Madras High Court
Commissioner Of Income-Tax vs Stanes Amalgamated Estates Ltd. on 13 August, 1997
Equivalent citations: [1998]232ITR443(MAD)
JUDGMENT Thanikkachalam, J.
1. In pursuance of the order dt. 10th December, 1984 by this Court the Tribunal referred the following question of law for the opinion of this Court under s. 256(2) of the IT Act, 1961 :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sale proceeds of eucalyptus oil extracted by the assessee from the leaves of the eucalyptus trees grown by it was in the nature of agricultural income and hence it was not assessable to tax ?"
2. The assessee-company grows eucalyptus trees as shade trees and extracts eucalyptus oil from them. In the course of assessment proceedings for the asst. yr. 1978-79 the assessee contended that the sale proceeds of oil represented its agricultural income. The ITO rejected this plea and treated the sale proceeds of the oil as miscellaneous receipts. However, on appeal, the CIT(A) held that the extraction of oil was a process to render the leaves fit to be taken to market and, therefore, yielded agricultural income, which was not taxable. On further appeal by the Department, the Tribunal, relying upon the decision of the Supreme Court in 44 STC 392 held that eucalyptus oil was agricultural produce. The Tribunal accordingly confirmed the order of the CIT(A).
3. Before us learned standing counsel appearing for the Department submitted that the eucalyptus leaves are having market and, therefore, the sale of the oil extracted from the eucalyptus leaves cannot be considered to be an agricultural produce. According to learned standing counsel, agricultural income means any rent or revenue derived from land and is used for agricultural purposes. Since the oil extracted from the eucalyptus leaves has no direct nexus to the land, it cannot be considered as agricultural produce. It was further submitted that since the eucalyptus leaves themselves have no market that would not mean that the oil extracted from the eucalyptus leaves which alone is marketable is to be considered as agricultural produce. In order to support the above said contentions, reliance was placed upon the decisions reported in the case of Dooars Tea Co. Ltd. vs. Commr. of Agrl. IT in the case of South Arcot District Co-operative Marketing Society Ltd. vs. CIT and in the case of Seth Banarsidas Gupta vs. CIT . On the other hand, learned counsel for the assessee submitted that the eucalyptus leaves themselves have no market and, therefore, the assessee has got to extract oil and bring the oil to the market since the eucalyptus oil alone has got the marketing. Placing reliance upon the provisions contained in s. 2(1)(a)(b)(ii) of the Act, the learned counsel submitted that even after a process is employed by a cultivator to make the produce fit for marketability, it would not lose its character as an agricultural produce. According to learned counsel, since the leaves themselves cannot be sold and the oil extracted alone is fit for marketability and therefore, the eucalyptus oil is agricultural produce. Reliance was placed upon the decisions reported in CIT vs. H. G. Date (1971) 82 ITR 71 (Bom) : TC 31R.575, CIT vs. Woodland Estate Ltd. (1965) 58 ITR 612 (Ker) : TC 31R.583 and CIT vs. Diwan Bahadur S. L. Mathias (1937) 5 ITR 435 (Mad) : TC 31R.471.
4. We have heard both the learned standing counsel as well as the learned counsel for the assessee.
5. The point for consideration is :
Whether the eucalyptus oil extracted from the eucalyptus leaves can be considered as an agricultural produce ?
6. While considering ss. 2(1)(b)(i), 4 and 6 of the Indian IT Act, 1922, the Supreme Court in Dooars Tea Co. Ltd. vs. Commr. of Agrl. IT (supra) held as under :
"Going back to s. 2(1)(b) it refers to income derived from land which means arising from land and denotes income the immediate and effective source of which is land. Sec. 2(1)(b) consists of three clauses. Let us first construe cls. (ii) and (iii). Clause (ii) includes cases of income derived from the performance of any process therein specified. The process must be one which is usually employed by the cultivator or receiver of rent-in-kind; it may be simple manual process or it may involve the use and assistance of machinery. That is the first requirement of this proviso. The second requirement is that the said process must have been employed with the object of making the produce marketable. It is, however, clear that the employment of the process contemplated by the second clause must not alter the character of the produce. The produce must retain its original character and the only change that may have been brought about in the produce is to make it marketable. The said change in the condition of the produce is only intended to make the produce a saleable commodity in the market. Thus cl. (ii) includes within the categories of income, income derived from the employment of the process falling under that clause. As we have just observed, the object of employing the requisite process is to make the produce marketable but in terms the clause does not refer to sale and does not require that the income should be obtained from sale as such though in a sense it contemplates the sale of the produce."
