Pullala and Rosary Estate vs Commissioner of Agricultural Income Tax

K.P. Balanarayana Marar, J.—This is a revision u/s 78 of the Agricultural Income Tax Act, 1991. The assessee is the revision petitioner.

The petitioner, Messrs. Pullala and Rosary Estate, is an assessee before the Agricultural Income Tax Officer, Trichur, and assessed in the status of tenants-in-common. The petitioner owns 100.07 acres in Pullala Estate planted with coffee and 242.60 acres planted with coffee, rubber and pepper in Rosary Estate. These properties belong to eight persons as co-tenants. They were assessed by the Agricultural Income Tax Officer in the status of tenants-in-common under the name and style "Messrs. Pullala and Rosary Estate". The properties were leased on April 1, 1979, to a partnership by name "Messrs. Pullala and Rosary" for a period of 11 months on a yearly rent of Rs. 84,000. The lease was periodically renewed. The stock of agricultural produce was also taken over by the lessee who took over the properties as a going concern. The petitioner was assessed for the assessment year 1980-81 and the assessment was completed by order dated March 29, 1986, a copy of which is annexure "B". That was appealed against. Annexure "C" is a copy of the appellate order. The lessee-partnership was also assessed for the same year and the assessment completed by order dated March 29, 1986, a copy of which is annexure "D". That also was the subject-matter of an appeal. While so, the respondent, Commissioner of Agricultural Income Tax, issued a notice dated December 18, 1990, purporting to be u/s 34 of the Agricultural Income Tax Act, 1950, proposing to cancel annexure "B" assessment. The main reason alleged is that the sum of Rs. 13,44,264.96 received from the Coffee Board during the accounting year relating to the assessment year 1980-81 was wrongly assessed in the hands of the lessee-partnership instead of the petitioner. It was also stated that the value of the stock-in-trade handed over to the lessee-firm should be considered as income of the petitioner for the aforesaid year. Objections were filed by the petitioner to this notice. Rejecting those objections, the respondent cancelled annexure-B assessment by order dated March 30, 1991, which was received by the petitioner on June 17, 1991, by which the case was remitted to the assessing authority for fresh disposal. The respondent found the objections raised on jurisdiction to invoke the power u/s 34 as not valid since the objections raised before the respondent were not raised before the appellate authority. It was held that the doctrine of merger does not apply to the case. The receipt of Rs. 13,44,264.96 from the Coffee Board was held to be the income of the petitioner and assessable to tax in the petitioner''s hands. The value of the stock-in-trade handed over to the lessee-firm was also found to be income in the hands of the petitioner and liable to assessment. Aggrieved by that order, the petitioner has come up in revision on the ground that the order is erroneous in law. The following questions of law are seen raised in the revisional memorandum :

"(i) Whether, on the facts and in the circumstances of the case, the proceedings of the Commissioner u/s 34 of the Agricultural Income Tax Act, 1950, amounts to trenching upon the statutory powers of the Assessment Officer to assess escaped income and is for that reason without jurisdiction ?

(ii) Whether, on the facts and in the circumstances of the case, the proceedings of the Commissioner u/s 34 of the Agricultural Income Tax Act, 1950, cancelling the assessment order for 1980-81 is without jurisdiction and wrong in law by reason of the assessment order having merged with the appellate order of the Appellate Assistant Commissioner?

(iii) Whether, on the facts and in the circumstances of the case, the proceedings of the Commissioner u/s 34 of the Agricultural Income Tax Act, 1950, cancelling the assessment for 1980-81, passed after expiry of five years form the date of such assessment is unreasonable or irrational and hence unsustainable ?

(iv) Whether, on the facts and in the circumstances of the case, the proceedings of the Commissioner cancelling the assessment for 1980-81, are without jurisdiction and barred by limitation in view of the provisions of the Agricultural Income Tax Act, 1991 ?

(v) In view of the cash system of accounting followed by the petitioner, was the Commissioner right and justified in holding that the amount of Rs. 13,44,264.96 received by the lessee-firm from the Coffee Board during the accounting year relevant to the assessment year 1980-81; is assessable in the hands of the lessor-petitioner ?

(vi) Whether, on the facts and in the circumstances of the case, the Commissioner was right and justified in holding that the value of stock of agricultural produce taken over by the lessee-firm under the lease agreement is assessable in the hands of the lessor-petitioner in the assessment year 1980-81 ?

(vii) In the facts and circumstances of the case, was not the receipt from the Coffee Board and the value of the stock taken over by the lessee- firm assessable only in its hands for the assessment year 1980-81, by reason of diversion of income in its favour by an overriding title under the lease agreement ?"

