1. Dispute over taxability of agricultural income received from a statutory board for produce delivered prior to the commencement of the taxing Act under the mercantile system. (Para 1 )
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1965 Supreme(SC) 238
SUPREME COURT OF INDIA
P.B. GAJENDRAGADKAR, C.J.I., K.N. WANCHOO, M. HIDAYATULLAH, J.C. SHAH AND S.M. SIKRI, JJ.
State of Kerala and another, Appellants
Versus
Bhavani Tea Produce Co., Ltd., Punalur, Respondent.
Civil Appeals Nos. 650 and 651 of 1964
Advocates appeared
Mr. P. Govinda Menon and Dr. V.A. Seyid Mauhammad, Advocates, for Appellants; Mr. M.C. Selalvad, Senior Advocate, (Mr. O. P. Malhotra, Advocate and M/s. J. B. Dadachanji, O. C. Mathur and Ravinder Narain, Advocates, of M/s. J. B. Dadachanji and Co., with him), for Respondent.
Advocates:
CO., J.B.DADACHAN, M.C.SETALVAD, O.C.MATHUR, O.P.MALHOTRA, P.GOVINDA MENON, Ravindra Narayan, V.A.SEYID MUHAMMAD
CO., J.B.DADACHAN, M.C.SETALVAD, O.C.MATHUR, O.P.MALHOTRA, P.GOVINDA MENON, Ravindra Narayan, V.A.SEYID MUHAMMAD
Under the mercantile system of accounting, income from produce delivered to a statutory board (where ownership transfers by operation of law) is taxable in the year of delivery and accounting entry, rather than the year the payment is actually received.
Headnote:(A) Agricultural Income-tax Act - Sections 2, 3 and 4 - Coffee Act - Sections 25, 33 and 34 - Determination of the year in which agricultural income is derived - Assessee following mercantile system of accounting - Produce delivered to a statutory board prior to the commencement of the tax act, but payments received subsequently - Whether such receipts are taxable in the year of receipt or the year of delivery - Delivery of produce to the board for inclusion in a surplus pool, where the owner retains no rights other than the right to receive payment, constitutes a sale by operation of law - Under the mercantile system, income is taxable in the year the sale occurs and the entry is made in the books of account, regardless of when actual payment is received. (Paras 4, 5)
(B) Mercantile system of accounting - Distinction between cash and mercantile systems - In a cash system, income is taxable when received; in a mercantile system, it is taxable in the year in which the relevant entry is made about the sale. (Para 5)
Facts of the case:
The assessee company delivered coffee to a statutory board in years prior to the commencement of the relevant Agricultural Income-tax Act. The company maintained its accounts on the mercantile system and recorded the value of the coffee upon delivery. However, the actual payments were received in subsequent years after the tax act had come into force. The tax authorities sought to assess the income in the years the payments were received, while the assessee contended that the income was derived in the years of delivery and thus not taxable under the new act.
Findings of Court:
The court found that the delivery of coffee to the statutory board for the surplus pool resulted in the transfer of ownership to the board, as the producer retained no rights in the coffee except the right to receive payment. This transaction amounted to a sale by operation of law.
Issues: Whether the income from the sale of produce was derived when the produce was handed over to the statutory board and entered in the books under the mercantile system, or when the actual payment was received.
Ratio Decidendi: Since the handing over of produce to the statutory board constitutes a sale by operation of law, the income is derived at the time of delivery. For an assessee following the mercantile system of accounting, the income is taxable in the year the sale takes place and the entry is made in the books, not in the year of actual receipt of payment.
Result: Appeals dismissed.
