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E.M.V Muthappan v. Agricultural Income-Tax Officer

Karnataka High Court
Sep 1, 1989
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Summary of the Opinion (Rajendra Babu, J.)

Factual and Procedural Background

The petitioner is an assessee under the Karnataka Agricultural Income Tax Act, 1957. For the assessment years 1979-1980 and 1980-1981 the petitioner filed returns accompanied by a letter stating that prior to that letter he had been assessed in his individual capacity but that on 10 August 1978 he had impressed his agricultural estate ("Cotacadu & Jeynacadu Coffee Estates") with the character of a joint family property and therefore claimed he was not liable to pay tax as an individual.

The petitioner was the kartha of an undivided Hindu joint family. On 14 August 1978 he effected a partial partition (registered 17 August 1978) under which no share was allotted to his wife or daughter; after the partition his status was that of a member of the joint family. The petitioner contended that supplementary coffee points (payments) relating to earlier coffee seasons had been received by him in the assessment years in question but that such receipts should not be taxed in his individual capacity because the relevant interest / status had changed and he argued that the income could not be subjected to tax once the source was not in existence in the relevant status.

The Agricultural Income-Tax Officer (AITO) rejected the petitioner's contentions, assessed him to tax in his individual status up to the date of partition and included the supplementary coffee points (relating to earlier seasons) in the assessments, raising demands. The petitioner challenged those assessment orders by filing writ petitions seeking (i) quashing of the assessment orders and demands, (ii) striking down Rule 9(c) of the Karnataka Agricultural Income-Tax Rules, 1957 as ultra vires Sections 3 and 7 of the Act, and (iii) striking down Section 26(4) of the Act as unconstitutional and beyond the competence of the State legislature.

The Court heard counsel for the parties and counsel who had filed similar petitions raising constitutional challenges to Section 26(4) and Rule 9(c).

Legal Issues Presented

  1. Whether receipts in respect of earlier-season coffee crop (supplementary points) received during the previous year but relating to crops of earlier years can be considered income of the previous year and brought to tax in that year (challenge to Rule 9(c), second proviso).
  2. Whether Rule 9(c) of the Karnataka Agricultural Income-Tax Rules, 1957 (in particular the second proviso) is ultra vires the Act (i.e., whether the Rule improperly enlarges the charging provisions by treating receipts relating to earlier seasons as income of the year of receipt).
  3. Whether Section 26(4) of the Act (treating receipts after discontinuance of a business/profession as agricultural income in the year of receipt) is unconstitutional and beyond the legislative competence of the State.
  4. Whether the definition of "previous year" in Section 2(1)(s) (a full twelve-month period) precludes taxing agricultural income for a broken/part period occasioned by change of status or partition during the year.
  5. Whether the impugned assessment orders correctly included the supplementary coffee points in the petitioner's taxable agricultural income.

Arguments of the Parties

Petitioner's Arguments

  • The second proviso to Rule 9(c) is ultra vires the Act because the Act (and Section 7) does not provide for bringing to tax dividends/supplementary points received in respect of coffee grown and surrendered in earlier years; there is no statutory basis in the charging provision to tax such receipts in the year of receipt.
  • The method of accounting provisions (Section 7) and its provisos do not permit the rule-making power to create a new substantive charge; the provisos only address computation, not chargeability across years.
  • When coffee is delivered to the Coffee Board there is a statutory sale and property passes; relying on that, petitioner argued sale was completed on delivery, so subsequent payments concerning earlier seasons cannot be taxed in a later year as agricultural income of that later year.
  • Section 26(4) is beyond the competence of the State Legislature because it treats receipts after cessation of agricultural operations as agricultural income, thereby extending taxation to items that do not bear the character of agricultural income as contemplated by Article 366(1) of the Constitution.
  • The "previous year" must be a full twelve-month period; a broken period caused by partition and change of status means there was no previous year for assessment and so tax cannot be charged for that assessment year.

