Raja Bejoy Singh Dudhuria vs The Commissioner Of Income-Tax

On the death of his father in 1894 the appellant succeeded to the family ancestral estate. His
stepmother, who had survived his father, subsequently brought a suit for maintenance against him in
the High Court at Calcutta. The suit was compromised and a decree was by consent pronounced
directing the appellant to make a monthly payment of Rs. 1,100 to his stepmother, which he has since
regularly done. It was not disputed that the lady's maintenance was a legal liability of the Raja [the
appellant] arising by reason of the fact that the Raja is in possession of his ancestral estate, that it is
payable out of such estate and that this Court had declared that the maintenance was a charge thereon
in the hands of the Raja.

CIT vs Raja Benoy Kumar Sahas Roy 1957 AIR 768, 1958 SCR 101

The question for decision in this appeal by the Commissioner of Income-tax was whether a sum of Rs.
51,978 shown by the assessee in his return as income from his forest land was agricultural income
within the meaning of S. 2(1) Of the Indian Income tax Act and was as such exempt from taxation
under S.4(3)(viii) of the Act. The forest was of spontaneous growth, 150 years old, and consisted of sal
and piyasal trees. It was in parts denuded of trees from time to time by destructive elements and the
assessee had to plant fresh trees in those parts. Considerable amount of human labour and skill had to
be applied year after year for maintaining the 'forest, protecting the offshoots from the stumps of the
trees that had been cut and sold and in reviving its denuded parts by fresh plantation. The staff
employed by the assessee performed such operations as pruning, weeding, felling, clearing, cutting
of channels, guarding the trees and sowing seeds by digging the soil in the denuded areas. The
Income-tax Officer rejected-the assessee's claim of exemption and added a sum of Rs. 34,430 to the
assessable income, allowing a sum of Rs. 17,548 as expenditure. The Assistant Commissioner of
Income-tax confirmed the assessment. The Appellate Tribunal held that the sowing of seeds were few
and far between and the income, derived as it was from jungle products, was not agricultural income
within the meaning of the Act. The High Court took a contrary view, held that tillage of the soil was
not essential, and the income was agricultural income as human labour and skill had been expended on
the land itself and answered the question in favour of the assessee. No attempt was, however, made by
the Income-tax Authorities to ascertain the income actually derived from the trees planted by the
assessee, nor were any materials placed on the record from which its exact amount could be ascertained,
but having regard to the magnitude of the expenditure shown by the assessee as against the total
income this Court held that a substantial portion of it must have been derived from the trees planted by
the assessee.
Held, that the income actually derived from the trees planted by the assessee was agricultural
income within the meaning of 2(1) of the Indian Income-tax Act and no attempt having been made
to ascertain its exact amount and a fresh enquiry being undesirable after such a long lapse of time, the
appeal must be dismissed.
The term 'agriculture' in S. 2(1)(b)(i) of the Indian Income-tax Act connotes the entire and integrated
activity of an agriculturist performed on the land in order to raise its produce and consists of such
basic and essential operations, requiring human skill and labour on the land itself, as the tilling of the
soil, sowing of the seeds, planting and similar operations on the land and such other subsequent
operations, performed after the produce sprouts from the land, as weeding, digging of the soil
around the growth, removal of undesirable under-growths, tending, pruning, cutting, harvesting and
marketing. But these subsequent operations, if unconnected with the basic operations, cannot by
themselves constitute agriculture. It is only when the land is subjected to such integrated activity, that: It
can be said to be used for ,agricultural purpose' and its income called agricultural income within the
meaning of the Act.
Case-law discussed.
Whatever is produced by such agriculture must be an agricultural product and the ambit of the term
'agriculture' cannot be confined merely to the production of grain and food for men and cattle but must
extend to all products of the land that have some utility either for consumption or trade and commerce.
Fruit and vegetable plantations, groves, pastures, articles of luxury such as betel, coffee, tea,
spices, tobacco etc. or commercial crops like cotton, flax, jute, hemp, indigo etc. as also forest
products such as timber, sal and Piyasal trees, Casuarina plantations, tendu leaves, horranuts etc., can
come within its ambit.
Such an extended meaning of the term 'agriculture' and its processes and products can be tenable only
where there is cultivation, which means the basic operations, and can never be dissociated from them.
There is, therefore, no warrant for its further extension so as to include activities which are in some way
connected with or dependent on land, such as breeding and rearing of livestock, dairy-farming, butter
and cheese making and poultry farming.
Although human labour and skill are required both in the performance of the basic as well as the
subsequent operations, it is only in the case of the basic operations alone that such skill and labour can
be said to have been spent on the land itself, and this distinction becomes important where they are
disjointed and do not form an integrated activity, as in the case of products of land that are of
spontaneous growth where human skill and labour are spent merely in fostering the growth,
preservation and regeneration of such products.
Judicial opinion is unanimous that products which grow wild on the land or are of spontaneous growth
and do not involve any human skill or labour on the land, and all that the assessee has to perform in
respect of them is only to collect them for consumption and marketing, are not products of agriculture
and the income derived from them is not agricultural income within the meaning Of S. 2(1) Of
the Act. When, however, the assessee performs subsequent operations on these products of land, the
nature of those operations will have to be determined in the light of the principles enunciated above.
Held further, that there is no basis for the argument that the demarcation of agriculture and
forestry as separate heads of legislation in Entries 14 and 19 of List 11 of the Seventh Schedule to the
 Constitution has the effect of making them mutually exclusive. Income from forestry coming within
the definition of agricultural income' contained in S. 2(1) of the Indian Income-tax Act will be
agricultural income under Entry 46 and thus fall within the purview of that Act.
COMMISSIONER OF INCOME-TAX BIHAR AND ORISSA v. MAHARAJADHIRAJ OF DARBHANGA: A
moneylender lent money on a “zarpeshgi lease and usufructuary mortgage” of agricultural
lands under which he was put in possession with the general powers and obligations of an
owner to manage the estate, collect rents, pay the Government revenue and taxes and to
exercise all powers in relation to raiyats that an owner might exercise and upon terms that after
deducting from a gross estimated rental the estimated costs of management and a sum (thika
rent) which was to be credited towards discharge of the debt, he was to take the balance (thika
profits). On the question whether the thika profits were agricultural income, not assessable
under the Act, or income from a money-lending business:—

