K. Lakshmanan & Co. And Others v. Commissioner Of Income Tax .

CAs Nos. 5086-97 of 1984

1. The short question which arises for consideration in this batch of appeals is whether or not the income derived from business of rearing silkworms is “agricultural income” as defined under Section 2(1) of the Income Tax Act, 1961 (for short “the Act”).

2. The appellant is a partnership firm constituted for the purpose of carrying out agricultural activities. During the course of its business it indulges in the activity of growing mulberry leaves and rearing silkworms. The assessee purchases silkworm eggs and when they are hatched the worms are principally fed on mulberry leaves. The mulberry leaves are plucked from the trees grown by the appellant and these leaves are cut into stripes which are fed to the silkworms. The worms wind around themselves the saliva which oozes from their mouth and the hardened saliva forms the protective cocoons. These cocoons are then sold in the market by the appellant.

3. Before the Income Tax Officer, the appellant claimed that the entire income which it derived from the growing of the mulberry leaves to the sale of the cocoons, was exempt from levy of income tax as it was “agricultural income” within the meaning of that expression used in Section 2(1) of the Act. The Income Tax Officer accepted the contention of the appellant only insofar as it related to the growing of the mulberry leaves but did not accept the appellant's contention that the rearing of the worms and the selling of the cocoons resulted in agricultural income. He accordingly concluded that that part of the income which was attributable to growing of mulberry leaves alone constituted agricultural income and was exempt from levy of income tax but the income derived from the rearing of silkworms on the leaves and selling of the cocoons was not agricultural income. Therefore, the Income Tax Officer estimated the income derived from the process of growing silkworms and rearing of cocoons at 25 per cent of the total income and subjected the same to tax in the assessment years involved.

4. The Appellate Assistant Commissioner, in the appeals filed by the appellant, accepted its contention and came to the conclusion that income derived by it from growing mulberry leaves and from rearing of silkworms and cocoons was exempt from tax under the Act.

5. The Revenue then filed an appeal before the Income Tax Appellate Tribunal which allowed the same and came to the conclusion that even though mulberry leaves did not have a market the case would still not fall within the purview of Section 2(1) of the Act inasmuch as the agricultural produce, viz., the mulberry leaves, was not what was sold in the market and what in fact was sold were cocoons which were not the agricultural produce of the appellant. At the instance of the appellant, the Tribunal then stated the case and referred the following question of law to the High 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 silkworms, is not entitled to exemption under Section 2(1)(b)(ii) of the Income Tax Act, 1961?”

6. The High Court in the impugned judgment has answered the question of law in favour of the Revenue as it came to the conclusion that feeding of mulberry leaves to silkworms was not a process employed by cultivator of mulberry leaves to make them marketable by way of producing silk cocoons.

7. On the basis of the facts found by the Tribunal, we do not find any infirmity in the conclusion of the High Court. Section 2(1) of the Act defines the expression “agricultural income”. The relevant part of the definition reads thus:

“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 of rent-in-kind to render the produce raised or received by him fit to be taken to market; or….”

8. Eliminating the unnecessary words from the said definition, “agricultural income” would mean an income derived from such land by the performance by a cultivator of any process ordinarily employed by him to render the produce raised by him fit to be taken to market. It is clear from the reading of the aforesaid statutory provision that what is taken to the market and sold must be the produce which is raised by the cultivator. Even though for the purpose of making it marketable or fit for sale, some process may have to be undertaken, the section does not contemplate the sale of an item or a commodity which is different from what is cultivated and processed. Had mulberry leaves been subjected to some process and sold in the market as such then certainly the income derived therefrom would be regarded as agricultural income but the case of the appellant before the authorities, and in this Court, has been that mulberry leaves cannot be sold in the market and they can only be fed to the silkworms. The agricultural produce of the cultivator will be mulberry leaves and by no stretch of imagination can the silkworms, and certainly not the silk cocoons, be regarded as the agricultural produce of the cultivator.

9. The aforesaid view finds support from the following observations of this Court in Dooars Tea Co. Ltd. v. CIT (1962) 44 ITR 6, AIR 1962 SC 186 (ITR at p. 12):

“Section 2(1)(b) consists of three clauses. Let us first construe clauses (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 clause (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.”

10. We are in respectful agreement with the aforesaid observations. The High Court, as we have already observed, has rightly come to the conclusion that the income derived by the appellant from the sale of the cocoons could not in law be regarded as agricultural income. The question of law was, therefore, rightly answered in the affirmative and against the appellant.

11. The appeals are accordingly dismissed. There will be no order as to costs.

CAs Nos. 4486, 4485-A and 4485-C of 1995

12. These appeals having not been pressed are dismissed.