P. CHANDRA REDDY J - The question that requires an answer in this reference is framed in the following words :

"Whether the proportionate income accruing on the sale of tobacco after the process of "flue-curing", is income exempt under section 4(3)(viii) of the Act being "agricultural income" within the meaning of section 2(1)(b) of the Act ?"

The reference relates to the assessment year 1955-56. The assessee is a Hindu undivided family. One of the businesses carried on by the assessee is export in tobacco, which is grown on the assessees lands. Exemption from tax was claimed by the assessee under section 4(3)(vii) of the Indian Income-tax Act in respect of income arising on the sale of tobacco as "agricultural income". The department allowed the claim in part. The income ascribable to the operations carried on up to the stage of "flue-coring" of the tobacco was regarded as "agricultural income", while that accruing from subsequent activities up to and including the sale of tobacco by export to foreign countries was treated as income from business which is subject to tax. The tobacco to be made fit for export to countries like United Kingdom and Russia had to undergo a further process of redrying, stripping and granding. The order of the proper Income-tax Officer was affirmed on appeal by the Appellate Assistant Commissioner as also by the Income-tax Appellate Tribunal on a further appeal. Further, as the Tribunal thought that the case raises a question of law, it referred the matter to this court under section 66(1) of the Indian Income-tax Act.

In this enquiry, the problem that presents itself is whether the income attributable to operations of re-drying, stripping and grading would also come within the connotation of the expression

"agricultural income"

"Agricultural income" is defined in section 2(1) thus :

"(1)Agricultural income means - ...

(b) any income derived from such land by - ...

(ii) the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by a cultivator or receiver by him fit to be taken to market, or..."

It is plain that in order to attract clause (ii) two requisites should be present, namely, (i) that the process should be ordinarily employed by the cultivator and (ii) that it should be necessary to make the agricultural produce marketable. Sri Kuppuswamy, learned counsel for the assessee, contends that the process called "re-drying, stripping and grading" have to be employed to give durability and better quality to the tobacco and as such these activities also come with the sweep and range of clause (ii). He further submits that all the process commencing from ""flue-curing"" should together be described èas agriculture.

In support of this contention, the learned counsel draws our attention to the judgments of the High Courts of Patna, Madras, and Kerala in J.M. Casey v. Commissioner of Income-tax, State of Madras v. Saravana Pillai and Deputy Commissioner of Agricultural Income-tax and Sales Tax, Kerala State v. A. P. Raman respectively.

In the first of these case, it was decided by a Special Bench of the Patna High Court that the whole of the profits derived from the manufacture of fibre was ""agricultural income"" within the terms of the Indian Income-tax Act and such was exempt from assessment to tax.

That case has no analogy here for the reason that the cultivator of aloe plant had no convert it into sisal fibre to render it fit to be taken to the market since aloe leaves as much had to market in the proper sense. It was observed that the mere fact that aloe leaves could be supplied to jails did not make any difference since the leaves so bought by the Jail authorities were treated by the prisoners by means of the same laborious and uneconomic process which was employed by some villagers in treating the leaves of the wild and uncultivated plant and that the object of the manufacturer in jails was not conducting of an economic process which shall render profitable the cultivation of the aloe plant, but merely to keep the prisoners employed on sufficiently laborious and punitive work. There, it was definitely found that the aloe leaves were not ordinarily marketable and they could normally be sold only after they were manufactured into sisal fibre. The test propounded by the learned Chief, Justice, one of the members of the Division Bench, who spoke for the court, is stated thus :

"It is further to be noted that in order to test whether the process employed by the assessee is an agricultural process it would be possible to compare with that which is ordinarly employed by a cultivator, that is to say, it must be found that the plant with which we are concerned is in fact cultivated and that the cultivator in order to render the produce fit to be taken to market ordinarily employs a process to treat the produce of actual cultivation."

It is by applying this test that learned judges negatived the contention of the department that the income derived did not fall outside the contemplation of section 2(1)(b)(ii) and section 4(3)(viii).

State of Madras v. Saravana Pillai also does not come to the rescue of the assessee. The questions that fell to be considered there was whether subjecting arecanuts to certain processes such as pealing, slicing, boiling and drying to make them fit for marketing would take the produce out of the purview of section 2(1)(b)(ii) of the Income-tax Act. It was answered in the negative, for the reason that arecanuts could not be marketed in the state in which they were gathered from the trees, that they had necessarily to be processed before they could be put into market and that processing was short of any manufacturing process.

