Sri Ranganatha Enterprises vs Commissioner of Income Tax

Y. Bhaskar Rao, J.—This is a reference made u/s 256(1) of the income tax Act, 1961 (�the Act�) for consideration at the instance of the assessee. The three questions are referred for consideration which are as follows :

"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee�s income as a result of toddy tapping was not agricultural income exempt u/s 10(1) of the income tax Act, 1961.

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the activity of tapping toddy did not involve manufacture or production of an article or thing ?

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was not entitled to deduction u/s 80HHA in respect of its toddy business ?"

The facts of the case are that the assessee is the licensee for tapping and vending of the toddy. He filed his returns for the assessment year 1983-84 declaring nil income. A notice u/s 142 of the Act was issued and a representative of the assessee was present and was heard. The assessee has not filed any application for registration u/s 184 of the Act. Therefore, it was treated as unregistered firm. The assessee was made liable to pay the tax on the total amount of Rs. 1,16,660. It is contended by the assessee that u/s 10(1) of the Act he is exempted from payment of the tax as extracting toddy and vending is part and parcel of agricultural operations and income from agricultural operations is exempted under clause (1) of section 10. The assessing authority did not agree with him. It is secondly contended that the process of extracting toddy and vending amounts to an industrial operation. As such, he claimed exemption u/s 80HHA of the Act. The assessing authority held that obtaining a licence for extracting toddy and vending toddy does not amount to an industrial undertaking within the meaning of section 80HHA and, accordingly, rejected both the contentions. Aggrieved by that order, an appeal was filed. The appellate authority confirmed the order of the assessing authority on both the points and the Tribunal also confirmed the view taken by both the authorities. Therefore, the petitioner sought a reference of the above stated questions to this Court and, accordingly, they are referred.

Though the petitioner is served, nobody is present today. Therefore, we have heard the learned counsel appearing for the revenue department.

The first question that arises for consideration is as follows :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee�s income as a result of toddy tapping was not an agricultural income exempt u/s 10(1) of the income tax Act ?"

The business of the assessee consists of extracting toddy and vending toddy in the districts of Mysore, Nanjangud and Periapatna taluks. The assessee has shown the income of Rs. 1,11,558 as profits from business. The question is whether the activity of tapping and vending toddy constitutes an agricultural operation. The assessee has not produced any evidence to show that he does an agricultural operation for extracting toddy and vending the same. Section 17(2) of the Karnataka Excise Act, 1965 provides for grant of licence in terms of lease to a lessee, right to manufacture, etc. Section 18 of the Karnataka Excise Act provides for permission to draw toddy only after obtaining a lease from the Government and the required licence. The Karnataka Excise (Tapping of Trees) Rules, 1991 govern the tapping of toddy trees. Rule 3 of the Rules, deals with the licence for tapping. Rule 10 provides for authorised persons only to tap the toddy trees. The lessee has to only tap the trees allotted by the State which are marked and numbered as per rule 15 of the Rules. Rule 18 deals with the tapping of excise trees on the conditions prescribed therein. Chapter III of the Excise Act deals with the import, export and transport of intoxicant and provides that unless there is a licence or permission, the same cannot be transported or exported or imported. Thus, the tapping of toddy and vending of toddy is regulated by the provisions of the Karnataka Excise Act, and the Karnataka Excise (Tapping of Trees) Rules, 1967 and the Karnataka Excise (Manufacture and Bottling of Toddy) Rules, 1972. The sections of the Act and rules make it clear that no person can tap or vend the toddy without a required licence from the concerned authorities under the Act. The entire tapping and vending process is regulated by the provisions of the Act and rules thereunder. Therefore, on the face of it, it cannot be said that the activity is an agricultural activity. The lessee will be given only the right to extract the toddy and vend the same. The excise toddy trees which are also on the private lands and Government lands are auctioned for the purpose of leasing them to the highest bidders in the concerned excise year. The trees are naturally grown on the lands. Even taking that the trees are owned by the owner of the land, he is not permitted to tap the trees. Only the Government has got a right to cut the trees, tap and vend the liquor. At the most the owner will be paid the tax as per the rules or in case the trees are situated in such a land which is an agricultural land wherein tapping is permitted, his crops will be spelled but the trees will not be exempted from tapping. There is no right for the owner to tap the trees and vend the liquor. Therefore, it cannot be said that the activity is an agricultural activity. Further, there is no growing, irrigating or manuring of the trees. The trees grow naturally and without watering manuring, etc., they give the wealth which is a natural product from the trees. It is relevant to refer to the judgment of the Supreme Court in The Commissioner of Income Tax, Bihar and Orissa Vs. Sri Ramakrishna Deo, The Supreme Court while considering the question whether the income derived by the assessee from the sale of forest trees is agricultural income or not has held that it is for the assessee to prove that the income derived from it is an agricultural income and is exempted from taxation u/s 4(3)(viii) of the Act. While considering the question whether a particular income is an agricultural income within the meaning of section 2(1) of the Act, it has referred to the judgment in Commissioner of Income Tax, West Bengal, Calcutta Vs. Raja Benoy Kumar Sahas Roy, wherein it was held that before an income could be held to be agricultural income, it must be shown to have been derived from land by agriculture or by one or the other of the operations described in sub-clauses (i) and (ii) of section 2(i)(b) of the Indian income tax Act, 1922, that the term �agriculture� meant, in its ordinary sense, cultivation of the field, which would connote such basic operations as tilling of the land, sowing of trees, plantation and the like and that though subsequent operations such as weeding, pruning, watering, digging the soil, ground, the growth and removing undergrowths, could be regarded as agricultural operations when they are taken in conjunction with and as continuation of the basic operations mentioned before, they could not, apart from those operations, be regarded as bearing the character of agricultural operations. But if these basic operations are wanting, the subsequent operations do not acquire the characteristic of agricultural operations. It is agreed on all hands that products which grow wild on the land or are of spontaneous growth not involving any human labour or skill upon the land are not products of agriculture and the income derived therefrom is not agricultural income. There is no process of agriculture involved in the raising of these products from the land.