Respondent's / Assessing Authority's Arguments

The opinion does not contain a detailed account of the parties' legal arguments presented on behalf of the respondent or Assessing Authority; the record shows the Assessing Officer overruled the petitioner's contentions and assessed the supplementary receipts to tax, but the specific legal submissions of the respondent are not set out in the text of the opinion.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Puthutotam Estates (1943) Ltd. v. A.I.T.O., 1962 45 ITR 81 Sale proceeds of agricultural produce are taxable even if the produce was grown in an earlier year; sale in later year gives rise to taxable income in that year. The Court relied on the view expounded to support that receipts in a later year (sale proceeds) remain agricultural income and are taxable in the year of receipt or accrual as appropriate.
State of Kerala v. Bhavani Tea Produce Co. Ltd., SC 1966 59 ITR 254 Approved the view that agricultural income tax is payable even if the produce belonged to an earlier year and the sale took place later. The Court relied on the Supreme Court approval to reject the petitioner's contention that delivery to the Coffee Board constituted a sale that made later receipts non-taxable; the decision reinforced that timing of sale/receipt does not exempt income if it is derived in the year of account.
S.S. Rajalinga Raja v. State of Madras, 1967 63 ITR 617 Income arises on disposal (sale) of produce; produce received in earlier years does not exempt sale proceeds realized later from tax in the year of realization. The Court cited it for the proposition that the character of "income" arises on disposal and therefore sale proceeds in the year of account are taxable even if the produce was obtained earlier.
Tara Chand Hoti Lal Babu Ram v. I.T.O., 1973 89 ITR 298 Reiterated the position that receipts from sale of plantation produce are taxable when derived, irrespective of when the produce was grown. The Court noted this decision as one of several confirming that sale proceeds relating to earlier seasons are taxable when received/derived in the previous year.
Sheveroy Estates Ltd. v. Govt. of Madras Supported the legal position that income from sale of plantation produce is taxable in the year in which sale proceeds are derived, even if crop was from earlier years. Cited as reinforcing the body of authorities that the timing of production does not alone determine taxability of sale proceeds.
M.L. Narasimhaiah Setty v. Agril. Income-Tax Officer, 1965 55 ITR 616 Earlier contrary view on the matter of taxability of receipts from earlier crops. The Court held that this earlier contrary view must be considered "no longer good law" in light of the later Supreme Court authorities; it declined to follow that decision.
C.I.T. v. Krishnaswamy Mudaliar, 1964 53 ITR 122 SC Distinction between cash and mercantile systems; method of accounting relates to computation and may not always correctly reflect income; computation methods do not alter the nature or ambit of taxable income. The Court used this authority to support the proposition that Section 7 and Rule 9(c), which regulate computation, cannot enlarge or restrict the substantive charge created by Section 3.
B.S. Veerathradhya v. Commissioner of AIT, 1973 87 ITR 193 Second proviso to Section 7 permits valuation on points when accounts are not accepted; it addresses valuation/quantum, not the year of chargeability. The Court held that this decision does not determine the point in time when income arising from earlier crops is to be taxed and therefore does not affect the question before the Court.
Ambalal Mody v. S.A.L. Narayana Row, C.I.T., 1966 61 ITR 428 In cases of discontinued business, where income-earning asset is no longer in assessee's hands, income earned after cessation may not be within chargeability absent special provision. The Court noted this authority but observed that statutory provisions (analogous to Section 25 of 1922 Act / Section 176(4) of 1961 Act) were enacted to meet this difficulty; Section 26(4) of the State Act serves a similar purpose and, having held Section 26(4) valid, Ambalal Mody does not assist the petitioner.
Agricultural Income-Tax Commissioner v. Jethmal Girdharilal Addressed prior issues relating to the definition or application of "previous year" for agricultural income tax purposes. The Court considered the petitioner's reliance on this authority regarding the contention that "previous year" must be a full twelve-month period, and rejected the contention as not affecting chargeability in seasonal agricultural contexts.

Court's Reasoning and Analysis

The Court's analysis proceeded in stages, each tied to provisions of the Act, the Rules, constitutional entries and the authorities cited.

Constitutional and statutory foundation

The Court began by identifying Entry 46 of List II (State list) as the constitutional head empowering the State to levy tax on "agricultural income" and Entry 82 of List I (Union list) as empowering the Union to tax income other than agricultural income. Article 366(1) defines "agricultural income" by reference to income-tax enactments, so the Court looked to the Income-Tax Act's definition incorporated into the State Act (Section 2(1)(a) of the State Act). Section 3 of the State Act is the charging section that levies tax on the total agricultural income of the previous year of every person.

Nature of "agricultural income" and timing

The Court emphasized that agricultural income is income "derived" from land used for agricultural purposes, including sale proceeds of produce. It explained that the word "derived" does not require that production and receipt occur in the same year: produce gathered at the end of one year may be sold and proceeds realized in a later year and still constitute agricultural income in that later year. Citing Puthutotam, Bhavani Tea, Rajalinga Raja and other authorities, the Court concluded that the timing of production does not exempt sale proceeds from tax when the proceeds are income derived in the year of account.

Role of accounting method (Section 7) and Rule 9(c)

The Court analyzed Section 7 (method of accounting) and Rule 9(c) (which prescribes computation rules for coffee crop income and contains the second proviso treating receipts for earlier seasons received during the accounting period in excess of amounts already taken into consideration as income of the previous year). It held that Section 7 and Rule 9(c) deal with modes of computation and valuation and cannot enlarge or restrict the substantive scope of taxable income created by Section 3. Method of accounting determines computation but not the chargeability principle; accordingly, it was permissible for the legislature to provide specific rules (e.g., valuation on Coffee Board points and treatment of supplementary receipts) to deal with the commercial realities of coffee transactions.

