1. The Income-tax Appellate Tribunal, Madras Bench, under Section 256(1) of the Income-tax Act, 1961, has referred the following questions of law for the opinion of this court:
'(1) Whether, on the facts and in the circumstances of the case, the Tribunal is justified in Jaw in holding that Rule 8 of the Income-tax Rules is inapplicable for determining the taxable portion of the sum of Rs. 10,381 representing the income derived by the assessee-firm as lessee under the deed dated October 21, 1964 ?
(2) Whether, on the facts and in the circumstances of the case, the inference drawn by the Tribunal that the subsequent operations carried on by the asscssee were not of the nature of basic agricultural operations is correct ?'
2. The assessee is a firm carrying on business in the manufacture of tea. It owns tea estates as well as a factory for the manufacture of tea. Sometimes tea is also manufactured from leaves bought from outsiders. By an indenture dated October 21, 1964, the assessee took on lease for a period of ten years, all those pieces and parcels of land situate in the village of Hubathalai in the sub-registration district of Coonoor, measuring 54.51 acres at a rental of Rs. 550 per acre per annum. The period of lease was to commence from October 20, 1964, The first year's rent of Rs. 29,925.50 was payable on the execution of the lease deed and the rents for the following years were to be paid in two equal half-yearly instalments on or before the 19th day of April and 19th day of October each year. Clause 2(b) of the deed empowers the assessee to use the estate only as a tea estate and on the determination of the said term, to deliver the same to the lessors in the same order and condition as at the commencement of the lease; loss and damage due to accidental fire, storm or other acts of God are excepted. The lessee under Clause 2(f) was given powers to weed, prune, cultivate and work the estate in a proper and husbandlike manner according to approved methods of cultivating and working tea estates in the Nilgiris ; and in the course of such cultivation and working of the estate to manure the tea plants at least twice a year. The supply of vacancies and diseased and dead plants were not the responsibilities of the lessee. The lessee was not to assign or underlet or part with the possession of the said estate or any part or portion thereof without the written consent of the lessors. Under the terms of the lease deed the assessee was not authorised to cut any trees without the lessor's written permission. Even in the event of the trees being cut, it could remain the property of the lessors and would be handed over to their agent.
3. In the accounting year relevant to the assessment year 1966-67, with which alone we are concerned, the assessee disclosed an income of Rs. 10,381 from the Rajarajeswari Estate which it had taken on lease. The assessee claimed that only forty per cent, of the income thereof would fall for computation in its total income under Rule 8 of the Income-tax Rules, 1962 The Income-tax Officer rejected the claim of the assessee. According to him, the said rule will apply only in respect of income which is derived by an assessee from the sale of tea grown and manufactured by the seller in India, and the assessee was a manufacturer of tea but the tea is from the estate which it had taken on lease and thus he considered that the assessee's case could not be equated with the tea grown by a seller. For this purpose, he relied on the decision of the Allahabad High Court in Maharaj Prashad Jain v. Commissioner of Income-tax : 61ITR297(All) . Since the assessee was not performing the basic operations of growing tea, but only the subsequent operations such as pruning, weeding, etc., and the tea leavesgathered by the assessee were not from the tea planted by it, he was of the view that the cent. per cent. income arising from the leased estate was taxable at the hands of the assessee and Rule 8 of the Income-tax Rules, 1962, would not apply. The assessee preferred an appeal to the Appellate Assistant Commissioner of Income-tax who differed from the conclusion of the Income-tax Officer. According to the Appellate Assistant Commissioner, when once the basic operations had been carried on the land in the first instance, the subsequent operations like weeding, pruning, etc., would be considered as agricultural operations, and the basic operations in the case of the assessee had already been completed by the lessor, and the subsequent operations were in conjunction with it, and, therefore, the income would be partly agricultural and partly business and, consequently, Rule 8 of the Income-tax Rules, 1962, would apply. Against this order of the