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Commissioner of Income-tax Vs. Sutton and Sons Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 67 of 1971
Judge
Reported in[1981]127ITR57(Cal)
ActsIncome Tax Act, 1961 - Section 2(14)
AppellantCommissioner of Income-tax
RespondentSutton and Sons Ltd.
Appellant AdvocateSuhas Sen and ;Ajit Kr. Sengupta, Advs.
Respondent AdvocateD. Pal and ;J. Shah, Advs.
Cases ReferredPanadai Pathan v. Ramasami Chetti
Excerpt:
- .....though sine qua non for a land to be considered as agricultural land, did not by itself make a land agricultural land. it was necessary, according to the learned advocate for the revenue, to examine the nature of the purpose for which those operations were carried out. reading the aforesaid decision in detail we do not find any warrant that the supreme court laid down that in considering whether a land in question is agricultural land or not, even in spite of the fact that agricultural operations are carried on on the land, it was necessary further to examine for what purpose those operations were carried out. as we have noticed before, in this connection, it is important to note the significant difference between 'capital asset' under the 1922 act and a capital asset so far as.....
Judgment:

Sabyasachi Mukharji, J.

1. In this reference under Section 256(2) of the I.T. Act, 1961, the following question has been referred to this court as directed by this court:

'Whether, on the facts and in the circumstances of the case, the land of the assessee at Tollygunj, which had been sold by the assessee, was agricultural land and fell outside the scope of the meaning of the words 'capital asset' in Section 2(14) of the I.T. Act, 1961, and the excess realisation on the sale of the said land was not chargeable to capital gain?'

2. The assessment year involved is 1963-64 for which the relevant accounting year ended on 31st May, 1962. The assessee is a Sterling company incorporated in the United Kingdom and has branches in India. The business of the assessee is that of growing vegetables and flower seeds and selling the same. The assessee-company's head office in India is situated in Calcutta while it has farms and depots in Bangalore, Ranchi and Kashmir. The assessee owned a plot of land in Tollygunj in the suburbs of Calcutta measuring about 2.83 acress. This plot of land was utilised as a trial ground where, according to the ITO, samples of seeds purchased by the assessee for re-sale were sown so that a record of the resultant crop could be maintained. This was done by the assessee-company with a view to keeping control over the quality of the seeds. During the year relevant for the present assessment year the said plot of land was sold by the assessee to Goenka Tea & Timber Pvt. Ltd. for a sum of Rs. 1,62,000. In the original return of income filed by the assessee, the assessee-company had shown the capital gain for Rs. 98,405 in respect of sale of the said plot of land. Subsequently, however, the assessee modified its stand and urged that there was no capital gain involved in the sale of the said plot of land because, according to the assessee, the land in question did not constitute any capital asset within the meaning of the definition of 'capital asset' in Section 2(14) of the I.T. Act, 1961. The ITO rejected the assessee's claim and assessed the capital gains as shown by the assessee at Rs. 98,405.

3. The assessee being aggrieved by the order preferred an appeal before the AAC. The AAC was of the opinion that the said plot of land in Tolly gunj at Calcutta was an agricultural land and was, therefore, outside the purview of the definition of 'capital asset' in Section 2(14) of the I.T. Act, 1961. He, however, held that a portion of the gains made by the assessee-company should be attributed to such assets as office room, store room, mali's quarters, tubewells and boundry walls, etc. He, therefore, estimated the capital gains at Rs. 10,000, which amount alone, in is opinion, could be attributed to the asset in the shape of the said structures on the said plot of land.

