K. LAKSHMANAN & CO. V. C.I.T. (1998) 9 SCC 537

FACTS

The appellant is a partnership firm that grows mulberry leaves and rears silkworms. The silkworms are fed on mulberry leaves and produce cocoons from there saliva, which the appellant sells in the market.
The Income Tax Officer accepted that income from growing mulberry leaves constituted agricultural income but disagreed regarding income from rearing silkworms and selling cocoons. The Officer estimated and taxed the latter at 25% of the total income.
In appeal, the Appellate Assistant Commissioner ruled in favour of the appellant, considering both activities exempt from tax.
The Revenue appealed to the Income Tax Appellate Tribunal, which overturned the decision, stating that the sale of cocoons did not constitute agricultural income.
The Tribunal referred the question of law to the High Court, which ruled in favour of the Revenue, stating that feeding mulberry leaves to silkworms was not a process employed to make mulberry leaves marketable by producing silk cocoons.

ISSUE

Whether the income derived from selling cocoons after feeding mulberry leaves to silkworm qualifies as "agricultural income" under Section 2(1) of the Income Tax Act, 1961?

RULE

The produce taken to market and sold must be the produce raised by the cultivator. Any process undertaken must not alter the character of the produce but rather make it marketable.

HELD

The High Court's conclusion aligns with the statutory provision that the produce taken to market must be the produce raised by the cultivator. While processes may be undertaken to make the produce marketable, the character of the produce should remain unchanged.
In this case, mulberry leaves, the agricultural produce, cannot be sold in the market directly but are fed to silkworms. Silkworms and cocoons cannot be considered the agricultural produce of the cultivator. Therefore, the income derived from selling cocoons cannot be regarded as agricultural income. The decision of the High Court is upheld, and the question of law is answered in favour of the Revenue.

COMMENTARIES RATIO/NOTE

The employment of the process contemplated by section 2(1A)(b)(ii) 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 [Dooars Tea Co. Ltd. v. CAgIT, (1962) 44 ITR 6 [LNIND 1961 SC 435], 12 (SC); CIT v. Stanes Amalgamated Estates Ltd., (1998) 232 ITR 443 [LNIND 1997 MAD 690], 445-46 (Mad)].