The Court concluded that Rule 9(c), including its second proviso, falls within the rule-making power under Section 63 and is not ultra vires the Act. The Court noted that complex features of coffee marketing (sale to Coffee Board, tentative price, subsequent adjustments) justify legislative prescription of a computation method treating certain later receipts as income for the year of receipt.

On the decision B.S. Veerathradhya

The Court clarified that B.S. Veerathradhya does not determine the point in time when income from earlier crops is to be taxed; that decision concerns valuation (points) where accounts are not accepted and not the year of chargeability.

Validity of Section 26(4)

The Court considered the challenge that Section 26(4) (treating receipts after discontinuance of the business/profession as income of the recipient in the year of receipt) was beyond State legislative competence because such receipts allegedly lacked the character of agricultural income. The Court observed that Section 26(4) does not confine itself to companies or associations (unlike other subsections) and that the legislature plainly intended a broader application. The Court found a sufficient nexus between the receipts from the Coffee Board and the agricultural operation (the sale of coffee grown earlier); accordingly, treating such receipts as agricultural income by statute is within the competence of the State. The Court therefore held Section 26(4) to be a valid legislative provision.

Other contentions (previous year as full twelve months)

The Court rejected the petitioner's contention that the "previous year" must be an unbroken twelve-month period so as to prevent taxation for a broken period caused by partition or change of status. The Court reasoned that agricultural income is typically seasonal and that whether income is for a broken period or a full year does not prevent its being taxed if it is income of the previous year.

Relief relating to impugned assessments

Having upheld the validity of Rule 9(c) and Section 26(4), the Court nonetheless observed that Section 26(4) (and its validating Section 13 of the Amending Act) was introduced by a later amendment (Act 10 of 1987) with retrospective effect from 1 April 1975 and that Section 13(1) of the Amending Act prescribes several conditions for retrospective applicability. Those conditions had not been before the Assessing Officer at the time the impugned assessment orders were passed, and the Assessing Officer had not applied his mind to the amended provisions. Consequently, the Court found it appropriate to remit the matter to the Assessing Authority for re-examination and reassessment in the light of the Court's conclusions and the statutory amendments.

Holding and Implications

Core Ruling: The petitions were partly allowed.

Specific holdings:

  • The Court held that Rule 9(c) of the Karnataka Agricultural Income-Tax Rules, 1957 (including its second proviso) is not ultra vires the Act and is valid.
  • The Court held that Section 26(4) of the Karnataka Agricultural Income Tax Act is constitutionally valid and within the competence of the State Legislature.
  • The Court allowed the petitions insofar as they challenged the inclusion of income received from earlier season's crop in the impugned assessments: the impugned assessment orders were quashed to the extent of inclusion of such receipts, and the matters were remitted to the Assessing Authority to redo the assessments in the light of the Court's order and in accordance with law.
  • Except as indicated above (quashing and remittance regarding inclusion of earlier-season receipts), the impugned assessment orders remain undisturbed.

Implications and immediate consequences:

  • The constitutional challenges to Section 26(4) and Rule 9(c) failed; those provisions remain valid and available to the Assessing Authority for future application.
  • Because Section 26(4) was made retrospectively applicable by the Amending Act (with conditions specified in Section 13(1) of the Amending Act), and because those conditions were not considered by the Assessing Officer when passing the impugned orders, the contested assessments are remitted for reassessment. The Assessing Authority must re-examine and re-open the assessments (if appropriate) applying the amended provisions and the conditions of retrospective applicability.
  • The direct effect on the parties is that the challenged assessment orders are partly set aside and the matters are to be reconsidered by the Assessing Authority; no broad new principle of law was articulated by the Court beyond its application of existing precedent and statutory interpretation to the facts before it.

Disposition

The Court ordered: (i) petitions partly allowed; (ii) petitions dismissed insofar as they sought to challenge validity of Section 26(4) and Rule 9(c); (iii) petitions allowed insofar as they related to inclusion of income received from earlier season's crop — impugned assessments quashed and remitted to Assessing Authority to redo the assessment in light of the order and in accordance with law; and (iv) except as above, the impugned assessment orders remain undisturbed.

Show all summary ...

Rajendra Babu, J.:—

The petitioner in these two petitions is an assessee under the Karnataka Agricultural Income Tax Act, 1957 (Act for short). For the assessment years 1979-1980 and 1980-1981, the petitioner filed his returns accompanied by a letter which inter alia stated that he was, prior to the said letter, assessed to tax in his individual capacity, but on 10th August 1978 he having impressed his agricultural estate known as ‘Cotacadu & Jeynacadu Coffee Estates’, with the character of a joint family property he was not liable to pay any tax. In these circumstances, he requested the authority to conclude the assessment holding the petitioner as not liable to pay tax.