4. The revenue being aggrieved filed further appeal to the Tribunal. The Tribunal found that the assessee-company being a Sterling company was engaged in the business of purchase and sale of vegetables and flower seeds and in its gardens in Bangalore, Ranchi and Kashmir it had cultivated and grown, for the purpose of sale, vegetable and flower seeds. The assessee, however, owned a separate plot of land at Tollygunj in the suburbs of Calcutta which the assessee-company was using as an experimental ground for the purpose of testing the quality of the seeds and ascertaining if these Seeds conformed to the requisite standard. According to the Tribunal, the assessee used this plot of land for experimental or trial cultivation carrying out operations such as preparing the land, manuring, tilling and sowing vegetable and flower seeds, etc. The expenses incurred in this connection year after year were being claimed as an expenditure and allowed in the assessment of the company, it was stated by the departmental representative before the Tribunal, on the ground that such expenses were treated as testing laboratory charges in the course of the business of the assessee and incurred in the cultivation and growing of seeds at the farms at Ranchi, Bangalore and Kashmir as well as the sale proceeds of the produce thereof were excluded from the assessment on the ground of such income being agricultural. Thereafter, after discussing the facts, as mentioned hereinbefore, and the orders and the contentions of the parties, the Tribunal was of the opinion that the land where agricultural operation was carried on was agricultural land. The Tribunal found as a fact that the land in question was actually used for cultivation and agricultural operation, though on a limited experimental scale. The Tribunal was of the opinion that the nature of the operations carried out and not the purpose for which the operations were carried out was the determining factor, and as the nature of the operations carried out, according to the well-settled definition, was agricultural, it was held that the said land was not a capital asset under Section 2(14) of the I.T. Act, 1961. On these facts, as directed by this court, the Tribunal has referred the question indicated before.

5. Before we deal with the rival contentions it would be appropriate to refer to the meaning of agricultural land and agricultural income. Under Section 2(1) of the I.T. Act, 1961, as it stood at the relevant time, agricultural income meant any rent or revenue derived from land which is used for agricultural purposes and is either assessed to land revenue in India or is subject to a local rate assessed and collected by officers of the Govt. of India as such. Section 2(14), Clause (iii), defines agricultural land in India. Section 2(14) deals with the definition of capital asset. It may also be interesting in this connection to bear in mind that under the Indian I.T. Act, 1922, Section 2(4)(a), Clause (iii), was as follows :

'Any land from which income derived is agricultural income.'

6. There is a significant departure in the definition of capital asset in the 1961 Act, as it stood at the relevant time, so far as agricultural land is concerned. The capital asset excluded under the 1961 Act agricultural land in India but under the 1922 Act it was not all agricultural lands which were excluded from the definition of capital asset but only the lands, the income derived from which was agricultural. So the purpose for which the agriculture was carried on was a relevant factor under the 1922 Act. In the definition under which we have to consider, whether the land in question was agricultural land or not, all that was required to see was whether the land in question was an agricultural land in India. Similar expression has been used in other statutes like the W.T. Act, E.D. Act and other allied statutes. The expression 'agricultural land' has come up for consideration by different courts, the first observation about which, we must remind ourselves, is in the decision of the Supreme Court in the case of CIT v. Raja Benoy Kumar Sahas Roy : [1957]32ITR466(SC) , where it was held that agriculture in its primary sense meant the cultivation of the field and was restricted to the cultivation of the land in the strict sense of the term, meaning thereby tilling of the land, sowing of seeds, planting and similar operations on the land. These were basic operations and required the expenditure of human skill and labour upon the land itself. In that decision, the Supreme Court was really considering whether sal trees out of which timber was extracted in a forest land was agricultural land. The Supreme Court observed that these operations which the agriculturist had to resort to and which were absolutely necessary for the purpose of effectively raising produce from the land, operations which were to be performed after the produce sprouted from the land, that is to say, weeding, digging the soil around the growth, removal of undesirable undergrowth and all operations which fostered the growth and preservation of the same not only from insects and pests but also rendering the produce fit for the market would all be agricultural operations when taken in conjunction with the basic operations. The human labour and skill spent in the performance of these subsequent operations could not be said to have been spent on the land itself. The mere performance of these subsequent operations on the products of the land, where such products had not been raised on the land by the performance of the basic operations, would not be enough to characterise these as agricultural operations; in order to invest these lands with the character of agricultural operations, these subsequent operations must necessarily be in conjunction with and in continuation of the basic operations which were the effective cause of the products being raised from the land. The subsequent operations divorced from the basic operations could not constitute by themselves agricultural operations. Only if this integrated activity which constituted the agriculture was undertaken and performed in regard to any land could that land be said to have been used for agricultural purpose and the income derived therefrom could be said to be agricultural income derived from the land by agriculture under Section 2(1) of the Indian I.T. Act, 1922. Agriculture comprised, according to the Supreme Court, within its scope the basic as well as subsequent operations described above regardless of the nature of the products raised on the land. The products might be grain or vegetable or fruits which were necessary for the sustenance of human beings, including plantation and groves, or grass or pasture for the consumption of beasts or articles of luxury, such as betel, coffee, tea, spices, tobacco or commercial crops like cotton, flax, jute, hemp, indigo. All these are products raised from the land, but the term 'agriculture' could not be confined merely to the production of grain and food products for human beings and beasts; it must be understood as comprising all the products of the land which had some utility either for consumption or for trade and commerce and would also include forest products such as timber and sal and piya sal trees, casuarina plantation, tendu leaves and horra nuts. There was no warrant at all for extending the term 'agriculture' to all activities which had some relation to the land or were in any way connected with the land, for, the term 'agriculture' could not be dissociated from, the primary significance which was that of cultivation of the land. The extension of the term 'agriculture' to denote such activities as breeding and rearing livestock, dairy farming, butter and cheese-making, and poultry farming was an unwarranted distortion of the term. In this connection, our attention was drawn to the observations of the Supreme Court at page 474 of the report, where the Supreme Court had referred to the observations of Bhashyam Ayyangar J. in the case of Murugesa Chetti v. Chinnathambi Goundan ILR [1901] 24 Mad 421, which gave the following dictionary meaning of agriculture as culled out from the Century Dictionary and the Anderson's Dictionary of Law:

