2017 (8) TMI 384 - HC - Income Tax

Agricultural income or not - turnkey contract of plantation - to create and develop plantations, rock gardens etc. for companies/institutions - splitting the income derived from the turnkey contract of plantation in two different stages - income received at the second stage - interest in land - executors of trust - Held that - Executor had a right to receive remuneration for management of the trust and its properties. The Assessee s contention was that the income received by him is agricultural income was negatived by the Apex Court in Maharajadhiraj Sir Kameshwar Singh .vs. CIT 1960 (10) TMI 5 - SUPREME Court as it held that he had no interest in the land and what the Executor received was the salary/remuneration to take care of the properties of the trust. The aforesaid decision is sought to be distinguished by the appellant on the ground that the appellant is deriving its income from actually cultivating the land. The income received is for agricultural activity and for no other activity. This distinction does not take note of the fact that the activity carried out by the appellant would not decide whether the remuneration received is agricultural income or not, but whether the income is derived from land. For any income to be classifiable as agricultural income, it has primarily to be derived from land In the present facts, no agricultural income is derived by the appellant from the land. It receives consideration for providing Services under the contract dated 23.7.1999. For providing Services relatable to agricultural operations is still not income derived from the land. The words derived from would mean direct linkage/immediate source of income and not an indirect source of income. - Decided in favour of revenue. Income fall under Section 2(1A)(b)(ii) - agricultural income - nature of income - Held that - So far as activity carried out at Stage-II is concerned, there is no evidence on record to indicate that taking care of the plants after they have been transplanted on the land owned by the WCL would be an activity ordinarily employed by a cultivator in taking care of the plants to render it to be fit to be taken to the market. On a bare reading of subsection, the burden would be upon the appellant to show that it is a cultivator and similar activities are being carried out by cultivators or receiver on rent in kind and this activity of taking care of plants at Stage-II is to render the produce fit to be taken to the market. Therefore, in the present facts, even if one assumes that the appellant is a cultivator, yet, in absence of any evidence on record that the activity carried out by it at Stage-II is ordinarily carried out by a cultivator to render the produce fit to be taken to the market. Therefore, the income cannot fall under Section 2(1A)(b)(ii) of the Act. We note that for Section 2(1A)(b)(iii) of the Act to apply the income should be derived from land by the sale of agricultural produce. In this case, admittedly, the appellant/asseessee has not sold any agricultural produce even if one assumes agricultural produce has derived from the the land of WCL at stage II. The consideration received cannot be classified as agricultural income under 2(i)(a)(iii) of the Act. The income received by the appellant is for rendering of Service and not for carrying out of operations as listed in Section 2(1A)(b)(ii) or (iii) of the Act.- Decided in favour of revenue.

Summary

Issues:
1. Whether the ITAT and the Authorities below were right in splitting the income derived from the turnkey contract of plantation into two different stages to determine whether such income is from agricultural operations.
2. Whether the ITAT and the Authorities below erred in holding that the income derived by the appellant from the turnkey contract of plantation is not agricultural income as defined under Section 2(1A)(b)(ii) and (iii) of the Income Tax Act, 1961.

Analysis:

Issue 1: Splitting Income Derived from Turnkey Contract of Plantation

The appellant, a company wholly owned by the Government of Maharashtra, engaged in turnkey plantation activities, contended that the income derived from such activities should be considered agricultural income and thus not subject to income tax under the Income Tax Act, 1961. The Tribunal split the appellant's activities into two stages:

- Stage I: The appellant sows seeds and develops plants on its own land. This stage was considered agricultural, and the income derived was classified as agricultural income.
- Stage II: The appellant transplants the plants to the land owned by the client (e.g., WCL) and maintains them for 2-3 years. This stage was considered non-agricultural as the appellant had no interest in the land, and the income was derived from providing services.

The Tribunal's bifurcation was based on the fact that the appellant's activities at Stage II were not directly derived from the land but from the service contract. The appellant argued that the entire operation should be considered agricultural, citing the Supreme Court's decision in CIT vs. Raja Benoy Kumar Sahas Roy. However, the court noted that the operations at Stage II were distinct and could be carried out by another agency, thus justifying the split.

Issue 2: Classification of Income as Agricultural Income

The appellant argued that the income derived from Stage II should also be classified as agricultural income under Section 2(1A)(b)(ii) and (iii) of the Act. The court examined the definition of agricultural income under Section 2(1A) and noted that it is a restrictive definition. For income to be classified as agricultural, it must be derived directly from land used for agricultural purposes.

- Section 2(1A)(b)(ii): The court found no evidence that the activities at Stage II (taking care of transplanted plants) were ordinarily employed by a cultivator to render produce marketable. Thus, the income could not be classified under this section.
- Section 2(1A)(b)(iii): The court noted that the appellant did not sell any agricultural produce derived from the land of WCL. The income was derived from providing services, not from the sale of agricultural produce.

The court also referenced several precedents, including Premier Construction Co. vs. CIT and Maharajadhiraj Sir Kameshwar Singh vs. CIT, which supported the view that income derived from services related to agricultural operations does not qualify as agricultural income.

Conclusion:

The court concluded that the Tribunal was correct in splitting the income into two stages and that the income derived from Stage II could not be classified as agricultural income. The appeals for Assessment Years 1998-99 and 1999-2000 were dismissed, with no order as to costs.