(Delivered by Varadachariar, J.)

The question referred to this Court for decision is whether, on the facts set out in the Commissioner's statement, any part of the income derived by the assessee from the produce of his coffee estates in Mysore is exempt from taxation under the second proviso to Cl. (2) of S. 4 of the Indian Income-tax Act.

The assessee who owns coffee plantations in the Mysore State is a resident of British India (Mangalore): and the case states that while he maintains an office in the Mysore territory to supervise the cultivation work there, the labour required for the cultivation is recruited in Mangalore, materials required for the estate like manure, tools, spray materials, crop bags etc., are purchased at Mangalore, the harvested crops are brought to Mangalore in their raw state to be dried and cleaned there in the factories of Pierce Leslie & Co., and sold there by Pierce Leslie & Co., the selling agents of the assessee. As the sale proceeds are received and retained at Mangalore and a separate staff is maintained by the assessee at Mangalore to attend to the above operations, the Commissioner was of opinion that the assessee was liable to be taxed as one carrying on ‘business’ and receiving the income or profits thereof in Mangalore.

As both S. 4 and S. 6 of the Indian Income-tax Act are qualified by the opening words “save as hereinafter (otherwise) provided”, the point for determination is whether the assessee can claim exemption under the 2nd proviso to S. 4(2) and, if so, to what extent. The Commissioner has expressed the opinion that proviso 2 to S. 4(2) has no application here, because the profits of the business are received in Mangalore, and “the agricultural processes carried on in Mysore” are not in themselves a source of income but merely ‘an element in the business which produces the income.’ In support of this view he has relied on the decisions in Ponnuswami Pillai v. Commissioner of Income-tax, Madras and Smith & Co. v. Greenwood, but it must be observed that even in Ponnuswami Pillai v. Commissioner of Income-tax, Madras the proviso now to be interpreted did not come up and could not have come up for consideration and there can be little doubt that but for that proviso, the assessee in the present case will be liable to be assessed in respect of the profits to the extent determined by the authorities. After this reference had been made, the scope and effect of the proviso was considered by a Division Bench of the Calcutta High Court, In re Mohanpura Tea Co. Ltd., and the judgment is a direct authority in favour of the Commissioner's view. We have carefully considered the reasoning in that judgment but, with all respect to the learned Judges we are unable to follow that decision.

The basis of the Calcutta decision and of the Commissioner's opinion is that when a person who owns lands outside British India sells the produce of those lands in British India, no income, profits or gains can be said to arise or accrue until the produce is sold and that in such cases there is accordingly no room for the application of the proviso which only relates to ‘income……arising or accruing in an Indian State’. The learned Judges emphasise the distinction between the place where the income accrues and the source from which it accrues and point out that the proviso is not concerned with the source. As a corollary, they think that if the sale also had taken place outside British India, the income thus realised even if subsequently received in British India would be exempt as income from agriculture that had arisen or accrued in the State, within the meaning of the proviso. Whatever may be said as to ‘profits’ or ‘gains’, the view that ‘income from agriculture’ can be said to arise or accrue only when and where the produce is sold and converted into money seems to us, with all respect, difficult to reconcile with the reasoning in Commissioner of Taxation v. Kirk.

Reliance was placed before us in this connection, on the observation of the Judicial Committee in Commissioner of Income-tax, Bengal v. Shaw, Wallace & Co. that the term ‘income’ in the Indian Income-tax Act connotes a ‘periodical monetary return’ coming in with some sort of regularity or expected regularity from definite sources; but their Lordships were then laying emphasis not on the distinction between receipt in money and receipt in kind but between recurring receipts from a business continuously carried on and an occasional receipt of the kind then in question. On the other hand, they refer in the course of their judgment to income being likened to the ‘crop of a field’. In Commissioner of Income-tax, Bihar and Orissa v. Maharajadhiraj of Darbhanga the Privy Council affirms that “a receipt in kind may be taxable income”; they only add that what is received in kind should be money's worth. It was admitted before us by Mr. Patanjali Sastri that in respect of the produce of land in British India, the Indian Income-tax Act recognises the receipt of income or rent in kind as receipt or accrual of income; it is difficult to see why as a matter of language, the expression ‘receipt’ or ‘accrual’ of income should not have the same significance when used in connection with the receipt of produce from lands outside British India.

