1. These three appeals have been filed by Mulkanoor Co-operative Rural Bank Ltd. of Mulkanoor against orders of the AAC for the assessment years 1977-78 and 1979-80 and the Commissioner (Appeals) for the assessment year 1978-79.
2. The assessee is a co-operative society engaged in rural banking business. It also runs a rice mill and undertakes various other services for its members. The disputed assessments are for the assessment years 1977-78, 1978-79 and 1979-80 of which the first one is a reassessment while the later two assessments are original ones. The ITO noticed that the assessee besides providing credit for its members who were agriculturists was also distributing sugar, kerosene and cloth to its members and was marketing the produce of its members including eggs. It was the assessee's case that supply of consumer goods was by way of service to its members and that no profit was intended or earned in these activities. As for marketing of eggs, it was claimed that the assessee was advancing loans towards poultry farming to farmer members and that this activity was also exempt under Section 80P(2)(a)(iii) of the Income-tax Act, 1961 ('the Act'). The ITO accepted the assessee's plea that profit from banking activities will be eligible for relief under Section 80P(2)(a)(i). But he was unable to accept the claim that profit on sale of eggs can be treated as activity for 'the marketing of agricultural produce of its members'. He also took the view that the profit on sale of consumer goods to its members will be liable to be taxed. The assessee went in appeal. After mentioning the assessee's claim that poultry farming was part of activity of its members and that eggs therefrom constituted agricultural produce of its members, the first appellate authority, who dealt with appeals for the assessment years 1977-78 and 1979-80, dismissed the claim on the ground that there was 'nothing in the accounts to substantiate the claim'. The first appellate authority who dealt with the appeal for the assessment year 1978-79 observed that 'poultry farming should be an integral part of agricultural operations or it should be raised independently on scientific lines to be considered as agriculture. There is no evidence to indicate the nature of business dealt in by the appellant-society.
It appears that according to the society, members supply eggs and these are sold on their behalf. There is nothing in the accounts to substantiate the claim for exemption under Section 80P(2)(a)(iii)'. The ITO had also rejected the assessee's claim that there was no profit from these activities (on supply of consumer goods and sale of eggs).
He had estimated the same at 1.5 per cent on such sales. In appeals for the assessment years 1977-78 and 1979-80, this rate was confirmed while for the assessment year 1978-79, it was reduced to 1 per cent. The profits attributable to egg sales are included in this estimate. The egg sales were Rs. 9,85,133, Rs. 6,95,355 and Rs. 6,48,937 for the assessment years 1977-78, 1978-79 and 1979-10. The assessee is in second appeal for all the three years.
3. It was claimed by the learned representative for the assessee that only agriculturists are members of the society. Eggs were of member-agriculturists and that profit on such sale of eggs qualifies for relief under Section 80P(2)(a)(iii) as on account of 'marketing of agricultural produce of its members'. It was contended that the assessee advanced moneys to farmers for maintaining a poultry farm as a supplemental agricultural activity and that the undertaking of the marketing activity was incidental to its financing activity and was, therefore, even otherwise exempt. Eggs, it was contended, were agricultural produce in the facts and circumstances of the case.
Authorities from dictionary, extracts from Law Lexicons, and extracts from various judgments were filed. The quantum of profit estimated was also disputed.
4. The learned departmental representative claims that poultry farming was never intended to be considered as part of agriculture. He pointed out that there were separate provisions for exempting poultry farming, etc. Even in Section 80P, dairy farming is separately provided. Section 80JJ of the Act gives special concession to poultry farming.
Redundancy, he pointed out, cannot be presumed in a statute. He took us over the judgments relating to agricultural income to stress rather the obvious proposition that income from poultry farming is not agricultural income for the income-tax purposes. He tried to obtain assistance also from the decision of the Karnataka High Court in K.Lakshmansa & Co. v. CIT  128 ITR 283 where it was held that income from rearing of silk worms is not agricultural income.
