The question referred to this court for decision is whether on the facts set out in the Commissioners statement, any part of the income derived by the assessee from the produce of his coffee estates in Mysore is exempt from taxation under hte second proviso to clause (2) of Sec. 4 of the Indian Income Tax Act.
The assessee who owns coffee plantations in the Mysore State is a resident of British India (Mangalore); adn the ccase states that while he maintains an office in the Mysore territory to supervise the cultivation work there, the labour required for the cultivation is recruited in Mangalore, materials required for the estate like manure, tools, spray materials crop-bags etc., are purchased at Mangalore, and the harvested crops are brought to Mangalore in their raw state to be dried and cleaned there in the factories of Pierce Leslie and CO., and sold there by Pierce Lesile & Co., the selling agent of the assessee. As the sale proceeds are received and retained at Mangalore and a separate staff is maintained by the assessee at Mangalore to attend to the above operations, the Comissioner was of opinion that the assessee was liable to be taxed as one carrying on business and receiviing the income or profit thereof in Mangalore.
As both Sec. 4 and Sec. 6 of the Indian Income Tax Act are qulified by the opening woids save as hereinafter (other wise) provided the point for determination is whether the assessee can claim exemption under the second proviso to Sec. 4(2) and if so, to what extent. The Commissioner has expressed the opinion that proviso 2 Sec. 4(2) has no application here, because the profit of t he business are received in Mangalore and 'the agricultural processe s carried on in Mysore' are not in themselves a source of income but merely an element in the business which produces the income. In support of this view, he has relied on the decisions in 3 Income Tax Cases 378 and 8 Tax Cases at p. 204; but it must be observed that even in 3 Income Tax Cases 378, the proviso now to be interpreted did not come up and could not have come up for consideration and there can be little doubt that but for that proviso, the assessee in the present case will be liable to be assessed in respect of he profits to the extent determined by the authorities. After this reference had been made, the scope and effect of the proviso was considered by a Division Bench of the Calcutta High Court in Mohanpura Tea Co. In re (V Income Tax Report edited by A. N. Aiyar, p. 118) and the judgment is a direct authority in favour of hte Commissioners view. We have carefully considered the reasoning in that judgment but, with all respect to the learned Judges, we are unable to follow that decision.
The basis of the Calcutta decision and of the Commissioners opinion is that when a person who owns lands outside British India sells the produce of those lands in British India, no income, profits or gains Civil Appeal No. be said to arise or accrue until the produce is sold and that in such cases there is accordingly no room for the application of the proviso which only relates to income.....arising or accruing in an Indian State. The learned Judges emphasise the distinction between the place where the income accrues and the source from which it accrues and point out that the proviso is not concerned with the source. As a corollary, they think that if the sale also had taken place outside British India, the income thus realised, even if subsequently received in British India, would be exempt as income from agriculture that had arise or accrued in the State, within the meaning of that proviso. Whatever may be said as to profits or gains, the view that income from agriculture can be said to arise or accrue only when and where the produce is sold and converted into money seems to us, with all respect, difficult to reconcile with the reasoning in Commissioner of Taxation v. Shaw Wallace & Co. (59 C. 1343) that the term Income in the Indian Income Tax Act connotes a periodical monetary return coming in with some sort of regularity or expected regularity from definite sources : but their Lordship were than emphasis not on distinction between receipt in money and receipt in kind but between recurring receipts rom a business continuously carried on and an occcasional receipt of the kind then in question. On the other hand, they refer in the course of their judgment to income being likened to the crop of a field. In Maharaja of Darbhangas case (12 patna 318 at p. 336) the Privy Council affirm that a receipt in kind may be taxable income; it is difficult to see why as a matter of language, the expressions receipt or accrual of income should not have the same significance when used in connection with the receipt of produce from lands outside British India.
In Kirks case (1900 A.C. 588) the question arose as to the assessment to be levied in New Sourth Wales on a Company which extracted ore from mines owned by it in New South Wales and converte d it into a merchantable product there but carried the product to Victoria for sale, the sale proceeds being received either in London or in Melbourne. The Judicial Committee overruled the view taken by the New South Wales Court that 'the income was not earned in New Sourth Wales because the finished products were sold exclusiv ely outside that Colony.' Referring to the several steps which had to be gone through, from the extraction of the ore to the receipt of moneys on the sale of the merchantable product, their Lordships held tht to the extent of two of the steps, viz., extraction of the ore from the soil and conversion thereof into a merchantable product, 'the income was earned and arising and accrruing in New Sourth Wales.' In the Calcutta Case, the learned Judges distinguish this decision as turning on the language of hte particular statute and take it as only relating to the source from which the income accrued and not to the place where it accrued. With all respect, it seems to us that this way of distinguishing Kirks case fails to take note of certain portions of the argument as well as of the judgment. In the New South Wales Act, there was an exemption, Sec. 27(3), to the effect that no tax shall be payable in respect of income earned outside the Colony of New South Wales. On the strength of this provision, it was contended before their Lordships on behalf of the assessee that the income was derived from the sales, that is, from the business carried on outside the colony. This argument they repel with the remark that it is fallacious as 'leaving out of sight the initial stages and fastening attention exclusively on the final stage in the production of hte income.' These relevant parts of that judgment decided on not seem to us to turn on any peculiarity of the New South Wales Act but to recognise that as a matter both of language and of business, receipt of produce in kind may well be spoken of as receipt or accrual of income at the place where the producce is received.
