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Commissioner of Income-tax, Madras Vs. K. S. Imam Saheb. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case Number Tax Case No. 62 of 1965 (Reference No. 18 of 1965)
Reported in[1969]71ITR742(Mad)
AppellantCommissioner of Income-tax, Madras
RespondentK. S. Imam Saheb.
Cases ReferredYagappa Nadar v. Commissioner of Income
Excerpt:
- .....the account books. the assessee paid a fixed annual sum and was allowed to enjoy the fruits of the coconut trees for a stipulated period ranging from 1 to 3 years or even longer. whether the term ran continuously is not clear from the record. in a few cases there was a stipulation that the lease did not include the land. at the end of the term the assessee should deliver possession of the trees to the lessors. the typical recital is :'as this sum...has been received by me in the manner mentioned above, you shall pluck and take the yield of the coconut in the aforesaid thope, enjoy the same and deliver possession of the grove to me at the expiry of the lease.....the ground land is not subject to the lease.'in the other cases, it is doubtful whether the land was included in or excluded.....
Judgment:

VEERASWAMI J. - This reference turns on the character of the income derived by the assessee in respect of the assessment years 1958-59 and 1959-60. If it is agricultural income, it would be exempt from the charge under section 4(3)(viii) of the Income-tax Act, 1922. The revenue as well as the Tribunal have all concurred in the view that the assessee will be entitled to the exemption. At the instance of the Commissioner of Income-tax, therefore, this reference arises under section 66(1) and the question is :

'Whether, on the facts and in the circumstances of the case, the two sums of Rs. 8,962 and Rs. 8,835 are agricultural income, exempt under section 4(3)(viii) ?'

The assessee at the relevant time was a dealer in coconuts. He also took leases, the transactions have been so described, of coconut thopes from different parties. Some of the transactions were registered and the others were not, but supported by acknowledgments by the lessors. There was a third category of transaction, evident from the entries in the account books. The assessee paid a fixed annual sum and was allowed to enjoy the fruits of the coconut trees for a stipulated period ranging from 1 to 3 years or even longer. Whether the term ran continuously is not clear from the record. In a few cases there was a stipulation that the lease did not include the land. At the end of the term the assessee should deliver possession of the trees to the lessors. The typical recital is :

'As this sum...has been received by me in the manner mentioned above, you shall pluck and take the yield of the coconut in the aforesaid thope, enjoy the same and deliver possession of the grove to me at the expiry of the lease.....The ground land is not subject to the lease.'

In the other cases, it is doubtful whether the land was included in or excluded from their scope.

The Tribunals view that the income was agricultural income was based on the following reasoning. The right to cut the coconuts extended over along period, not merely a particular harvest; in view of this, the lessee must be taken to have the right to see that all future crops for the terms stipulates for accrued to him so that he could reimburse to him all payments made to the lessor; whereas the purchase of a particular lot or of a standing crop would refer to a commodity in praesenti, the taking up on a lease for a long period committed the assess in futuro; in the circumstances, the lessee had a right and indeed it was in his interest to see that the land was properly kept, well watered, tilled, pruned and fenced so that his interests may be protected. The Tribunal also relied on A. Govindaswami Vanniar v. Smt. S. Mahalakshmi Ammal as being in support of its view. It was alive to the fact that there must be some relationship between the produce sold and the land from which it was got as to entitle the assessee to claim it as produce from agriculture.