2. The petitioner was the kartha of his undivided Hindu joint family consisting of himself, his wife Banumathi, minor son viswanathan and a minor daughter. On 14th August 1978 the petitioner effected a partial partition, which was registered on 17th August 1978, in which no share was allotted to the wife or the daughter with the result his status after the partition in question was that of a member of the joint Hindu family. He stated that the act of impressing the estate with the character of a joint Hindu family came about only on 10th August 1978, the coffee points declared in respect of the coffee crop delivered by him during 1977-1978 coffee season and prior thereto, were collected by him in the status of an individual. He contended that impressing the property with the character of joint family property and the subsequent partition would absolve him of the liability to pay tax in respect of the receipts came to him in the form of coffee points. According to him, he no longer held the property as an individual, but held it only as HUF. During the previous year relevant to the assessment years in question, he had no agricultural income in his status as HUF, and in his individual capacity or status he owned or held land only for a part of the accounting year between 1-4-1978 to 9-8-1978 and therefore he was not exiqible to pay agricultural income-tax as he had not held land during the entire assessment year under Section 3 of the Act. It was also contended that the income could not be subjected to tax once the source was not in existence.

3. The Agricultural Income-Tax Officer (AITO) overruled the contentions raised by the petitioner and assessed him to tax in the status of an individual till date of partition, bringing to tax the supplementary points declared for the coffee season referred to above and raised a demand accordingly. For the assessment year 1980-1981, petitioner filed returns to the supplementary coffee points received relating to the earlier season preceding the partition, when his status was that of an individual. The total receipt for 1975-1976 to 1977-1978 seasons, on cash basis, amounted to Rs. 79,644/-. The AITO, on a consideration of the matter and finding that the net income was taken to be at the same figure held that there was no expenditure since the estate had been partitioned between the father and his minor son. As for the contention of the assessee that the supplementary coffee points received in the year in question are not liable to tax as the same were not income of the previous year, the Assessing Authority rejected the same and brought the said points also to tax.

4. Aggrieved by these two assessment orders, the petitioner has filed these petitions and has, inter alia, sought for the following reliefs:

(i) Quash the assessment orders dated 14-5-1981 and 16-5-1981, for the assessment years 1979-1980 and 1980-1981, and the demand made thereon;

(ii) Strike down Rule 9(c) of the’ Kanataka Agricultural Income-Tax Rules, 1957 (Rules for short) as being ultra vires of Sections 3 and 7 of the Act; and

(iii) Strike down Section 26(4) of the Act holding the same unconstitutional and beyond the competence of the State legislature.

5. We have heard the learned Counsel for the parties. Besides, we also had the benefit of the arguments of those learned Counsel who had filed similar Writ Petitions challenging the constitutional validity of Section 26(4) of the Act and Rule 9(c) of the Rules more or less on selfsame contentions.

6. In attacking the validity of second proviso to Rule 9(c) the petitioner has raised the following contentions: That in the absence of the specific provisions in the Act the supplementary point received by the petitioner which relate to crops of earlier years, not being the crops of the previous year, cannot be charged to tax. According to the learned Counsel the coffee picking season commences in the month of November and terminates about the end of March of next year after the picking is completed. The growers supply coffee to curers under the directions of the Coffee Board and even at the point of picking there is a statutory sale of the coffee grown pursuant to the directions of the Coffee Board and the Coffee Board thereafter allots points to the growers and declares certain value per point, and it is submitted that depending upon the price realised on sale in auctions there were subsequent declaration of dividends. Thus, in a year a grower may receive dividends in respect of the crops raised in any of the earlier crop seasons. It is submitted that there is no provision in the Act to bring to tax dividends received by a grower in respect of coffee grown and surrendered to the curers in earlier years and in view of such absence there cannot be tax in respect of supplementary points received for earlier years. The learned Counsel brought to our notice Section 7 of the Act which provides for method of accounting. It is submitted that the manner in which the income is to be computed from specified source is not regulated by Section 7 of the Act and the proviso to Section 7 cannot modify or enlarge the ambit of the substantive part of the Section. It is contended that the first proviso authorises the AITO to reject the method of accounting adopted by an assessee if no regular method of accounting adopted is such that the agricultural income cannot be deduced therefrom. The second proviso merely states that income from coffee crop may be computed on the basis of valuation of coffee points declared by the Coffee Board. Neither Section 7 nor the provisos thereof contemplate framing of a Rule. But Rule 9(c) has been framed pursuant to the power under Section 63 of the Act and in particular the second proviso to the said rule regulates the accounts in relation to any receipt in respect of earlier crop seasons received during the accounting period in excess of the amount already taken into consideration in the assessment of preceding years shall be considered as the income of the previous year. The contention is that when the Act did not make any provision for bringing to tax sums of money received in respect of the earlier coffee seasons, Rule 9(c) of the Rules which makes a specific provision is ultra vires the Act and there is no warrant for taxing the receipt in the year of receipt itself disregarding the method of accounting adopted by the assessee.