Heard counsel for the revision petitioner and Sri V. C. fames, Senior Government Pleader, for the respondent.

The first point argued by learned counsel for the petitioner is that in exercising the powers conferred on the Commissioner u/s 34 of the Agricultural Income Tax Act, 1950 (for short, "the Act"), he has trenched upon the statutory powers of the Assessment Officer under sections 35 and 36 of the Act. Section 34 enables the Commissioner to call for the record of any proceeding under the Act which has been taken by any authority subordinate to him and may make such enquiry or cause such enquiry to be made. Subject to the provisions of the Act he may pass such orders thereon as he thinks fit. The revisional power can be exercised by him either of his own motion or on an application by an assessee. u/s 35, the Agricultural Income Tax Officer has power to assess or reassess such income which has escaped assessment in any financial year or the income has been assessed at too low a rate. Section 36 enables the authority which passed an order on appeal or revision or the Agricultural Income Tax Officer to rectify any mistake apparent from the record. The power u/s 35 can be invoked only within 5 years of the end of the financial year during which any income has escaped assessment or the assessment was made at too low a rate. The power to rectify any mistake u/s 36 has to be exercised within a period of three years from the date of the order sought to be rectified. The contention is that in the case of escaped assessment, proceedings have to be initiated u/s 35 by the Assessment Officer. It is also contended that no proceeding can be initiated by the Commissioner u/s 34 beyond the period of 5 years from the outer date fixed in Section 35 since that will be trenching upon the powers of the Assessment Officer u/s 35.

While explaining the scope of the revisional power, the Supreme Court in State of Kerala Vs. K.M. Charia Abdullah and Co., held :

"It would not invest the revising authority with power to launch upon enquiries at large so as either to trench upon the powers which are expressly reserved by the Act or by the Rules to other authorities or to ignore the limitations inherent in the exercise of those powers. For instance, the power to reassess escaped turnover is primarily vested by Rule 17 in the Assessing Officer and is to be exercised subject to certain limitations, and the revising authority will not be competent to make an enquiry for reassessing a taxpayer. Similarly, the power to make a best judgment assessment is vested by Section 9(2)(B) in the assessing authority and has to be exercised in the manner provided. It would not be open to the revising authority to assume that power."

The matter was again considered by the Supreme Court in Swastik Oil Mills Ltd. Vs. H.B. Munshi, Deputy Commissioner of Sales Tax, Bombay, , It was held that, whenever a power is conferred on an authority to revise an order, the authority is entitled to examine the correctness, legality and propriety of the order and to pass such suitable orders as the authority may think fit in the circumstances of the particular case before it. When exercising those powers, the authority is entitled to hold an enquiry or direct an enquiry to be held and, for that purpose, additional material can be admitted. The Supreme Court further held that if the proceedings were started suo motu, it must not be based on a mere conjecture and there should be some ground for invoking the revisional powers. The Supreme Court observed that the revising authority necessarily has the power to make such order as, in the opinion of that authority, the case calls for when the authority is satisfied that it is an appropriate case for interference in exercise of revisional powers. A Full Bench of this court in the decision in Madras Rubber Factory Ltd. v. State of Kerala [1979] 44 STC 208, after an exhaustive survey of the judicial pronouncements on the subject, held that the power of assessing escaped turnover and of revision are two distinct and separate powers. The Full Bench was considering the powers of the two different authorities under sections 19 and 35 of the Kerala General Sales Tax Act. The Full Bench ultimately held that the statement of law in C. C. Transport Co. v. State of Kerala [1977] 40 STC 448, is the correct principle on this aspect. The principle enunciated by the Division Bench in that case is (at page 220 of 44 STC):

"While the revisional power is restricted to the examination of the records for determining whether the order of assessment was according to law, the power to assess escaped turnover can be exercised in matters de hors the record of assessment proceedings. These two sections, therefore, relate to different jurisdictions and different matters. A valid order under the one is not an infringement of the power under the other."

The Full Bench held that the above statement of the law is correct in so far as it laid down that a valid exercise of the revisional power is not an infringement of the power of assessing escaped turnover. It is observed that it requires qualification in so far as it stated that the revisional power is restricted to the examination of the records.

