1954 (10) TMI 2 - SC - Income Tax

Whether 60% of the dividend amounting to ₹ 2,750 received by the assessee from the two tea companies is agricultural income and as such exempt under section 4(3) (viii) of the Act? Held that - It is true that the agricultural process renders 60% of the profits from land which is used for agricultural purposes exempt from tax in the hands of the company but can it be said that when such company decides to distribute its profits to the shareholders and declares the dividends to be allocated to them, such dividends in the hands of the shareholders also partake of the character of revenue derived from land which is used for agricultural purposes? Such a position if accepted would extend the scope of the vital words revenue derived from land beyond its legitimate limits. The policy of the Act as gathered from the various sub-clauses of section 2(1) appears to be to exempt agricultural income from the purview of the Income-tax Act. The object appears to be not to subject to tax either the actual tiller of the soil or any other person getting land cultivated by others for deriving benefit therefrom, but to say that the benefit intended to be conferred upon this class of persons should extend to those into whosoever hands that revenue falls, however remote the receiver of such revenue may be, is hardly warranted. Appeal dismissed.

Issues Involved:
1. Whether 60% of the dividend received by the assessee from two tea companies is agricultural income and exempt under section 4(3)(viii) of the Indian Income-tax Act.

Detailed Analysis:

Issue 1: Whether 60% of the dividend received by the assessee from two tea companies is agricultural income and exempt under section 4(3)(viii) of the Indian Income-tax Act.

The appeal raises a significant point of law under the Indian Income-tax Act. The core question referred to the High Court was whether 60% of the dividend received by the assessee from two tea companies is agricultural income and therefore exempt under section 4(3)(viii) of the Act. The High Court, through separate but concurring judgments, answered the question in the negative.

The appellant, a shareholder in two tea companies, received dividends aggregating Rs. 2,750. The companies engaged in growing and manufacturing tea, and under Rule 24 of the Indian Income-tax Rules, 1922, 40% of the income from the sale of tea was deemed taxable, while 60% was exempt as agricultural income. The appellant contended that 60% of the dividend income should be considered agricultural income and thus exempt from tax. However, the Revenue argued that dividend income is not agricultural income and is fully taxable.

The Income-tax Officer, the Appellate Assistant Commissioner, and the Income-tax Appellate Tribunal all held that the entire dividend income was taxable. The High Court upheld this view but granted leave to appeal to the Supreme Court.

The Supreme Court examined the relevant provisions of the Income-tax Act. According to section 2(1)(a), "agricultural income" means any rent or revenue derived from land used for agricultural purposes. Section 4(3)(viii) exempts agricultural income from tax. The appellant needed to prove that the dividend was "revenue derived from land used for agricultural purposes."

The Court noted that while 60% of the tea companies' profits were exempt as agricultural income, this did not mean that dividends distributed to shareholders also retained this character. Dividends are derived from investments in company shares and are based on the contractual relationship between the company and the shareholder, not from any direct association with agricultural land.

The Court emphasized that agricultural income must have a direct and immediate connection with the land. Dividends, however, are derived from the company's profits and are distributed based on the company's decision. The shareholder's right is to participate in the company's profits, not to claim a direct share of the agricultural income.

The Court rejected the analogy between shareholders and partners, noting that a company is a separate legal entity distinct from its shareholders. The dividend is a share of the company's profits, not a direct revenue from agricultural land.

The Court also referred to several precedents, including decisions by the Privy Council, which supported the view that income must have a direct connection with agricultural land to be considered agricultural income. The Court dismissed the appeal, concluding that the dividend income received by the appellant was fully taxable and not exempt as agricultural income.

Conclusion:
The Supreme Court upheld the High Court's decision, ruling that the dividend income received by the appellant from the tea companies is not agricultural income and is fully taxable. The appeal was dismissed with costs.

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