5. We have carefully considered the facts as well as the arguments.
Bye-laws of the assessee-co-operative society mention in the preamble under 'Area and operation' that it was organised for 'marketing of agricultural produce and supply of agricultural requirements' to persons specified in Clause 3. Sub-clause 1 of 'aims and objects' is a general one of promoting economic interests of its members on co-operative principles, while the Sub-clause 2 which appears to indicate the main object reads as under: To borrow or to raise funds to be lent out to its members at a moderate rate of interest mainly for their agricultural needs, viz., seasonal agricultural operations, development of irrigation facilities, agricultural machinery, orchards, piggery, sheep rearing, dairy, poultry and for other agricultural needs of members and society and to receive fixed deposits." There are also other objects relating to various other types of activities which are expected by the co-operative department to be undertaken by the rural banks organised on co-operative basis. Supply of agricultural needs of members is an object in Clause (xiii) while Clause (xi) mentions the object 'to arrange for the sale of agricultural produce, milk and milk products and poultry and poultry products, products of cottage and village industries of its members to their best advantage'. Though membership was declared open to all, credit-worthy agriculturists, protected tenants and the Government were specially mentioned as being eligible for membership vide Clause 6(2) of the bye-laws. It is the case of the assessee that agriculturists only were members. While offering of credit was the main function of this rural bank, it is claimed that the lengthy clauses dealing with loans specifically provided in Clause 33(16) state one of the purposes of loans was 'For purchase, construction, production, development or maintenance of such equipment as may be needed for carrying on animal husbandry, poultry farming and allied activities jointly undertaken with agricultural operations'. This clause shows that giving of loans to poultry farms was undertaken only where this activity was taken up along with agricultural operations. It is the assessee's case that eggs are received from farmer members for sale and that eggs should be treated as agricultural produce so that the sale of these eggs could be construed as 'marketing of agricultural produce of its members'. The authorities have raised an initial hurdle to the effect that there is nothing in the accounts to substantiate the claim. When it is the assessee's consistent claim that eggs are secured in its dealing with other members as all other activities and that all its members are agriculturists, we do not see what type of accounts the assessee is required to maintain. If it is felt that any part of the dealings may be with non-members, it is not clear how the exemption on profits from dealing with members could be denied, if such profit is from activity under Section 80P(2)(a)(iii). At best, the matter could be further examined with a view to verify the assessee's claim on facts and the portion which does not qualify for exemption could be denied exemption.
Hence, the crucial question is whether eggs, on the facts and in the circumstances of the assessee's case, could be treated as agricultural produce. The first appellate authorities more or less conceded that if poultry farming is an integral part of agricultural operations, eggs from such farms could be agricultural produce. But the learned departmental representative would like to support the order even from the point of view that eggs from poultry farm could never be treated as agricultral produce. We would, therefore, discuss this issue from this angle.
6. The learned departmental representative had laid great reliance on citations dealing with agricultural income and provisions like Section 80JJ to support that poultry income could never be agricultural income.
The issue before us is not whether income from poultry farming is agricultural income, but whether the eggs produced by farmers as part of their agricultural activities could be treated as agricultural produce. The revenue is, no doubt, right in contending that the meaning of agriculture in the context of definition of agricultural income under the income-tax law has to be confined to those activities related directly to land and not those merely having relationship with land or connected with the land. But should such a definition of agricultural income be extended to agricultural produce as well 7. The Rangoon High Court in the case of CIT v. Kokine Dairy  6 ITR 502 held as under : ... Where cattle are wholly stall-fed and not pastured upon the land at all, doubtless it is trade and no agricultural operation is being carried on : where cattle are being exclusively or mainly pastured and are nonetheless fed with small amounts of oil-cake or the like, it may well be that the income derived from the sale of their milk is agricultural income. But between the two extremes there must be a number of varying degrees, and the task for the Income-tax Officer is to apply his mind to the two distinctions and to decide any particular case on which side of the fence, if I may use the term, the matter falls." (p. 509) The above decision followed the English view in the decision in Lean & Dickson v. Ball  10 TC 341 where it was held that poultry farming, where poultry derived sustenance to a material extent from the produce of the land, could be regarded as agricultural activity. Lord Wright in Lord Glanely v. Wightman  AC 618 observed : "If authority were needed, the provisions just quoted do at least show that profits of 'occupation' include gains from the animal produce as well as the agricultural, horticultural or arboricultural produce of the soil; ... equally it is obvious that the rearing of animals, regarded as they must be as products of the soil--since it is from the soil that they draw their sustenance and on the soil that they live--is a source of profit from the occupation of land, whether these animals are for consumption as food (such as bullocks, pigs or chickens), or for the provision of food (such as cows, goats or fowls), or for recreation (such as hunters or race horses), or for use (such as draught or plough horses). All these animals are appurtenant to the soil in the relevant sense for this purpose, as much as trees, wheat crops, flowers or roots though no doubt they differ in obvious respects. Nor is it now material towards determining what are products of occupation that farming has developed in its use of mechanical appliances and power, not only in such matters as ploughing, reaping, threshing, and so forth, but in such ancient methods of preparing its products as making cream butter or cheese. The farmer is still dealing with the products of the soil, and Schedule B covers the income." (p. 638) Though these decisions were noticed by the Supreme Court, the final definition of agricultural income as evolved by it in the classic case of CIT v. Raja Benoy Kumar Sahas Roy  32 ITR 466 was narrower and did not comprehend dairy farm or poultry farm in India. But the reason is not far to seek. The Supreme Court in this decision before laying down the law on the subject after survey of decided cases, had the following preamble in Raja Benoy Kumar Sahas Roy's case (supra) : "It may be noted at the outset that the definition of 'agricultural income' given in Section 2(1) of the Indian Income-tax Act is in identical terms with the definitions of that term as given in the various Agricultural Income-tax Acts passed by the several States.
