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R. Vaidyanatha Mudaliar Vs. State of Madras - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case Nos. 75 to 77 of 1966 (Revision Nos. 49, 50 & 51 of 1966)
Judge
Reported in[1976]104ITR444(Mad)
ActsMadras Agricultural Income Tax Act, 1955 - Sections 2
AppellantR. Vaidyanatha Mudaliar
RespondentState of Madras
Appellant AdvocateK. Srinivasan and ;K.C. Rajappa, Advs.
Respondent AdvocateK. Venkataswamy, 1st Asst. Govt. Pleader
Cases ReferredQuoting Dooars Tea Co. Ltd. v. Commissioner of Agricultural Income
Excerpt:
.....in exercise of powers under section 35 revised assessment on tax payable on ground of escaped income - assessee contended that assessing officer had no jurisdiction to reopen assessment - further contended that advance paddy received were returned during accounting year cannot be part of agricultural income - section 35 enables income-tax officer to asses or reassess any agricultural income which had escaped assessment - entries relating to return of deposits do not connote produce receipt during relevant assessment years - matter returned back to tribunal to decide in accordance with law. - - a similar view was taken regarding the assessment year 1961-62 as well. it may be stated immediately that for the assessment year 1962-63, a similar process was adopted by the assessing..........agricultural income-tax, : [1962]44itr6(sc) thus:'therefore, it is clear that income derived from sale of agricultural produce has been provided for by clauses (ii) and (iii) and prima facie that would show that clause (i) which does not refer to sale even indirectly cannot be intended to cover cases of income derived from the sale of agricultural produce.considered in the light of clauses (ii) and (iii) of section 2(1)(b) what is the true scope and effect of the income contemplated by clause (i) in terms the clause takes in income derived from agricultural land by agriculture; and as we have already pointed out, giving the material words their plain grammatical meaning, there is no doubt that agricultural produce constitutes income under this clause. is there anything in the context.....
Judgment:

Ramaprasada Rao, J.

1. These three tax cases are connected and arise out of three appeals filed before and disposed of by the Madras Agricultural Income-tax Tribunal. T. Cs. Nos. 75 and 76 of 1966 relate to the assessment years 1960-61 and 1961-62 in which the assessing officer invoked his jurisdiction under Section 35 of the Madras Agricultural Income-tax Act, 1955. T. C. No. 77 of 1966 concerns itself with the original assessment made for the year 1962-63.

2. For the years 1960-61 and 1961-62 the assessee, an individual, was assessed on the net income reckoned originally by the Agricultural Income-tax Officer, Sirkali, who was the assessing authority. Later, the assessing officer, in the purported exercise, of his powers under Section 35 of the Act, revised the assessments and the tax payable thereon. For the year 1962-63, an original order of assessment was made based on the principle adopted by the assessing authority when he revised the assessments for the earlier years. The assessing authority was of the view that the accounts were maintained under the cash system and that while computing the agricultural income of the assessee for the assessment year 1960-61, the opening and the closing stocks of paddy for the assessment year 1960-61 were not taken into account when the original assessment order was passed, and in this view there has been an escapement of the assessable income of the assessee. In those circumstances he exercised his jurisdiction under Section 35 of the Act, and discountenanced the objections of the assessee that he had no jurisdiction to reopen closed assessments and in any event the basis of reassessment was wrong, One other contention raised by the assessee was that the advance of paddy received by him during the earlier accounting year 1959-60, which was noticed in the relevant assessment year since they were returned in that year, can never form part of his agricultural income for the assessment year in question, and if at all they represented the income of the earlier years which was the subject-matter of a composition proceeding and hence it was urged that such items added on in the revised proceedings ought to be deleted and the reassessment order corrected. The Agricultural Income-tax Officer, Sirkali, as already stated, negatived the objections of the assessee and reassessed him since there was an escapement of assessment within the meaning of law.