In a similar situation, a Division bench of this Court has held thus :

"14. The income from the date-trees was claimed as an agricultural income by the assessee. This was held against the assessee and it was found to be a non-agricultural income. The finding is that there were 3,000 trees in the lands measuring in all 900 acres and trees scattered at different parts of the lands. On an average, this will be about 3 trees per acre ignoring the fraction. Obviously, these trees were of spontaneous growth and could not be considered as the result of agricultural operation. In the circumstances, there is no reason to differ from the finding given by the Appellate Tribunal that it is a non-agricultural income. This affects the assessee�s case only for the year 1971-72. This question is answered in the affirmative and against the assessee."

Hence, this Court has considered and held that the income derived from the data-trees is not an agricultural income. The principle laid down in the above two judgments squarely applies to this case. Therefore, we hold that the extracting of toddy and vending of toddy is not an agricultural process and, hence, the income derived from therein is not an agricultural income. We also further hold that burden lies on the assessee to prove that the income derived from him is an agricultural income to claim exemption provided under clause (1) of section 10. We answer the above question against the assessee and in favour of the revenue.

Question Nos. 2 and 3 are interlinked and they are as follows :

" 2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the activity of tapping toddy did not involve manufacture or production of an article or thing ?

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was not entitled to deduction u/s 80HHA in respect of its toddy business ?"

It is the case of the assessee that he is carrying on industrial operations. Therefore, he is entitled to claim exemption u/s 80HHA. As stated supra, the activity conducted by the assessee is tapping of trees and vending of toddy and, therefore, there is no process of manufacturing carried on by him nor it is shown that any machinery is installed by him or required by him for the purpose of tapping of trees and vending of toddy. Further, clause (b) of sub-section (8) of section 80HHA reads as follows :

"(b) an industrial undertaking shall be deemed to be a small-scale industrial undertaking, if the aggregate value of the machinery and plant (other than tools, jigs, dies and moulds) installed, as on the last day of the previous year, for the purpose of the business of the undertaking does not exceed,�

(1) in a case where the previous year ends before the 1st day as August, 1980, ten lakh rupees;

(2) in a case where the previous year ends after the 31st day of July, 1980 but before the 18th day of March, 1985, twenty lakh rupees; and

(3) in a case where the previous year ends after the 17th day of March, 1985, thirty-five lakh rupees,

and for this purpose the value of any machinery or plant shall be,�

(i) in the case of any machinery or plant owned by the assessee, the actual cost thereof to the assessee; and

(ii) in the case of any machinery or plant hired by the assessee, the actual cost thereof as in the case of the owner of such machinery or plant."

By reading the above Explanation, it is manifest that unless there is a machinery at least of the required value of Rs. 20 lakhs installed and used for such process, it cannot be an industry and will not amount to an industrial undertaking as required u/s 80HHA. The assessee has not produced any evidence to show that he has purchased or installed any machinery and there is no evidence on record.

As per the provisions of the Excise Act referred to supra, the process of tapping and vending of toddy trees will be done by obtaining the lease and the required licence from the Government and no manufacturing process is involved in extracting toddy and vending. In view of the above circumstances, the activity of tapping and vending of toddy will not amount to an industrial operation and is not an industrial undertaking. The establishment of the lessee is not an industrial undertaking or the assessee is not entitled for exemption u/s 80HHA. Accordingly, question Nos. 2 and 3 are also answered against the assessee and in favour of the revenue.