Viswanatha Sastri, J.
1. The question referred to us is as follows :
'Whether in the circumstances of the case the Tribunal was right in holding that the sum of Rs. 7500 was 'agricultural income' within the meaning of Section 2 (1) (b) of the Act and exempt from taxation under Section 4 (3) (viii) of the Indian Income-tax Act.'
The facts are briefly these. The assessee, a firm of merchants, purchased a standing crop of tobacco on an area of 93 acres 12 cents for Rs. 13,833 in January 1943 from the person who had raised the tobacco on the land. The tobacco was harvested, cured and sold in the market by the assessee before 21st March 1943, for Rs. 33498. The plucking of the ripe leaves, the pruning and flue curing of the harvested tobacco were all done by the assessee firm. It is also stated that there was some sort of ploughing on the land by assessee. The curing of tobacco is said to be a process which is ordinarily employed by a cultivator of tobacco to render it fit for sale in the market.
2. The assessee was not a land-holder or a ryot or a lessee of the land on which the tobacco crop stood. The tobacco plants had been raised on land by its owner or lessee and they had reached such a degree of maturity as to render them saleable as standing crops to tobacco merchants in the locality. We may observe that it is not uncommon for merchants and traders in agricultural produce to purchase standing crops of tobacco, sugarcane, groundnut etc., when the crop is ready or nearly ready for harvest. The purchaser in such a case may have to do some pruning work with reference to the crops as in this case and then cut the crops and market the produce. The operations said to have been performed by the purchaser in the present case were evidently performed with the consent of the person who raised the standing crop. They are incidental to reaping the fruits of the purchase. The Income-tax Officer and the Appellate Assistant Commissioner held that a part of the profit of the assessee realised by the sale of the tobacco, namely, Rs. 7500 was derived from non-agricultural sources or operations and therefore liable to income-tax. The Appellate Tribunal held that the entire profits of the assessee from the tobacco dealer calculated in the sum of Rs. 12000 was agricultural income and was exempt from income-tax under Section 4 (3) (viii) of the Income-tax Act. The Commissioner of Income-tax disputes the correctness in law of the decision of the Appellate Tribunal. Hence this reference.
3. The burden is upon the assessee who claims exemption from tax under Section 4 (3) (viii) of the Income-tax Act to prove that the income is 'agricultural income' as defined in the Act. --See 'Raja Mustafa Ali Khan v. Commissioner of Income-tax', 1948 16 ITR 330. It is true, as pointed out by the learned advocate for the assessee, that the exemption is conferred by the Act upon a particular kind of income and it does not depend on the character of the recipient. 'Agricultural income' as defined in the Act is exempt from tax even though it can be brought under one or the other of the heads of income set out in Section 6 of the Act. Agricultural income has been held not to be assessable as business profits merely because the recipient of the income is a money lender who has lent monies on a mortgage with possession and is receiving the rents and profits of agricultural land in lieu of interest on the loan. This is settled by the decision of the Judicial Committee in 'Commissioner of Income-tax B & O v. Kameshwar Singh', 1935 3 ITR 305 and 'Raja Mustapha Ali Khan v. Commissioner of Income-tax', 1948 16 ITR 330. But it has to be observed that the rent of agricultural income received by a usufructuary mortgagee is agricultural income not because he is an usufructuary mortgagee but because being a usufructuary mortgagee he has gone into possession of the land and received rent as such. The mortgagee who receives rent receives it in the character of a person who has interest in the land and who is entitled to possession thereof. Therefore the income he receives in lieu of the interest on the loan is considered to be agricultural income. We, however, consider that this line of argument is not of assistance to the assessee in the present case.
4. It, is agreed that the land on which the tobacco crop was raised was assessed to land revenue and was used for agricultural purposes. The income of the assessee was obviously not 'rent' or 'revenue' derived from such land within the meaning of Section 2 (1) (a) of the Act. The only question is as to whether it is 'income derived from such land by agriculture' within the meaning of Section 2 (1) (b) (i) of the Act. The owner of the land, or of an interest therein, be he the landlord, ryot, lessee or usufructuary mortgagee, has an interest in the land and derives his income from the land. He may actually cultivate the land or he may receive the rent from cultivating tenants. In either case, the rent is the immediate and effective source of income and if the rent is derived from agriculture, the exemption from tax is attracted. Section 2 (1) (a), (b) (ii) and (iii) and (c) of the Act clearly indicate that the persons entitled to exemption are the persons falling within the following categories: The owner who lets agricultural land to cultivating tenants for a stipulated rent; the owner of agricultural land in which the tenant has a permanent right of occupancy with liability to pay a fixed rent or revenue; the owner of agricultural land who cultivates it himself, the lessee of such land; an occupancy tenant of such land having a permanent tenancy with liability for a fixed rent; a usufructuary mortgagee of the interest of the owner, land-holder or tenant of such land as the case may be; a sub-lessee, and persons occupying a similar position. The argument of the assessee's learned counsel is that Section 2 (1) (b) (i) which alone falls to be considered in the present case is so wide in its scope as to be applicable to profits derived by a merchant who purchases a standing crop and sells the produce after harvesting it. It is said that such profits constitute an income 'derived from land by agriculture'. A cultivating owner or tenant of land who sells a standing crop or the produce after harvest, derives his income from his land by agriculture. The land-holder or lessor who receives his rent either in kind or in cash from his tenant, derives income from his land by agriculture, though the person who actually ploughs and tills the land is the tenant. A merchant who purchases the standing crop derives profit from his contract of purchase at an advantageous price and resale of the produce at a higher price. The land is not the direct or immediate or effective source of his income. Agricultural income cannot be said to accrue to every person into whose hands the produce of the land passes. It is only the owner, landlord or ryot, or persons having a derivative interest in the land from these persons that can be said to 'derive' income from the land by the performance of agricultural operations on it. A merchant who purchases the standing crop appears on the scene when the crop is ripe or very nearly ripe for harvest, and pays a price for the commodity in which he is trading. No doubt he has a right to enter upon the land to preserve the crop, to tend it and to harvest it but he has no right or interest of any kind in the land itself nor has he any right to the exclusive possession of the land for any period. Growing crops are movable property under Section 3, T. P. Act and Section 2 Clause (6) of the Registration Act. See also definition of immoveable property in the General Clauses Act. In English law a sale of growing crops is regarded as sale of chattels. The purchaser of a standing crop differs from the purchaser of harvested crops only in this; that the former has a right to enter upon the land to attend to the crop and cut it when it is ripe for harvesting. He is in the position of the holder of a 'license' within the definition of that term in Section 52 of the Indian Easements Act. The purchaser whether of standing crop or of the harvested produce derives his profits as a trader or merchant from the purchase and resale of the produce in the market and does not derive the profits from the land in which 'ex concessi' he has no interest.