7. Although the arguments have been advanced on a very wide compass, the question that really arises for consideration is: Whether any receipt of income of earlier season coffee crop (in excess of the amount already taken into consideration in the assessments of previous years) cannot be considered as income of previous year and brought to tax. In resolving this question petitioner attacked Rule 9(c) of the Rules.

8. The power of the State to levy tax on “agricultural income” is traced to Entry 46 of List II in Seventh Schedule to the Constitution. Entry 82 of List I of the Seventh Schedule to the Constitution empowers the Union to levy tax on income other than agricultural income. Article 366(1) of the Constitution having defined “agricultural income” as meaning attributed to it for the purpose of enactments relating to income-tax, to ascertain the meaning of the expression “agricultural income”, we have to look to enactments under the Income-Tax Act. The Act incorporates the very definition and the concepts enumerated in the Income-Tax Act, 1961, to the expression “agricultural income” as provided in Section 2(1)(a) thereof.

9. Section 2(1)(a) of the Act defines “agricultural income” to mean as any event or revenue derived from land which is used for agricultural purpose and is assessed to land revenue and also any income derived from such land by agriculture, or by subjecting an agricultural crop grown thereon to a process to render such produce fit to be taken to market or sale of such crop or used thereof. ‘Person’ is defined as any individual or association of individuals owning or holding property for himself or for any other, or partly or for any other in the capacity as owner, trustee, receiver, common manager and includes an undivided Hindu Mitakshara family, a firm, company etc. ‘Previous year’ is defined to mean as the twelve months ending on the 31st day of March preceding the year for which the assessment is to be made, or, if the accounts of the assessee have been made up to a date within the said twelve months in respect of a year ending on any date other than the said 31st day of March, then at the option of the assessee the year ending on the day to which his accounts have been so made up. Section 3 is the charging Section which provides for levy of tax at such rate or rates as specified in the Act to be charged for each financial year on the total agricultural income of the previous year of every person.

10. When the income derived is in the previous year and its character is agricultural income, it cannot escape the net of taxation although the crop from which such income was grown or harvested during earlier years. The sale proceeds of agriculture produce constitute income derived from a plantation. The use of the expression “derived” by itself does not postulate the income that must have been derived in the previous year in question. The agricultural produce gathered towards the end of the year of account may be sold, and the sale proceeds realised early next year. The sale proceeds will never the less be liable to total agricultural income though the amount was not received in the year in which this produce was gathered. Since the amount was not received in the year in which this produce was gathered it does not cease to be agricultural income derived from plantation merely on the ground that the receipt of income is in a year subsequent to the year in which the produce was raised and gathered for sale. This view was clearly expounded in the case of Puthutotam Estates (1943) Ltd. v. A.I.T.O . 1962 45 ITR 81. That view stood approved by the Supreme Court in State of Kerala v. Bhavani Tea Produce Co. Ltd. . SC 1966 59 ITR 254. It was specifically noticed in the Judgment of the Supreme Court that agricultural income tax was payable no matter even if the produce was of an earlier year and the sale took place in a later year. Though distinction is made on the basis of the system of accounting, Supreme Court held that this view of the High Court was right and stated the reasoning in the said case was the same as in the Judgment of the Supreme Court. In S.S Rajalinga Raja v. State Of Madras. . 1967 63 ITR 617. the Supreme Court again considered this question and stated that merely because the produce of plantation was received in earlier years, income derived by the assessee from the sale proceeds of that produce in the year of account is not exempt from tax under the Act in that year. In that case the Court was concerned with Section 3 of the Madras Plantation Agricultural Income-Tax Act, 1955. It has been explained that ‘income’ in normal connotation does not mean mere production or receipt of a commodity which may be converted into money. Income arises when the commodity is disposed of by sale, consumption or use in the manufacture or other processes carried on by the assessee qua that commodity. There is no reason to think that the expression “income” has any other connotation in the Act. A tax on income whether agricultural or non-agricultural is, unless the statute otherwise provides, a tax on monetary return. Merely because the produce of his plantation was received in the earlier years, income derived by the assessee from the sale of that produce in the year of accounting is not exempt from tax under the Act in that year.

