Papaya Farms (P) Ltd. vs Deputy Commissioner of Income Tax

Prabha Sridevan, J.—The following questions arise for consideration in these above tax case appeals:

(1) Whether the Tribunal was right in upholding the reassessment made u/s 147 of the Act for the asst. yrs. 1993-94 and 1994-95 ?

(2) Whether the Tribunal was right in upholding the validity of reassessment made u/s 147 of the Act for the asst. yrs. 1993-94 and 1994-95 when

the mandatory notice u/s 143(2) had not been issued within the time prescribed ?

(3) Whether the Tribunal was right in holding that the income earned by the Assessee is not agricultural income but income from business ?

(4) Whether the Tribunal was right in not considering the grounds of appeal questioning the validity of the estimate of income u/s 44AD for the asst.

yrs. 1996-97 and 1997-98 ?

These cases relate to the asst. yrs. 1993-94 to 1998-99. The questions are identical. The Appellant claims that it is engaged in growing and

maintenance of teak farms. The Assessee admitted the total income for the relevant years and claimed that it was exempt as agricultural income. As

against the returns filed, intimation and reassessment was made u/s 147 of the IT Act, 1961. The Assessee filed a petition u/s 154 of the Act.

The case of the Department was that they came into possession of the information, subsequent to the rectification of the assessment, that the

Assessee''s claims were factually incorrect. The Assessee had entered into agreements with the owners of lands pursuant to which they were also

put into possession of the same. M/s Sterling Tree Magnum (India) Ltd. (""STM"", in short), a company engaged in the business of growing and

selling teak, introduced a scheme promising its investors specified return from the rearing of teak trees. The Assessee agreed to earmark the lands

in its possession for the purpose of the scheme. It also agreed to plant and grow the saplings in accordance with the know-how and guidance of

STM and the irrigation facilities provided by STMIL. The trees would be inspected by STM. STM would appropriate the profits and the

Assessee had no right to create any encumbrance on the said lands. In return for this, STM agreed to give (a) compensation for non-utilisation at

an agreed rate; (b) cultivation and planting expenses; (c) maintenance charges: and (d) balance maintenance charges. The Assessee then entered

into another agreement with M/s West Range Farms (P) Ltd. (""WRF"" in short), which is admittedly a sister-concern of STM. By this agreement,

the Assessee shifted the entire responsibility of growing and maintaining the trees to WRF. The Assessee agreed to pay an agreed amount to WRF

towards maintenance charges. WRF had to Honour the commitments under the Assessee''s contract with STM. The Assessee treated the resultant

surplus arrived at by deducting the amounts paid to WRF from the amounts received from STM as agricultural income.

The AO treated the non-utilisation charges as licence fees, maintenance charges as remuneration paid by STM and assessed them as business

income. On appeal, the CIT(A) agreed to the factual findings. He also upheld the reopening on the ground that it was not because of change in

opinion as alleged but because of inaccurate particulars furnished deliberately which came on record later. The Tribunal confirmed this view and

rejected the appeal as without merit.

The learned Counsel for the Appellant focused his submissions only on the issue whether the income was agricultural in nature. He admitted that

the Assessee had no expertise in teak planting. It was clearly understood by all the parties that the stipulations of STM would be complied with

only by WRF. But the fact is indisputable that the lands were used for agricultural operations; they were in the Assessee''s possession and the

income was derived there from. Therefore Section 2(1A) would clearly apply. Learned Counsel read out the agreements between the parties. He

said that it cannot be denied that maintenance charges and non-utilisation charges would come under agricultural income. He relied on

Commissioner of Income Tax, West Bengal, Calcutta Vs. Raja Benoy Kumar Sahas Roy, . He also submitted that it was no one''s case that the

agreements were not genuine.

The learned standing counsel appearing for the Department would support the impugned decision. According to him, the nomenclature of the

receipt cannot clinch the issue, but only the actual nature of the receipt.