The claim for exemption had been rested on section 2(1)(a) which defines 'agricultural income' so far as is relevant to this case. This provision says that, in the Act, unless there is anything repugnant in the subject or context, 'agricultural income' means any rent or revenue derived from land which is used for agrcultural purposes, and is either assessed to land-revenue in the taxable territories or subject to a local rate assessed and collected by officers of the Government as such. Having regard to this definition, an income to be agricultural income should satisfy that it is derived from land, and land the land is used for agricultural purposes. To put it differently, there should be a nexus between income, land and agricultural operations, by which is meant something done to the land by human or mechanical agency to produce out of the land any crop, tree, plantation or other produce or product. The immediate source of the income must be land of the description or character mentioned in the definition. Do the facts in this case as to the character of the income satisfy the test We are of opinion that they do not. It is obvious that (the test that) the land should be used for agricultural purposes is satisfied. The coconut trees grown on the land are agricultural produce, resulting from agricultural operations. If it is land which is used for agricultural purposes, the next enquiry had to be whether the income is derived from such land. It is here the difficulty for the assessee arises. The contention on his behalf is that a right to exploit or cut and remove coconuts from coconut trees is an interest in immovable property because the term stipulates was over a period during which the coconut trees derived sustenance from the land, and this being the case, it is a lease of the land itself with the coconut trees and the income derived in that sense is from the land used for agricultural purposes. We are not convinced that the reasoning is correct. The very case cited for the assessee, Venugopala Pillai v. Thirunavukkarasu, brings out the distinction between a lease of land and lease of immovable property for agricultural purposes. While land may be immovable property the converse is not necssarily true. That was a case of an agreement of lease in respect of toddy yield form coconut trees, and the question the court was called upon to decide was whether in was a lease or or licence in the context of the requisite of a proper notice to quilt under section 106 of the Transfer of Property Act. The officiating Chief Justice and Yahya Ali J. held that it was not a lease of and because they found on a plain reading of the document that the rights created thereunder were only (i) the right to enjoy the toddy yield from the trees and (ii) the right to enter upon the land for the said purpose. In their view, the transaction amounted to a licence so far as the land was concerned, a licence for the licence to use it for the purpose of exercising the right to enjoy the toddy yield from the trees. Having said that, the learned judges proceeded to hold, applying the principle of Marshall v. Green, that the transaction was in any case a lease of immovable property used for agricultural purposes, and, therefore, a notice to quit was necessary under section 106 of the Transfer of Property Act. Reference was made in that case to the definition of a 'lease', 'licence' and of 'immovable property' as defined by section 3(35) of the General Clauses Act.

In Marshall v. Green, the statement of the law which was quoted by the learned judges is this :

'The principle of these decisions appears to be this, that wherever at the time of the contract it is contemplated that the purchaser should derive a benefit from the further growth of the thing sold, from further vegetation and from the nutriment to be afforded by the land, the contract is to be considered as for an interest in land; but where the process of vegetation is over, or the parties agree that the thing sold shall be immediately with-drawn from the land, the land is to be considered as a mere warehouse of the thing sold, and the contract is for goods.'

Applying this test, as was done in the case relied on by the assessee, his learned counsel urges that, if the transaction is regarded as a lease of immovable property for agricultural purposes, inasmuch as thereby an interest in immovable property is created, it should follow that the income is from the land used for agricultural purposes. But, as we said, there is a distinction between an interest in imovable property and an interest in land. Apart from that, the answer to the question under reference eventually would revolve round whether the income had been derived as agricultural income.

The Privy Council in Commissioner of Income-tax v. Kamakshya Narayan Singh explained the scope of the word 'derived' in section 2(1)(a) :

'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.'

Now the genealogy is that there was here a land, that it was used for agricultural purposes, namely, raising of coconut trees, and leasing out, so to speak, of the right to cut and remove the usufruct therefrom. Can it be said that the source of the income of the assessee is the land To our minds, it does not appear to be so. The immediate source is, as we are inclined to think, the coconut trees. Assuming that counsel for the assessee is right in his contention that the transaction in his favour amounted to a lease of an interest in immovable property, it does not flow from it that the income for that reason is derived from the land on which the coconut tress stand. In order to constitute agricultural income there should be a clear nexus between such income, land and agricultural operations. In this case, the last two are present but not the first. In our view the nexus between the income and the land is missing. The connection of the income is with the trees themselves without reference to the land or agricultural operations.

On that view, it would be unnecessary to refer in any detail to two of the cases cited for the revenue. The first of them, Yagappa Nadar v. Commissioner of Income-tax, a decision of a Full Bench of this court, held that income derived from toddy was agricultural income within the meaning of section 2(1) of the Income-tax Act, but only when it was received by the actual cultivator, whether as owner or lessee of the land on which the trees grow. On the facts there, the court made the observation :

'No interest in the land had been transferred here and it would appearnd that what the petitioner had obtained is a mere licence to tap the trees and draw the juice. If that be so, the mere fact that he has to water the trees (and that is not proved to be the case) shows only that the watering is one of the conditions of his licence and not an act whereby the agricultural produce had been raised, for that was raised before the obtained his licence.'

The actual decision, therefore, in that case was that the income was not agricultural in character. That, if we may say so with respect supports the view we have taken of the facts in the instant case.

Commissioner of Income-tax v. Maddi Venkatasubbayya, relied on for the revenue, may, however, not be quite apposite. For, in that case, as rightly sought to be distinguished for the assessee, the right which was the subject-matter of the agreement related only to cut and remove tobacco which was ripe for harvest and which was cultivated by another, and the transaction did not spread over a period. That means that the interest created by the agreement would not even amount to an interest in immovable property.

We answer the question under reference in favour of the revenue with costs. Counsels fee Rs. 250.


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