1970 (3) TMI 32 - HC - Income Tax

Assessee produced sugar cane and used it as raw material in his Sugar industry - sugarcane grown by the assessee became its agricultural income, when it is used as a raw material. Therefore, the assessee was entitled to the deduction u/r 7 of the Income-tax Rules, 1962 - it is not necessary that the agricultural produce grown by the assessee should be sold - agricultural produce grown by the assessee would constitute agricultural income within the meaning of section 2(1) of Income-tax Act, 1961

Issues Involved:
1. Whether the income of the petitioner-company comprises partly of agricultural income and partly of profits and gains of business.
2. Applicability of Rule 7 of the Income-tax Rules, 1962.
3. Validity of the notice issued by the Appellate Assistant Commissioner.
4. Jurisdiction of the Appellate Assistant Commissioner.
5. Constitutionality of imposing tax on agricultural income.

Issue-wise Detailed Analysis:

1. Whether the income of the petitioner-company comprises partly of agricultural income and partly of profits and gains of business:
The petitioner-company, Nizam Sugar Factory Ltd., claimed an exemption for agricultural income under Rule 7 of the Income-tax Rules, 1962. The Income-tax Officer allowed a partial exemption, leading to an appeal by the petitioner. The court examined whether the income derived from sugarcane, grown on the company's farm and used as raw material in its sugar factory, should be considered partly agricultural income and partly business income. The court referenced Rule 7, which outlines the method for determining income when it comprises both agricultural and business income. The court concluded that the sugarcane produced and used as raw material by the petitioner-company constitutes agricultural income, which must be excluded from taxable income under section 10(1) of the Income-tax Act, 1961.

2. Applicability of Rule 7 of the Income-tax Rules, 1962:
Rule 7 applies to cases where agricultural produce is used as raw material in the business carried on by the assessee. The court emphasized that Rule 7 does not require the agricultural produce to be sold to qualify for exemption. The rule specifically addresses situations where the agricultural produce is utilized within the business, thereby necessitating the calculation of its market value for exemption purposes. The court rejected the department's contention that Rule 7 is inapplicable without a sale, stating that such an interpretation would defeat the rule's purpose.

3. Validity of the notice issued by the Appellate Assistant Commissioner:
The Appellate Assistant Commissioner issued a notice proposing to include certain amounts in the taxable income of the petitioner-company. The petitioner argued that this notice was issued without jurisdiction and violated Article 246(1) of the Constitution of India. The court held that the Appellate Assistant Commissioner had formed a prima facie opinion without proper consideration of the petitioner's entitlement to exemption under Rule 7. The court found the notice to be without jurisdiction and restrained further proceedings based on it.

4. Jurisdiction of the Appellate Assistant Commissioner:
The court examined whether the Appellate Assistant Commissioner had the jurisdiction to issue the impugned notice. It was determined that the Commissioner acted without jurisdiction by proposing to include agricultural income in the taxable income of the petitioner-company. The court emphasized that agricultural income, as defined under section 2(1) of the Income-tax Act, must be excluded from taxable income, and any attempt to include it would be unconstitutional.

5. Constitutionality of imposing tax on agricultural income:
The petitioner contended that taxing agricultural income violates Article 246(1) of the Constitution, which reserves the power to tax agricultural income to the states. The court agreed, stating that including agricultural income in the taxable income of the petitioner-company would be unconstitutional. The court referenced prior Supreme Court decisions, affirming that agricultural produce used in business constitutes agricultural income, which is exempt from Union taxation.

Conclusion:
The court concluded that the income of the petitioner-company comprises partly of agricultural income and partly of business income. Rule 7 of the Income-tax Rules, 1962, applies to determine the market value of agricultural produce used as raw material. The notice issued by the Appellate Assistant Commissioner was found to be without jurisdiction and unconstitutional. The writ petition was allowed, restraining further action based on the impugned notice, and the petitioner was awarded costs.

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