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TMI Blog1991 (1) TMI 204X X X X Extracts X X X X X X X X Extracts X X X X ..... ll these appeals is, whether the income derived by the assessee trust could be regarded as agricultural income or could be regarded as income out of a business carried on by the assessee trust. 3. The assessee is a charitable and religious trust created in 1846 by Maharaja Gulab Singh ofJammu and KashmirState. Large tracks of land were given to this trust, which consisted of chir and pine wood trees. The pine wood trees yielded resin. The assessee collected the resin, sold it and utilised the proceeds for the purposes of the trust. That the sale proceeds were utilised for the purposes of the trust was not a point in dispute before us. The assessee regarded the income derived from the sale of this resin as agricultural income not liable to Income-tax under section 2(1A) of the Income-tax Act, 1961 whereas the department considered that this was an income derived out of a business carried on by the assessee trust and therefore under the provisions of section 11(4A) the income therefrom was liable to tax in the hands of the trust. Arguments were taken up before the Income-tax Officer and also before the Commissioner(A) as to the question whether section 11(4A) would or would not appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... categorical terms that the income derived therefrom was utilised for the objects of the trust. Nonetheless according to him even if the management of the forest was entrusted to the Government of Jammu and Kashmir on payment of royalty, still that would amount to carrying on of a business because the assessee had incurred expenditure both on manufacture of resin and maintenance of forest. Following observations made by the Assessing Officer in this context are very relevant and are reproduced below : " However it is seen that the assessee has given the forest only for management purposes to the Forest Department of the Jammu & Kashmir Govt. for which the royalty is being paid to the forest Department. The very fact that the assessee has accounted for the expenditure on the manufacturing of resin, maintenance of forests and has also taken into consideration the entire sale proceeds of resin clearly indicates that the assessee is carrying on a business of manufacturing of resin from the forests. It is immaterial whether the assessee has given the management of the forest to the Forest Department. Accordingly the income from resin to the extent of Rs. 2,06,256 is taxed in the hands o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it relevant to observe that forests lands covered by the trees of spontaneous growth could not be held to be agricultural land unless there was some evidence to show that such lands were set apart or earmarked for or linked up with agricultural purposes by their owners or occupiers. He held that the principle that was attached to lands belonged to the land was not applicable toIndia. Thus trees which stand on agriculture are not agricultural land inIndiawithin the meaning of section 2(14)(iii) of the Income-tax Act, 1961. He thus came to the conclusion that these were capital assets and the profits arising therefrom were assessable as capital gains and does not constitute as agricultural income. However, if the trees were not sold as such but they were tapped to yield resin, then the activity of tapping the pine trees for collecting resin and thereafter selling the same would be considered as commercial activity. Having held that the income derived by the assessee was not agricultural income and that for deriving that income, commercial activity was involved, he proceeded to examine what was 'business' and how the word 'business' had been judicially noticed and eventually came to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cultural income. It laid down in that case that if trees are of spontaneous growth, the income derived therefrom would be non-agricultural income but if the trees are planted or for existing trees some agricultural operations were carried out, then the income derived therefrom would cease to be non-agricultural income and becomes agricultural income because of the operations. In other words, the fact that distinguishes agricultural income from non-agriculture income, is carrying out of operations akin to agriculture like tending, manuring, pruning, laying out canals, irrigation, weeding out, protection from pests etc. etc. Since in this case admittedly expenditure was incurred by the assessee in carrying out operations apart from operations necessary to collect the resin, the income could not but be treated as agricultural income. The test laid down by the Supreme Court was either misapplied or ignored. Applying the correct test he submitted that as there was admittedly expenditure incurred on carrying out operations, which were allowed as deductions in allowing the income from the sale of resin, it is wrong on the part of the Revenue still to say that the income realised on the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the assessee to argue about the exemption and, therefore, the appeals should be decided only in favour of the Revenue. The entire argument and the trouble taken by the learned Departmental Representative before us was about the admissibility of this point. She genuinely believed that this point was not taken up before the authorities below and, therefore, out of our purview for consideration. Since she strongly felt that this point was not taken up before the Commissioner(A) and also before the Assessing Officer, we wish to dispose of this preliminary point first. 9. It is no doubt true that this point was not seen to be taken up before the Assessing Officer except in a very round about way but definite observation from his order was available as underlined by us about this matter whereby he admitted that expenditure on maintenance of forest was incurred. But it cannot be denied that the point was not discussed by the Assessing Officer in sufficient detail. However this shows that this aspect was before the Assessing Officer and he applied his mind, though in, a little manner. It cannot be said, therefore, that this point was not raised. Before the Commissioner(A) this point w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ocess ordinarily employed by a cultivator or receiver of rent-in-kind to render the produce raised or received by him fit to be taken to market ; or (iii) the sale by a cultivator or receiver of rent-in-kind of the produce raised or received by him, in respect of which no process has been performed other than a process of the nature described in paragraph (ii) of this sub-clause. (c) any income derived from any building owned and occupied by the receiver of the rent or revenue of any such land or occupied by the cultivator or the receiver of rent-in-kind, of any land with respect