Mr. Patanjali Sastri had to concede that on the principle of the decision in Kirks case, the assessee in this case might well be held by the Mysore State to have received the income within that State, but he contended that the rmedy for any hardship arising from that possibility must be had by invoking the provisions of the Act relating to double taxation. We are not concerned here with any question of double taxation or hardship caused thereby; but we refer to ths aspect of hte matter only to point out that if for asse ssment in Mysore, there is no reason why for purposes of the 2nd proviso too Sec. 4(2) the income should not in this case be held to have arisen or accrued in Mysore. The decision in Port Said Salt Association, In re, (59 C. 1226) does not materially help the Referring Officer in this connection. The learned Judges recognised in that case that part of hte profits might have been earned elsewhere, but they held that if the whole is received in British India, no portion could escape taxation unless there be a convention to limit the claim of one State against the nationals of others. The 2nd proviso is in a sense the result of such a convention : the case cannot throw light on the interpretation of hte scope of that convention.
Reliance was also placed by Mr. Sastri on the observation in Jiwandas v. Commissioner of Income Tax, Punjab (4 I.T.C. 40) to the effect that the place where the sale is efected and the price realised is the principal place, if not the place, of hte accrual of profits. That statement must be understood in the light of the fact that the case then under consideration related to the liability of a British Indian assessee who only purchased goods in British India but sold them outside and never received or brought the proceeds into British India. Following Sulley v. Attorney-Genral (2 Tax Cases 149) the learned Judges held that the mere purchase of goods will not amount to the carrying on of trade (except in the cases provided for in Sec. 42) and in the circumstances there was nothing like receipt of income or gains or profits in British India. There was no question in that case of hte receipt of produce from ones own estate : but the way the learned Judges deal with Kirk;s case shows that if the facts before them had been similar to those in Kirks case or to those in the present, they would have held that the receipt of hte produce would amount to receipt of income.
Accepting our interpretation of the decision in Kirks case, Mr. Patanjali Sastri advanced an alternative argument. Assuming that the income might be held to have accrued or arisen to the assessee in mysore he maintained that it might nevertheless be held to have been received by the assessee in British India not merely within the meaning of cl.(2) of Sec. 4 but even within the meaning of the first part of clause(1). The purpose of this argument was in any event to exclude the operation of the second proviso which is worded as a proviso only to sub-section (2) and not to sub-section(1). The first clause deals with two kinds of receipt in British India; one, receipt in the ordinary sense of that word and the other, in an artificial or extended sense and the second clause defines the artificial or extended meaning. If the 2nd proviso qualifies only this artificial sense of receipt, it would have no operation in cases where receipt of income in British India can be held to amount to receiptin its natural or ordinary sense. In support of hte cotentio n that income mayaccrue or arise in one place and yet be held to have been received in another place, he relied on the decision of the Judicial Committee in the Pondicherry Companys case (I.L.R. 54 Mad. 691).
We may observe at the outset that in the Pondicherry Companys case, their Lordships were not called upon to decide whether the receipt of income by the company was a receipt in the grammatical sene or in the extended or artificial sense, because the Companys contention was that there was no receipt at all, by or on their behalf in British India and that they received the income only in London. If that decision gives us any guidance at all in the present case, it may well be held that on the facts here, the receipt of the produce in Mysore itself by the assessees men on the spot will correspond to the receipt by Mrs. Rothera in the Pondicherry Companys case and the assessees receipt of the income in British India Can only be a receipt in the secondary stage, just like the receipt by any Nattukottai Chetty here of profits earned by a business carried on his behalf in foreign countries. Even apart from this view of the facts, it does n ot seem to us necessary or reasonable to read clauses (1) and (2) Sec. 4 as mutually exclusive. The first clause cmprises receipts falling undr he 2nd clause as well and when the facts of a case clearly bring it within the terms of the 2nd proviso, it is obviously a case which on grounds of policy the Legislature intended to exempt and it does not seem to us right to deprive the subject of this exception by holding that the receipts in British India is in the primary sense and not in the secondary sense, especially when the 2nd clause as well as the 2nd proviso speak only of accruing or arising outside British India and not also of being received in British India. There Can be nod doubt that in this case the income accrued or arose without British India and was received or brought nto British India. We would give the same answer to the argument founded on clause(3) of Sec. 42 which provides for the taxability in British India of profits or gains from the sale in british India of merchandise exported to British India from outside. Reading the clause as a whole it is evident that it refers to a person who sells goods purchased by him and not to one who sells the produce of hs own lands. It is significant that the clause deals only with profits of gain and not with income generally.