The Assessee claimed that they ""are doing agricultural activities in our own lands and cultivating seasonal and long-term crops like dhal, soya,

vegetables, teak etc."" The factual finding is that the Assessee had not grown long-term or seasonal crops like dhal, soya and vegetables. This is not

disputed. So the finding that the Assessee had furnished incorrect particulars stands proved. Therefore, on the basis of the above concurrent

factual findings, the reopening was justified.

The actual fact was that, it was only because of the diligence of the AO that, in the words of the CIT(A), he had ""ferreted out relevant

information on ownership of lands, growing and maintenance of teak saplings"". The Assessee did not own the lands but the land owners have put

them in possession of the lands. Learned Counsel for the Assessee admitted that the Assessee does not have the expertise or the experience to

grow or maintain teak. What we can cull out from this is that even at the time when the agreement was entered into between STM and the

Assessee, the understanding was that, what the Assessee had to do under the agreement will actually be done by WRF, which is a sister-concern

of STM.

Section 2(1A) of the IT Act, 1961 reads as follows:

In this Act, unless the context otherwise requires,--

(1) advance tax'' means the advance tax payable in accordance with the provisions of Chapter XVII-C;

(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 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 para (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 paras (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 the rent or revenue or the cultivator or 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 outbuilding, and

(ii) the land is either assessed to land revenue in India or 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 is not situated--

(A) in any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area

committee, town area committee, town committee or by any other name) or a cantonment board and which has a population of not less than ten

thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year; or

(B) in any area within such distance, not being more than eight kilometers, from the local limits of any municipality or cantonment board referred to

in item (A), as the Central Government may, having regard to the extent of, and scope for, urbanisation of that area and other relevant

considerations, specify in this behalf by notification in the Official Gazette.

Explanation 1.--For the removal of doubts, it is hereby declared that revenue derived from land shall not include and shall be deemed never to

have included any income arising from the transfer of any land referred to in item (a) or item (b) of Sub-clause (iii) of Clause (14) of this section;

Explanation 2.--For the removal of doubts, it is hereby declared that income derived from any building or land referred to in Sub-clause (e) arising

from the use of such building or land for any purpose (including letting for residential purpose or for the purpose of any business or profession)

other than agriculture falling under Sub-clause (a) or Sub-clause (b) shall not be agricultural income.

The following Expln. 3 to Clause (1A) shall be inserted by the Finance Act, 2008, w.e.f. 1st April, 2009:

Explanation 3. -For the purposes of this clause, any income derived from saplings or seedlings grown in a nursery shall be deemed to be

agricultural income.

The income that is referred to is not derived from any building. Therefore, Section 2(1A)(c) does not apply. It is also not the Assessee''s claim that

the income has been derived from the land in any of the modes specified in Section 2(1A)(b). Therefore, we necessarily have to look at Section

2(1A)(a) and whether it was derived from agricultural purpose. In fact, it is the Assessee''s case that it should be held as rent/revenue derived from

the lands, which means, according to the Assessee, the income derived would fall u/s 2(1A)(b). The authorities below had rejected the case of the

Assessee that he was the owner of the land and also that the income is agricultural income.

In this context, learned Counsel for the Assessee referred to Commissioner of Income Tax, Bombay etc. Vs. M/s. Podar Cement Pvt. Ltd.

etc., , where with regard to income from house property, the Supreme Court held that having regard to the object of the Act, namely, ""to tax the

income"", ""owner"" is a person who is entitled to receive income from the property in his own right and the requirement of registration of sale deed is

not warranted. In Warwick Estate Syndicate and Kesaria Nilgiri Hills Tea Plantations Vs. State of Tamil Nadu, a Full Bench of this Court held

that, ""while deciding a question whether it is a prerequisite or a condition precedent for a firm to own or hold property to get assessed under the