3. The Assistant Commissioner of Agricultural Income-tax, Thanjavur, as appellate authority, on appeals filed by the assessee, agreed with the assessing officer and held that the reassessment proceedings were in order. He was of the view that the opening and the closing stocks as found in the accounts have to be noticed for a correct reckoning of the income of the assessee. He was also of the view that inasmuch as the assessee had a closing stock at the close of the accounting year 1958-59, which obviously represented the opening stock for the assessment year 1960-61, it should be concluded that the earlier composition proceedings under Section 34 of the Act relating to and inclusive of the accounting year 1958-59 could only relate to the tax which was levied on the sale proceeds of paddy which the assessee had actually realised during the accounting year 1958-59. In that view he upheld that the opening stock as on April 1, 1959, which relates to the assessment year 1960-61, has escaped assessment. A similar view was taken regarding the assessment year 1961-62 as well. The assessee's contention that including the opening stock as if it represented the income during the accounting year would amount to double taxation did not find favour with the appellate authority. Even so, the items of paddy which were reflected in the accounts as if they were receipts of paddy advance during the earlier years should be omitted from the computation was also rejected. It may be stated immediately that for the assessment year 1962-63, a similar process was adopted by the assessing authority and upheld by the appellate authority as well.

4. Second appeals against the three orders of the Assistant Commissioner of Agricultural Income-tax, Thanjavur, relating to the assessment years 1960-61, 1961-62 and 1962-63 were filed before the Madras Agricultural Income-tax Appellate Tribunal. The petitioner objected to the finding of the assessing authority that the accounts were on a cash system whereas they were in fact maintained on a hybrid basis. He also urged that the original assessments made were in order and the reassessments undertaken by the assessing authority for the years 1960-61 and 1961-62 were without jurisdiction, and even if he could reopen such assessments, it was irregular and on a misappreciation of the words 'agricultural income' appearing in the Act. The Tribunal once again came to the conclusion that the system of accounting was the cash system and it ought to be held to be so because the assessee did not object to such a characterisation of his account before the appellate authority and that such an objection for the first time before the Tribunal cannot be entertained. It held that the proceedings initiated by the assessing officer under Section 35 of the Act was valid. It is curious, however, to note that the Tribunal after having come to the conclusion that it is impossible to decide on the basis of the entries in the books whether the petitioner is following the cash system of accounting or not, held that the method of accounting followed by the petitioner was the cash system because he raised no objection to such a finding before the assessing or the appellate authorities. Regarding the other objection raised by the asses-see that the opening stock during the assessment years in question cannot be inducted into the method of computation of agricultural income, the Tribunal was of the view that such an item was rightly considered and included in the process. It would, however, give the following findings :

'When an agriculturist keeps with him the paddy grown by him in his lands, there is no doubt that he is the possessor of the agricultural income. That income becomes assessable only when this stock of paddy goes out of his possession either by sale or otherwise ............ the income becomes computable for the purpose of assessment only when the sale takes place or the produce goes out of the ownership or possession of the assessee.'

5. After making the above observations the Tribunal was of the view that in the original assessment only the paddy that was grown was taken into consideration and the revised assessments have set right this defect as they have taken into consideration the other paddy also which the appellant had dealt with during the year, which represented, the difference between the quantity of the opening stock and the closing stock. In that view, they rejected the appeals of the assessee before it.

6. It is against the order of the Tribunal that these tax cases have been filed. Once again, the same contentions were repeated before us by the assessee. In particular, it was stated that the assessing authority had no jurisdiction to invoke Section 35 of the Act; that the system of accounting as reflected in the books of account maintained by the assesses does not lend support to the contention that it is a cash system, but it is a medley of all systems; that in any event the incidence of taxation on agricultural income depends on its production, raising and receipt, and not upon its disposal, sale, consumption or other dealings of such paddy by the assessee; that the entire produce was harvested and gathered during the previous years relevant for the purpose of assessment in 1960-61 and 1961-62; that there was no escapement of assessment of income chargeable to tax for the first two years ; that the opening stock of paddy has no relevance and cannot enter into the scheme of computation of agricultural income at all; that the department has failed to prove that there was in fact such an escapement; that there was double taxation in the process ; that the paddy received by the petitioner from others and which admittedly was not referable to the produce of the accountable year, cannot be deemed to be agricultural income of that year and that the original order for the assessment year 1962-63 based on the above erroneous assumption is illegal.

7. The learned Assistant Government Pleader, however, supported the order and urged that the contentions of the petitioner are untenable.

