1980 (11) TMI 36 - HC - Income Tax

Summary

Issues:
Whether feeding mulberry leaves to silkworms constitutes agricultural income under section 2(1)(b)(ii) of the Income-tax Act, 1961.

Analysis:
The case revolved around determining whether the process of feeding mulberry leaves to silkworms, resulting in the production of silk cocoons, qualifies as agricultural income under section 2(1)(b)(ii) of the Income-tax Act, 1961. The assessee's business involved rearing silkworms by feeding them mulberry leaves grown on their land, leading to the production of silk cocoons. The Income Tax Officer (ITO) initially assessed that only the income attributable to the cultivation of mulberry leaves constituted agricultural income, not the subsequent activities related to rearing silkworms and selling cocoons. The Assistant Commissioner (AAC), however, accepted the argument that the process of converting mulberry leaves into silk cocoons through silkworms falls under the definition of agricultural income.

The matter was then taken to the Appellate Tribunal, which concluded that the process of feeding mulberry leaves to silkworms did not meet the criteria under section 2(1)(b)(ii) to qualify as agricultural income. The Tribunal emphasized that the resulting silk cocoons did not retain the character of the original agricultural produce, mulberry leaves, and were not directly connected to agriculture or its produce. The Tribunal held that the income derived from rearing silkworms was not entitled to exemption under the specified section.

The assessee contended that the process of feeding mulberry leaves to silkworms and obtaining silk cocoons was a standard practice employed by cultivators to render the leaves marketable, thus constituting agricultural income. The assessee relied on previous court decisions where similar processes were deemed agricultural income. However, the Tribunal distinguished those cases, emphasizing that in this instance, the entire agricultural produce, mulberry leaves, was consumed in the process without retaining its original character.

Furthermore, the Supreme Court precedent highlighted that agricultural income is based on the produce itself, even if not sold but consumed. The Court established criteria for determining the process employed to make agricultural produce marketable, emphasizing that the produce must retain its original character and only undergo changes to enhance marketability. Applying these principles, the Court concluded that the process of converting mulberry leaves into silk cocoons did not meet the criteria to qualify as agricultural income under section 2(1)(b)(ii).

In summary, the Court held that feeding mulberry leaves to silkworms was not a process ordinarily employed by cultivators to make them marketable through silk cocoon production, thereby denying the assessee's claim for exemption under the specified section.