Agricultural Income-tax Officer has adopted the taxable turnover for the assessment year as the agricultural income from tea. As per the charging provision under Section 3 of the Agricultural Income-tax Act, tax is charged for each financial year on the total agricultural income of the previous year of the assessee. In the present case, the estimate of agricultural income from tea for the purpose of assessment is not of the income during the previous year, but the taxable turnover on sale of tea during the relevant assessment year itself. The assessment accordingly is not in conformity with Section 3 of the Act. The taxable turnover as per its definition in Section 2(xxv) of the Sales Tax Act is the turnover on which a dealer is liable to pay sales tax after making such deductions as are admissible under the Act, The taxable turnover in the present case in each of these years is on the sale of tea produced in the petitioner's "estate and processed for the purpose of sale. The admissible deductions under the Agricultural Income-tax Act for expenses of cultivation, maintenance, etc., are not allowed in accepting the taxable turnover as the agricultural income from tea for the relevant assessment year. The estimation of agricultural income from tea as equal to the taxable turnover on the sale of tea for the relevant assessment year is clearly wrong and the orders of assessment are vitiated by these errors apparent on the face of the record.
12. Under Article 246(1) of the Constitution, Parliament has exclusive power to legislate with respect to any of the matters enumerated in List I of the Seventh Schedule to the Constitution. As per Clause (3) of the said article, the Legislature of a State has exclusive power to make laws with respect to matters enumerated in List II of the said Schedule, Entry 82 of List I reads : "Taxes on income other than agricultural income". Entry 46 of List II provides for taxes on agricultural income, Article 366(1) of the Constitution defines "agricultural income" as follows :
'"agricultural income' means agricultural income as defined for the purposes of the enactments relating to Indian income-tax."
13. Sub-section (1) of Section 2 of the Indian Income-tax Act, 1922, defines "agricultural income", the material portion of which reads :
'"agricultural income' means-
(a) any rent or revenue derived from land which is used for agricultural purposes, and either assessed to land revenue in the taxable territories or subject to a local rate assessed and collected by officers of the 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 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 (in) 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) ;..."
14. The definition of "agricultural income" in Sub-section (1) of Section 2 of the Income-tax Act, 1961, is similar to the definition in the 1922 Act. Section 59 of the 1922 Act deals with the power to make rules. Rule 24 of the Income-tax Rules, 1922, related to the computation of income derived from the sale of tea grown and manufactured by the seller. As per the said rule "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 forty per cent. of such income shall be deemed to be income, profits and gains liable to tax" (proviso omitted). Section 295 of the Income-tax Act, 1961, deals with the power to make rules. Rule V of the Income-tax Rules, 1962, deals with income which is partially agricultural and partially from business. The material part of Rule 8 dealing with income from the manufacture of tea reads :
"Income derived from the sale of tea grown and manufactured by the seller in India shall be computed as if it were income derived from business and forty per cent. of such income shall be deemed to be income liable to tax."
15. It is thus clear that the entire income derived from the sale of tea is not agricultural income. The State Legislature is not competent to levy tax on income other than agricultural income as is clear from the aforesaid entries in the Seventh Schedule of the Constitution. In view of the provisions of law adverted to above, levy of tax by the State under the Agricultural Income-tax Act can relate only to sixty per cent. of the income derived from the sale of tea after allowing also admissible deductions under Section 5 of the Agricultural Income-tax Act. In Anglo-American Direct Tea Trading Co. Ltd, v. Commr. of Agrl. I. T. [1968] 69 ITR 667, 672 (SC) ; AIR 1968 SC 1213, it is stated at p. 1216 : .
"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 deemed to be income derived from business and assessable to non-agricultural income-tax, Having regard to the decision in Karimtharuvi Tea Estates Ltd. v. State of Kerala (1963] 48 ITR (SC) 83 ; [1963] Supp. 1 SCR 823 ; AIR 1963 SC 760, we are bound to hold that (a) the Explanation to Section 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. The agricultural income taxable under the Kerala Act is 60 per cent. of the income so computed after deducting therefrom the allowances authorised by Section 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."