In the abovecited decision it is clearly pointed out that the employment of the process contemplated by the second clause must not alter the character of the produce.
7. In the case of South Arcot Co-operative Supply & Marketing Society vs. CIT (supra), the assessee purchased paddy from some of it members, hulled the same and sold the resultant rice to its other members. The assessee's claim for exemption of the profits made on this transaction under s. 14(3)(i)(c) of the Indian IT Act, 1922 was negatived by the Department. On a reference, this Court held that the rice is not an agricultural produce and as it does not continue to have the same original character as paddy after hulling and further it cannot be said that the agricultural produce of the members is what was being sold as it is only the paddy that belonged to the members and hulling is not a necessary process for marketability of that produce and hence, the assessee was not entitled to exemption. In the case of Seth Banarsi Das Gupta vs. CIT (supra), the assessee sold part of sugarcane raised on the land while the remaining part was converted into gur. On a reference the Allahabad High Court held that the income from gur business was not agricultural income exempt from tax. In order to bring the case within the meaning of agricultural income as defined in s. 2(1)(a) of the Indian IT Act, 1922, it is necessary inter alia to establish that the nature of the goods remains the same even after the application of the process. When sugarcane is converted into gur it results in the production of a different commodity. The conversion of sugarcane into gur is not a necessary process performed by a cultivator to render sugarcane fit for being taken to the market. In the case of CIT vs. H. G. Date (supra) the assessee, who cultivated the sugarcane on his land and converted it into jaggery for sale in the market claimed exemption from the income received as agricultural income. On a reference the Bombay High Court held that there was evidence before the Tribunal to justify its finding that there was no market for the sugarcane produced by the assessee in its natural condition. Hence the income received by the assessee from sale of jaggery was exempt from Income-tax as agricultural income. In the case of CIT vs. Woodland Estate Ltd. (supra), while considering the provisions of s. 2(1) of the Indian IT Act, 1922, the Kerala High Court held that in order that an income might fall within the definition of agricultural income under s. 2(1)(b)(ii) of the Indian IT Act, 1922 two conditions have to be satisfied; (1) the process to which the agricultural produce is subjected whether manual or mechanical should be one which is ordinarily employed by a cultivator and (2) the said process should be employed in order to render the produce fit to be taken to market and not for any other purpose. The produce must retain its original character in spite of the process unless there is no market for selling it in that condition. If there is no market to sell the produce, then any process which is ordinarily employed to render it to reach the market where it can be said would be covered by the definition. A combined reading of the decisions cited supra would go to show that even under processing the produce should not lose its identity and the assessee must establish the agricultural produce itself has got no market and only by converting the same into some other product there can be a market. In the present case, the oil extracted from the eucalyptus leaves lost its original identity. According to the assessee, the eucalyptus leaves themselves have got no market, but, in the order passed by the Commissioner it is clearly stated that the leaves also have ready market as evidenced by contract allowed by the Forest Department for cutting green leave by private merchants. Even though the assessee contended that the leaves themselves have got no market, but, it was not substantiated before the Tribunal. In view of the foregoing reasons we consider that the order passed by the Tribunal in coming to the conclusion that eucalyptus oil extracted from the eucalyptus leaves is also agricultural produce is not acceptable. In that view of the matter we answer the question referred to us in the negative and in favour of the Department. The tax case is ordered accordingly. No costs.