1. This is a reference by the Income-tax Appellate Tribunal, Indore Bench, under Section 256(1) of the Income-tax Act, 1961, at the instance of the Commissioner of Income-tax, Madhya Pradesh, of the following question of law to this court: for its opinion
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that a portion of the assessee's income from the sale of rice in so far as it related to paddy supplied by the members of the society is exempt under
Section 14(3)(i)(c) of the Indian
Income-tax Act, 1922?"
2. The reference relates to the assessment year 1960-61, the corresponding accounting year of which ended 30th June, 1959. The assessee is a co-operative society carrying on the business of purchase of paddy from its members as well as non-members, and of selling rice milled therefrom at a profit. Daring the accounting year in question, the books of account of the society revealed total sales of the rice at Rs. 14,28,665 disclosing a net profit of Rs. 54,632.
3. The assessee claimed exemption of its total income on the basis that its income prior to April 1, 1960, was not taxable under Section 14(3) of the Income-tax Act, as it stood prior to its amendment by the Finance Act, 1960, which came into force with effect from April 1, 1960. It was contended that the amended section would be applicable only in respect of income earned after April 1, 1960. That contention was rightly rejected by the income-tax authorities, as well as by the Tribunal, and has not been pressed before us.
4. The assessee then put forward a submission in the alternative that, under Section 14(3) of the Income-tax Act, as amended, the assessee being a society engaged in marketing of the agricultural produce of its members, was entitled to exemption of the income earned from the sale of rice milled from the paddy purchased by it from such members. That contention was raised for the first time before the Appellate Assistant Commissioner, who rightly disallowed it, and observed :
"...the business done in this case is in milling of paddy converting it into rice. This activity will not amount to the marketing of agricultural produce, because here the agricultural produce happens to be the paddy which is not marketed as such. The counsel sought to rely on the definition of agricultural produce given in
Section 2(1)(i) of the 'M.P. Agricultural Produce Markets Act, 1960' which takes us to the Schedule where against entry No. II{2) paddy (husked and unhusked) is included as an item of agricultural produce. Apart from the fact that a definition given in the local Act cannot be imported into a Central Act with an expanded meaning, the local Act itself has nowhere called the finished and polished rice an agricultural produce. The mere process of unhusking does not result in finished rice. Besides, as can be seen from the definition of agricultural income given in
Section 2 of the Income-tax Act, only such operations or processing as are essential to make the produce fit to be carried to the market, are permitted in order that the character of agricultural produce is retained..."
5. But the Tribunal taking into account the definition of the expression "agricultural produce" as given in Section 2(1)(i) of the Madhya Pradesh Agricultural Produce Markets Act, 1960, held that paddy, husked as well as unhusked, is an item of agricultural produce, and that the act of turning the paddy into rice, is only to make the produce marketable and, therefore, its conversion into rice, does not cease to bear the same meaning as agricultural produce within the meaning of Section 14(3)(i)(c) of the Indian Income-tax Act, 1922. The Tribunal, accordingly, accepted the contention of the assessee, and directed that the proportionate profit on the sale of rice from paddy purchased from its members should be deducted, while determining its taxable income.
6. The statement of the case shows that the assessee purchases paddy from its members, and mills it into rice and sells the same. We cannot go behind the statement of fact as contained in the statement of the case which is binding on us; that position was also not disputed before us. That being so, the claim for exemption by the assessee based under Section 14(3)(i)(c) of the Indian Income-tax Act, 1922, was not well founded.
7. The provisions of Section 14(3) of the Income-tax Act, as amended by the Finance Act, 1960, so far as relevant, are as follows :
"(3) The tax shall not be payable by a co-operative society-
(i) in respect of its profits and gains of business carried on by it, if it is-
(a) a society engaged in carrying on the business of banking or providing credit facilities to its members ; or
(b) a society engaged in a cottage industry; or
(c) a society engaged in the marketing of the agricultural produce of its members ; or
(d) a society engaged in the purchase of agricultural implements, seeds, livestock or other articles intended for agriculture for the purpose of supplying them to its members ; or
(e) a society engaged in the processing without the aid of power of the agricultural produce of its members; or
(f) a primary society engaged in supplying milk raised by its members to a federal milk co-operative society :
Provided that, in the case of a co-operative society which is also engaged in activities other than those mentioned in this clause, nothing contained herein shall apply to that part of its profits and gains as is attributable to such activities and as exceeds fifteen thousand rupees;
(ii) in respect of so much of its profits and gains of business carried on by it as does not exceed fifteen thousand rupees, if it is a co-operative society other than a co-operative society referred to in Clause (i)..."
8. A Division Bench of this court in Commissioner of Income-tax v. Kisan Co-operative Rice Mills, Miscellaneous Civil Case No. 417 of 1971, decided on 4-8-1975--Since reported in [1976] 103 ITR 264, 267 (MP). while recently dealing with the case of the present assessee in a subsequent year of assessment, which was governed by the corresponding Section 81(i)(c) of the Income-tax Act, 1961, has held that the assessee having purchased paddy from its members, as here, and sold the rice in the market, by milling the paddy, the assessee's income from such sale of rice was not exempt under Section 81(i)(c) of the Income-tax Act, 1961. That precisely is the case here.