Appellate Assistant Commissioner, the department went up in appeal to the Income-tax Appellate Tribunal. The Tribunal observed that Rule 8 of the Income-tax Rules, 1962, provided that 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 and the said rule enunciated the position that in cases where the tea is grown and manufactured by the seller in India, forty per cent. shall alone be liable to tax. It further held that this Rule would come into play if the tea is grown and manufactured by the seller in India. The Tribunal, after referring to the decision of the Supreme Court in Commissioner of Income-tax v. Raja Benoy Kumar Sahas Roy : 32ITR466(SC) , pointed out that the mere regeneration or preservation of trees could not be said to be expenditure of human skill and labour upon the land itself and operations which are to be performed after the produce sprouts from the land, e.g., weeding, digging the soil around the growth, removal of undesirable undergrowth, and all operations which foster the growth and preservation of the same not only from insects and pests, but also from depredation from outside, tending, pruning, cutting, harvesting and rendering the produce fit for the market, would all be agricultural operations when taken in conjunction with the basic operations. As these basic operations were not performed by the assessee, but only the subsequent ones, the Tribunal held that the assessee was not entitled to the exemption provided under Rule 8 of the Income-tax Rules, 1962. In this view, it allowed the appeal preferred by the department. It is the correctness of this conclusion that is being challenged in the form of the questions referred to this court extracted already.
Rule 8 of the Income-tax Rules, 1962, stated as follows : '8. (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 frombusiness, and forty per cent. of such income shall be deemed to be income liable to tax.
(2) In computing such income an allowance shall be made in respect of the cost of planting bushes in replacement of bushes that have died or become permanently useless in an area already planted, if such area has not previously been abandoned.'
4. It is the meaning of Sub-rule (1) of Rule 8 of the Income-tax Rules, 1962, which has to be considered in the present case.
5. As we pointed out already, the Tribunal relied on the decision of the Supreme Court in Commissioner of Income-tax v. Raja Benoy Kumar Sahas Roy : 32ITR466(SC) . In our opinion, that decision has no bearing on the question to be considered in the present reference. That decision dealt with the meaning of the word 'agriculture', in the context of and, in relation to, a forest of natural and spontaneous growth. While considering that question, the Supreme Court elaborately went into what would constitute agricultural operations and referred to the distinction between basic operations and subsequent operations. In that case, since the growth was natural and spontaneous, there were no basic operations carried out by the assessee at all and, only in that context, the Supreme Court expressed the view that the subsequent operations would not render the income derived from such forest as an agricultural income since the original growth was a spontaneous and natural one. As a matter of fact, the Supreme Court itself in a subsequent decision of it, in Commissioner of Wealth-tax v. Officer-in-charge (Court of Wards), Paigah : 10ITR133(SC) observed as to what the above earlier decision decided, in the following terms (page 136):
'In Raja Benoy Kumar Sahas Roy's case : 32ITR466(SC) the question before this court was whether income from forest lands derived from sal and piyasal trees 'not grown by human skill and labour' could constitute agricultural income. The test applied there was whether there was some integrated activity which could be described as agricultural operation yielding income. It was pointed out that, although a mere wild or spontaneous growth of trees not involving the employment of any human labour or skill for raising them, could not be agricultural income, yet, when there was a forest more than 150 years old, which had been carefully nursed and attended to by its owners, the income would be agricultural.'
6. Thus, the decision of the Supreme Court in Commissioner of Income-tax v. Raja Benoy Kumar Sahas Roy : 32ITR466(SC) , as explained by the subsequent decision referred to above, certainly takes into account the subsequent nursing of the living trees of spontaneous growth as constituting 'agricultural operations' so as to make the resultant income an 'agricul-tural income'. Therefore, that decision cannot be of any assistance to support the conclusion of the Tribunal in the present case.