Act in the capacity of a registered or unregistered firm, held that anyone falling within the definition of ""person"" who receives the income from the

land, which income is taxable, what is required is receipt of agricultural income from the land within the State and it is not necessary to hold or own

the land"". In M/s Mysore Minerals Limited, M.G. Road, Bangalore Vs. The Commissioners of Income Tax, Karnataka, Bangalore, the Supreme

Court held that, ""anyone in possession of a property in his own title exercising such dominion over the property as would enable others being

excluded there from and having right to use and occupy the property in his own right would be the owner of building for the purpose of Section

32(1), though a formal deed of title may not have been executed and registered, and he would be entitled to depreciation thereon."" Learned

Counsel also relied on a decision of the Tribunal. Chennai ''B'' Bench made in [Premier Farms (P) Ltd. v. Dy. CIT ITA No. 1147 of 1999 etc., dt.

30th Dec, 2003, where with regard to another Assessee who had entered into identical agreements with STM, but had passed on that duty to one

Sastha Pharms as in the instant case where the Assessee has passed on the duty to WRF, the Tribunal held that non-utilisation charges is rent

received by the Assessee from agricultural land; the amounts received for cultivation and maintenance charges is not an agricultural income.

A copy of the agreement has been produced before us. The agreement of the Assessee with STM contains inter alia the following items:

(a) Assessee is the absolute owner of the agricultural lands;

(b) STM is engaged in the business of growing and selling teak trees and has entered into ""thousands of agreements"" with investors wherein STM

has undertaken to plant, grow and nurture teak saplings: and

(c) STM has approached Assessee for planting of teak saplings in the manner required by STM with inputs of STM and to grant a licence to STM

to cut and remove fully grown teak trees.

The Assessee has agreed to plant accordingly and the consideration for the agreement is Rs. 41,59,000 and the breakup is:

(i) Rs. 2,000 per acre per year as advance for 20 years as compensation towards non-utilisation of the scheduled property for purposes other than

those mentioned in Clause 10;

(ii) Cultivation and planting expenses of Rs. 10,000 per acre for 20 years; and

(iii) Rs. 2,500 per acre towards maintenance charges.

Thereafter, the Assessee entered into an agreement with WRF, admittedly a sister company of STM. A comparison of the services offered to

the Assessee by STM and the services given by the Assessee to WRF can be seen from the following table:

STM and assessee Assessee and WRF

(a) To earmark the schedule (a) To carefully select and plant such

property for the purpose of STM''s number of teak saplings supplied by

Sterling Teak Bumper Profit Schemethe Assessee in the schedule

property (f) To provide proper

security for the teak plants in the

schedule property by employing

directly its own servants or through

agents.

From this it is clear that the operations that should be done on the land for STM are really carried out by WRF, which is STM''s own sister

concern and apart from allowing the land to be used the Assessee does nothing, and the income is for allowing the land to be used by STM. The

AO found that all that the Assessee did was to place at the disposal of STM 41.59 acres. for which the above payments were made and that it

shifted the entire responsibility under its agreement to WRF. The above tabular column will also substantiate this finding. The AO also found that

what the Assessee did was to provide the lands used by it and lease out some to STM and for that non-utilisation charges were paid. This cannot

be treated as income derived from lands or as rents received from land and found on facts that the nexus between the land and agricultural

operations thereon have not been established. On appeal, the appellate authority specifically dealt with the suppression of information regarding

what is actually grown on the lands on behalf of STM and projection as if agricultural operations to grow dhal, soya etc. and that it would

tantamount to displaying incorrect facts.

The Tribunal held that as per the agreement, the Assessee received certain non-utilisation charges and maintenance charges so the STM could

implement its scheme of planting teak trees. Therefore, the Tribunal held, ""this is the income derived for allowing STM to use the land for a specific

purpose and the Assessee agreed not to encroach upon their activity for a period of 20 years"". Therefore, the Tribunal rightly held that it is not

income ""derived from"" agriculture or agricultural operations, but it is income from business.

