1988 (5) TMI 6 - SC - Income Tax

As per provisions of Central IT law the State Legislature has no power to impose Agricultural IT on more than 60% of the income from growing and manufacturing of Tea

Summary

Issues Involved:
1. Constitutional validity of sections 3 and 5 of the Bengal Agricultural Income-tax (Amendment) Act, 1980.
2. Legislative competence of the State Legislatures of West Bengal and Kerala to impose agricultural income-tax on income derived from the sale of tea grown and manufactured by an assessee.
3. Interpretation of "agricultural income" under Article 366(1) of the Constitution and its relation to the Indian Income-tax Acts.
4. Retrospective effect of the Bengal Agricultural Income-tax (Amendment) Act, 1980.

Issue-wise Detailed Analysis:

1. Constitutional Validity of Sections 3 and 5 of the Bengal Agricultural Income-tax (Amendment) Act, 1980:
The petitions challenged the constitutional validity of sections 3 and 5 of the Bengal Agricultural Income-tax (Amendment) Act, 1980, which omitted sub-sections (2) and (2A) of section 8 of the Bengal Agricultural Income-tax Act, 1944, with retrospective effect. The petitioners argued that this amendment sought to impose agricultural income-tax on the entire income derived from the sale of tea grown and manufactured by an assessee, thereby transgressing the constitutional limitations contained in Article 246(3) of the Constitution read with Entry 46 of List II of the Seventh Schedule.

2. Legislative Competence of the State Legislatures of West Bengal and Kerala:
The core issue was whether the respective State Legislatures had the competence to legislate regarding taxes on the income from the sale of tea grown and manufactured by an assessee beyond 60% of such income, as computed under the Indian Income-tax Act. The petitioners contended that the amendments by the State Legislatures of West Bengal and Kerala were void and of no legal effect as they exceeded the legislative competence of the states under Article 246 of the Constitution.

3. Interpretation of "Agricultural Income" under Article 366(1) of the Constitution:
Article 366(1) defines "agricultural income" as having the same meaning as in the enactments relating to Indian income-tax. The court examined whether the definitions under the Indian Income-tax Act, 1922, and the Income-tax Act, 1961, along with the relevant rules (Rule 24 of the Income-tax Rules, 1922, and Rule 8 of the Income-tax Rules, 1962) formed part of the definition of "agricultural income." The court held that the income derived from the sale of tea grown and manufactured by an assessee must be computed as business income, and only 60% of such income is deemed agricultural income, which the State Legislatures can tax.

4. Retrospective Effect of the Bengal Agricultural Income-tax (Amendment) Act, 1980:
Although the petitioners challenged the retrospective operation of the Bengal Agricultural Income-tax (Amendment) Act, 1980, the court did not find it necessary to delve into this issue in detail, given its conclusions on the other issues.

Judgment:
The court declared that the State Legislatures of West Bengal and Kerala could impose agricultural income-tax only on 60% of the income derived from the sale of tea grown and manufactured by an assessee, as computed under the Indian Income-tax Act and the relevant rules. The amendments made by the Bengal Agricultural Income-tax (Amendment) Act, 1980, and the deletion of the Explanation in the Kerala Agricultural Income-tax Act did not confer any wider power on the State Legislatures to impose taxes on agricultural income. The petitions were substantially successful, and the parties were directed to bear their own costs.