''The primary meaning of agriculture is the cultivation of the ground (The Century Dictionary) and in its general sense, it is the cultivation of the ground for the purpose of procuring vegetables and fruits for the use of man and beast including gardening or horticulture and the raising or feeding of cattle and other stock (Anderson's Dictionary of Law). Its less general and more ordinary signification is the cultivation with the plough and in large areas in order to raise food for man and beast (The Century Dictionary) or, in other words, ' that species of cultivation which is intended to raise grain and other field crops for man and beast'. (Anderson's Dictionary of Law). Horticulture, which denotes the cultivation of gardens or orchards, is a species of agriculture in its primary and more general sense.'

7. Ramesam J., in Panadai Pathan v. Ramasami Chetti ILR [1922] 45 Mad 710 referred to the following connotation of 'agriculture ':

'Wharton's Law Lexicon adopts the definition of 'agriculture' in 8th Edn., VII, c. 36, as including 'horticulture, forestry and the use of land for any purpose of husbandry, etc.' In 10 Edn., VII, c. 8, s. 41, it wasdefined so as to include the use of land as 'meadow or pasture land or orchard or osier or woodland, or for market gardens, nursery grounds or allotments, etc.' In 57 and 58 Vict. c. 30, Section 22, the term 'agricultural property' was defined so as to include agricultural land, pasture and woodland, etc.'

These are the various meanings ascribed to the term 'agriculture' in various dictionaries and it is significant to note that the term has been used both in the narrow sense of the cultivation of the field and the wider sense of comprising all activities in relation to the land including horticulture, forestry, breeding and rearing of live-stock, dairying, butter and cheese making, husbandry, etc.'

8. Reliance was also placed on the observations of the Supreme Court at page 505 of the report : [1957]32ITR466(SC) , which were as follows :

'In order that an income derived by the assessee should fall within the definition of agricultural income two conditions are necessary to be satisfied and they are : (i) that the land from which it is derived should be used for agricultural purposes and is either assessed to land revenue in the taxable territories or is subject to local rates assessed and collected by the officers of the Government as such'; and (ii) that the income should be derived from such land by agriculture or by one or the other of the operations described in Clauses (ii) and (iii) of Section 2(1)(b) of the Indian Income-tax Act.

It was at one time thought that the assessment of the land to land revenue in the taxable territories was intended to exempt the income derived from that land from liability for payment of income-tax altogether and that theory was based on the assumption that an assessee who was subject to payment of land revenue should not further be subjected to the payment of income-tax, because if he was so subjected he would be liable to pay double taxation.'