It will be idle therefore to treat 'Taxes on Agricultural Income' which fall within the legislative competence of the State Legislature as having no relation at all to the corresponding provisions of the Indian Income-tax Act. Once it is determined that the income in question is derived from land used for agricultural purposes by agriculture, it would be agricultural income and as such exempt from tax under Section 4(3)(viii) of the Indian Income-tax Act and would fall within the purview of the relevant provisions of the several Agricultural Income-tax Acts passed by the various States. The result of this determination would be that the assessee would not be liable to assessment under the Indian Income-tax Act but he would have to pay the agricultural income-tax which would be levied upon him under the relative Agricultural Income-tax Acts. The only enquiry which would therefore be relevant is whether the income in question is agricultural income within the terms of the definition thereof and that would have to be determined in each case by the Court having regard to the facts and circumstances of the particular case before it." (p. 504) It was in this limited context of definition under Indian law of agricultural income that the decision in Kokine Dairy's case (supra) or the English decisions including specific mention of poultry farm did not find favour with the Supreme Court. In other words, the wider definition of agricultural income had to be ruled out for the limited purpose of exemption of agricultural income for tax purposes. Even after the Supreme Court decision, the learned authors, Kanga and Palkhivala, of Law and Practice of Income-tax, seventh edition, vol. 1, would say that-- "... In cases where livestock breeding or poultry or dairy farming is an integral part of agricultural operations, the income therefrom may be regarded as part of agricultural income and would be exempt from tax as such, and the question of claiming relief under Section 80JJ or the old Section 10(27) would not arise." (p. 29) Such a view, not shared by many other commentaries, may well be debatable but the issue for consideration is whether the wider definition of agriculture can be ruled out for ascertaining the meaning of the words 'agricultural produce' in Section 80P(2)(a)(iii) 8. Poultry farming, dairy farming, animal husbandry, etc., could be agricultural activity if the animals found sustenance from land and such activities were taken up as part of farming activity by agriculturists. This was the meaning generally assigned to agriculture in its wider and general meaning even as noticed in the English authorities mentioned in the preceding paragraph and reproduced by the Supreme Court in Raja Benoy Kumar Sahas Roy's case (supra). If further authorities are required for this proposition, the assessee has furnished some more. Biswas' Encyclopaedic Law Dictionary (1979 edition) defines Agricultural Produce as under: "Things which have a situs of their production upon the farm and which are brought into condition for uses of society by labour of those engaged in agricultural pursuits as contradistinguished from manufacturing or other industrial pursuits. That which is the direct result of husbandry and the cultivation of the soil. The product in its natural unmanufactured condition." (p. 63) Such is the meaning given also in U.S. (where the word farming is preferred to agriculture) as extracted from same dictionary : Farming purposes: These words are not limited in meaning to mere cultivation of soil and maintenance of improvements thereon for such purposes, but include raising of livestock, as well as production of farm crops directly from soil. State v. Superior Court for Walla Country, 168 Wash. 142, 10 p. 2d. 986, 987. See Farming Operations.