The circumstances in which the 2nd proviso came to be inserted decided on not suggest any intention to make the kind of differntiation now insisted on by the Referring Officer. Prior to 1933, it was only profits or gains of business outsideBritish India that wre taxed when brought into British India. The amending Bill of 1932 sought to amend only clause (2) of Sec. 4. The kind of income exempted by the 2nd proviso is undoubtedly foreign income and when theLegistature resolved to exempt foreign income of the particular kind dealt with in that proviso, it seems tohave ben thought sufficient to enact the exemption as a proviso to the 2nd clause which was then being amended for the very purpose of including foreign income generally. We are accordingly of opinion that the assessee in this case is entitled to claim the benefit of hte 2nd proviso to Sec. 4(2).
It remains to determine the extent of hte exemption which he assessee can claim. It was contended on his behalf that the whole of the price realised by him by the sale of theMysore coffee in Mangalore should be excluded, but is was maintained on behalf of the Referring Officer that the assessee is at best only entitled to a deduction of the value of hte coffe beans in a raw state in Mysore. The statement of the Commissioner and an affidavit of Mr. Kirkbride, Manager of Pierce Leslie and Co., set out in detail what happens to the beans between the time when they are picked and the time they are actually sold. If the process subsequent to the picking acan be regarded as in the nature of manufacture the assessee will on the analogy of the rule applicable to tea (see Killing valleey Tea Co., Ltd. v. Secretary of State, and rule 124 of the rules framed under Sec. 59 of he Act0 be entitled to deduct only the agricultural part of he income. But the affidavit states that in the case of coffee, the process is not in the nature of a manufacturing process but only a process ordinarily employed by the cultivator to render the produce fit to be taken to the market [see Sec. 2(1)(b)(ii)]. The learned counsel appearing for the assessee definitely asserted, that in respect of coffee grown on assessed lands in British India, this is the view adopted in practice by the income tax authorities and we have been shown nothing to the contrary. We have accordingly come to the conclusion that if the assessee Civil Appeal No. claim to be treated as on the same footing with one sellin coffee grown on ones own land in British India, he is entitled to exemptionin respect of the whole price realised by the sale of his coffee. Thisleads us to the consideration of the question whether exemptionudner the 2nd proviso the Sec. 4(2) is of the same scope as the exemption applicable to 'agricultural income' as defined in Sec. 2(1) of the Act.
Mr. Patanjali Sastri is certainly right in his contention that the statutory definition of agricultural income does not in terms apply to cases falling within the proviso now in question. If the definitionin the Act is one which is intended to iclude what will not otherwise be ordinarily comprehended in the meaning of hte expression agricultural income the assessee in the present case cannot claim the benefit of the full scope of he definition because it appliesonly to income derived from lands in British India. But we are inclined to agree with the learned counsel for the assessee that the statutory definition involves no artificial extension but merely embodies the significance attaching in a business sense to the word income when applied to agriculture. As pointed out by ROWLATT, J., in Back v. Daniels (1924)2 K. B. 432, if a farmer is entitled to sell his produce in the village he is equally entitled to take it to a market town and it cannot be said that he is 'commencing a new business from the time when he toook his crops fro m the farm on the way to the market.' The same principle must apply to what the may decided on to make it fit or the market unless it involves such a distinct process as to justify its being regarded as in the nature of a amanufacturing process. In the Court of Appeal, SCRUTTION, L. J., took the view that even if cultivation of land to grow produce for the purpose of sale is to be regarded as a trade the State, by its separate system of taxing land, may reasonably be taken not to have intended to deal with it was as a trade (1925, 1 K. B. at p. 543). Mr. Sastri pointed out that our conclusion would practically amount to reading hte proviso in Sec. 4 into the definitionof agricultural income when the Legislature had not (as it might well have done) included in that definition income from assessed lands in Indian States. Having regard to the mannr in which ammendements have een from time to time inserted in the Act, the argument founded on the particular place where a amendment is inserted cannot have ahte same force here as in the case of a provision which formed part of the original scheme of the Act.As we have already explained Sec. 492) might well have been thought to be the proper place for the insertion of theproviso. On the other hand we have not been shown any reason why the proviso was inserted at all and why it should have been limited to lands paying assessment to a Indian State if it was not the intention to treat the owners of such lands as on the same footing as owners of assessed lands in British India. The policy clearly was to avoid double taxation : not double taxation in the sense of paymet of income tax on two places but of taxing a person who in respect of the same subject matter has already paid a reasonably heavy land tax, whether in British India or in an Indian State.
Our answer to the question referred is that the whole income derived by the assessee by the sale in Mangalore of the produce of his coffee estates in Mysore is exempt from taxation.
The assessee will be entitled to Rs. 250 for his costs and also to refund of the deposit of Rs. 100.