8. Before noticing the respective contentions of the parties, it is common ground that the material made available before the assessing officer as also the accounts scrutinised by him do not disclose that the paddy was ever the subject-matter of sale or performance of any process by the assessee to render the produce raised or received by him fit to be taken to the market. As a matter of fact, no manufacturing process or sale of the produce of the crop raised was ever indulged in by the assessee and it is not the case of the revenue that such is the nature of the agricultural income in the instant case. On the other hand, it is common ground that it is the agricultural income derived from the land in the State by agriculture within the meaning of Section 2(a)(2)(i) of the Madras Agricultural Income-tax Act, 1955.

9. Mr. K. Srinivasan initially urged that the Agricultural Income-tax Officer did not have the jurisdiction to act under Section 35 of the Act. This section enables the Income-tax Officer to assess or reassess any agricultural income which has escaped assessment during any financial year. Such escapement may be due to actual escape or due to the income being assessed at too low a rate or because of under-assessment. Such a reopening by the Income-tax Officer can be undertaken for any reason such as a change in law, a change of opinion and such other similar matters--See United Motor Works v. State of Madras, [1969] 23 STC 503 . We do not, therefore, agree that, in the instant case, the powers have been irregularly exercised by the Income-tax Officer when, according to him, certain items of income were omitted to be brought to tax in the original proceedings.

10. The Tribunal found that the system of accounting adopted by the assessee was the cash system, not because it was satisfied about the character of the method of accounts but because no objection was raised by the petitioner about such a. characterisation by the assessing and appellate authorities. Section 7 prescribes that agricultural income shall be computed in accordance with the method of accounting regularly employed by the assessee but if no such method is regularly employed or if its regularity and character cannot easily be deduced, then the computation of the income shall be made upon such basis and in such manner as may be prescribed. The Tribunal found that the assessee maintained the books of account perfectly and was also of the view that the method employed does not disclose that it was on the 'cash system' basis. If, therefore, the usual method of accounting adopted by the assessee found acceptance with the Tribunal and if it was also regular in the sense that it was proper, then the system evolved by the assessee has to form the basis of computation. The Tribunal went wrong in lightly characterising the mode as the cash system. The statement that no objection was taken by the assessee regarding the same appears to be incorrect. Apart from it, no estoppel or waiver can be created in such circumstances when the accounts speak for themselves. The cash system of book-keeping which is the opposite of the mercantile system envisages a record of actual cash receipts and actual cash payments. They reflect cash dealings as they occur. The entries are made only if cash is received or cash is disbursed. In this system, income would be taxable when actually received, whereas in the mercantile system it would be taxable in the year of receipt or on the date of entry of such receipt--See Puthutotam Estates (1943) Ltd. v. Agricultural Income-tax Officer, : [1962]45ITR86(Mad) and State of Kerala v. Bhavani Tea Produce Co. Ltd., : [1966]59ITR254(SC) It is not suggested in this case that the entries in the books ever disclosed a cash receipt or disbursement. In fact, there is no suggestion that the produce was ever subject to a sale or a manufacturing process with intention to sell. The entries disclosed only the receipt of income in kind. Even the other entries regarding the refund of advances of paddy are entries in kind. This is one method of accounting of the agricultural produce. The account books are regularly kept and the finding is that they are regularly maintained. The system may be a queer one, but it is an acceptable one. Whether the quantification as made in the books is correct or not is a different matter. At this stage we are concerned with the system of accounting which is infallible besides being properly maintained. The system may evade analysis in the words of an accountant, but it is, as rightly stated, a hybrid one. Nevertheless the method cannot be disregarded and a badge of mis-description implanted on it to call it a cash system of accounting. We are, therefore, of the view that it is not a cash system as is commonly and legally understood, but it is a system which is regularly employed by the assessee and it is on this system that agricultural income shall be computed for purposes of the Act.

11. If the account books as maintained by the assessee have to be the basis for the reckoning of the chargeable income, then it is necessary to explain as to what is 'agricultural income'. Section 2(a)(1) equates rent or revenue derived from the land as 'agricultural income'. Section 2(a)(2)(i) and (ii) provides that 'agricultural income' means any income derived from such land in the State by agriculture, or 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.

'Explanation.--Agricultural income derived from such land by the cultivation of arty crop means that portion of the income derived from the cultivation, manufacture and sale of the produce of that crop as is defined to be agricultural income for the purposes of the enactments relating to Indian income-tax and if it has not been so defined, the whole of the income.'