9. Our attention was also drawn to the observations at page 507 of the report : [1957]32ITR466(SC) , where the Supreme Court had observed that they had to consider as to when it could be said that the land was used for agricultural purposes or agricultural operations were performed on it. Agriculture was the basic idea underlying the expression 'agricultural purposes' and 'agricultural operations' and it was pertinent, therefore, to enquire as to what was the connotation of the 'term agriculture'. Thereafter, the Supreme Court referred to various other definitions and observed as we have indicated before. Learned advocate for the revenue emphasised before us that in this decision the Supreme Court was emphasising the basic operations that were needed for a land to be used for agricultural purposes. But, he submitted that the performance of these basic operations, though sine qua non for a land to be considered as agricultural land, did not by itself make a land agricultural land. It was necessary, according to the learned advocate for the revenue, to examine the nature of the purpose for which those operations were carried out. Reading the aforesaid decision in detail we do not find any warrant that the Supreme Court laid down that in considering whether a land in question is agricultural land or not, even in spite of the fact that agricultural operations are carried on on the land, it was necessary further to examine for what purpose those operations were carried out. As we have noticed before, in this connection, it is important to note the significant difference between 'capital asset' under the 1922 Act and a capital asset so far as agricultural land is concerned in the 1961 Act. Agriculture, according to us, is cultivation which is signified by the word 'cultura', that is, culture and 'ager' means land. Thus, culture of land means cultivation of land. If a land is used for that purpose, irrespective of what happens to the resultant of the produce, in our opinion, it would merit to be considered an agricultural land. This view is fortified by the observations of the Supreme Court in the case of CWT v. Officef-in-charge, Paigah : [1976]10ITR133(SC) , where at page 136 of the report, the Supreme Court, after referring to the decision in the case of Raja Benoy Kumar Sahas Roy's case : [1957]32ITR466(SC) , observed that the question before the Supreme Court was whether income from forest lands derived from sal and piya sal 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 contended that 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. It is true that this case was not a direct authority upon what was agricultural land. Nevertheless, according to the Supreme Court, it went a long way in helping them to decide what could be agricultural land. The Supreme Court observed that this must be land which could be said to be either actually used or ordinarily used or meant to be used for agricultural purposes. In other words, according to the Supreme Court, agricultural land must have a connection with an agricultural user or purpose. It was on the nature of the user that the very large number of definitions and authorities discussed by the Supreme Court have direct bearing. Learned advocate for the revenue, however, drew our attention to the observations of the Supreme Court, where the Supreme Court did not fully approve of the test laid down by the Division Bench decision of the Andhra Pradesh High Court in the case of Smt. Manyam Meenakshamma : [1967]63ITR534(AP) , Our attention was also drawn to the observations of the Division Bench decision of the Gujaran High Court in the case of Smt. Chandravati Almaram Patel v. CIT : [1978]114ITR302(Guj) , where the Gujarat High Court reiterated that all the cumulative factors should be taken into consideration. It appears to us from the aforesaid decisions and the tests that the question whether the land in question is agricultural land or not is a question of fact to be determined by the cumulative effect of all the relevant factors. But the basic factor to be taken into consideration is whether the land is such where agricultural operations are carried on or are capable of being carried on. We have noticed what are the tests laid down by the Supreme Court to judge as to what would constitute agricultural operation. Undoubtedly, in the instant case, the land in question was used for agricultural purposes because there were agricultural operations, there was cultivation of the land and sowing of seeds. The purpose of this cultivation does not, in view of the definition of capital asset under the 1961 Act, in any way affect the question whether the land in question is agricultural land or not. The user or the potentiality of use is a relevant factor but the purpose for which such nature of activity is carried on is of no relevance. If that is the position, then, in view of the facts found by the Tribunal, in our opinion, the Tribunal came to a correct conclusion and the question must be answered in the affirmative and in favour of the assessec.

10. In the facts and circumstances of this case, there will be no order as tocosts.

Sudhindra Mohan Guha, J.

11. I agree.


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