In the same trend of thought is the judgment of the Kerala High Court in Deputy Commissioner of Agricultural Income-tax, Sales Tax, Kerala State v. A. P. Raman. The question that fell to be considered there was whether the income derived from the sale of coconut fibre made out of èthe husks of coconuts plucked from the garden of the assessee was exempt from tax under the proviso to section 2(1) of the Madras General Sales Tax Act, 1939. The Kerala High Court accepted the contention of the assessee that it was ""agricultural income"", being of pinion that converting the husks into fibre by a process ordinarily employed by cultivators was necessary to make the husks really a marketable commodity and make them fit for being taken to the market. Raghavan J., who delivered the opinion of the court, stated that the green husks, if they were not sold within a few days of de-husking, would dry up and lose their value, that the only use to which the husks could thereafter be put was fuel or firewood and that even if there was some market for green husks in the locality it was only a very limited and precarious one and the process employed by the assessee was necessary to preserve the value and to prevent the deterioration of the husks. Thus, this case also is easily distinguishable, the facts being quite dissimilar to those in the instant case.

Sheolal v. Commissioner of Income-tax is of some assistance to the department. The problem that presented itself before the Nagpur High Court in this case was whether the whole of the income derived from ginned cotton would attract the applicability of section 2(1)(b)(ii) of the Indian Income-tax Act. The learned judge decided against the assessee on the ground that ginning was not essential to make cotton for fir being taken to market. Although it might it distinctly advantageous even from the mere point of transport, in the opinion of the learned judges, that did not make the process of ginning essential in order to enable the product to be taken to be market.

In our opinion, the criterion suggested is helpful in the solution of the problem before us. The following observations of the learned judges will also furnish an answer to the argument of Sri. A. Kuppuswamy that the matter must be approached from the standpoint of the assessee, who uses the tobacco grown on his lands for export purposes. Said the learned judges :

"It has been suggested on behalf of the applicant that, even assuming that it is not the general practice amongst the cultivators to have their cotton ginned in the first instance, as he does, the sub-section quoted should be taken as implying that the process in question should be postulated to be taken as implying that the process in question should be postulated to be one ordinarily employed by an agriculturist in the position and standing of the applicant. We do not think, however, that this interpretation is the correct one. The process ordinarily employed by a cultivator must, in our opinion, mean one in ordinary use amongst cultivators generally, and the Income-tax Act, so far as "agricultural income" is concerned, only relieves the producer from liability to income-tax so long as he is a bona fide agriculturist carrying on that business in the ordinary course of good husbandry."

If we apply this test to the instant case and also consider it in the light of the language of section 2(1)(b)(ii) there can be little doubt that the operations of re-drying, striping, and grading are not quite èessential to make tobacco marketable. It is not disputed that Virginia tobacco after

"flue-curing"

It is pointed out in a bulletin issued by the Agricultural Research Institute, Poona, extracted from an article written by Messrs F.J.F. Shaw, Imperial Economic Botanist, and Kashiram, Second Assistant to Imperial Economic Botanist, and relied on by the assessee before the Income-tax Appellate Tribunal that "the tobacco after curing and bulking is completed must be passed through re-ordering and drying machines". Indisputably, these machines are very expensive plants and I am told by the learned counsel for the assessee that each of such plants costs about five to six lakhs of rupees and that it is the commercial organizations who perform the operations of "re-ordering and drying." So it is not within the capacity of an ordinary cultivator to perform the process of redrying and as such it could not be said that this process is ordinarily employed by a cultivator. It is not a normal activity of a tobacco grower who wants to sell his tobacco.

It is not disputed that Virginia tobacco should be subjected to this process only if it is to be exported either to Great Britain of Russia. Perhaps, the climatic conditions in those countries require that the moisture content in the tobacco should be between ten to fifteen per cent., which could be brought about by resort to the operations mentioned above. Further, the Income-tax Appellate Tribunal also found that tobacco without undergoing the process of re-drying, stripping and grading could be easily sold in market. It is pointed out by the Appellate Assistant Commissioner that most of the agriculturists and even merchants buy large quantities of roughly graded tobacco. Thus, the operations mentioned above could not regarded as process ordinarily employed the cultivators necessary to make the produce marketable. If that were so, the income attributable to these operations cannot be described as "agricultural income" but should be treated as business income. It cannot, therefore, be said that the Income-tax Appellate Tribunal erred in holding that the whole of the income from the sale of tobacco could not be treated as "agricultural income" within the connotation of section 2(1)(b)(ii) of the Income-tax Act.

We have, therefore, to answer the reference in favour of the department and against the assessee. No costs.