In Kirk's case the question arose as to the assessment to be levied in New South Wales on a company which extracted ore from mines owned by it in New South Wales and converted it into a merchantable product there but carried the product to Victoria for sale, the sale proceeds being received either in London or in Melbourne. The Judicial Committee overruled the view taken by the New South Wales Court that “the income was not earned in New South Wales because the finished products were sold exclusively outside the colony.” Referring to the several steps which had to be gone through, from the extraction of the ore to the receipt of moneys on the sale of the merchantable product, their Lordships held that to the extent of two of the steps, viz., extraction of the ore from the soil and conversion thereof into a merchantable product ‘the income was earned and arising and accruing in New South Wales.’ In the Calcutta case, the learned Judges distinguish this decision as turning on the language of the particular statute and take it as only relating to source from which the income accrued and not to the place where it accrued. With all respect, it seems to us that this way of distinguishing Kirk's case fails to take note of certain portions of the argument as well as of the judgment. In the New South Wales Act, there was an exemption, S. 27(3), to the effect that no tax shall be payable in respect of income earned outside the colony of New South Wales. On the strength of this provision, it was contended before their Lordships, on behalf of the assessee, that ‘the income was derived from the sales, that is, from the business carried on outside the Colony.’ This argument they repel with the remark that it is fallacious as ‘leaving out of sight the initial stages and fastening attention exclusively on the final stage in the production of the income.’ These relevant parts of that judgment do not seem to us to turn on any peculiarity of the New South Wales Act but to recognise that as a matter both of language and of business, receipt of produce in kind may well be spoken of as receipt or accrual of income at the place where the produce is received.

Mr. Patanjali Sastri had to concede that on the principle of the decision in Kirk's case the assessee in this case might well be held by the Mysore State to have received the income within that State, but he contended that the remedy for any hardship arising from that possibility must be had by invoking the provisions of the Act relating to double taxation. We are not concerned here with any question of double taxation or hardship caused thereby; but we refer to this aspect of the matter only to point out that if for assessment in Mysore, the assessee can in the ordinary sense of words (and not by any fiction of law) be held to have received the income in Mysore, there is no reason why for purposes of the 2nd proviso to S. 4(2) the income should not in this case be held to have arisen or accrued in Mysore. The decision in In re Port Said Salt Association Ltd. does not materially help the Referring Officer in this connection. The learned Judges recognised in that case that part of the profits might have been ‘earned’ elsewhere, but they held that if the whole is ‘received’ in British India, no portion could escape taxation unless there be a convention to limit the claim of one State against the nationals of others. The 2nd proviso is in a sense the result of such a convention; the case cannot throw light on the interpretation of the scope of that convention.

Reliance was also placed by Mr. Sastri on the observation in Jiwan Das v. Commissioner of Income-tax, Punjab to the effect that the place where the sale is effected and the price realised is the principal place, if not the place, of the accrual of profits. That statement must be understood in the light of the fact that the case then under consideration related to the liability of a British Indian assessee who only purchased goods in British India but sold them outside and never received or brought the proceeds into British India. Following Sulley v. Attorney General the learned Judges held that the mere purchase of goods will not amount to the carrying on of trade (except in the cases provided for in S. 42) and in the circumstances there was nothing like the receipt of income or gains or profits in British India. There was no question in that case of the receipt of produce from one's own estate; but the way the learned Judges deal with Kirk's case shows that if the facts before them had been similar to those in Kirk's case or to those in the present, they would have held that the receipt of the produce would amount to receipt of income.