Held, that the thika profits were agricultural income, not assessable under the Act. Agricultural
income is altogether excluded from the Act, howsoever and by whomsoever it may be
received. The exemption is conferred indelibly on a particular kind of income and does not
depend on the character of the recipient, thus contrasting with the exemption conferred on the
“income of local authorities.”

The Premier Construction Co. Ltd. v The Commissioner of Income-Tax ILR 1946 Bom 68

Indian Income-tax Act (XI of 1922), ss. 2(1), 4(3) (VIII)—Portion of income of a company
derived from agricultural sources—Commission payable to managing agents on the
profits of the company—Whether any portion of the Commission received by the
managing agents deemed agricultural income and exempt from income-tax.
The assessee company were the managing agents of Messrs Marsland Price and Co., Ltd.,
which carried oninter alia the business of manufacturing sugar from sugarcane. The sugarcane
used for manufacturing sugar was partly grown on the company's farms and partly bought from
outside. A part of its income was thus derived from agricultural sources and was exempted
from income-tax under s. 4(3)(viii) of the Income-tax Act as agricultural income within the
meaning of s. 2(1) of the Act.
Under the managing agency agreement the assessees were entitled to “A commission at
the rate of ten per cent per annum on the annual net profits of the said company after making
all proper allowances and deductions from revenue for working expenses chargeable against
profits but without making any deduction for depreciation or in respect of any amount carried to
reserve or sinking fund or any payment on account of super-tax or any deduction for
expenditure on capital account provided that such commission shall not in any year amount to
a less sum than rupees ten thousand”.
The assessees contended that a part of the managing agency commission which they
received was from the agricultural activities of the principal company and that such part was
agricultural income in their hands and was exempt from taxation under s. 4(3)(viii) of the Act.
 Held, negativing the contention of the assessees, that (1) the agreement for remuneration was
not an agreement for participation in profits between the shareholders and the managing
agents and that what the assessees were entitled to receive in the event of the principal
company making profits was not the payment of a share in the profits simpliciter but a
remuneration for services, which deductible before the profits divisible among the shareholders
were ascertained.
(2) On a true construction of the clause in question, no portion of the agricultural income of
the principal company was payable to the assessees as remuneration for services rendered for
managing the affairs of the company, a part only of whose business was agriculture and that
the agreement had nothing whatever to do with the income earned by the company from
agricultural sources.