9. The learned judges, however, appear to have rejected the contention advanced by the revenue as to the meaning of the expression "agricultural produce", and observed :
"It is true that rice and paddy may be treated as different marketable commodities. It is also correct that subjecting paddy to the process of milling may result in a changed commodity and after milling, paddy does not remain in existence and is converted into rice. But even after such conversion and change, rice remains in the class of ' agricultural produce '. The term 'agricultural produce' has not been defined in the
Income-tax Act and, therefore, we have to adopt the meaning as commonly understood and incorporated in the dictionaries. 'Wheat' and 'rice', etc., are such commodities which are commonly known as 'agricultural produce' and there is no doubt or scope for taking any other view. The Tribunal has also referred to the definition in the State enactment, i.e., M. P. Agricultural Produce Markets Act. However, for the purposes of this case, we have to construe the word ' agricultural produce ' as commonly known and understood in the absence of any specific definition in the Act. It may be true that for the purposes of other enactments like levy of purchase tax or sales tax, rice and paddy could be treated as different marketable commodities but still both of them will remain in the class of 'agricultural produce'. We accept this contention that even after milling of paddy and conversion of the same into rice, there is no material difference for the purposes of treating rice as an agricultural produce."
10. We are inclined to think that the enlarged meaning as given by the learned judges to the expression "agricultural produce" in Section 81(i)(c) of the Income-tax Act, 1961, does not seem to be correct. That extended meaning can be given only when the paddy is converted into rice by the cultivator himself with a view to make the produce fit to be carried to the market, and not otherwise. To give to the expression "agricultural produce" such an extended meaning even where the cultivator has sold the produce, would be against the scheme of the Income-tax Act.
11. It is no doubt true that the expression "agricultural produce "occurring in Section 14(3)(i)(c) has not been defined. But the expression must, in our view, be given a meaning which is in consonance with the scheme of the Income-tax Act. Under Section 2(1) of the Act, the underlying principle is that receipts out of agricultural produce are not taxable in the hands of the cultivator. That scheme for exemption would extend not only to the produce actually harvested, but also include any process to which the agricultural produce may be subjected to render the produce fit to be taken to the market. (See Kanga and Palkhivala on Income-tax, 6th edition, volume 1, page 29). But that does not imply that when the cultivator has parted with the agricultural produce as a commercial commodity to another, the purchaser can still claim it to be agricultural produce.
12. In our opinion, after an agricultural crop passes from the ownership of the cultivator to that of a trader who purchases it, it loses the quality of agricultural income at that point, and any profit made by the trader thereafter, by a sale of the produce at a higher price than his cost price would be a business profit. In Commissioner of Income-tax v. Maddi Venkatasubhayya Satyanarayana Rao, [1951] 20 ITR 151, 158, 159 (Mad) & Visvanatha Sastri JJ., in dealing with the question, observed :
"In Premier Construction Co. Ltd. v. Commissioner of Income-tax, [1948] 16 ITR 380, 384 ; 18 Comp Cas 269 (PC) the Judicial Committee observed :
'In their Lordships' view the principle to be derived from a consideration of the terms of the Income-tax Act and the authorities referred to is that where an assessee receives income not itself of a character to fall within the definition of agricultural income contained in the Act, such income does not assume the character of agricultural income by reason of the source from which it is derived.'
13. If the contention in the present case is to prevail, the trader in grains, cereals or other produce who purchases a standing crop ready to be harvested and sells the standing crop at a profit to another merchant, his profit is exempt from income-tax, even though he has no interest of any kind in the land on which the crops stand......The assessee earned a profit by the sale of the tobacco at a price over and above the cost price paid for the standing crop and the expenses incurred in harvesting and curing the tobacco. The pruning and the ploughing operations were ancillary operations of an unsubstantial character and were conducted under an arrangement with the person who raised the crop. Once the standing crop passed from the ownership of the cultivating tenant to that of the trader who purchased it, it lost the quality of agricultural income at that point and any profit made by the trader thereafter by a sale of the produce at a higher price than his cost price should, in our opinion, be a business profit......The profit in this case is derived, as we have already stated, by entering into contracts for the purchase of a commodity and by the resale of that commodity for a higher price. The fact that the movable property now in question springs from, or is the product of, agricultural operations carried out by the owner, or tenant of agricultural land, does not lead to the conclusion that the profit of a trader who has no interest in the land but who buys and sells the movable property in the course of his trade is 'agricultural income' as defined in the Act." We are in respectful agreement with these observations.
14. The reference must be, as it is, in that view answered in the negative and in favour of the Commissioner of Income-tax as follows :
"The Tribunal was, on the facts and in the circumstances of the case, not right in holding that the portion of the assessee's income arising from the sale of rice in so far as it related to paddy supplied by the members of the society was exempt under
Section 14(3)(i)(c) of the Indian Income-tax Act, 1922."
15. The Commissioner shall have his costs of these proceedings. Hearing fee Rs. 100, if certified.