Legal Category Hierarchy
Table of Contents
2. Whether income is taxable upon actual receipt of payment or upon delivery of produce and entry in books of account under the mercantile system. (Para 1 , 2 )
3. Delivery of produce to the statutory board constitutes a sale by operation of law, transferring ownership and creating a right to payment. (Para 4 , 5 )
4. Under the mercantile system, income from produce delivered to a statutory board is taxable in the year of delivery and accounting entry, regardless of payment date. (Para 5 )
5. Appeals dismissed; assessment orders cancelled as sales occurred before the taxing Act came into force. (Para 7 )
6. When is income from coffee delivered to the Coffee Board considered derived for tax purposes?
Income is derived when the coffee is handed over to the Coffee Board, as this constitutes a sale by operation of law, transferring ownership to the Board and leaving the planter with only a right to payment. (Para 4 , 5 )
7. How does the system of accounting affect the timing of taxability for agricultural income?
Under a cash system, income is taxable when actually received. Under the mercantile system, it is taxable in the year the sale occurs and the relevant entry is made in the books of account. (Para 5 )
8. Does the delivery of produce to a statutory pool for later payment constitute a sale?
Yes, if the producer ceases to be the owner upon delivery, cannot reclaim the produce, and the board can pledge the produce, the delivery amounts to a sale by operation of law. (Para 4 , 5 )
Judgment
HIDAYATULLAH, J. : These two appeals by special leave arise from two petitions under Art. 226 of the Constitution in the High Court of Kerala questioning the assessment to Agricultural Income-tax of Bhavani Tea Produce Co. Ltd. (respondent) under the Madras Plantations Agricultural Income-tax Act, 1955 (as extended to Kerala State) for the assessment years 1955-56 and 1956-57, respectively. The High Court decided that certain receipts were not taxable in those assessment years and the State of Kerala is the appellant before us. The assessment year in each case ended on March 31, of the year and tax was leviable on the results of the previous year. For the first of the two assessment years, corresponding to the previous year ended on March 31, 1955 the net agricultural income was assessed at Rs. 1,32,198 and a tax of Rs. 45,443-1-0 was demanded by the Department and in the succeeding assessment year, corresponding to the previous year ended on March 31, 1956, the amounts of net agricultural income and the tax were respectively Rs. 1,24,339 and Rs. 42,810-5-0. The assessee Company claimed that Rs. 97,090 in the first year and Rs. 10,095 in the second year were not taxable although received by the company from the Coffee Board during the relevant accounting years. The Company contended that these payments were in respect of coffee delivered by the Company to the Coffee Board under S. 25 of the Coffee Market Expansion Act, 1942, in the years 1952-53 and 1953-54, that is to say, prior to April 1, 1954 when the Madras Plantations Agricultural Income-tax Act came into force and were not assessable, as the accounts were maintained on the mercantile system and the amounts were shown in 1952-53 and 1953-54. This plea was not accepted by the Agricultural Income-tax Officer, Coimbatore. His assessment orders are, dated May 18, 1956 and July 15, 1957, respectively. The Company appealed, but the Appellate Assistant Commissioner by orders passed on December 19,1958 dismissed the appeals. The Company appealed further. By a common order, dated January 25, 1960 the Agricultural Income-tax Appellate Tribunal dismissed the appeal in respect of the assessment year 1955-56. In the other appeal the conclusion was the same but the case had to be remanded to ascertain some matters not connected with the present controversy. In both the cases the Department had held that the income was derived in the relevant previous year and this opinion was upheld previous year and this opinion was upheld by the Appellate Tribunal. The Appellant Tribunal observed that.
"amounts actually received in the previous year as the price of coffee from the plantation should be regarded as income derived from the plantation in that year irrespective of the year to which the crop belongs."
The Company did not apply for revision under S. 54 of the Agricultural Income-tax Act, but instead filed petitions under Art, 226 of the Constitution against Agricultural Income-tax Officer, Coimbatore. Appellate Assistant Commissioner of Agricultural Income-tax, Kozhikode and Agricultural Income-tax Appellate Tribunal, Trivandrum. The petitions were heard by Mr. Justice Vaidialingam who accepted the contention of the assessee company and cancelling the assessment orders impugned before him directed the Agricultural Income-tax Officer to make a reassessment of the total income excluding the sums of Rs. 97,090 in the first year and Rs. 10,095 in the second year. The judgment was pronounced on August 18, 1961. The State of Kerala and the Agricultural Income-tax Officer appealed under the Letters Patent. The appeal was summarily dismissed on January 9, 1962. It is from this judgement that the present appeals have been filed.
2. The only question is whether the two amounts were rightly excluded from the assessable agricultural income for the two assessment years. The answer to this question depends on whether under the scheme of the Madras Plantations Agricultural Income-tax Act read with
