C.I.T. V. MADDI VENKATASUBBAYYA (1951) XX ITR 151 (MAD.)
FACTS
The assessee, a merchant firm, purchased a standing crop of tobacco on 93 acres 12 cents of land for Rs. 13,833 in January 1943.
The tobacco was harvested, cured, and sold for Rs. 33,498 before 21st March 1943 by the assessee.
The plucking of ripe leaves, pruning, and flue-curing of tobacco were done by the assessee firm, along with some plouging on the land.
The land was not owned or leased by the assessee, and the tobacco plants were raised by the landowner or lessee.
The Income Tax Officer and the Appellate Assistant Commissioner deemed a part of the profit, Rs. 7,500, as derived from non-agricultural sources and subject to income tax.
However, the Appellate Tribunal considered the entire profit of Rs. 12,000 as agricultural income exempt from tax under Section 4(3)(viii) of the Income-tax Act.
The Commissioner of Income-tax disputed the Tribunal's decision, leading to this reference to the HC.
ISSUE
Whether, in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 7,500 was ‘agricultural income’ within the meaning of Section 2(1)(b) of the Act and exempt from taxation under Section 4(3)(viii) of the Indian Income-tax Act?
RULE
To claim an exemption under Section 4(3)(viii) of the Indian Income-tax Act, agricultural land should be the direct source of income. Income made from buying standing crops will not be the direct source of income. Hence, will not be exempted as agricultural income.
HELD
The burden of proof lies on the assessee to demonstrate that the income qualifies as "agricultural income" under Section 4(3)(viii) of the Income-tax Act.
When a merchant buys a standing crop, they make a profit from buying it at a lower price and selling it at a higher price. The land itself is not the direct source of their income. Not everyone who handles the produce from the land can claim agricultural income. Only the owner, landlord, ryot (i.e., tenant farmer), or those who have a derivative interest in the land can claim income from performing agricultural operations on it.
Also, growing crops are movable property under Section 3 of the Transfer of Property Act and Section 2, clause (6), of the Registration Act.
In Yagappa Nadar v. Commissioner of Income-tax [(1927) I.L.R. 50 Mad. 923], this Court held that income earned by a person who had a license to tap toddy from trees belonging to the licensors and who sold the toddy extracted by him at a profit was non-agricultural income, though if the same income was earned by the owner or the lessee of the land on which the trees grew, it would be agricultural income.
In the present case, the immediate and effective source was the trading operation of purchase of the standing crop and its resale in the market after harvesting the produce at an advantageous price.
Therefore, the sum of Rs. 7,500 was not exempt from taxation, and the answer to the referred question is in the negative, against the assessee.
The assessee is ordered to pay the costs of Rs. 250 to the Commissioner of Income-tax.
COMMENTARIES RATIO/ NOTE
Nexus between income, land and agricultural operations needed.—Having regard to the definition of ‘agricultural income’ in section 2 (1A)(a), an income to be ‘agricultural income’ should be derived from land and the land should be used for agricultural purposes. In other words, there should be a nexus between income, land and agricultural operations, by which is meant something done to the land by human or mechanical agency to produce out of the land any crop, tree, plantation or other produce or product. The immediate source of income must be land of the description or character mentioned in the definition [CIT v. K.S. Imam Saheb, (1969) 71 ITR 742 [LNIND 1968 MAD 130], 744 (Mad) ]. In that case the facts were: Under the terms of a lease of certain coconut thopes, the assessee was allowed to enjoy the fruits of the coconut trees for a stipulated period on payment of a fixed annual sum. In some cases, there was a stipulation that the lease did not include the land. At the end of the term, the assessee had to deliver possession of the trees to the lessor. On these facts, it was held by the Tribunal, that the income from the lease was agricultural income. On a reference, the High Court held that the nexus between the income and the land was missing as the connection of the income was with the trees themselves without reference to the land or agricultural operation; and, therefore, the sums in question were not agricultural income.