to which, or the produce of which, any process mentioned in paragraphs (ii) and (iii) of sub-clause (b) is carried on : Provided that-- (i) the building is on or in the immediate vicinity of the land, and is a building which the receiver of rent-in-kind, by reason of his connection with the land, requires as a dwelling house, or as a store-house, or other out-building, and (ii) the land is either assessed to land revenue inIndiaor is subject to a local rate assessed and collected by officers of the Government as such or where the land is not so assessed to land revenue or subject to a local rate, it i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or cantonments, forest lands, etc. where the land is not assessed to land revenue and is not subject to any local rate as require under the above-mentioned definition of agricultural income. Accordingly, income derived by agricultural operations on such lands is presently outside the scope of " agricultural income " and becomes liable to central income-tax. Apart from this, in several States, lands up to specified limits have been exempted from land revenue assessment. Hence income derived by the performance of agricultural operations on such land in these States would also come within the purview of central income taxation. 93. As the character of the income derived by agricultural operations remains the same whether or not the land is subject to land revenue or a local rate, it would be anomalous to subject to central income-tax such income in those cases where there is no land revenue assessment while exempting income of the same nature in other cases. With a view to removing this anomaly and providing tax relief to agriculturists who cultivate forest lands, lands in terai areas or cantonments or in States which have abolished land revenue on small holdings, the definition of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eme Court cautioned that the human labour and skill spent in the performance of the subsequent operations cannot be said to have been spent on the land itself. Thus a distinction was drawn between the basic operations and the subsequent operations. The mere performance of the subsequent operations on the produce of the land, where such products have not been raised on the land by the performance of the basic operations, would not be enough to characterise them as agricultural operations. Therefore, the necessity of the conjunction of the basic operations with the subsequent operations. Thus there should be an integrated activity in order to constitute agriculture and that the integrated activity must be performed in regard to any land. Only then the land can be said to have been used for agricultural purposes and the income derived therefrom could be said to be agricultural income derived from the land by agriculture. The Supreme Court also pointed out that agriculture comprised within its scope all basic and subsequent operations regardless of the nature of the product raised on the land. The emphasis, therefore, is not on the products raised but on carrying out of the basic and s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relate to agriculture and another part to business and in order to differentiate this part, the Income-tax Rules, particularly Rules 7 & 8 were enacted with this object. The crop is harvested may not find a market. In order to make the produce a saleable commodity, it may be necessary to perform certain processes, which will enhance the value of the produce. Even that also is considered as agricultural income. The only thing is the ascertainment of income attributable to the performance of the marketing process should have to wait till an actual sale takes place. This is decided by the Supreme Court in the case of Dooars Tea Co. Ltd. v. CAIT [1962] 44 ITR 6. The whole idea is that even though some processes have to be employed to make the commodity marketable and even though the employment of those processes will enhance the value, still the produce is to be regarded as income derived from agricultural land, which is the immediate and effective source of such income. The processes that may be employed may depend upon the commodity raised. It may be manual or it may be mechanical. Merely because machinery is used to make the product raised marketable, the character of agricultural i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch consisted of sal and piyasal trees. The forest was originally of spontaneous growth. It was in existence for over 150 years. The question arose whether the income from the sale of trees and the product was agricultural income or not. After referring to the definition of " agricultural income " and after laying down the principle as to when the income could be called agricultural income, the Supreme Court found on the facts in that case that though the forest in question was originally of spontaneous growth, since the forest was more than 150 years old, some portion of the forest must have from time to time been denuded, trees must have been completely felled down and the proprietors must have planted fresh trees and they performed operations for the purpose of nursing the trees planted by them. In respect of those trees the income would certainly be agricultural income. Having regard to the age of the trees, the Supreme Court held that all the trees could not be said to be of spontaneous growth and trees of such spontaneous growth would be negligible. It therefore held that whole of the income derived from the forest could be treated as agricultural income. Then the Supreme Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, and nurturing them thereafter, would only constitute the basic and subsequent operations as defined by the Supreme Court in the case referred to above. 14. Having regard to these facts, we are of the opinion that the income derived from resin is agricultural income and therefore entitled to exemption from the levy of tax. 15. Before we part with this matter, we would like to add a word about the application of section 11(4A) of the Income-tax Act, 1961. Though it is conceded that section 11(4A) would apply and would make this income liable to tax as if it is the income from business still under clause (b) of sub-section (4A) of section 11, the income from business even though carried on by a trust would still earn exemption if the business is carried on by an Institution wholly for charitable purposes and the work in connection with the business is mainly carried on by the beneficiaries of the Institution. In this case it is an admitted fact that assuming that it was a business carried on by the Institution, namely, the trust, was wholly for charitable purposes. There is also no dispute that the income derived from the sale of resin was applied for the purposes of the trust. T ..... X X X X Extracts X X X X X X X X Extracts X X X X
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