1962 (11) TMI 44 - SC - VAT and Sales Tax

Praying for a declaration that the Agricultural Income-tax (Amendment) Act, 1961 enacted by the Kerala State Legislature, is null and void - that the State s power to tax income from tea to agricultural income-tax is limited to taking 60% of the income computed for the purpose of the Indian Income-tax Act as if it were income derived from business and for the issue of appropriate orders to the respondents, viz., the State of Kerala. Held that - Appeal allowed. Declare that Explanation 2 to section 5 of the Agricultural Income-tax Act added by the Amendment Act does not cover the expenses incurred in the upkeep or maintenance of immature tea plants from which no income has been derived during an accounting year and that the agricultural income derived from tea plantations will be computed in accordance with the provisions of the Income-tax Act and the Income tax Rules - writ be issued to the respondents restraining them, their agents and servants, from enforcing or acting upon the provisions of Explanation 2 to section 5 of the Agricultural Income-tax Act against the Karimtharuvi Tea Estates Ltd., Kottayam, viz., petitioner No. 1.

Issues Involved:
1. Competence of the State Legislature to enact the Agricultural Income-tax (Amendment) Act, 1961.
2. Validity of Explanation 2 to Section 5 of the Agricultural Income-tax Act, 1950.
3. Consistency of Explanation 2 with the definition of "agricultural income" under the Indian Income-tax Act.
4. Discrimination and contravention of Article 14 of the Constitution.

Issue-wise Analysis:

1. Competence of the State Legislature to Enact the Agricultural Income-tax (Amendment) Act, 1961:
The petitioners challenged the validity of the Agricultural Income-tax (Amendment) Act, 1961, arguing that it was not within the competence of the State Legislature. The court noted that Entry 46, List II, of the Seventh Schedule to the Constitution relates to taxes on agricultural income, and Article 246(3) empowers the State Legislature to enact laws regarding these taxes. Article 366 defines "agricultural income" for the purposes of the Constitution as per the Indian Income-tax Act. Therefore, the State Legislature can legislate on agricultural income as defined in the Indian Income-tax Act.

2. Validity of Explanation 2 to Section 5 of the Agricultural Income-tax Act, 1950:
Explanation 2 to Section 5, added by the Amendment Act, states that no deduction shall be allowed for expenses incurred in the upkeep and maintenance of immature plants from which no agricultural income has been derived. The court found that this provision was not consistent with the definition of "agricultural income" in the Income-tax Act and Rule 24 of the Income-tax Rules, which allows for such deductions. The court held that the State Legislature could not add to the amount of agricultural income by disallowing deductions permitted under the Income-tax Act.

3. Consistency of Explanation 2 with the Definition of "Agricultural Income" under the Indian Income-tax Act:
The court emphasized that "agricultural income" must be defined as per the Indian Income-tax Act, including the rules made thereunder. Rule 24 of the Income-tax Rules provides that income from tea grown and manufactured by the seller is computed as if it were income derived from business, with 40% deemed taxable and 60% considered agricultural income. The court held that Explanation 2 to Section 5, if applied to tea plantations, would create an agricultural income not contemplated by the Income-tax Act and the Constitution, rendering it void.

4. Discrimination and Contravention of Article 14 of the Constitution:
The petitioners argued that Explanation 2 to Section 5 was discriminatory and violated Article 14 of the Constitution. However, the court found it unnecessary to address this contention, as the primary issue was resolved by holding that Explanation 2 does not apply to the computation of agricultural income from tea plantations.

Conclusion:
The court declared that Explanation 2 to Section 5 of the Agricultural Income-tax Act does not cover expenses incurred in the upkeep or maintenance of immature tea plants from which no income has been derived during an accounting year. The agricultural income from tea plantations must be computed in accordance with the provisions of the Indian Income-tax Act and the Income-tax Rules. A writ was issued restraining the respondents from enforcing Explanation 2 against the petitioner company. The petitions were allowed, and the respondents were directed to pay the costs of the petitioner company.

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