1994 (9) TMI 124 - AT - Income Tax

Summary

Issues Involved:
1. Whether processed tendu leaves should be considered as 'forest produce' under section 44AC of the Income-tax Act.
2. Applicability of section 44AC to the assessee's purchase of processed tendu leaves from Orissa Forest Corporation Ltd.
3. Interpretation of the term 'forest produce' in the context of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Whether processed tendu leaves should be considered as 'forest produce' under section 44AC of the Income-tax Act:
The assessee, a firm of tobacco merchants, contended that processed tendu leaves should not be treated as 'forest produce'. The process involved drying, binding, sorting, and grading the leaves before they were sold. The Assessing Officer disagreed, relying on a tax deduction certificate from Orissa Forest Corporation Ltd., which classified the tendu leaves as 'any other forest produce not being timber'. The CIT (Appeals) sided with the assessee, referring to the processes involved and a CBDT clarification that traders selling processed tendu leaves would not fall under section 44AC. The Tribunal upheld the CIT (Appeals)' decision, stating that processed tendu leaves could no longer be regarded as 'forest produce'.

2. Applicability of section 44AC to the assessee's purchase of processed tendu leaves from Orissa Forest Corporation Ltd.:
The Assessing Officer applied section 44AC, deeming 35% of the purchase price as profit, resulting in significant deemed profits for the assessment years 1989-90 and 1990-91. The CIT (Appeals) overruled this, noting that the processed tendu leaves were not 'forest produce' and thus not subject to section 44AC. The Tribunal agreed, emphasizing that processed tendu leaves, being altered from their natural form, should be considered commercial produce rather than forest produce. Therefore, section 44AC was not applicable.

3. Interpretation of the term 'forest produce' in the context of the Income-tax Act:
The Tribunal noted that the term 'forest produce' was not defined in the Income-tax Act, leading to ambiguity. The departmental representative argued for adopting definitions from various Forest Acts, while the assessee's representative contended that these definitions should not extend to Income-tax proceedings. The Tribunal agreed with the assessee, citing the Supreme Court decision in S. Mohan Lal v. R. Kondiah, which emphasized the need for a popular meaning. The Tribunal concluded that anything grown or found in the forest in its natural form could be considered 'forest produce'. However, once subjected to significant processing, the item becomes a commercial commodity. Applying this reasoning, the Tribunal held that processed tendu leaves were not 'forest produce' for the purposes of section 44AC.

Conclusion:
The Tribunal dismissed the revenue's appeals, affirming that the processed tendu leaves purchased by the assessee from Orissa Forest Corporation Ltd. were not 'forest produce' and thus not subject to the provisions of section 44AC of the Income-tax Act. The Tribunal emphasized the distinction between natural forest produce and items that have undergone significant processing, which alters their original form and identity.