11. This position has been reiterated in the case of Tara Chand Hoti Lal Babu Ram v. I.T.O . 1973 89 ITR 298. and Sheveroy Estates Ltd. v. Govt. of Madras.5 However, the learned Counsel for the petitioner contended that the decision in Rajalinga Raja's case must be confined to the facts of that case and sought to rely upon the decision of the Supreme Court reported in the case of State of Kerala v. Bhavani Tea Produce Co. Ltd. to contend that coffee delivered to the Coffee Board becomes the property of the board no sooner it is delivered and therefore sale was completed when the coffee was delivered to the Coffee Board. Learned Counsel relied upon the observations of Chief Justice Rajamannar in Puthutotam Estates (1943) Ltd.'s case to contend that if the sale took place during the financial year, tax was payable no matter whether the produce is of the earlier year and if the sale took place earlier, namely, prior to the financial year, tax would not be payable even if the price was realised later. In view of the clear enunciation of law by the Supreme Court in Bhavani Tea Produce Co. Ltd.'s case there is no warrant for such a contention. Even if the sale takes place in a later year after crop is gathered income is computed depending upon the system of accounting adopted or according to statute or rules thereunder. In view of this settled position of law, the view expressed by this Court in M.L Narasimhaiah Setty v. Agril. Income-Tax Officer . 1965 55 ITR 616. to the contrary and disagreeing with the view expressed in Puthutotam's case therefore must be held to be no longer good law.

12. With this background let us look at the contention raised on behalf of the petitioner based on Section 7 of the Act and attack on second proviso to Rule 9(c) of the Rules. Section 7 of the Act provides for computation of income in accordance with the method of accounting regularly employed by the assessee. If the method of accounting is defective or no method is regularly employed the Assessing Officer can assess on any other reasonable basis provided in case of coffee crop. The Assessing Officer may compute on the basis of valuation of points declared by the Coffee Board in respect of such crop. Rule 9(c) of the Rules reads as follows:

“(c) in case of coffee crop of the previous year, the cash amount received within the accounting period in respect of the crop grown and consigned by the assessee to the Coffee Board or the estimated value of such crop shall be taken into account as the income of the year according to the method of accounts regularly employed by the assessee:

Provided that if the estimated value declared by the assessee is less than the average of the rates declared by the Coffee Board for three immediate previous years the Agricultural Income Tax-Officer or the Assistant Agricultural Income-Tax Officer shall take into consideration the average rates for the purpose of assessment:

Provided further any receipt in respect of the earlier season's coffee crop received during the accounting period in excess of the amount already taken into consideration in the assessment of preceding years shall be considered as the income of the previous year.”

These provisions prescribe the manner of computation of income. The question is at what point of time its chargeability is answered, by the method of accounting adopted by the assessee either when it is received by him or when it accrues or arise to him during the previous year. Taxability is attracted even when income is accrued and it is clear that receipt of income is not the sole test of taxability under the Act. Whether it is on receipt basis or on accrual basis, it is the real income and not hypothetical or theoretical income that has to be subjected to tax under the Act. In C.I.T v. Krishnaswamy Mudaliar . 1964 53 ITR 122 SC. after noticing the distinction between the cash and the Mercantile systems of accounting it was held that both methods are somewhat rough and may not always give a correct picture of the income. On the basis of the observations made in the said decision it can be safely said that the provision such as Section 7 or Rule 9(c) which deal with computation of income do not purport to and cannot enlarge or restrict the nature, scope or content of taxable income. The method of accounting is relevant only for the purpose of computation of income, but it cannot restrict or enlarge the range or character or content of the taxable income. A regular method of accounting determines the mode of computing the taxable income but it does not determine or even alter the range of taxable income or ambit of taxation. Therefore Section 7 or Rule 9 cannot control the charging section. Section 3 brings total agricultural income of the previous year of every person to tax. The question whether such income is derived from the crop harvested during the previous year or any other preceding year is irrelevant as long as income is relatable to agricultural operation and is derived during the previous year. If in the previous year any income is derived and such income although may relate to the crops harvested in earlier years is also taxable under the Act. Therefore, the argument developed on the basis of the provisions relating to assessment and computation have no relevance in understanding the nature, scope, ambit or content or character of the income which is subjected to tax under the Act.

