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TMI Blog2001 (9) TMI 74X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions 115-0(1) and 115-0(3) of the Income-tax Act, 1961., are partially ultra vires the Constitution as questioned by the writ petitioner or not. It appears that the writ petitioner No.1 has been carrying on business of growing tea leaves by its agricultural process and manufacturing black tea out of the same and selling the same, and also manufacturing and selling chemicals and fertilizers, plywood, etc. This apart petitioner No. 1 has also business of warehousing and real estate development. The petitioner-company is limited by shares. Therefore, the shareholders of the petitioner-company are paid dividend out of the profits earned by petitioner No. 1. Dr. Debi Prosad Pal, the learned senior advocate, appearing in support of the writ petition, submits that in the case of a tea company whose income is derived from sale of tea grown and manufactured it is not the entirety of the profits or income which is liable to income-tax, and by virtue of rule 8 of the Income-tax Rules, 1962 the income derived from sale of tea grown and manufactured by the seller is computed as if it is income derived from business and of the income so computed 40 per cent. is to be deemed as non-agricu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ution not upon Parliament, and trenches upon the legislative field which is exclusively within the jurisdiction of the State Legislature. He submits that it is well settled principle that where the business of a company has two sources of income, one subjected to tax and the other not, one is entitled to assume and deem that the company has paid the money which it ought to pay according to the most businesslike way of appropriating expenses. Even though it had not been done, in fact by any separate allocation of money, one still was entitled to treat the money as having been paid out of the fund which was favourable to the company. In support of this submission, he has relied on the following decisions: (i) CIT v. Ashoka Charity Trust [1982] 135 ITR 556 (Cal); (ii) Indian Explosives Ltd. v. CIT [1984] 147 ITR 392 (Cal); (iii) CIT v. Jayashree Charity Trust [1986] 159 ITR 280 (Cal); (iv) East India Pharmaceutical Works Ltd. v. CIT [1997] 224 ITR 627 (SC); and (v) CIT v. Silk and Art Silk Mills Association Ltd. [1990] 182 ITR 38 (Bom). Dr. Pal further contends that the provision of section 115-0 is applicable in general but applicability thereof in the case of tea gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not really on the dividend income of the shareholders. The incidence of tax under the aforesaid section is actually on the profits of the company, which the company distributes by way of dividends. He submits that merely because the levy attaches on the happening of a subsequent event, the nature and character of the levy does not change. Therefore, he submits that the liability to pay tax under section 115-0 of the Act arises only at the time when a company declares or distributes dividend to its shareholders, the nature and character of the tax, namely, that the same is imposed on the profits of the company, does not change or get altered in any manner. In support of his submission, he has relied on a decision of the Supreme Court in Hotel Balaji v. State of Andhra Pradesh [1993] 88 STC 98; AIR 1993 SC 1048. Mr. Agarwal, learned advocate, appearing for the Revenue, submits that section 115-0 is intra vires and the same is to be applied just after ascertaining the profit of the business but before the application of rule 8 of the Income-tax Rules, 1962. He contends that additional. income-tax has been levied not on any income derived from the agricultural operation but it is on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e amount of tax so paid. (5) No deduction under any other provision of this Act shall be allowed to the company or a shareholder in respect of the amount which has been charged to tax under sub-section (1) or the tax thereon." It will appear from a plain reading of the aforesaid section that by the aforesaid law additional income-tax is sought to be imposed on any amount declared, distributed or paid by a domestic company by way of dividends out of current or accumulated profits. I do not think there can be any controversy as regards payment of tax from and out of the income of tea growers and manufacturers after computation of the income in the manner of rule 8 of the Income-tax Rules, 1962. It has now become settled law that the entire income of the tea growers and manufacturers is not taxable under the Income-tax Act rather 40 per cent. of the total income derived by this assessee is taxable under the Income-tax Act and the balance 60 per cent. thereof is treated under the law as being agricultural income. Therefore, any Central law providing for payment of tax out of the agricultural income is unconstitutional as the same cannot be subject under Union List of the Seventh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the tea grower and/or manufacturer, then the position will be different, as it will tantamount to realisation of tax on agricultural income to the extent of 60 per cent. thereof. Dr. Pal wants me to accept that there is no difference between the head of the source of income, viz., between the dividend and the income of the petitioner, as the profit is being distributed out of the income of the writ petitioner which is essentially agricultural income to the extent of 60 per cent., so it is not chargeable or taxable under the Income-tax Act as Parliament cannot legislate under the Constitution for realisation of tax out of the agricultural income to the extent as above in the case of composite one. I cannot accept the argument of Dr. Pal on this score. In my view the dividend stands on a different footing from that of the income of the tea company so far as taxability is concerned. The dividend is payable to the shareholders under the Companies Act, as well as, contractual relationship between the company and the shareholders. The source of payment of dividend is the share capital investment primarily. However, the source of payment of the dividend may be secondarily the profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the meaning of the definition in section 2(1)(a) of the Act. It seems to us that in this case the source of income is clearly the arrangement arrived at in 1837, and, therefore, it is not agricultural income as defined in the Act." In this case going by the words of section 115-0 it cannot be held that the said section is ultra vires on the ground of incompetence of the Legislature, yet while making an indepth enquiry if it is found the dividend payable or paid out of the profit of the tea growing and manufacturing company is an agricultural income then certainly this section has to be held ultra vires so far as it relates to 60 per cent. of the profit of the company. It would be apposite here to reproduce the definition of "agricultural income" in the Income-tax Act, 1961. "Section 2. (1A) 'agricultural income' means- (a) any rent or revenue derived from land which is situated in India and is used for agricultural purposes ; (b) any income derived from such land by- (i) agriculture ; or (ii) the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render the produce raised or recei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the employees of the petitioner's company cannot be brought under the income-tax payability net. Such an analogy is not only far fetched but revolting also. The decision of the Supreme Court in Hotel Balaji v. State of Andhra Pradesh [1993] 88 STC 98; AIR 1993 SC 1048, 1078, does not apply in this case. In this Supreme Court decision it was sought to establish that purchase tax imposed under the concerned Sales Tax Act was not sales tax, so the State Legislature is not competent to impose purchase tax and in this context the Supreme Court held that because the levy attaches on the happening of a subsequent event, the nature and character of the levy does not change. Under such circumstances, I cannot accept the argument of Dr. Pal. All judgments cited by him are of no use at all. The decision in CIT v. Ashoka Charity Trust [1982] 135 ITR 556 (Cal), relied on by Dr. Pal is not applicable in this case. In that case a certain expenditure incurred by a charitable trust which enjoyed exemption from payment tax received from charity, out of the composite income comprising contribution received from both charitable and non-charitable institution, was allowed deduction, holding the s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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