In that case (which is known as the Durbhanga case) a loan was advanced on the usufructuary
mortgage of certain agricultural properties for a period of fifteen years. The mortgagee was put
in possession and after allowing a certain amount as tika rent to the mortgagor, he was
allowed to take the balance of the profits which the mortgagee appropriated towards interest
and the excess for principal. It was contended on behalf of the taxing authorities that the
receipt by the mortgagee lost the character of agricultural income, because the mortgagee was
doing moneylending business and the receipts should be considered, as falling under the head
“Business” under s. 6. This contention was rejected because of the peculiar position the
mortgagee held under the mortgage deed. The following passage, taken from the judgment of
the Chief Justice, was emphasized in the judgment of Lord Macmillan, who decided the issue
against
the taxing authorities. The learned Chief Justice observed as follows (p. 307):—

“The mortgagee lessee was to be in possession of both properties, and, in his relation
to the cultivators of the soil he stood in the position of landlord dealing directly with them
and collecting the rents. He had, moreover, to pay the Government revenue, casses and
taxes and his name was registered in the land registration department. He alone was able
to sue for rent whether current or arrears; to sue for enhancement or for ejectment and was
able to settle lands with raiyats and tenants in all the properties; in fact he was in a position
to take all proceedings which the mortgagor would have been able to take in the ordinary
course [as] if the lands leased and mortgaged had remained in her khas possession.”
Sakarlal Naranlal VersusThe Commissioner of Income - tax

The assessee is an individual and he holds certain agricultural ???. In or about 1952 a friend of the
assessee suggested to him the idea of growing a vegetable product commonly called “Galka”, the
botanical name being “Luffa pentandra” and the assessee accordingly obtained Galka seeds from
abroad and after preparing the lands for cultivation, raised Galkas on the lands in 1952. Now the
kind of Galkas grown by the assessee was not an indigenous kind but was a kind grown fairly widely in
Formosa, Japan and other places. After the Galkas were fully grown, they were removed from the
plants and the assessee then subjected them to a process for preparing what are called Loofahs. The
process consisted of various steps taken in the following order: (1) tapping dry Galkas for taking but
the seeds; (2) deskinning them; (3) giving them an acetic acid bath; (4) boiling them in salicylic acid; (5)
drying them in the sun; (6) putting them to cold water for two days; and (7) lastly pressing them for the
purpose of packing. The final product which emerges as a result of subjecting Galkas ??? this process
is known as Looiah. It is a fibrous product in the nature of a pad and we are told that it is commonly
used in the manufacture of Shoes. The foreign Loofahs are about 16″ in length and 4″ in width. The
Loofahs prepared by the assessee were, however, only 5″ in length and 2½″ in width. The assessee
tried to market these Loofahs abroad and sent them to England on consignment basis for sale, but it
was found that it was not possible to sell them. The position was that even if they were sold at the
lowest possible rate, the Assesses would have been liable to pay purchase tax and that would have
caused considerable loss to the assessee. The Loofahs were, therefore, re-Shipped to India. The result
was that loss was suffered by the assessee in this transaction. The assessee claimed a loss of Rs.
1,85,932.8.0 in the assessment for the assessment year 1954–55 and Similar losses were also claimed
in the assessments for the subsequent assessment years 1955–56 and 1956–57.

the accounts in respect of the activities relating to the cultivation of Galkas were entered by the
assessee in the books of account of a business carried on by him in the name of Sakarlal Sons and
Company. After the Galkas were raised and removed from the plants, they were transferred by the
assessee to the books of account of another business carried on by the assessee in the
name of Minaxi Trading Company at a particular value determined by the assessee and it was Minaxi
Trading Company which processed the Galkas and exported Loofahs prepared out of them. The
losses set out above were, therefore, suffered by the business of Minaxi Trading Company and they
were obviously arrived at on the basis of the cost of the Galkas being taken at the value at which they
were shown to have been taken over from Sakarlal Sons and Company. These losses were claimed by
the assessee as business losses arising out of non-agricultural operations but the Revenue contended
that they were agricultural losses and were, therefore, not liable to be taken into account in computing
the income of the assessee from business

The question whether the process employed by the assessee for the purpose of preparing Loofahs
out of Galkas with a view to exporting and selling Loofahs abroad satisfies the requirements of Section
2(1)(b)(11) becomes material because if the process is covered by Section 2(1)(b)(11), the
whole of the loss suffered by the assessee would be agricultural loss and would by reason of Section
4(3)(viii) be liable to be excluded in computing the income of the assessee. Section 4(3)(viii) provides
that agricultural income shall not be included in the total income of an assessee.