Several other decisions have been referred to by the learned Counsel for the petitioners which explained the scope and applicability of Section 7 and Rule 9(c) of the Act in relation to income from plantations depending upon the nature of the method of the accounting adopted and the circumstances available. If it is borne in mind that both Section 7 and Rule 9(c) merely provide for method of computation of income without affecting the extent of scope or content of Section 3 of the Act as to chargeability of agricultural income, it becomes clear that Rule 9(c) is framed to carry out the purposes of the Act. Since the method of accounting by itself will not determine the nature or ambit of tax, the Act itself can provide for a mode apart from the cash system or mercantile system to bring to tax an income which is really intended to be subjected to tax. Considering the nature and complexity of the matter involved in respect of the income from coffee estate as the coffee is supplied to Coffee Board and such supply takes place in pursuance of the statute which is held to be a sale, the sale proceeds therefore constitute income. Such income will fall under Section 2(1)(a) as it is income derived from land in the State by the sale by cultivator of the produce raised by him. The price is tentatively fixed at the time of sale but is liable to adjustment subsequently. Often that process takes time before the entire sale price is paid. If we bear these aspects in mind demonstrating the complexity of the nature of transaction, it cannot be said that the Legislature cannot provide for any other mode of ascertaining income for purposes of taxation apart from cash or mercantile system. Hence it is certainly permissible for the legislature to provide for taxing all income derived from agriculture produce harvested and sold in a year in preceding the previous year, but the income during the previous year can be brought to tax in a particular manner. Even if it modifies the system of accounting no fault can be found with. Indeed a careful perusal of the provisions thereto will reveal that even if the income was computed on the accruel basis, what is now sought to be added is income in excess of that, and therefore no exception can be taken to the same. In a given case in what manner the provisions will operate is altogether a different question, but that does not affect validity of the provisions.

13. It is contended that in view of second proviso to Section 7 of the Act there is no option left to the Assessing Officer except to compute the income on the basis of valuation on points declared by Coffee Board of such crop by placing reliance on the decision in B.S Veerathradhya v. Commissioner of AIT . 1973 87 ITR 193., we do not think that decision lays down any proposition that in case of income arising in the previous year from a crop of earlier years the second proviso of Section 7 determines the point at which tax has to be computed. That decision lays down that second proviso to Section 7 provides that when accounts of the assessee are not accepted as correctly disclosing the income, Assessing Officer shall evaluate the quantum of income on the basis of points and not determine the year in which such income has to be brought to tax. Hence neither that decision nor that provision can have any bearing upon the question that arises for consideration in this case.

To sum up the discussion, Section 7 and Rule 9(c) provide for several modes of computation of income. Any one of them can be adopted in any given case subject to the conditions thereof. Each one of those methods of computation of income is within the scope of the Act. Those provisions have been subject-matter of interpretation by this Court without touching upon that validity. Therefore we hold that Rule 9(c) including second proviso thereto is not ultravires the Act.

14. We now propose to deal with the contention of the petitioner with regard to Section 26(4) of the Act. It was contended on behalf of the petitioner that sub-section (4) of Section 26 of the Act is unconstitutional as the same was beyond the competence of the State Legislature, and therefore the same should be declared as invalid by this Court.

15. Section 26 of the Act came to be substituted by Karnataka Act 10 of 1987. Sub-section (4) of Section 26 provides that receipts after discontinuance of the business or profession can be treated as agricultural income in the year of receipt in the hands of the recipient. Petitioner's contention is that this provision is applicable only to cases in respect of a company, firm or association of individuals discontinuing the business of agricultural income and is not attracted to a case of the nature on hand. According to the learned Counsel for the petitioner, since the State has no power to bring within the net of taxation an item which does not bear the character of an agricultural income, sub-section (4) legislated beyond the purview of Article 366(1) of the Constitution and therefore it is liable to be struck down. Supplementary receipts received by the petitioner were at a point of time when he ceased to have an interest in the agricultural land and there being no nexus between agricultural operation, and income those receipts cannot be treated as agricultural income and the State cannot bring to tax an item which is shorn of the character of an agricultural income. It was submitted that the concept of agricultural income cannot be different from the one contained in Article 366(1) of the Constitution which states that Agricultural income means such income as defined for the purpose of income-tax enactments. It is therefore contended that since the State, by the impugned legislation, has brought to tax receipts which do not bear the characteristics of an agricultural income going far beyond the mandate of Article 366(1) of the Constitution, the same is unconstitutional.

16. While Section 26(1) and (3) of the Act clearly refers to company, firm or association of persons Section 26(4) of the Act does not make any such reference. When Section 26(4) does not in terms refer to any company, firm or association of persons. While other sub-section refer to such expressions, it is obvious that the legislature did not intend to confine the provisions of Section 26(4) to Company, firm or Association of persons. Hence the contention of the petitioner that Section 26(4) is applicable only to company, firm on Association of persons is untenable and rejected.

17. Section 26(4) of the Act is to the effect that where any business through which agricultural income is received, is discontinued in any year, any sum received after the discontinuance shall be deemed to be the income of the recipient and liable to tax accordingly in the year of such receipt if such sum could have been included in the total income of the person who carried on the business had such sum been received before such discontinuance. Provisions of Section 26 were brought into effect by the validation clause found in Section 13 of the Amendment Act so as to have effect from 1st of April 1975 validating the assessments made thereunder on that basis. The question that emerges for consideration is whether the State Legislature had no competence to enact such a provision. The basis of the contention is that the source of income earned has ceased to be in the hands of the assessee and after the cessation of agricultural operation any income received cannot be treated as agricultural income so as to make it liable to tax. Elaborating this submission it was contended that agricultural income can be brought to tax as provided in Entry 46 List II of Seventh Schedule read with Entry 82 of List I. It was submitted that concept of income would include only such income such as agricultural income as defined in the Income-Tax Act.