7. The other decision relied on by the Income-tax Officer as well as the Tribunal is that of the Allahabad High Court in Maharaj Prashad Jain v. Commissioner of Income-tax : 61ITR297(All) . In that case the assessee obtained the right to pluck the tea leaves from the perpetual lessee of the tea estate. The assessee entered into an agreement with the perpetual lessee on January 8, 1954. The agreement is substantially reproduced in the judgment. In that agreement, it was made clear that what was sought to be sold by the perpetual lessee to the assessee was the crop of tea bushes in the tea estate concerned. The terms of the agreement made it absolutely clear that the sale of tea crop was made for a period of five years till the end of 1958, but the assessee will have the option to collect and gather tea for another two years. The agreement further stipulated that the possession of the tea estate will always remain with the perpetual lessee and the only right which the assessee had was the right to enter and reside in the estate to pluck, pick up, gather and collect, that the hoeing and pruning would be done by the perpetual lessee at his own cost, but the perpetual lessee would not spend more than Rs. 4,000, it shall be done at the cost of the assessee. Thus, the terms of the agreement made it absolutely clear that the assessee was not the lessee of the estate and he merely obtained the right, to use the language of the agreement, 'to pluck, pick up, gather and collect tea crop in all seasons'. A subsequent agreement was entered into on January 30, 1954, and that agreement made provision for the expenditure in excess of Rs. 4,000 for the purpose of hoeing as well as pruning. This agreement stated that the perpetual lessee had given a contract for hoeing and pruning of the tea cultivated in the said estate to the assessee for a consideration of Rs. 4,000 per annum from 1st January to 30th December, each year and the assessee will henceforth get the hoeing and pruning done at his own cost receiving from the perpetual lessee the sum of Rs. 4,000 annually. The combined operation of the two agreements was that the assessee merely obtained a right to enter the tea estate for the purpose of plucking, picking up, gathering and collecting tea crop in all seasons and the hoeing and pruning operations were the responsibility of the perpetual lessee to the extent of an expenditure of Rs. 4,000 and even by the subsequent agreement, when the responsibility was entrusted to the lessee on his receiving a sum of Rs. 4,000 from the permanent lessee, he was doing it only as an agent or on behalf of the permanent lessee. Consequently, the right which the assessee acquired in the tea estate was a very limited one. As a matter of fact, he did not acquire any interest whatever in the estate at all and merely acquired the right to pluck the tea leaves and nothing beyond that. In that context, theconclusion of the Allahabad High Court, we may say so with respect, was certainly correct in holding that the income derived by the assessee could not be said to be agricultural income and it would not attract Rule 24 of the Indian Income-tax Rules, 1922, corresponding to Rule 8 of the Income-tax Rules, 1962. However, what is pressed into service from this judgment are certain observations found therein at page 300 to the following effect :
'It was further contended that the word 'grown' has to be given a wider meaning than that given to 'cultivation' or 'agriculture'. There is no force in these contentions. The question that arises is res integra as there is no authority as to what constitutes growing of tea. A consideration ol the scheme of the Act and the Rules framed, however, leave no doubt that the intention was to give the words 'tea grown' by the manufacturer and seller of tea the same meaning as the growing of any other agricultural crop (and to distinguish it from spontaneous growth) by the expenditure upon the land itself of human labour and skill.'
8. Further, at page 302, the court observed as follows :
'It is manifest that in the instant case no primary or basic operation upon the land itself in the actual growing of the tea bushes was performed by the assessee. The best that could be said for the assessee was that some hoeit.g could have been done by him under the first agreement and under the second agreement he was to carry out the hoeing operations on behalf of the lessor as a contractor. The hoeing operations in the present case would not be in the actual planting or growing of the tea bushes as they were already in existence and would at best constitute caring or tending of the grown bushes. That would only be a subsequent and secondary operation on the land and not the basic operations which are the ploughing of the land and putting or planting the tea seeds or bushes into the ground to grow. There is no evidence that any hoeing at all was done but even assuming that some hoeing was carried out it would still not constitute agricultural operations to exempt that income from tax.
Mere coppicing, tending, pruning, etc., can never in themselves be 'agriculture' and what is required is the actual growing of the tea seeds and planting in the soil after preparing it.