Accepting our interpretation of the decision in Kirk's case Mr. Patanjali Sastri advanced an alternative argument. Assuming that the income might be held to have ‘accrued’ or ‘arisen’ to the assessee in Mysore, he maintained that it might nevertheless beheld to have been ‘received’ by the assessee in British India not merely within the meaning of Cl. (2) of S. 4 but even within the meaning of the first part of Cl. (1). The purpose of this argument was in any event to exclude the operation of the 2nd proviso which is worded as a proviso only to sub-S. (2) and not to sub-S. (1). The first clause deals with two kinds of receipt in British India; one, receipt in the ordinary sense of that word and the other, in an artificial or extended sense, and the second clause defines the artificial or extended meaning. If the 2nd proviso qualifies only this ‘artificial’ sense of receipt, it would have no operation in cases where the receipt of income in British India can be held to amount to ‘receipt’ in its natural or ordinary sense. In support of the contention that income may ‘accrue’ or ‘arise’ in one place and yet be held to have been ‘received’ in another place, he relied on the decision of the Judicial Committee in the Pondicherry Railway Co. Case.

We may observe at the outset that in the Pondicherry Railway Co. Case their Lordships were not called upon to decide whether the ‘receipt’ of income by the company was a receipt in the grammatical sense or in the extended or artificial sense, because the company's contention was that there was no receipt at all, by them or on their behalf, in British India and that they received the income only in London. If that decision gives us any guidance at all in the present case, it may well be held that on the facts here, the receipt of the produce in Mysore itself by the assessee's men on the spot will correspond to the receipt by Mr. Rothera in the Pondicherry Ry. Co. case and the assessee's receipt of income in British India can only be a receipt in the secondary stage, just like the receipt by any Nattukottai Chetty here of profits earned by a business carried on his behalf in foreign countries. Even apart from this view of the facts, it does not seem to us necessary or reasonable to read Cls. (1) and (2) of S. 4 as mutually exclusive. The first clause comprises ‘receipts’ falling under the 2nd clause as well, and when the facts of a case clearly bring it within the terms of the 2nd proviso, it is obviously a case which on the grounds of policy the legislature intended to exempt and it does not seem to us right to deprive the subject of this exemption by holding that the ‘receipt’ in British India is in the primary sense and not in the secondary sense, especially when the 2nd clause as well as the 2nd proviso speak only of ‘accruing’ or ‘arising’ outside British India and not also of being ‘received’ outside British India. There can be no doubt that in this case the income ‘accrued or arose’ without British India and was ‘received or brought into British India’. We would give the same answer to the argument founded on Cl. (3) of S. 42 which provides for the taxability in British India of profits or gains from the sale in British India of merchandise exported to British India from outside. Reading the clause as a whole it is evident that it refers to a person who sells goods purchased by him and not to one who sells the produce of his own lands. It is significant that the clause deals only with ‘profits’ or ‘gains’ and not with income generally.

The circumstances in which the 2nd proviso came to be inserted do not suggest any intention to make the kind of differentiation now insisted on by the Referring Officer. Prior to 1933, it was only ‘profits or gains of business’ outside British India that were taxed when brought into British India. The Amending Bill of 1932 sought to make all income (not merely profits from business) accrued outside British India taxable if and when brought into British India; the Bill therefore sought to amend only Cl. (2) of S. 4. The kind of income exempted by the 2nd proviso is undoubtedly foreign income and when the legislature resolved to exempt foreign income of the particular kind dealt with in that proviso, it seems to have been thought sufficient to enact the exemption as a proviso to the 2nd clause which was then being amended for the very purpose of including ‘foreign income’ generally. We are accordingly of opinion that the assessee in this case is entitled to claim the benefit of the 2nd proviso to S. 4(2).