Power is conferred on the Commissioner u/s 34 to call for the record of any proceeding under the Act taken by any authority subordinate to him and he may make such enquiry and he may pass such orders as he thinks fit. When such wide powers are conferred on the Commissioner under this section, he is entitled to examine the correctness, legality and propriety of any order by any authority subordinate to him and pass such suitable orders as he thinks fit. The only restriction imposed is that there should be some ground for invoking the revisional powers and, for interference in revision, the Commissioner is empowered to make an enquiry by himself or cause such enquiry to be made by any other authority subordinate to him. There is, thus, no error in the revising authority holding a further enquiry or directing an enquiry to be held by any other appropriate authority. That the Agricultural Income Tax Officer has been empowered u/s 35 to serve a notice on the person liable to pay tax in respect of any agricultural income which has escaped assessment in any financial year or in a case where income has been assessed at too low a rate is no reason why the power conferred on a superior authority u/s 34 should not be invoked by him. The exercise of the revisional powers u/s 34 by the respondent cannot, therefore, be said to trench upon the powers of the Agricultural Income Tax Officer u/s 35 of the Act.

The next ground of attack is based on the delay in exercising the powers u/s 34 of the Act. The contention is that the exercise of the powers after expiry of five years from the end of the year in which the agricultural income was first assessable is unreasonable and irrational and hence unsustainable. No period of limitation is fixed u/s 34 within which the Commissioner should exercise the powers conferred on him under that section. The question arises as to whether suo motu revision proceedings can be initiated at any time and whether any restriction has been imposed on such power. This Bench had occasion to consider this aspect in Nelliampathy Tea and Produce Co. Ltd. Vs. Commissioner of Agricultural Income Tax, . After referring to sections 34 to 36 of the Act, it was observed that the normal period within which an assessment once made can be reopened u/s 35 of the Act is five years from the end of the assessment year. u/s 36, a mistake could be rectified within three years from the date of the assessment order. It was further observed that once a final assessment is rendered (after the appeal or revision or reference, as the case may be), the finality attached to the order can be put in peril and the assessment can be reopened normally only in proceedings u/s 35 or 36 of the Act. To reopen a final assessment after the said periods, in exercise of the powers conferred u/s 34 of the Act, demands cogent and sufficient reasons. This court held that the power vested in the Commissioner of Agricultural Income Tax u/s 34 should be exercised bona fide and within a reasonable period. It was further held (at page 234) :

"The Revenue should be able to demonstrate that there were circumstances beyond control or other supervening events or insurmountable difficulties for not setting in motion the proceedings u/s 34 of the Act within the normal period provided in sections 35 and 36 of the Act."

The question whether there are exceptional or extenuating circumstances explaining the reason for not setting in motion the proceedings u/s 34 of the Act within the normal period will depend upon the facts and circumstances of each case.

The scope of the power of the Commissioner u/s 34 of the Act and the period within which it has to be exercised having been explained by this court in the aforementioned decision, we have to see whether the Commissioner had exercised his power within the normal period provided in Section 35 and if not, whether cogent and sufficient reasons had been given. The assessment related to the year 1980-81. The period of five years provided in Section 35 expired on March 31, 1986. The assessment order is dated March 29, 1986. The period of three years provided u/s 36 of the Act expired on March 29, 1989. The Commissioner initiated suo motu proceedings only on December 18, 1990, by which time the period prescribed under sections 35 and 36 had expired. Since no time-limit is prescribed in Section 34 of the Act for exercising the power of revision conferred on the Commissioner, it is possible for the respondent to invoke his power under that section even after the expiry of the period of five years provided u/s 35(2) of the Act. But, in such cases, as observed by the court in Nelliampathy Tea and Produce Co. Ltd. Vs. Commissioner of Agricultural Income Tax, , the Revenue should demonstrate that there were circumstances beyond their control for not setting in motion the proceedings u/s 34 before the above date. No reason is seen given by the respondent on this aspect. This is a question of fact on which no advertence has been made by the Commissioner. So the matter requires a remit to the Commissioner for consideration of this aspect.

By annexure "D" order, the amount of Rs. 13,44,264.96 representing the amount realised by sale of coffee was assessed as the income of the firm to which the properties were leased by the petitioner. Admittedly, the amount was due to the petitioner, the coffee having been supplied by the petitioner before the grant of lease. The assessment happened to be in the name of the firm for the reason that the amount was received by them. This is now sought to be revised on the ground that the income represents the income of the agricultural commodity sold by the original owners and that it cannot be considered as income in the hands of the firm which began to carry out agricultural operations only from April 1, 1979, onwards. It is for this reason that the assessment completed against the petitioner was set aside and the assessing authority was directed to make a reassessment in accordance with the directions in annexure "G" order. Challenging this order, it is contended that the assessment has been completed on the basis of the receipt of the amount by the firm and an assessment of the same amount in the hands of the petitioner would amount to double taxation. That the amount represents the sale proceeds of coffee belonging to the petitioner before the grant of lease does not admit of any doubt. The amount is, therefore, liable to be assessed as the agricultural income of the petitioner. The assessment happened to be in the name of the firm only because of the receipt of the amount by them, probably on the strength of the partnership deed. Whatever that be, no error has been committed by the Commissioner in revising, the assessment and in finding that the amount is assessable in the hands of the petitioner.