12. The above definition is not attracted if the context otherwise requires. The assessee, besides bringing into his record the quantum of the produce during the accounting year, does no more. It does not appear that the income disclosed includes any rent or revenue derived from the land. It is undoubtedly income derived by agriculture. There is no evidence or suggestion in the case to say that the agricultural income is derived by the assessee performing any process so as to render the produce raised or received by him fit to be taken to the market. It is not the case of the revenue that the income in question was derived by the assessee from the lands in the State by the sale of the produce raised or received by him. Therefore, the agricultural income in the instant case does not fall under Sub-clauses (ii) and (iii) of Clause (2) of Section 2 of the Act. On the other hand, the agricultural income tits into the definition as contained in Sub- Clause (i) of Clause (a)(2) of Section 2 of the Act. In such a case, as there is no actual sale and as no mechanics are there in the Act to find the money equivalent to the produce raised or received, the Act provides a machinery to evaluate the income notionally and in accordance with the market value thereof. It is now well settled that for income to be 'agricultural income', the produce which is the subject-matter need not have been the subject-matter of a sale resulting in a profit or gain. The word 'income', in the context in which it appears in the Madras Agricultural Income-tax Act, does not derive colour from any antecedent transaction such as sale in relation to the agricultural produce receipted or derived. If the produce is subject to a sale or a manufacturing process with intent to sell, then the money equivalent of the ultimate result of such an activity becomes chargeable. But in the absence of a clear postulate in the language of the definition of 'agricultural income', envisaging a sale of the produce as. a condition precedent for charging agricultural income to tax, it would be straining its language to superimpose such, a condition. It, therefore, follows that once it is established that agricultural produce has been received or raised during the accounting year, then such produce becomes chargeable to tax.

13. The Supreme Court, after fully explaining the implications of a similar section under the Bengal Agricultural Income-tax Act (IV of 1944), concluded in Dooars Tea Co. Ltd. v. Commissioner of Agricultural Income-tax, : [1962]44ITR6(SC) thus:

'Therefore, it is clear that income derived from sale of agricultural produce has been provided for by Clauses (ii) and (iii) and prima facie that would show that Clause (i) which does not refer to sale even indirectly cannot be intended to cover cases of income derived from the sale of agricultural produce.

Considered in the light of Clauses (ii) and (iii) of Section 2(1)(b) what is the true scope and effect of the income contemplated by Clause (i) In terms the clause takes in income derived from agricultural land by agriculture; and as we have already pointed out, giving the material words their plain grammatical meaning, there is no doubt that agricultural produce constitutes income under this clause. Is there anything in the context which requires the introduction of the concept of sale in interpreting this clause as suggested by the appellant In our opinion this question must be answered in the negative. Not only is there no indication in the context which would justify the importing of the concept of sale in the relevant clause, but as we have just indicated the indication provided by Clauses (ii) and (iii) is all to the contrary. What this clause seems clearly to have in view is agricultural produce itself which has been used by the assessee.'

14. A Division Bench of this court in Beverley Estates Ltd. v. Commissioner of Agricultural Income-tax, : [1966]61ITR374(Mad) while considering the point as to when agricultural income can be said to have been actually received, and after noticing the above decision of the Supreme Court, observed :

'Looked at broadly, it seems clear that income derived from the land by a process of agriculture is itself receipt of agricultural income. It may be in the shape of produce or it may be in the shape of rent received by a person owning land from a lessee or other person cultivating the land. It may in certain circumstances be taken to be the actual sale price of the produce respectively raised or received by such a person. But where a person raises a crop and realises the produce, such realisation itself amounts to the receipt of agricultural income............The definition of 'agricultural income' however indicates that a sale of the produce is not always necessary before one can expect the receipt of agricultural income.....

Again at page 380 it was observed:

'What the legislature has endeavoured is to specify the receipt of income by two different classes of persons, one by a person who derives income by agriculture, the income being represented by the crop itself and which presumably is not subsequently sold by him but utilised by him for his own needs. In such a case, the income is received when the crop is harvested. In the other case, where the cultivator raises principally for the purpose of marketing it, it is the sale of the produce that results in the realisation of income. If any process necessary to render the produce fit for the market such as ordinarily employed by such persons, is performed, that presumably results in an increased value of the crop obtained by the sale. The money realised by the sale is treated as the income derived from the land in cases where the cultivation is undertaken principally for the purpose of marketing the produce.'

