1. The following question of law has been referred to the High Court for decision by the Income-tax Appellate Tribunal, Gauhati Bench, under Section 256(1) of the Income-tax Act, 1961, hereinafter referred to as 'the Act' :
'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the 'lease rent of Rs. 10,000 received by the assessee, Haroocharai Tea Co., Jorhat, from M/s. Gatoonga Tea Estate for Sumaguri Tea Estate was assessable at 40% in view of Rule 8 of the Income-tax Rules, 1962 ?'
2. The dispute relates to the lease rent received by the assessee from another partnership firm. The assessee is a partnership firm called M/s. Haroocharai Tea Company. It purchased a tea estate known as Samaguri Tea Estate from Moabund Tea Co. Ltd. on January 24, 1963. For this purchase it had taken a loan from the Assam Financial Corporation by mortgaging the same tea estate. The partners of this firm and the partners of another firm called Gatoonga Tea Estate are the same. The two firms with common partners entered into an agreement according to which Gatoonga Tea Estate should manage Samaguri Tea Estate. This agreement was effective from January 1, 1963, though the agreement was drawn up on February 5, 1963. The lease was for a period of 10 years and the important clauses in the lease agreement to be noticed are Clause 5 and Clause 8, which are as under :
'5. Messrs. Gatoonga Tea Company will during the subsistence of this agreement cultivate tea and manage the said Samaguri Tea Estate in proper manner according to the best system of the tea plantation in the district and shall properly manufacture all teas of the said Samaguri Tea Estate from their factory at Gatoonga Tea Estate and will be entitled to sell the same in their own name and they will keep proper account of all teas manufactured from the produce, of the said Samaguri Tea Estate All excise and other duties payable in respect of the said manufactured tea of Samaguri Tea Estate shall be borne and paid by the said Gatoonga Tea Company.
8. In consideration of their services as aforesaid, the said Messrs. Gatoonga Tea Company is entitled to retain all sale proceeds of tea and other produce of the said Samaguri Tea Estate and all other profits or earnings in respect of the business to be carried on by them in connection therewith in terms of these presents except a net yearly sum of Rs. 10,000 (rupees ten thousand only) to be paid by them to Messrs. Haroocharai Tea Company as their guaranteed profits per year, it being expressly agreed and understood that all interest becoming payable by Messrs. Haroocharai Tea Company to the Assam Financial Corporation in respect of the loan secured by the aforesaid mortgage in their favour (which such interest is payable by instalments on 31st March and 30th September in each year) shall be borne and paid by Messrs. Gatoonga Tea Company and the same will not be deducted from the guaranteed income of Rs. 10,000 per annum payable by them to Messrs. Haroocharai Tea Company as aforesaid.'
3. The assessee-firm thus is to receive Rs. 10,000 annually from M/s. Gatoonga Tea Company irrespective of whether there is any profit or not. Before the Income-tax Officer the assessee submitted that it was not taxable being agricultural income. The Income-tax Officer, however, taxed it cent, per cent.
4. On appeal, the Appellate Assistant Commissioner held that Rule 8 of the Income-tax Rules, 1962, would apply and that only 40% would be assessable. In the assessee's appeal it was submitted on behalf of the assessee that the income was from leas(c) of agricultural holdings on which agricultural operations are carried on and, therefore, the income was agricultural. It was further pointed out that Samaguri Tea Estate had no factory of its own and green leaves had to be carried to some other factory in order to manufacture. Since no manufacturing works were involved the entire proceeds were agricultural only. On that basis the assessee took the stand before the Appellate Assistant Commissioner that the entire sum of Rs. 10,000 was not taxable.
5. Thereafter, appeals were filed before the Tribunal both by the assessee and the department. The Tribunal considered the definition of agricultural income under the Act and also considered the facts and circumstances of the case and came to the finding that Rule 8 of the Income-tax Rules, 1962, was attracted to the facts of the case and, therefore, only 40% of the lease rent was taxable.
6. On the above facts, mentioned in brief, the above-mentioned question of law has been referred.
7. It appears from the facts of the case that the assessee, M/s. Haroocharai Tea Company, which is a partnership firm, and M/s. Samaguri Tea Estate, which is also a partnership firm, have common partners. The assessee-firm purchased Samaguri Tea Estate and leased out the same to the firm, M/s. Gatoonga Tea Estate for management, for which a sum of Rs. 10,000 was payable annually as guaranteed profits by the firm, M/s. Gatoonga Tea Estate to the assessee-firm, M/s. Haroocharai Tea Company. This sum of Rs. 10,000 may be either profit from the business of growing and manufacturing tea or, taking the worst view, lease rent for leasing out Samaguri Tea Estate. Both the firms, namely, the assessee and M/s. Gatoonga Tea Estate, do the business of growing and manufacturing tea. Similarly, in Samaguri Tea Estate also tea is grown and green leaves are taken to some other tea estate for manufacturing purpose as Samaguri Tea Estate itself does not own any factory. Whatever that may be, all the three tea estates are engaged in producing agricultural product, namely, tea.
8. Section 2(1)(a) and (b) of the Act defines agricultural income as follows:
'2. Definitions.--In this Act, unless the context otherwise requires,--
(1) 'agricultural income' means-
(a) any rent or revenue derived from land which is situated in India and is used for agricultural purposes ;
(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
(iii) the sale by a cultivator or receiver of rent-in-kind of the produce raised or received by him, in respect of which no process has been performed other than a process of the nature described in para, (ii) of this sub-clause;......'
9. So, under this definition, if a tea estate engaged in producing agricultural product is leased out, the rent or share of profits derived from it will certainly be included under agricultural income and, normally, agricultural income is excluded in computing total income under Section 10(1) of the Act.
10. Section 295 of the Act empowers the Board to make rules, the relevant portion of which reads as follows :
'295. Power to make rules.--(1) The Board may, subject to the control of the Central Government, by notification in the Gazette of India, make rules for the whole or any part of India for carrying out the purposes of this Act.
(2) In particular, and without prejudice to the generality of the foregoing power, such rules may provide for all or any of the following matters;......
(b) the manner in which and the procedure by which the income shall be arrived at in the case of-
(i) income derived in part from agriculture and in part from business '.....'
11. Under Section 295 of the Act, Rule 8 of the Income-tax Rules, 1962, has been framed, which reads as follows :
'8. Income from the manufacture of tea.--(1) Income derived from the sale of tea grown and manufactured by the seller in India shall be computed as if it were income derived from business, and forty per cent. of such income shall be deemed to be income liable to tax.......'
12. In a tea garden, it is well known, growing of green tea leaves and manufacturing of tea are carried on. That being the position, Rule 8 will be attracted to the produce of the tea gardens in question and since the lease rent also comes within the definition of agricultural income and since this agricultural income is derived in part from agriculture and in part from business, Rule 8 will be attracted to this sum of Rs. 10,000, which is stated to be the lease rent or the guaranteed profits from the tea estate in question.
13. We, therefore, hold that, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the lease rent of Rs. 10,000 received by the assessee, Haroocharai Tea Co., Jorhat, from M/s. Gatoonga Tea Estate for Samaguri Tea Estate was assessable at 40% in view of Rule 8 of the Income-tax Rules, 1962.
14. The question of law referred is accordingly answered in the affirmative and against the department.
15. The reference is accordingly disposed of. There will be no order as to costs.
Ibotombi Singh, J.
16. I agree.