That leads us to the question as to whether the assessment of the amount in the hands of the petitioner amounts to double taxation and if so whether the order, annexure "G", can be sustained. The Supreme Court, in Income Tax Officer, A-ward, Lucknow Vs. Bachulal Kapoor, had occasion to consider the doctrine of double taxation in the case of a Hindu undivided family. In that case, the orders of assessment on the individual members of the family had become final. It was proposed to assess the Hindu undivided family for the same assessment year. That would amount to payment of tax twice for the same amount. The Supreme Court observed that the Income Tax Act does not envisage taxation of the same income twice over "on one passage of money in the form of one sort of income". So long as the Hindu undivided family exists, the individuals thereof cannot separately be assessed in respect of its income. The Supreme Court further observed that if, under some mistake, such income was assessed to tax in the hands of the individual members, when a proper assessment had been made on the Hindu undivided family in respect of the same income, the Revenue had to make appropriate adjustments. The Supreme Court ultimately held that if the assessment proceedings initiated u/s 34 (of the Indian Income Tax Act, 1922) culminate in the assessment of the Hindu undivided family, appropriate adjustments have to be made by the Income Tax Officer in respect of the tax realised by the Revenue in respect of that part of the income of the family assessed on the individuals of the said family. It is further observed that to do so is not to reopen the final orders of assessment, but in reality to arrive at the correct figure of tax payable by the Hindu undivided family.

After referring to the judicial pronouncements on this aspect, the Supreme Court held that the Income Tax Officer has jurisdiction to initiate proceedings u/s 34 of the Act, if the conditions laid down therein are complied with, against a person on the ground that the income, though it bas been assessed in the hands of another, has escaped assessment in his hands. Those decisions do not deal with the connected question how the adjustments will have to be made to avoid double taxation of the same income. The only question which arises at that stage is whether the income has escaped assessment or has been underassessed in the hands of the person against whom the said proceedings are initiated. The Supreme Court observed that the question of resolving the conflict between the proposed assessment and an earlier assessment made on a wrong person did not arise at that stage. The Supreme Court is therefore of the view that parallel proceedings might be started against both when there was a doubt as to which person between the two was liable to be assessed. The Supreme Court ultimately held that the High Court was wrong in holding that the Officer had no jurisdiction to initiate proceedings u/s 34 of the Act against the respondent therein as the karta of a Hindu undivided family.

Following the principle enunciated in the aforementioned decision, we hold that the order of the Commissioner is beyond challenge. The income realised by the sale of coffee owned by petitioner had escaped assessment and has been assessed in the hands of the firm. The Commissioner has therefore jurisdiction to exercise powers u/s 34 of the Act and to direct the Assessing Officer to make a fresh assessment. The question whether this will amount to double taxation and whether proper adjustments are to be made by the Income Tax Officer to the tax realised by Revenue from the firm are matters to be considered by the assessing authority at the time of making the fresh assessment.