In the order cited by the learned Counsel for the Assessee in ITA No. 1147 of 1999 (supra) which was passed by the same Tribunal, the facts

were similar to the one on hand--the scheme was STM''s scheme, but the owner of the land who received the income for non-utilisation was one

Premier Farms and the person who actually did agricultural operations was one Sastha Farms. It is true that in that case, the Tribunal allowed the

appeal filed by the Assessee. But now, we are concerned only with the question of law raised before us.

In MEMBER FOR THE BOARD OF AGRICULTURAL Income Tax, ASSAM Vs. SINDHURANI CHAUDHURANI AND OTHERS

(AND OTHER CASES)., , the Supreme Court construed what ""salami"" was and held: ""It is a payment by the tenant as a present or as price for

parting by the landlord with his rights under the lease of a holding"". They held that salami was not rent and that it had. therefore, all the

characteristics of a capital payment and it is not revenue. Those lands were in fact agricultural holdings. But the Supreme Court held that it was not

agricultural income. In In the matter of the Estate of Saradambal Ammal and Others, . the Supreme Court referred to the following extract in CIT

v. Raja Bahadur Kamakhaya Narayan Singh (1948) 16 ITR 325 (PC):

The word ''derived'' is not a term of Article Its use in the definition indeed demands an enquiry into genealogy of the product. But the enquiry

should stop as soon as the effective source is discovered. In the genealogical tree of the interest, land indeed appears in the second degree, but the

immediate and effective source is rent, which has suffered the accident of non-payment. And rent is not land within the meaning of the definition.

In Commissioner of Income Tax, Uttar Pradesh Vs. Kunwar Trivikram Narian Singh, . the Supreme Court referred to the observations of the

Privy Council in the judgment cited above and from the same judgment, quoted the following:

Agricultural income'' as defined in the Act is obviously intended to refer to the revenue received by direct association with the land which is used

for agricultural purposes and not by indirectly extending it to cases where that revenue or part thereof changes hands either by way of distribution

of dividends or otherwise.

The Supreme Court held thus:

It follows from the decisions of the Privy Council and the judgments of this Court that if it is held in this case, that the source of the allowance or

pension is the arrangement arrived at in 1837, then the income cannot be held to be derived from land within the meaning of the definition in

Section 2(1)(a) of the Act.

They quoted the following passage from the speech of Viscount Simon in IRC v. Wesleyan General Assurance Society (1948) 16 ITR 101, 103

(Supp)(HL):

It may be well to repeat two propositions which are well established in the application of the law relating to income tax. First, the name given to a

transaction by the parties concerned does not necessarily decide the nature of the transaction. To call a payment a loan if it is really an annuity docs

not assist the taxpayer, any more than to call an item a capital payment would prevent it from being regarded as an income payment if that is its true

nature. The question always is what is the real character of the payment, not what the parties call it.

In that case also, the Supreme Court held that it was not exempt from taxation as agricultural income. In Maharajadhiraja Sir Kameshwar Singh

Vs. Commissioner of Income Tax, Bihar and Orissa, the Supreme Court held as follows:

Both the source and character of the income arc, therefore, altered when a part of the income of the trust is appropriated by the Appellant as his

remuneration, and that is so, notwithstanding that computation of remuneration is made as a percentage of the income, a substantial part whereof is

derived from lands used for agricultural purposes. The remuneration not being received as rent or revenue of agricultural lands under a title, legal or

beneficial in the property from which the income is received, it is not income exempt u/s 4(3)(viii).

In this case too. the Supreme Court field against the Assessee.

In the present case, the concurrent findings of fact by all the authorities are that--(a) the Assessee had furnished incorrect particulars: and (b)

the income is not directly relatable to agricultural operations, nor derived from agriculture, but it is income derived for not encroaching upon STM''s

right to use the land for a specific purpose. These are findings of fact which we do not think are perverse so as to warrant interference at our

hands. The questions of law raised in the appeals are answered against the Assessee. The appeals are accordingly dismissed. There shall be no

order as to costs. Consequently, the connected miscellaneous petitions are closed.