18. The Act incorporates the very definition given in the Income-Tax Act in respect of agricultural income. What is really contended in this case is that the income derived being not from agricultural land and being merely a receipt from the Coffee Board, such income has no connection or nexus to the agricultural activities and therefore the same is invalid. It is clear that the income is derived as a result of supply of coffee to the Coffee Board. The Coffee Board was enjoined with the duty to make payments for coffee received and assessee is entitled to receive payment though not concerned any more with coffee supplied by him. Since the sale proceeds received is income relating to agricultural activity carried on during earlier years, it must be deemed to be the income of the recipient, as the original assessee is no longer continuing the business and therefore is liable to tax in the year of receipt in the hands of recipient. Thus it is clear that the income derived from the Coffee Board is agricultural income arising out of sale which is realised in a year other than the one in which it was produced. There exists a clear nexus between the amount received and the coffee supplied. Therefore, there is absolutely no substance in the contention raised on behalf of the petitioner that the State Legislature had no competence to bring to tax by creating a fiction under Section 26(4) of the Act. Thus we hold that Section 26(4) is a valid piece of legislation.

19. It was, however, contended by the learned Counsel for the petitioner relying on the decision in Ambalal Mody v. S.A.L Narayana Row, C.I.T . 1966 61 ITR 428. that in case of discontinued business when the income earning asset was no longer in the hands of the assessee in question, it was not open to bring to tax income earned after ceasing to hold the agricultural land though such income is relatable to such asset and therefore was not within the scope of chargeability of Section 3 of the Act. To obviate the difficulty caused by the said Section 25 of the Indian Income Tax Act, 1922, and Section 176(4) of the Income Tax Act, 1961, are enacted. Identical with those provisions Section 26 has been introduced into the Act. If Section 26 is valid there could be no argument available on the basis of Nalanikant Ambalal Mody's case to the petitioner. We have already held Section 26(4) to be valid and hence this contention has no force.

20. One other contention advanced on behalf of the petitioner is that the agricultural income should have been derived in the previous year and the previous year as defined in Section 2(1)(s) of the Act can only mean as full period of twelve months and does not contemplate a broken period thereof. The learned Counsel in this context relied upon a decision in the case of Agricultural Income-Tax Commissioner v. Jethmal Girdharilal. Giridharilal.10 Elaborating this contention the learned Counsel submitted that during the period between 1-4-1978 and 31-3-1979 petitioner had thrown his self-acquired property to HUF and thereafter had partitioned the properties which resulted in interruption in the period of 12 months. Thus, for the assessment year 1979-1980 there was no previous year at all and the charge to tax is not justified as Section 3 and 2(1)(s) contemplates only full previous year.

What is brought to tax under Section 3 of the Act is agricultural income during the previous year. If the income earned by the petitioner is agricultural income whether it is for a broken period or for a full period does not matter at all, because, in any agricultural operation the income is not earned throughout the year, but mostly seasonal; and therefore the contention raised on behalf of the petitioner has no basis at all.

21. Now what remains for consideration is the challenge to impugned assessment orders. We have upheld the constitutional validity of Section 26(4) of the Act. Section 13 of Act 10 of 1987 (hereinafter referred to as Amending Act) has made the same retrospectively applicable from 1-4-1975 and assessments made which fulfil the conditions thereto are validated. These petitions have been filed in the year 1984 while Section 26(4) was introduced into the Act in the year 1987. It is doubtful if the action of the respondent impugned herein could be sustained without recourse to the amended provisions. Moreover, Section 13(1) of the Amending Act prescribes several conditions for retrospective applicability of Section 26(4) of the Act. These provisions were not and could not have been before the Assessing Officer and obviously he has not applied his mind to these aspects of the matter while passing the impugned orders. Thus, the matter needs to be re-examined in the light of amended provisions.

22. In the result, we make the following order:

(i) These petitions are partly allowed;

(ii) The petitions are dismissed in so far as they relate to the challenge to validity of Section 26(4) of the Act and Rule 9(c) of the Rules are concerned;

(iii) The petitions are allowed in so far as they relate to inclusion of the income received from earlier season's crop and quash the impugned assessments and remit these matters to the concerned Assessing Authority to redo the assessment in the light of this order and in accordance with law;

(iv) Except to the extent indicated above, the impugned assessment orders shall remain undisturbed.