Karnataka High Court
K. Lakshmansa & Co. vs Commissioner Of Income-Tax, Karnataka on 14 November, 1980
Equivalent citations: (1981)20CTR(KAR)348, [1981]128ITR283(KAR), [1981]128ITR283(KARN), [1981]5TAXMAN272(KAR)
JUDGMENT Rama Jois, J.
1. Whether the feeding of mulberry leaves to silk-worms is a process ordinarily employed by cultivators of mulberry leaves, to make the leaves marketable by converting them into silk cocoons, is the precise question that arises for consideration in the twelve references made under s. 256(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act").
2. Section 10 of the Act provides that agricultural income shall not be included in computing the total income of the previous year of any person for purposes of levy of income-tax under the Act. Section 2(1) defines "agricultural income". Relevant part of the definition reads :
"2. In this Act, unless the context otherwise requires, -
(1) 'agricultural income' means-......
(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 or rent-in-kind to render the produce raised or received by him fit to be taken to market ; or......"
3. The business of the assessee is to purchase silk-worm eggs available for sale in the market and to rear the worms after the eggs are hatched, in circular trays by feeding the worms with fresh mulberry leaves grown by the assessee on the lands belonging to him after cutting them to required size. The worms grow in size and each worm builds a cocoon around itself consisting of fine filament. The whole process takes about 20 to 25 days. The assessee sells these cocoons to silk rearers who produce silk thread from the cocoons.
4. It is common ground that growing of mulberry leaves is an agricultural activity and the value of mulberry leaves constitutes agricultural income, and that the only use of mulberry leaves is to feed the leaves to the silk worms and that the mulberry leaves constitute the only fodder for the silk worms.
5. Assessment for the years 1961-62 to 1968-69 had been completed on the ground that the entire income arising out of the sale of silk cocoons constitutes the agricultural income and, therefore, exempt from tax under the Act. Later, the assessments were reopened under s. 147(a) of the Act. Notices were also issued under s. 139 for the assessment years 1969-70 to 1972-73.
6. Before the ITO, the assessee urged that cultivation of mulberry heaves was agriculture, and as there was not market available for mulberry leaves, the ordinary method adopted by every cultivator of mulberry including the assessee to make the leaves produced marketable was by way of feeding the leaves to silk-worms and converting the leaves into silk. The ITO agreed that income attributable to the cultivation of mulberry plants, plucking their leaves and cutting them to suitable size amounts to agricultural income, but not beyond that. He was of the view that agricultural operation ceased after the leaves were fed to the silk worms and that the activity of the assessee in rearing silk-worms and selling the cocoons did not constitute agricultural activity and, therefore, the income attributable to these activities was liable to be taxed under the Act. Taking all the relevant factors into account, the ITO assessed that out of the total income of the assessee form the sale of cocoons, 75% represented the agricultural income and 25% the non-agricultural income.
7. The AAC in his common order, vide annex. B, on the appeals preferred by the assessee, accepted the plea of the assessee that silk worms were being used by the assessee to carry out the necessary biological process of converting mulberry leaves into fine silk fibre and, therefore, the income attributable to the sale of silk cocoons was agricultural income within the meaning of s. 2(1)(b)(ii) of the Act.
8. The ITO preferred appeals before the Appellate Tribunal against the common order of the AAC. The Tribunal disposed of the twelve appeals by its common order, vide annex. C. After considering the points urged for the assessee and the decisions relied on, the Tribunal concluded as follows :
"In the instant case, it is impossible to hold that the character of the produce, i.e., mulberry leaves and silk cocoons, is the same. The mulberry leaves do not retain their character after the application of the process, through the medium of the silk worm, for, what results in a silk cocoon, which has no direct connection with land or with agriculture or its produce, i.e., mulberry leaves. Mulberry leaves are only the food for silk worms. That apart, there is no question of making the mulberry leaves marketable, for it is the assessee's own case that it does not grow them for marketing but only to feed them to the silk worms which it rears, so as to get silk cocoons from the sale of which it earns income. Thus, in the case in hand, none of the requirements for the application of section 2(b)(ii) laid down by the Supreme Court is satisfied-to repeat :- (i) the employment of the process alters the character of the produce : (ii) the produce does not retain its original character ; (iii) the said change is not brought about in the produce to make it marketable. That being the position, we are of the opinion that the income derived from the process employed by the assessee i.e., the rearing of silk-worms, to feed them with the mulberry leaves, is not entitled to exemption under section 2(1)(b)(ii)."
9. Thereafter, on the application made by the assessee, the Tribunal has made these twelve references under s. 256(1) of the Act and has referred the following common question for the opinion of this court :
"Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that the income derived by the assessee from the process, i.e., the rearing of silk-worms, is not entitled to exemption under section 2(1)(b)(ii) of the Income-tax Act, 1961 ?"