16. The Explanation referred to above in the Agricultural Income-tax Act, 1950, was deleted by the Agricultural Income-tax (Amendment) Act, 1980 (Kerala Act 17 of 1980), with a view to bring in the entire income from tea exigible to tax under the Agricultural Income-tax Act. The validity of the Amendment Act was questioned before the Supreme Court in Tata Tea Ltd. v. State of West Bengal [1988] 173 ITR 18 (SC) ; AIR 1988 SC 1435. The validity of a similar amendment of the Bengal Act was also considered by the Supreme Court in the said decision. After considering the relevant constitutional provisions and the definition of "agricultural income" in the Income-tax Act, the Supreme Court held that in spite of the amendment of the respective enactments for the levy of tax on agricultural income by the States of West Bengal and Kerala, the State can levy tax only on 60 per cent. of the income derived from tea after allowing also the permissible deductions under the respective enactments. The Supreme Court stated at page 1447 of AIR 1988 SC (at p. 37 of 173 ITR) :
"A scrutiny of the aforesaid decisions of this court in Karim-tharuvi Tea Estates Ltd. [1963] 48 ITR 83 ; AIR 1963 SC 760 and Anglo-American Direct Tea Trading Co. Ltd. [1968] 69 ITR 667 ; AIR 1968 SC 1213, shows that this court has consistently taken the view that the definition of the term "agricultural income" for the purposes of the Act of 1922 and the Act of 1961, being Acts pertaining to the levy of income-tax, has to be considered in the light of Rule 24 of the Indian Income-tax Rules, 1922, in the case of the Act of 1922 and Rules 7 and 8 of the Income-tax Rules, 1962, as far as the Act of 1961 is concerned. An analysis of the said decisions shows that this court has taken the view that, in the case of income from the sale of tea grown and manufactured by an assessee, Rule 24 of the Indian Income-tax Rules, 1922, and Rule 8 of the Income-tax Rules, 1962, although at first glance they appear to be rules of apportionment and computation, must be treated as incorporated in the definition of the term 'agricultural income' in the Act of 1922 and the Act of 1961, respectively. It is true that in both the cases, Karimtharuvi Tea Estates Ltd. [1963] 48 ITR 83 and Anglo-American Direct Tea Trading Co. Ltd. [1968] 69 ITR 667. it has been noticed by this court that the said Explanation to Section 2(a)(2) of the Kerala Agricultural Income-tax Act was in line with the provisions of Rule 24 of the Indian Income-tax Rules, 1922, and Rule 8 of the Income-tax Rules, 1962, but that by itself does not make any difference and the reading of the aforesaid decisions makes it perfectly clear that even without that Explanation, the position would have been the same. The conclusion which must follow is that although the Explanation has been deleted from Sub-clause (2) of Clause (a) of Section 2 of the Kerala Agricultural Income-tax Act and in spite of the amendments carried out by the Amendment Act of 1979 and thereafter the Amendment Act of 1980 in the case of the Bengal Agricultural Income-tax Act, an Agricultural Income-tax Officer acting under the Kerala Agricultural Income-tax Act or the Bengal Agricultural Income-tax Act has no power to levy agricultural income-tax except in respect of 60 per cent. of the income derived by an assessee from the sale of tea grown and manufactured by him and computed in the manner laid down under the relevant Central Income-tax Act and the Rules framed thereunder."
17. In the present case, the taxable turnover on the sale of tea for the respective assessment years is taken as the agricultural income from tea and the entire income is seen assessed in total disregard of the constitutional provisions adverted to above, The Agricultural Income-tax Officer has no jurisdiction to levy tax on that portion of income from the sale of tea which as per Rule 8 of the Income-tax Rules is to be treated as income for the purpose of levy of tax under the Income-tax Act, 1961.
18. In the counter-affidavit dated August 4, 1987, filed on behalf of the respondents, it is stated that a pre-assessment notice dated February 1, 1983, estimating the income was served on the assessee on February 25, 1983. The last; date for filing a reply to the proposals made in the pre-assessment notice was on March 3, 1983. Sri M.J. Udayavarma Raja, sales tax practitioner, filed a petition dated March 7, 1983, on behalf of the petitioner and that petition was received on March 9, 1983, after the assessment was completed on March 3, 1983. It is accordingly stated that the objections filed on March 9, 1983, could not be considered before the assessment orders were passed on March 3, 1983. The pre-assessment notice required the assessee to file objections on or before March 3, 1983. The notice was served on the assessee only on February 25, 1983. The assessee was given only six days' time to file objections to the proposals contained in the pre-assessment notice. The time allowed was too short and the assessment orders were passed on March 3, 1983, even before expiry of the time allowed to file objections. The objections filed on March 9, 1983, could not be considered in view of the orders already passed on March 3, 1983. This, according to us, has resulted in denial of natural justice to the petitioner and he had no opportunity to meet the case put against him in the pre-assessment notice.
19. The revisional authority has not considered any of these aspects borne out by the records of the case. Section 34 of the Act provides for a revision to the Commissioner at the instance of the assessee. The statutory revisional authority is also invested with jurisdiction to make such enquiries as may be found necessary for the disposal of the revision on merits. The revisional authority in the present case has not even perused the orders of assessment to sales tax for the different years in question. The Commissioner is wrong in ignoring the constitutional points raised by merely stating that the assessee has not shown that the income from tea assessed exceeds 60 per cent. of the total income from the sale of tea.
20. The impugned orders of assessment, exhibit P-8 series, and the revi-sionai order, exhibit P-13, are, therefore, vitiated by errors apparent on the face of the record. There is also lack of jurisdiction to assess income above 60 per cent. derived from tea and these orders are clearly unsustainable in law.
21. The petitioner seeks to quash also the revenue recovery proceedings culminating in exhibit P-7 notification for sale of the Ponmudi Estate. The counter-affidavit of the third respondent shows that revenue recovery proceedings are taken against the petitioner for recovery of amounts due from him under various heads as referred to in the earlier part of this judgment. The Ponmudi Estate was attached under Section 36 of the Revenue Recovery Act and the Collector has assumed management of the same in exercise of his powers under Section 37 of the Act. The agricultural income-tax arrears due from the petitioner relate also to earlier years. There are also arrears of sales tax, basic tax, plantation tax, employees' provident fund, etc., aggregating to large amounts to be recovered from the petitioner. The teamed Advocate-General has brought to our notice that separate demand notices under Section 34 of the Revenue Recovery Act had been issued to the petitioner for recovery of the different items of liability due from him. The assumption of management by the Collector under Section 37 of the Revenue Recovery Act after attachment of the properties under Section 36 of the Act cannot, therefore, be assailed. It is also open to the State to bring the properties to sale for recovery of the amounts due from the petitioner other than the agricultural income-tax due from him for the years 1977-78 to 1981-82 which is yet to be determined by the first respondent afresh.
22. For the aforesaid reasons, we quash the assessment orders, exhibits P-8(a) to P-8(e), and the revisional order, exhibit P-13, and direct the first respondent, the Agricultural Income-tax Officer, Nedumangad, to pass fresh orders of assessment in the light of the observations and directions contained in this judgment after affording the petitioner sufficient opportunity to substantiate his objections to the pre-assessment notice served on him.
23. The writ appeal is allowed as indicated above. The parties will suffer their respective costs.