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November 3, 2020

Spontaneous growth not involving any human labour/skill upon land are not products of agriculture and will be taxable under Income Tax

by CA Shivam Jaiswal in Income Tax

Spontaneous growth not involving any human labour/skill upon land are not products of agriculture and will be taxable under Income Tax

As India is basically an agrarian economy, several incentives and perks are offered, to those making aliving through agriculture. In India, agricultural income refers to revenue derived from sources thatinclude farming land, buildings on or identified with an agricultural land and commercial produce from ahorticultural land. Agricultural income is defined under the Income Tax Act, 1961. According to IncomeTax Law, agricultural income generally means:

  • Any rent or revenue derived from land which is situated in India and is used for agriculturalpurposes.
  • Any income derived from such land by agriculture operations including processing of agriculturalproduce so as to render it fit for the market or sale of such produce.
  • Income derived from farm building required for agricultural operations
  • Any income derived from saplings or seedlings grown in a nursery shall be deemed to beagricultural income.

Income Tax Act is exempt in India as per the provisions of the Income Tax Act, 1962.

Indian Income-tax Act (XI Of 1922) was applicable before the Income Tax Act, 1962.

Section 2(1) of the Indian Income-tax Act (XI Of 1922)  defines agricultural income and states that “agricultural income” means

  • any rent or revenue derived from land which is used for agricultural purposes, and is either assessed to land- revenue in the taxable territories or subject to a local rate assessed and collected by officers of the Government
  • any income derived from such land by:
    • agriculture, or
    • 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
    • the sale by a cultivator or receiver 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 (ii) above

Section 4(3) provides that, Agricultural income shall not be included in the total income of the person receiving them.

Let us refer to the case of The Commissioner of Income Tax Vs Raja Benoy Kumar Sahas Roywhere the main issue under consideration was whether Spontaneous growth not involving any human labour/skill upon land are products of agriculture or not and will the same be taxable under Indian Income Tax 1922 or not?

Brief Facts about the Assessee(respondent)

  • The respondent owned an area of 6,000 acres of forest land assessed to land revenue and the landhad Sal and Piyasal trees.
  • The forest was originally of spontaneous growth, “not grown by the aid of human skill and labour” and it was inexistence for about 150 years.
  • A considerable income was derived by the assessee from sales of trees from this forest.
  • The forest was occasionally parcelled out for the purposes of sale and the space from which trees sold are out away is guarded by forest guards to protect offshoots
  • Considerable amount of human labour and care was applied year after year for keeping the forest alive as also for reviving the portions that get denuded as a result of destruction by cattle and other causes.
  • Staff was employed by the assessee to perform the following specific operations:
    1. Pruning,
    2. Weeding,
    3. Felling,
    4. Clearing
    5. Cutting of channels to help the flow of rain water
    6. Guarding the trees against pests and other destructive elements
    7. Sowing of seeds after digging of the soil in denuded areas.
  • The respondent had submitted a return showing the gross receipt of Rs. 51,978 from the said forest. A claim was, however, made that the said income was not assessable under the Act as it was agricultural income and was exempt the Income Tax Act.
  • The Income Tax Officer rejected this claim and added a sum of Rs. 34,430 to the assessable income as income derived from the forest after allowing a sum of Rs. 17,548 as expenditure.
  • The Appellate Assistant Commissioner confirmed the assessment and the Income Tax Appellate Tribunal also was of opinion that the said income was not agricultural income but was income derived from the sale of jungle produce of spontaneous growth and as such was not covered by section 2(1).

Reference to High Court (HC)

At the instance of the assessee the Tribunal referred to the High Court on the issue thatwhether on the facts and in the circumstances of this case, the sum of Rs. 34,430 was “agricultural income” and as such is exempt from payment of tax under section 4(3)(viii) of the Indian Income Tax Act?”

The reference was heard by the HC and the HC held that actual cultivation of the land was not required and as human labour and skill were spent for the growth of the forest the income from the forest was agricultural income. It accordingly answered the above question in the affirmative. The Revenue then appealed to the Supreme Court.

Appeal to Supreme Court (SC)

The question that arose for consideration before SC was whether income derived from the sale of Sal and Piyasal trees in the forest owned by the assessee which was originally a forest of spontaneous growth “not grown by the aid of human skill and labour” but on which forestry operations were carried on by the assessee involving considerable amount of expenditure of human skill and labour was agricultural income were within the meaning of section 2(1) and as such exempt from payment of tax under s. 4(3)(viii) of the Indian Income-tax Act.