9. In the first place, since on the facts of that case the assessee had merely a right to pluck the tea leaves and even when he did the hoeing and pruning operations, he did so only as a contractor on behalf of the perpetual lessee, by no stretch of imagination the income derived by him by manufacturing tea from the tea leaves so plucked could be characterised to be agricultural income attracting Rule 24 of the Income-tax Rules, 1922, and, consequently, the further observation extracted by us will constitute only an obiter dicta. If it is contended that the learned judges had intended to lay down any principle in those observations, with respect, wewould express our disagreement with the same. We have already pointed out that the Supreme Court in the latest judgment while understanding the decision in Commissioner of Income-tax v. Raja Benoy Kumar Sahas Roy : 32ITR466(SC) pointed out that the income derived even by nursing the trees which are of spontaneous growth would constitute agricultural income. Even assuming that without there being any basic operations, there cannot be an agricultural income, no decision was brought to our notice or no principle was drawn to our attention which shows or holds that both the basic operations and the subsequent operations must be carried out by one and the same person for the purpose of getting the benefit of Rule 8 of the Income-tax Rules, 1962. Having regard to the special nature of growth and manufacture of tea, we are of the opinion that it is impossible to hold that only a person who actually planted the tea seeds would be entitled to the benefit of Rule 8 referred to above.
10. In Encyclopaedia Britannica, 1969 edition, volume 21, at page 739, it is stated as follows :
'On large plantations, where tea is usually grown from seed in nursery beds, the young plants are transplanted to prepared tea fields when they are six to eight inches high, usually in six months' time. They are set out in rows, three to six feet apart. In two years, when they reach a height of four to six feet, they are cut down to less than a foot. By the end of the third year, they are ready for plucking. Chinese, Japanese, and Formosan tea growers working mostly small family gardens do not set out nurseries, but cultivate the shrub either by planting the seeds directly where they are to be grown or by layering, i.e., transplanting. Weeding cultivation between the rows, and pruning continue regularly for 25 to 50 years, the average life of a tea bush.'
11. Thus, the average life of tea bush is said to be 25 to 50 years. If it is insisted that the very person who planted the seeds must subsequently gather the tea leaves to be entitled to the benefit of Rule 8 of the Income-tax Rules, 1962, it will exclude several persons to whom the rule is being applied. For instance, take a case where a person having planted the seeds dies before the seeds actually grow and his heirs succeed to the estate and thereafter carry out the subsequent operations; can it be said that the heirs who become the Owners of the estate cannot get the benefit of Rule 8 of the Income-tax Rules, 1962, simply because they had not planted the seeds or in other words they had not carried out the basic operations Similarly, a person who had planted the seeds subsequently sells the estate to another. Can it be said that the purchaser who derives income from the sale of the manufactured tea grown in the estate will not be entitled to get the benefit of Rule 8 simply because he did not carry-out the basicoperations The answer to these questions would necessarily be an emphatic 'no'. Even if basic operations in the form of tilling the soil, preparing the ground and sowing the seeds are required for the purpose of application of Rule 8, there is nothing in the rule to show that those operations and the conjoint subsequent operations should be carried out by one and the same person. As a matter of fact, what is to be understood in this context is as to what is meant by the expression 'tea grown' appearing in the rule in question.'Tea grown' in the context in which the expression occurs must necessarily refer to tea leaves and not to the tea plants. This view of ours derives support from the following observations contained in the judgment of the Supreme Court in Tea Estate India P. Ltd. v. Commissioner of Income-tax : 103ITR785(SC) :
'Income which is realised by sale of tea by a tea company which grows tea on its land and thereafter subjects it to manufacturing process in its factory is an integrated income. Such income consists of two elements or components. One element or component consists of the agricultural income which is yielded in the form of green leaves purely by the land over which tea plants are grown. The second element or component consists of non-agricultural income which is the result of subjecting green leaves which are plucked from the tea plants grown on the land to a particular manufacturing process in the factory of the tea company. Rule 24 prescribes the formula which should be adopted for apportioning the income realised as a result of the sale of tea after it is grown and subjected to the manufacturing process in the factory. Sixty per cent. is taken to be agricultural income and the same consists of the first element or component, while 40 per cent. represents non-agricultural income and the same comprises the second element or component.'