15. The revenue, however, brought to our attention the ratio in S.S. Rajalinga Raja v. State of Madras, : [1967]63ITR617(SC) . We do not think that the explanation of 'agricultural income' as propounded by the Supreme Court earlier in Dooars Tea Co. Ltd. v. Commissioner of Agricultural Income-tax has been departed from, as suggested in the later case. Though the court would say that the normal connotation of 'income' as arising from a disposal, consumption or use in the manufacture or other process carried on by the assessee would apply to 'income' as defined in the Madras Plantations Agricultural Income-tax Act, 1955 (an Act similar to the Madras Agricultural Income-tax Act, 1955), it would add:

'It is not necessary, however, for income to accrue that there must be a sale of a commodity: consumption or use of a commodity in the business of the assessee from which the assessee obtains benefit of the commodity may be deemed to give rise to income.'

16. Quoting Dooars Tea Co. Ltd. v. Commissioner of Agricultural Income-tax the learned judges conclude:

'The decision is authority for the proposition that for agricultural income to arise, it is not predicated that the agricultural produce must be sold; user of agricultural produce for the purpose of the business of the assessee may give rise to agricultural income.'

17. It is, therefore, clear that 'agricultural income' arises not necessarily by any supervening trading or commercial activity or mechanical process, but by the factum of production, receipt and derivation of the produce from the land.

18. If the above is the true concept of agricultural income, then the entry in the account books relating to 'opening stock' undoubtedly is not a receipt of income or income derived during the accounting year. It obviously refers to the produce of the years previous to the accounting year. They normally should have suffered tax in those years of production. There is also the additional factor in this case that up to the end of the accounting year 1958-59, the income was subject to a tax on the composition basis. This method of taxation mutually accepted by the assessee and the revenue postulates that the opening stock shown in the accounts for the assessment year 1960-61 was the subject-matter of a concluded assessment, though it might be on a composition basis. Thus, the closing balance as on March 31, 1959, or the opening balance as on April 1, 1959, reflected the produce grown during the accounting year 1958-59. This suffered tax already under the composition arrangement. Therefore, for the accounting year April 1, 1959, to March 31, 1960, relating to the assessment year 1960-61, it is illegal to take the above opening stock for any purpose and for reckoning agricultural income-tax for the accounting year ending with March 31, 1960. The assessee carried the surplus stock of the previous year only for purposes of accounting. This has no impact or bearing on the agricultural income for the year of account. Even so, the inclusion and consideration of such opening stock in the account books of the assessee for the assessment years 1961-62 and 1962-63 are without authority in law. In the light of our explanation of 'agricultural income', the entries relating to opening and closing stocks have no relevancy to exigibility to tax. This is so, as far as the entries relating to return of deposits or loans are concerned. These entries do not connote the produce raised or receipted during the relevant years of account. On the only ground that they find a place in the year of account, it cannot be concluded that it represents the 'agricultural income' for the year. No doubt, the burden is on the assessee to establish to the satisfaction of the revenue that the said items did form part and parcel of agricultural income of a previous year. In the instant case and having regard to the mode of accounting by the assessee, the matter is capable of easy verification. Our conclusion is :

(1) that the Agricultural Income-tax Officer under Section 35 of the Act had jurisdiction to reopen the assessment for the years 1960-61 and 1961-62;

(2) that the opening stock disclosed as such on April 1, 1959, April 1, 1960, and April 1, 1961, cannot enter into the computation for arriving at the agricultural income for each of the relevant assessment years in question;

(3) that the closing stock in each of the accounting years has no impact on the reckoning of agricultural income for the relevant accounting years ;

(4) that, on proof, the assessee is entitled to the reduction from the agricultural income of the year, the advances or loans repaid during the accounting year but which is not relatable to agricultural income of that year ; and

(5) that, on proof, the assessee is entitled to the reduction from the agricultural income of the year, of so much of the produce entrusted to the petitioner for storage and safe custody and which is not the product from the assessee's lands for that year.

19. As the Tribunal has disposed of the appeals before it without appreciating the correct position of law, it has become necessary for us to set aside the orders of the Tribunal and remit the matter to its file for a fresh disposal of all the three appeals in accordance with law and in the light of this judgment. The tax cases are allowed. There, will be no order as to costs.


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