Observations of the SC on the meaning of the term ‘agriculture’

  • The terms ” agriculture ” and ” agricultural purpose” was not defined in the Indian Income-tax Act.
  • Therefore, SC had to fall back upon the general sense in which they were understood in common parlance.
  • The Court also referred to dictionary meaning and various other legislation where the term was defined or interpreted.
  • It was noted that the definition of “agricultural income” given in section 2(1) of the Indian Income- tax Act was in identical terms with the definitions of that term as given in the various Agricultural Income-tax Acts passed by the several States.
  • Therefore, SC referred the general sense in which they were understood in common parlance. “Agriculture” in its root sense meant ager, a field and culture, cultivation, cultivation of field which implies expenditure of human skill and labour upon land. The term has, however, acquired a wider significance.
  • It was noted that the term was used both in the narrow sense of the cultivation of the field and the wider sense of comprising all activities in relation to the land including horticulture, forestry, breeding and rearing of livestock, dairying, butter and cheesemaking, husbandry etc.
  • A critical examination of the definition of “agricultural income” as given in Section 2(1) of the Indian Income tax Act and the relevant provisions of the several Agricultural Income- tax Acts of the various States also provided support to this position.
  • In the first instance, it was defined as rent or revenue derived from land which was used for agricultural purposes. It was also defined as income derived from such land by agriculture or by the activities described in clause 2 and 3 of section 2(1)(b) of the Act.
  • These activities were postulated to be performed by the cultivator or receiver of rent-in-kind of such land in regard to the products raised or received by him.This meant the produce raised on the land either by himself or by the actual cultivator of the land who paid such rent-in-kind to him.

Observations of the SC on whether income of the assessee was exempt agricultural income or not

  • The term “agriculture” used in clause (i) of section 2(1)(b) should be restricted to the performance of the basic operations on the land and there was no scope for reading the term agriculture ” in still wider sense.
  • There was the basic idea that there should be cultivation of land in the sense of tilling of the land, sowing of the seeds, planting, and similar work done on the land itself.
  • If the basic operations were there, the rest of the operations found themselves under the category of agriculture. But if these basic operations werenot present, then the subsequent operations did not acquire the characteristic of agricultural operations.
  • All these operations no doubt required the expenditure of human labour and skill but the human labour and skill spent in the performance of the basic operations only could be said to have been spent upon the land.
  • The human labour and skill spent in the performance of subsequent operations could not be said to be spent on the land itself, though it may have the effect of preserving, fostering and regenerating the products of the land.
  • This distinction was not so important in cases where the agriculturist performed these operations as a part of his integrated activity in cultivation of the land.
  • Where, however, the products of the land were of spontaneous growth, unassisted by human skill and labour, and human skill and labour were spent merely in fostering the growth, preservation and regeneration of such products of land, the question to be considered was whether these subsequent operations performed by the agriculturist were agricultural operations and enjoy the characteristic of agricultural operations.
  • It was agreed that products which grew wild on the land or were of spontaneous growth not involving any human labour or skill upon the land were not products of agriculture and the income derived therefrom was not agricultural income.
  • There was no process of agriculture involved in the raising of these products from the land.
  • There were no agricultural operations performed by the assessee in respect of the same, and the only work which the assessee performedwas that of collecting the produce and consuming and marketing the same.
  • No agricultural operations were performed and there was no question at all of the income derived therefrom being agricultural income within the definition given in section 2(1) of the Indian Income-tax Act.
  • If, however, the assessee performed subsequent operations on these products of land which were of wild or spontaneous growth, the nature of those operations would have to be determined in the light of the principles enunciated above.
  • Applying these principles to the facts of the present case, SC started with the finding that the forest in question was of spontaneous growth.
  • If there were no other facts found, that would entail the conclusion that the income was not agricultural income.
  • But, then, it was also found by the Tribunal that the forest was more than 150 years old, though portions of the forest were cleared from time to time, that is to say, trees had completely fallen and the proprietors had planted fresh trees in those areas, and they had performed operations for the purpose of nursing the trees planted by them.
  • It could not be denied that so far as those trees were concerned, the income derived therefrom would be agricultural income.
  • In view of the fact that the forest was more than 150 years old, the areas which had become cleared and replanted could not be considered to be negligible.
  • Therefore, the whole of the income derived from the forest could not be treated as non-agricultural income.
  • If the enquiry had been directed on proper lines, it would have been possible for the Income- tax authorities to ascertain how much of the income is attributable to forest of spontaneous growth and how much to trees planted by the proprietors.
  • But no such enquiry was directed, and in view of the long lapse of time, SC did not consider it desirable to direct any such enquiry now.
  • The expenditure shown by the assessee for the maintenance of the forest was about Rs. 17,000 as against a total income of about Rs. 51,000.
  • Having regard to the magnitude of this figure, SC deduced that a substantial portion of the income must was derived from trees planted by the proprietors themselves.
  • As no attempt was made by the Department to establish which portion of the income was attributable to forest of spontaneous growth, there were no materials on which SC could say that the judgment of the court below was wrong.
  • The appeal of the Revenue was dismissed.

In conclusion, spontaneousgrowth not involving any human labour or skill upon land arenot products of agriculture. Income derived therefrom is notagricultural income and the same will be taxable under Income Tax.

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