Farming operation : Term includes farming, tillage of the soil, dairy farming, ranching, production or raising of crops, poultry, or livestock, and production of poultry or livestock products in an unmanufactured state. Bankruptcy Act, 101(IS)". (p. 546) Poultry farm may be kept by an agriculturist as a part of his farm activity (a vocation) or it may be conducted as a business by itself by modern means not so integrated with land or other farm activity. In the latter case, the eggs cannot possibly be treated as agricultural produce and may well be treated as a product of an industry. Poultry farm may well be an industrial undertaking in the latter case even as held by this Tribunal in the case of Sri Venkateswara Hatcheries (P.) Ltd. v. ITO  1 ITD 1077 (Mad.) on the ground that human agency and technical expertise had been associated with natural process on a scientific basis. When it is produced by a farmer as part of his traditional vocation as an agriculturist, eggs should also be treated as 'agricultural produce' like chicken, livestock, milk, butter, etc., in the accepted sense of the phrase. It must be remembered that the bye-laws of the assessee itself contemplated the financing of agriculturists as a rural bank. It expected to finance only those poultry farms which are 'jointly undertaken with agricultural operation' [Clause 33(16)]. These rural banks themselves are refinanced through the State co-operative department by Agricultural Refinance Corporation, a creature of the Agricultural Refinance (and Development) Corporation Act which defines agriculture in Section 2(a) of the said Act as under : " 'agriculture' includes animal husbandry, dairy farming, pisciculture and poultry farming." This has been duly conveyed in a scheme circulated by the said corporation for purpose of refinancing assistance and such a scheme (copy filed) has been passed on by the Registrar of Co-operative Societies in a Circular, dated 3-11-1965. It has been clearly stated therein that poultry farming will qualify for refinance. It has been further stated in. the scheme itself as intended to cover only those agriculturists who have their own lands and have 'unrestricted morigageable or alienable rights' over their holdings. We also find that there is another old Central enactment, Agricultural Produce (Grading and Marking) Act, which in Section 2(a) defined agricultural produce as under : " 'agricultural produce' includes all produce of agriculture or horticulture and all articles of food or drink wholly or partly manufactured from any such produce and fleeces and the skins of animals ;" Again, the Schedule to the said Act lists 'eggs' as the third item immediately after 'fruits' and 'vegetables' and prior to such items like 'dairy produce', 'coffee', etc. No doubt, it could be argued that the definition of 'agricultural produce' to include eggs in the Agricultural Produce (Grading and Marking) Act or the specific inclusion of poultry as part of agriculture under the Agricultural Refinance (and Development) Corporation Act, pertain to the purposes of those Acts and does not and cannot extend the meaning of 'agricultural produce' in Section 80P(2)(a)(iii) of the 1961 Act. It would have been so, if the word 'agriculture' did not at all have a wider and natural meaning so as to comprehend all farm activities. As noticed earlier, the narrower meaning had to be preferred for purposes of taxation of agricultural income because of the specific definition of agricultural income necessitated by federal polity, That does not mean that the ordinary meaning gets lost for all purposes of the Act. There is also no reason why the meaning assigned to agricultural produce in some other enactment should be totally ignored. It must be remembered that 'agricultural income' has a definition in the Act while 'agricultural produce' has none. There appears to be no warrant for mixing up one concept with the other. A case was sought to be made out for the revenue on grounds of redundancy. This argument is again misconceived.
While Section 80JJ is concerned with income from poultry farming, Section 80P(2)(a)(iii) could well be concerned with sale of chicken and eggs in the hands of a dealer other than the farmer. To take an illustration, paddy is an agricultural produce beyond controversy. Just because Section 80P(2)(a)(iii) exempts profit to a co-operative society on marketing of its members' paddy, it does not mean that the exemption, in the light of Section 10(1) of the Act which exempts agricultural income, is redundant. Scope and amplitude of both these exemptions are different, though they may sometimes overlap. Hence, in any view of the matter, we find that when eggs are purchased from member-agriculturists who run the poultry farm as a part of their agricultural activity and marketed by the assessee, profit, if any, from such activity should fall under Section 80P(2)(A)(iii). Since, however, an issue was made of the fact that there was no finding in the orders of the authorities below that the assessee's claim that the eggs marketed by the assessee are of this description, we will remit the matter back to the ITO for verification of the assessee's claim and excluding that part of the profits attributable to eggs not belonging to this category.
9. There is yet another issue relating to the assessment years 1977-78 and 1979-80 only. It was the assessee's case that there was no profit on sale of consumer goods and eggs. The ITO estimated the profit at 1.5 per cent as the assessee could not prove the claim and the accounts did not segregate the profits relatable to these activities. The Commissioner (Appeals) reduced the rate to 1 per cent for the assessment year 1978-79, while the AAC who heard the appeals for these two years later noticed the decision of the Commissioner, but all the same confirmed the estimate at 1.5 per cent stating that the estimate is in order in the light of 'books' and 'supporting documents'. He did not, however, indicate the basis of his observations. Since we are remitting the other matter in the preceding paragraph to the ITO, we will remit the question of estimate of rate of profit also for these two years to the ITO for fresh consideration in accordance with law.