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TMI Blog1997 (2) TMI 496X X X X Extracts X X X X X X X X Extracts X X X X ..... all agricultural income derived from land referred to in sub-clause (b) of clause (1) of section 2 included in his total agricultural income and received by him in the previous year subject to the following allowances, namely: (1) the cost incurred by the assessee in the previous year: (i) in cultivating such land or raising livestock thereon; (ii) in performing any process contemplated in item (11) of sub-clause (b) of clause (1) of section 2 for rendering the produce of such land fit to be taken to market; (iii) in transporting such produce or livestock to market; and (iv) in maintaining agricultural implements and machinery in good repair and in providing for the upkeep of cattle for the purpose of such cultivation, process or transport: Provided that in the case of an agricultural income derived from land possessed by an individual or a Hindu undivided family and cultivated by such individual or by the members of such family with or without the aid of servants or hired labourers or of both, the allowances admissible under this clause shall, instead of such cost, be a sum equal to fifty per centum of the market value of the produce raised from such land; (2) any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d out wholly and exclusively for the purpose of deriving such agricultural income from such land; (9a) any sum of allowance computed under sub-section (2); (10) any other sum which may be prescribed. (2) Where an assessee has out of his total agricultural income, utilized any amount during the previous year for the purposes as may be specified in such industrial development scheme as may be framed by the State Government and notified in this behalf, the assessee shall be given an allowance of a sum equal to the amount, or the aggregate of the amounts so utilised, not exceeding twenty per centum of his such income, and such allowance shall be computed before the loss, if any, brought forward from the earlier year is set off under section 26: Provided that where such assessee is a firm, any association of persons or any body of individuals, such allowance shall not be considered in the computation of the income of any partner of such firm or any member of such association of persons or such body of individuals, as the case may be. 7A. Computation of agricultural income of company, firm or other association of persons. Notwithstanding anything to the contrary contained in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the proviso in question is discriminatory, arbitrary, unreasonable and unconstitutional being violative of article 14 of the Constitution of India, because it restricts the Agricultural Income-tax Officer to consider not more than fifty per cent. of the sale proceeds as cost of cultivation. In the process, it is contended, the State Legislature had laid down that a part of expenditure is to be taken into account as income , which is not permissible under entry 46 of List II of the Seventh Schedule to the Constitution of India as also under article 265. There is no basis for presuming that every individual or the Hindu undivided family earns an income equal to fifty per cent. of the sale proceeds. This is arbitrary and unreasonable. It also lacks the nexus with the object of the enactment. Reference is also made to section 7A of the Act of 1944 by which in the case of a company, a firm, or other association of persons agricultural income is to be computed in accordance with the method of accounting employed by the assessee. There is allegedly no rational or intelligible differentia in relation to the object sought to be achieved by the enactment for making a provision like th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion is founded on an intelligible differentia and is rational and reasonable being founded on practical details and a variety of factors. The proviso is, therefore, not open to attack. Respondent No. 3, had correctly computed the applicant s agricultural income as also interest was correctly charged in accordance with the provisions of law. Agricultural income-tax on agricultural income is levied on the strength of the powers under entry 46 of List II of the Seventh Schedule of the Constitution. Agricultural income has been defined in clause (1) of section 2 of the Act of 1944 in pari materia with clause (1A) of section 2 of the Incometax Act, 1961, and within the meaning of article 366(1) of the Constitution. Under the impugned proviso, a sum equal to fifty per cent. of the market value of the produce is to be deducted from agricultural income. Certain class or classes of assessees other than individuals and Hindu undivided families are, however, entitled to the cost of cultivation as laid down in clause (1) of sub-section (1) of section 7. In order to derive the benefit of allowances under section 7(1)(1), the assessees other than individuals and the Hindu undivided families a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch limits deduction of costs referred to in sub-clauses (i) to (iv) of section 7(1)(1) to only fifty per cent. of the market value of the agricultural produce, in effect seeks to treat as income an amount which is not actually an income and then to levy tax on such expenditure treating it as fictional income. The ceiling of cost to be deducted as imposed by the impugned proviso is again challenged as arbitrary and unreasonable. There is no basis for thinking that an individual or a Hindu undivided family earns an income equal to fifty per cent. of the sale proceeds. The impugned proviso, it is claimed, seeks to treat equals as unequal without any basis or justification for differential treatment. All growers of green tea leaves allegedly constitute one class irrespective of their status for the purpose of assessment. Cultivation of green tea leaves is distinct from cultivation of foodgrains or ordinary commercial crops like cotton or oil seeds which have shelf-life and can be stored or transported over long distance. There is no market place for green tea leaves. These can only be sold to a manufacturer of tea. The Income-tax Act, 1961, and the Act of 1944 both provide for separate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the