The next ground of attack is on the assessment of the value of stock of agricultural produce taken over by the lessee-firm under the lease agreement. The Commissioner directed that the value of the stock-in-trade should have been considered as income in the hands of the lessors-petitioners since the stock-in-trade was transferred to the licensee to undertake the liability of the lessor. Clause 5 of the agreement, annexure "A" was relied on by the Commissioner. By that clause, the stock-in-trade of coffee, rubber and pepper held by the petitioner has to be handed over to the lessee-firm on condition that the lessee should meet the liability on account of the gratuity payable to the workers and staff as and when payable. This finding, according to learned counsel for the revision-petitioner, cannot be sustained since the commodity has not been disposed of by sale, consumption or use in the manufacture or other process carried on by the assessee. The undertaking in the agreement to retransfer the stock-in-trade to the lessors at the time of termination of the agreement was also relied upon. The contention is that the transfer was of a going concern along with the stock-in-trade and the liability was to retransfer the properties together with the stock-in-trade handed over to the firm. From annexure "A", it does not appear that any consideration was received by the petitioner for the transfer of the stock-in-trade. According to counsel, the value of the stock-in-trade is liable to tax only if it amounts to agricultural income. In this connection, attention is drawn to the decision of the Supreme Court in S.S. Rajalinga Raja Vs. State of Madras, The Supreme Court was considering the provisions of the Madras Plantations Agricultural Income Tax Act, 1955, with special reference to the definition of agricultural income contained therein. A return was submitted by the assessee disclosing an income of Rs. 5,250 from the plantation. The Agricultural Income Tax Officer learnt that the appellant had sold stocks of cardamom of the value of Rs. 58,375-9-9 between April 1, 1956, and March 31, 1957. The appellant explained that those sales represented not the produce of the year of account, but accumulated stocks of the past 3 to 4 years. That explanation was rejected by the Agricultural Income Tax Officer. After allowing expenditure, the balance amount was brought to tax. The order was confirmed in appeal. But, the Appellate Tribunal was of the view that the average production of cardamom per acre was 40 lbs. and that if the stocks of cardamom sold in the year of assessment be attributed to production of the year, the yield would approximately be 134 lbs. per acre. The Tribunal directed that the assessment be modified. The matter was taken in revision before the High Court of Madras. The High Court held that a part of the stock of cardamom sold in the year, though not the whole, was probably stock accumulated out of previous years'' production, but since the appellant did not lay before the taxing authorities reliable evidence, his explanation was rightly rejected. The High Court also rejected the contention of the appellant that the income from sales of cardamom stock of previous years was not taxable in the year of account. On further appeal, the Supreme Court held that the expression "income" in its normal connotation does not mean mere production or receipt of a commodity which may be converted into money. Income arises when the commodity is disposed of by sale, consumption or use in the manufacture or other processes carried on by the assessee qua that commodity. It was observed that a tax on income, whether agricultural or non-agricultural, is, unless the statute otherwise provides, a tax on monetary return--actual or notional. It is not necessary that there must be a sale of the commodity. It is sufficient if the commodity is consumed or used in the business of the assessee from which the assessee obtains benefit of the commodity.

Following the decision of the Supreme Court, a Division Bench of this court in C. Velayudhan Nair Vs. Commissioner of Agricultural Income Tax, Kerala, , held that the produce received by the assessee would become income only when it is sold, consumed or used for the purpose of business. In that case, 1,484 lbs. of pepper which had been obtained by the assessee from his gardens had not been sold in the assessment year. The stock was carried over to the subsequent year. The Appellate Assistant Commissioner accepted the contention of the assessee that the price of pepper should not have been included in the income for the previous year. The Tribunal reversed that decision and held that the price of pepper should be included in the income of the assessment year irrespective of the fact whether it had been sold or not in that year. On a reference to this court by the Tribunal, it was beld that the pepper had not been sold, consumed or used and as such it is clear that the assessee had not derived any income so far as the produce is concerned. The produce received by the assessee who is carrying on agricultural operations is not income in his hands. It is observed that it would become income only when there is a sale of the commodity or consumption or use of the commodity in the business of the assessee. Merely because the produce from his lands was received by the assessee, it does not mean that he has derived any income chargeable to agricultural Income Tax. It was also held that the question whether the assessee follows the cash system of accounting or the mercantile system of accounting is not really germane to this discussion. This court held that the Tribunal was not correct in its finding that the Appellate Assistant Commissioner went wrong in holding that it is not open to the Agricultural Income Tax Officer to include the value of pepper alleged to have been carried over to the subsequent year in the assessable income of the assessee for the year in question.

The stock-in-trade has been transferred to the firm with the condition to retransfer the same on the termination of the lease. It was not sold by the petitioner. The same was not used or consumed by the petitioner in any business run by them. Following the decisions mentioned above, it has to be held that the value of the stock-in-trade cannot be assessed as the agricultural income of the petitioner. The direction of the Commissioner in annexure "G" to treat the value of the stock-in-trade as the income of the petitioner is, therefore, erroneous.

The revision is, therefore, partly allowed as stated in paragraphs 9 and 16 (at pages 157 and 162) supra. The direction of the respondents to include the value of the stock-in-trade in the agricultural income of the petitioner for the year 1979-80 is found to be erroneous and the same is set aside. There should be an appraisal and finding as to whether the proceedings u/s 34 of the Act were initiated within a reasonable time as stated in paragraphs 8 and 9 of this judgment. There will be an order of remit to the Commissioner on this aspect. The direction contained in annexure "G" for a reassessment taking into account the amount of Rs. 13,44,264.96 as the value of coffee supplied by the petitioner during the year 1979-80 is sustained. We make it clear that the adjustment of the tax realised by the Revenue from the firm is a matter to be considered by the assessing authority at the time of making fresh assessment. The revision is disposed of as above. No costs.