12. Therefore, so long as the assessee has carried out the necessary operations for the purpose of growing the tea leaves which he subsequently plucked and then manufactured into the commercial tea, he would be entitled to the benefit of Rule 8 of the Income-tax Rules, 1962.
13. We shall now refer to the nature of the operations that would be required for the purpose of growing tea leaves with reference to certain standard authorities. From the very nature of the case, plucking of the leaves is a repeated operation and when once the leaves are picked, certainly certain other operations have to be carried out with regard to the pruning so that the plant may sprout fresh leaves which could be plucked later. After plucking the leaves which had already grown, the person concerned cannot remain quiet and he will have to carry out the necessary operations in order to enable the plant to bring forth fresh leaves. In Hand Book of Agriculture published by the Indian Council of Agricultural Research, New Delhi, at page 300, it is stated as follows :
'Systematic nitrogenous manuring is essential for promotion of leaf growth. Besides, the application of large quantities of compost every year and the benefit derived from nitrogen fixation by and leaf fall of the leguminous shade trees, Glincidia Maculate, Tephrosia Candida and Crotolaria Striata, are grown specially for incorporation in the soil as green manure. Furthermore, fertiliser mixtures supplying 60 lb. N, 30 lb. P2 05 and 30 lb. K2 per acre are applied in one or two doses, the main application being after the pruning of bushes.
The garden is hoed and weeded judiciously three or four times during the rainy season. Moss adhering to stems of tea plants is removed to destroy pests harbouring in it. Shade trees are lopped to promote lateral development so as to shade a larger area,
Pruning: Tea bush is pruned regularly to maintain the proper shape (plucking table of four to five feet diameter) at a height of three to four feet above ground.
A year after planting, when the plant is about 18 inches high, 'centring' is done, i.e., the main stem is cut a few inches above ground. The new laterals developed by the plant are again cut a little higher up. This process is repeated. In four or five years, the plant becomes a mature bush of 18 to 24 inches height and is ready to yield a crop.'
14. To the same effect is the statement contained in The Wealth of India Industrial Products, Part 8, published by the Council of Scientific & Industrial Research, New Delhi. What important part pruning plays in tea is discussed in the book Tea by T. Eden published by Longmans, Green & Co., London. At page 56 the book states as follows:
'The technique of pruning itself plays a significant part in ensuring good results, and neglect of elementary principles can vitally affect the subsequent development and health of the bush.'
15. At page 57, the author further says as follows:
'After pruning a period ensues in which growth of new foliage is unrestricted. The bush is thus re-clothed with the maintenance foliage upon which the metabolism of the plant depends. At the same time, the new shoots are produced, which will mature into new wood in due course, and which will form the basic structure of the plucking-table.'
16. The above statements contained in the recognised publications will clearly establish that a tea plant requires a continuous nursing for the growth of the tea leaves which alone are ultimately manufactured into tea in the commercial sense as we understand it. Therefore, 'when a person takes a tea estate on lease for a period of five or ten years and during that period he carries out these operations and grows tea leaves in the sense explained above and plucks those leaves and manufactures the same into tea as commercially understood, certainly such a person will be entitled tothe benefit of Rule 8 of the Income-tax Rules, 1962, and the view taken by the Income-tax Appellate Tribunal on the basis of what the decision of the Supreme Court in Commissioner of Income-tax v. Raja Benoy Kumar Sahas Roy : 32ITR466(SC) was said to have laid down, is erroneous.
17. Accordingly, we answer the questions referred to us in the negative and in favour of the assessce. The assessee will be entitled to its costs of the reference. Counsel's fee is fixed at Rs. 500.