State for treating something as income which actually was cost of cultivation, was not at all pressed. The bone of contention is the proviso to clause (1) of sub-section (1) of section 7 of the Act of 1944. In the said clause (1), under four heads certain costs related to cultivation incurred by the assessees are enumerated. Thereafter, the following proviso appears: Provided that in the case of an agricultural income derived from land possessed by an individual or a Hindu undivided family and cultivated by such individual or by the members of such family with or without the aid of servants or hired labourers or of both, the allowances admissible under this clause shall, instead of such cost, be a sum equal to fifty per cent. of the market value of the produce raised from such land. The contention of Mr. Bajoria, appearing on behalf of the applicant, is that while assessees other than individuals and Hindu undivided families are at liberty to prove their actual cost under the aforesaid four heads on the basis of their books of account, as will appear from section 7A, the applicant being an individual has been specifically barred from claiming deduction of actual cost on p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions 28 to 43C to the particular businesses or trades dealt with in section 44AC calls for a different consideration. There is no reason why the persons carrying on business in the particular goods specified in section 44AC are to be denied the reliefs available to others. Such denial of reliefs to specified trades, it was further held, has no nexus to the object sought to be achieved by the Legislature. Hence, to the extent the non obstante clause in section 44AC excludes the provisions of sections 28 to 43C (applicable to all assessees), the provisions are unreasonable. Mr. Bajoria drew our attention to pages 356 to 358 of the report of the case in Union of India v. A. Sanyasi Rao [1996] 219 ITR 330 (SC). It was held that it is for the Revenue to show why the normal reliefs afforded to all assessees be denied to specified traders. It should be shown to have some basis, fair and rational, for denying the reliefs to a particular trade or business. In that case, no plea was put forward by the Revenue to that effect. The court held that there was no nexus of the said denying provisions to the object sought to be achieved by the Legislature. In the circumstances, the Andhra Pradesh Hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (SC). There is no doubt that had the impugned proviso not been there below clause (1) of section 7(1) of the Act 1944, the applicant, being an individual, would be entitled to deduction of cost as enumerated in subclauses (i) to (iv) of clause (1). But, in view of the impugned proviso, he is not entitled to that. Instead of such cost, under the proviso he is entitled to deduction of a sum equal to only fifty per cent. of the market value of the produce. It may so happen that cost of cultivation under clause (1) may exceed fifty per cent. of the value of the produce, but in view of this proviso, the assessing authority cannot allow deduction of cost more than the aforesaid amount. Mr. Bajoria accepted the proposition that individuals and Hindu undivided families can be validly placed within one class, as distinct from another class consisting of other assessees including companies and firms. But his grievance was that an individual should not have been deprived of the opportunity to prove and get deduction of the actual cost of production under heads enumerated in clause (1) in the same manner as other assessees including companies and firms. He submitted that there is no nexus o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plied. The test could only be one of palpable arbitrariness applied in the context of the felt needs of the times and societal exigencies informed by experience. In Shashikant Laxman Kale v. Union of India [1990] 185 ITR 104 (SC), also it was held that one has to look beyond the ostensible classification and to the purpose of the law and apply the test of palpable arbitrariness in the context of the felt needs of the times and societal exigencies informed by experience to determine reasonableness of the classification. For this, it is first necessary to discern the true purpose or object of the impugned enactment because only with reference to that, the existence of a rational nexus of the differentia can be examined in relation to the object sought to be achieved by the enactment. On behalf of the respondents, Mr. Saha submitted that the object of the Act of 1944 is to impose tax on agricultural income. The impugned proviso laying down a presumptive ceiling on deductible cost of cultivation does not provide, in our opinion, an intelligible nexus with the aforesaid object of the enactment. Mr. Saha also submitted that in the year of enactment, it was thought (obviously by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... confined to a few individuals. The question is whether denial of the general provision for deduction of cost under clause (1) of section 7(1) to a group of assessees has a nexus to the object of the enactment. We have already seen that there is no such nexus. In view of our finding, there are two options for us. Every legal provision is presumed to be valid and constitutional. But due to the foregoing lapse, the impugned proviso may be declared unconstitutional. However, the proviso may be justified in cases of individuals and Hindu undivided families who do not maintain records of cost of cultivation or who do not engage any hired labourer or servant in the work of cultivation. The other alternative is, therefore, that the said proviso may be read down, as done in the case of A. Sanyasi Rao [1989] 178 ITR 31 (AP) on appeal in [1996] 219 ITR 330 (SC), so that if an individual or a Hindu undivided family wants to avoid the obligation of proving actual cost and to take advantage of the proviso, he or it can do so; and if any of them wants to take the burden on himself or itself to claim and establish by satisfactory proof that a certain amount has been incurred as cost under clause ..... X X X X Extracts X X X X X X X X Extracts X X X X
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