5. In 'Premier Construction Co., Ltd. v. Commissioner of Income-tax', 1948 16 ITR 380 at p. 384, the Judicial Committee observed:
'In their Lordships' view the principle to be derived from a consideration of the terms of the Income-tax Act and the authorities referred to is that where an assessee receives income not itself of a character to fall within the definition of agricultural income contained in the Act, such income does not assume the character of agricultural income by reason of the source from which it is derived.'
If the contention in the present case is to prevail, a trader in grains, cereals or other produce who purchases a standing crop ready to be harvested and sells the standing crop at a profit to another merchant, his profit is exempt from income-tax, even though he has no interest of any kind in the land on which the crops stand. Neither he nor his tenants or servants ever performed any agricultural operation on the land. The assessee earned a profit by the sale of the tobacco at a price over and above the cost price paid for the standing crop and the expenses incurred in harvesting and curing the tobacco. The pruning and the ploughing operations were ancillary operations of an unsubstantial character and were conducted under an arrangement with the person who raised the crop. Once the standing crop passed from the ownership of the cultivating tenant to that of the trader who purchased it, it lost the quality of agricultural income at that point and any profit made by the trader thereafter by a sale of the produce at a higher price than his cost price would, in our opinion, be a business profit. The direct source of the assessee's income was the purchase and sale of the produce at an advantageous price. The mere fact that the thing purchased is standing crop rather than any other chattel would not make the profit derived from the operation of buying and selling anything else than a business profit. Rent, revenue or income derived from land by agriculture in Section 2 has reference to the rent, revenue or income derived by a person having some interest in land by virtue of the fact that he is the owner of that interest. A profit accruing to a firm of merchants having no interest in land but having a mere licence to enter upon land and gather the produce as incidental to a transaction of purchase of standing crops, by a sale of the crops after harvest, differs radically in its character from income derived by way of rent or revenue or by the performance of agricultural operations by a person having an interest therein as owner, tenant or mortgagee with possession etc. The profit in this case is derived, as we have already stated by entering into contracts for the purchase of a commodity and by the resale of that commodity for a higher price. The fact that the moveable property now in question springs from or is the product of, agricultural operations carried out by the owner, or tenant of agricultural land, does not lead to the conclusion that the profit of a trader who has no interest in the land but who buys and sells the movable property in the course of his trade is 'agricultural income' as defined in the Act. A fruit merchant may purchase only the produce of an orchard belonging to another and a timber merchant may purchase only the trees planted by the owner of the grove. In these cases he gets the right to gather the fruits or the timber on the land but the profit realised by the merchant on a sale of the commodity is not agricultural income derived from land but is business profit.
6. In 'Commissioner of Income-tax v. Yegappa Nadar', 50 Mad 923, this Court held that income earned by a person who bad a licence to tap toddy from trees belonging to licensors and who sold the toddy extracted by him at a profit was non-agricultural income, though if the same income was earned by the owner or the lessee of the land on which the trees grew, it would be agricultural income. The learned counsel for the Commissioner of Income-tax referred us to the decision of the Judicial Committee in 'Commissioner of Income-tax B & O v. Kamakshya Narayan Singh'. 1948 16 ITR 325, which decided that interest on arrears of rent payable in respect of land used for agricultural purposes was not agricultural income within Section 2 (1) of the Income-tax Act. It was held that the interest was neither rent nor revenue derived from the land. The relationship between the tenant who executed the bond for arrears of rent with interest and the landlord was held to be that of a debtor and creditor. There is however one observation of the Judicial Committee which might be helpful in connection with the present case. Their Lordships while holding that interest on rent was revenue derived by the land-holder, went on to hold that it was not revenue 'derived' from land. They observed:
'The word 'derived' is not a term of art. Its use in the definition indeed demands an enquiry into the genealogy of the product. But the enquiry should stop as soon as the effective source is discovered. In the genealogical tree of the interest, land indeed appears in the second degree, but the immediate and effective source is rent, which has suffered the accident of non-payment.'
Here also the land appears in the history of the trading operations of the assessee but it cannot be said to be the immediate or the effective source of the income made by the assessee firm. The immediate and effective source was the trading operation of purchase of the standing crop and its resale in the market after harvesting the produce at an advantageous price.
7. For these reasons we hold that the sum of Rs. 7500 was not exempt from liability to assessment to income-tax and that the answer to the question referred to must be in the negative and against the assessee. The assessee shall pay Rs. 250, the costs of the Commissioner of Income-tax on this reference.