10. Sri S. P. Bhat, learned counsel appearing for the assessee, strenuously contended that the view taken by the AAC was correct and the view taken to the contrary both by the ITO and the Tribunal was erroneous. He argued that as the tribunal had recorded a finding that there was no market for the mulberry leaves and the only use for which the mulberry leaves grown by the assessee could be put to use was to feed them to the silk-worms, which was the only food taken by the silk-worms, it should be held that the process of feeding mulberry leaves to silk-worms and securing silk cocoons through the agency of silk-worms was a process ordinarily adopted by a cultivator of mulberry leaves to render the leaves marketable and consequently constitutes agricultural income in view of s. 2(1)(b)(ii) of the Act.
11. In support of his contention, learned counsel for the assessee relied on the following decisions in which certain incomes were held to be agricultural income falling under s. 2(1)(b)(ii) of the Act :
(i) Decision of this court in A.T. Parthasarathiah & Bros. v. CIT [1963] 48 ITR 830 (Mys) in which the income derived from the sale of cleaned tamarind, the process of removing the outer cover, cleaning and removal of seeds and fibre from the tamarind fruits plucked from the trees, was held to be agricultural income.
(ii) Decision of the Kerala High Court in the case of CIT v. Woodland Estates Ltd. [1965] 58 ITR 612 (Ker) in which it was held that income derived by the sale of sole crepe produced after the conversion of latex collected from rubber trees was agricultural income.
(iii) Decision of the Bombay High Court in the case of CIT v. H. G. Date [1971] 82 ITR 71 (Bom) in which the income derived from the sale of jaggery after producing it from the sugarcane grown by the assessee was held to be agricultural income.
12. The ratio of all the three decisions is the same and not applicable to the case of the assessee. In all those case, the process adopted by the assessee was to make the agriculture produce marketable and what was sold was found in substance to be the agriculture produce produced by the assessee, but in a marketable form. In the present case, the entire agricultural produce, i.e., mulberry leaves, was used up or consumed by the assessee by feeding them to silk worms. Nothing remained. We see no substance in the contention that the assessee is employing biological process of converting mulberry leaves into silk. Assuming that a biological process could also be employed to make an agricultural produce marketable, even after the process, in substance and quality though not in form, what is marketed must be identifiable as an agricultural produce. To illustrate, if an agriculturist produces seeds and sells them after converting them to seedlings in pots or any other type of containers, if market in a given case, is normally available only for seedlings, it would be a case of subjecting seeds to a biological process to produce seedlings, as a biological change does take place in the seeds giving rise to the seedlings. In the present case, no biological change taken place in mulberry leaves. They are simply consumed when eaten by silk worms. The silk cocoons produced by silk worms do not bear any character or quality of an agricultural produce and at common parlance they are not considered as an agricultural produce or as a marketable form of mulberry leaves. In form and substance, it is not an agricultural produce. Just as milk yielded by a cow cannot be considered as a marketable form of grass or any other fodder eaten up by the cows, the silk produced by silk worms cannot be considered as a marketable form of mulberry leaves.
13. Learned counsel, however, contended that there was no market at all for mulberry leaves as they have got to be plucked and fed to the silk-worms immediately, the growers invariably are consumers and, therefore, the only known process to make mulberry leaves marketable and to receive the income from them was to produce silk cocoons by feeding the leaves to the silk-worms. In this behalf learned counsel for the assessee relied on the finding of the Tribunal that there was no market for the mulberry leaves. We see no substance in the contention. As held by the Supreme Court in Dooars Tea Co. Ltd. v. Commr. of Agrl. I.T. , on which Sri Rajasekhara Murthy, learned counsel for the revenue, relied, what constitutes agricultural income is the produce itself and it is not necessary that it should be sold. In that case agricultural produce such as bamboos, thatching grass and fuel timber produced by agricultural operations were not sold but consumed by the assessee for purposes of its tea business. Interpreting s. 2(1)(b) of the Bengal Agrl. I.T. Act, the wording of which is similar to s. 2(1)(b)(ii) of the Act, the Supreme Court held that agricultural produce itself constituted agricultural income and, therefore, even if the same was used up and not sold, still the value attributable to the agricultural produce was income. In the said case, the Supreme Court also laid down the criteria to determine as to whether a process was adopted to make the agricultural produce marketable as follows (p. 12) :
"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."
14. Applying the above tests, it is not possible to hold that mulberry leaves were converted into silk cocoons by a process biological or otherwise, as no trace or character of the agricultural produce, i.e., mulberry leaves, is retained in the silk cocoons.
15. In conclusion, we hold that feeding of mulberry leaves to silk-worms is not a process employed by a cultivator of mulberry leaves to silk-worms is not a process employed by a cultivator of mulberry leaves to make them marketable by way of producing silk cocoons.
16. Accordingly, we answer the question referred for our opinion in the affirmative, i.e., against the assessee.