This Section refers to income derived from land which means arising from land and denotes income the
immediate and effective cause of which is land. It is divided, into three clauses. Clause (i) in terms
takes in income derived from agricultural land by agriculture which would include agricultural produce
as held by the Supreme Court in Dooars Tea Co. Ltd. v . Commr. of Income - tax , (1962) 44 ITR 6 : (AIR
1962 SC 186). Clause (ii) includes cases of income derived from the performance of any process
ordinarily employed by a cultivator to render the produce fit to be taken to market. The reason behind
this provision is not far to seek and it really provides a clue to its interpretation. A cultivator raises
produce from the land with a view to selling it. If there is a market for the produce as grown, there is no
difficulty; the cultivator can in such a case sell the produce without anything more and he need not
perform any process on the produce. But If there is no market for the produce as grown and it can be
sold only by performing some process on it, the cultivator would have to perform such process in order
to he able to sell the produce: otherwise the produce would not be marketable and the raising of it
would be, futile, Where such is the case, the Legislature says that, though strictly the agricultural
operations cease when the produce is raised and removed from the soil, the performance of the
process should be regarded as a continuation of the agricultural operations since the process has to
be performed by the cultivator for the purpose of enabling him to sell the produce which he otherwise
cannot. It is because the performance of the process is essential in order to render the produce
marketable which it is otherwise not, that the law regards it as part of the agricultural operations carried
on by the cultivator. This reason also explains the other requirement of the Section, namely, that the
process must be such as is ordinarily employed by cultivators to make the produce saleable. The
performance of the process Is assimilated to agricultural operations and must, therefore, like
agricultural operations stricto sensu, Be an operation which is ordinarily done by cultivators. If some
special or unusual process is employed by a cultivator which is not ordinarily employed by cultivators to
render the produce marketable, it cannot be regarded as part of the agricultural operations and the
benefit of the income being treated as agricultural income would not be available to the cultivator. It will
be clear from this discussion that there are two conditions which are required to be fulfilled before a
process performed by the assessee can be said to be a process within the meaning of Section
2(1)(b)(11). The first condition is that the process must be necessary to render the produce fit to be
taken to market and that involves the proposition that there must be no market for the produce in its raw
state. If there is already a market for the produce in its raw state, then the process cannot be said to be
a process employed to render the produce fit to be taken to market or, in other words, to make it
marketable. That which is already marketable does not need any process to render it marketable. The
second condition is that the process must he one which is ordinarily employed by a cultivator of the
produce to render it marketable. But even if these two conditions are satisfied, it is not sufficient to
attract the applicability of Section 2(1)(b)(ii). There is an additional requirement which must be satisfied
and that requirement springs directly from the language and the reason of the enactment. It follows as
a necessary corollary from what is stated above that even where the produce is subjected to a process-
ordinarily employed by cultivators to render it fit to be taken to market, the produce must not change its
original character. The cultivator is permitted to subject the produce to a process in order to make it
marketable and what is ultimately markketed must, therefore, be that produce. The character of the
produce must not be altered as a result of the process. Of course when we say this we must make it
clear that there may be changes brought about in the produce for the purpose of making the produce
marketable, but those changes must not amount to altering the original character of the produce.
Vide Dooars Tea Company's Case, (1962) 44 ITR 6 : (AIR 1962 SC 186)

Pana High Court in In re, Bhikanpur Sugar Concern, AIR 1919 Pat 260. The question which arose in
this case was whether income derived from sale of sugar manufactured from sugarcane grown by the
assesses on its lands was agricultural income within the meaning of Section 2(1)(b) of the Income -
tax Act, 1918, which was in identical terms with Section. 2(1)(b) of the Income - tax Act, 1922. The
assessee contended that the income was agricultural income, but a Full Bench of the Patna High Court
consisting of three Judges held that it was not, on the ground that the process employed by the
assessee for manufacturing sugar was not a process ordinarily employed by cultivators of sugarcane
for rendering it fit for marketing. Dawson-Miller, C.J said that the market of the vast
majority of cultivators of sugarcane was the sugar factory or the country mill and they did not
manufacture sugar out of it in order to make it marketable and that the process employed by the
assessee was, therefore, not a process ordinarily employed by cultivators so as to bring the case within
Section 2(1)(b)(ii).

Calcutta High Court in Killing Valley Tea Co. Ltd. v . Secy. of State, AIR 1921 Cal 40. The
assessee in this case grew green leaf tea in a tea garden owned by it and manufactured tea by
performing a process on green leaves plucked from the tea garden. In its assessment
to income - tax , the assessee contended that the entire income from the sale of manufactured
tea was agricultural income within the meaning of Section 2(1)(b)(ii) of the Income - tax Act,
1918. The Calcutta High Court, however, held, that though the green leaf from the tea plant
was not a marketable commodity for immediate use as an article of food, it was certainly “a
marketable commodity to be manufactured by people who possess the requisite machinery
into tea fit for human consumption” and the manufacturing process could not, therefore,
properly be said to be employed to render the tea leaves fit to be taken to market as required
by the Section. This decision, therefore, proceeded on the basis that if there is a market for the
produce grown by the assessee and despite that, some process is performed on it, such
process cannot be said to be a process to render the produce fit to be taken to market so as to
attract the applicability of Section 2(1)(b)(ii).