It remains to determine the extent of the exemption which the assessee can claim. It was contended on his behalf that the whole of the price realised by him by the sale of the Mysore coffee in Mangalore should be excluded, but it was maintained on behalf of the Referring Officer that the assessee is at best only entitled to a deduction of the value of the coffee beans in a raw state in Mysore. The statement of the Commissioner and an affidavit of Mr. Kirkbride, Manager of Pierce Leslie & Co., set out in detail what happens to the beans between the time when they are picked and the time they are actually sold. If the processes subsequent to the picking can be regarded as in the nature of manufacture, the assessee will on the analogy of the rule applicable to tea (see Killing Valley Tea Coy v. Secretary of State for India and the R. 24 of the Rules framed under S. 59 of the Act,) be entitled to deduct only the agricultural part of the income. But the affidavit states that in the case of coffee, the process is not in the nature of a ‘manufacturing’ process but only a process ‘ordinarily’ employed by the cultivator to render the produce fit to be taken to the market [see S. 2(1)(b)(ii]. The learned Counsel appearing for the assessee definitely asserted that in respect of coffee grown on assessed lands in British India, this is the view adopted in practice by the Income-tax authorities and we have been shown nothing to the contrary. We have accordingly come to the conclusion that if the assessee can claim to be treated as on the same footing with one selling coffee grown on one's own land in British India, he is entitled to exemption in respect of the whole price realised by the sale of his coffee. This leads us to the consideration of the question whether the exemption under the 2nd proviso to S. 4(2) is of the same scope as the exemption applicable to ‘agricultural income’ as defined in S. 2(1) of the Act.

Mr. Patanjali Sastri is certainly right in his contention that the statutory definition of ‘agricultural income’ does not in terms apply to cases falling within the proviso now in question. If the definition in the Act is one which is intended to include what will not otherwise be ordinarily comprehended in the meaning of the expression ‘agricultural income’ the assessee in the present case cannot claim the benefit of the full scope of the definition because it applies only to income derived from lands in British India. But we are inclined to agree with the learned counsel for the assessee that the statutory definition involves no artificial extension but merely embodies the significance attaching in a business sense to the word ‘income’ when applied to agriculture. As pointed out by Rowlatt, J. in Back v. Daniels, if a farmer is entitled to sell his produce in the village he is equally entitled to take it to a market town and it cannot be said that he is ‘commencing a new business from the time when he took his crops from the farm on the way to market’. The same principle must apply to what he may do to make it fit for the market unless it involves such a distinct process as to justify its being regarded as in the nature of a manufacturing process. In the Court of Appeal, Scrutton, L.J took the view that even if cultivation of land to grow produce for the purpose of sale is to be regarded as a trade, the State, by its separate system of taxing land, may reasonably be taken not to have intended to deal with it as a trade, Back v. Daniels. Mr. Sastri pointed out that our conclusion would practically amount to reading the proviso in S. 4 into the definition of ‘agricultural income’ when the legislature had not (as it might well have done) included in that definition income from assessed lands in Indian States. Having regard to the manner in which amendments have been from time to time inserted in the Act, the argument founded on the particular place where an amendment is inserted cannot have the same force here as in the case of a provision which formed part of the original scheme of the Act. As we have already explained, S. 4(2) might well have been thought to be the proper place for the insertion of the proviso. On the other hand we have not been shown any reason why the proviso was inserted at all and why it should have been limited to lands paying assessment to an Indian State if it was not the intention to treat the owners of such lands as on the same footing as owners of assessed lands in British India. The policy clearly was to avoid double taxation; not double taxation in the sense of payment of income-tax in two places but of taxing a person who in respect of the same subject-matter has already paid a reasonably heavy land-tax, whether in British India or in an Indian State.

Our answer to the question referred is that the whole income derived by the assessee by the sale in Mangalore of the produce of his coffee estates in Mysore is exempt from taxation. The assessee will be entitled to Rs. 250 for his costs and also to refund of the deposit of Rs. 100.

Answer accordingly.

N.R.R