Full Judgment Text
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PETITIONER:
STATE OF KERALA AND OTHERS
Vs.
RESPONDENT:
BHAVANI TEA PRODUCE CO. LTD.
DATE OF JUDGMENT:
07/10/1965
BENCH:
SIKRI, S.M.
BENCH:
SIKRI, S.M.
GAJENDRAGADKAR, P.B. (CJ)
WANCHOO, K.N.
HIDAYATULLAH, M.
SHAH, J.C.
CITATION:
1966 AIR 580 1966 SCR (2) 63
CITATOR INFO :
F 1969 SC 302 (10)
E 1980 SC1109 (4)
ACT:
Madras Plantations Agricultural Income-tax Act, 1955 (as
extended to Kerala State) s. 3-Charge of income-tax on
income-tax previous year-Accounts wintained on mercantile
system-Coffee supplied to Coffee Board under s. 25 of the
Coffee Act, 1942 and price entered in accounts though not
received--Price received in next accounting year--Income
when accrues--Sale when occurs-Whether in year of supply or
year in which price received.
HEADNOTE:
Under s. 3 of the Madras Plantations Agricultural Income-tax
Act, 1955 (as extended to Kerala State) income-tax was to be
assessed in each financial year on the income of an assessee
during the previous Year. The first assessment under the
Act could be for 1955-56 so, that income of any period
before April 1, 1954 could not be taxed under the Act. The
respondent company was assessed for the years 1955-56 and
1956-57 on its income of the relevant previous years. The
company objected to the inclusion in its income for these
years of certain sums on the ground that they represented
income of the period before April 1, 1954 to which the Act
did not apply. The controversy was in respect of certain
sales -of coffee which, according to the company, took place
in its accounting years ending March 31, 1953 and March 31,
1954. The sales were to the Coffee Board under s. 25 of the
Coffee Act and as the company maintained its accounts on the
mercantile system the price was also entered in the accounts
at the time of the sale itself although it was received
later i.e. in the previous years relevant to the assessment
years 1955-56 and 1956-57. The Appellate Assistant
Commissioner of Agricultural In-come-tax and the Appellate
Tribunal held that the income arose when the price was
received and thus upheld the inclusion of the income from
the aforesaid sales in the assessment for 1955-56 and 1956-
57. The company filed writ petitions in the High Court
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challenging the said assessments. A single judge decided in
favour of the company and so did the Division Bench. The
State of Kerala appealed by special leave to this Court.
HELD : All Coffee which the Coffee Board obtains under the
Coffee Act is put in a pool and gets mixed up with other
coffee. Coffee in the Pool is disposed of on behalf of the
Coffee Board which pays only a proportionate price to the
planter. -Even though the planter does not actually sell
coffee to the Coffee Board there is in reality a sale by
operation of law as a result of which the planter ceases to
be the owner of coffee the moment he has handed over his
produce to the Coffee Board, The fact that the price is
received later does not make it any the less a sale. [99 H;
1100 A-B]
The system of accounting must make a difference as to the
time when the income arises. If it were a cash system
income would be taxable when actually received but in the
mercantile system it would be taxable in the year in which
the relevant entry is made about the sale of the coffee to
the Coffee Board. [100 C]
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The appellant company maintained its accounts on the
mercantile system. When it handed-over coffee to the Coffee
Board it entered the price of coffee according to the
valuation of the Coffee Board in its books of. account
although it did not receive payment immediately. The
payment for coffee handed over before April 1. 1954 was
received after that date. No doubt actual payment was
received in the previous years relevant to the assessment
years 1955-56 and 1956-57 but coffee was handed over to the
Coffee Board in the earlier years for which no, tax could be
demanded. The High Court therefore rightly held that the
income in question was not taxable in the said assessment
years. [99 F-G; 101 A]
Puthuthototam Estates (1943) Ltd. v. Agricultural Income-tax
Officer, Coimbatore, 34 I.T.R. 765, Puthuthotottam Estates
(1943) Ltd. v. Agricultural Income-tax Officer, 45 I.T.R. 87
JUDGMENT:
I.T.R. 353, referred to.
&
CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 650 and
651 of 1964.
Appeals by special leave from the judgment and order dated
January 9, 1962 of the Kerala High Court in Writ Petitions
Nos. 154 and 155 of 1961.
P. Govinda Menon and V. A. Seyed Muhammad, for the
appellants.
M. C. Setalvad, O. P. Malhotra, J. B. Dadachanji, O. C.
Mathur and Ravinder Narain, for the respondent.
The Judgment of the Court was delivered by
Hidaytullah 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 3 1, of the
year and tax was leviable on the results of the previous
year. For the first of the two assessment years, corres-
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ponding 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/ 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/The assessee Company claimed that
Rs. 97,090/- in the first year and Rs. 10,09-51/- in the
second year were not taxable although
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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, 1966 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 by the Appellate Tribunal. The Appellate 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 Com-
missioner 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
canceling 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 sumarily
dismissed on January 9, 1962. It is from this judgment that
the present appeals have been filed.
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
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under the scheme of the Madras Plantations Agricultural
Income Tax Act read with the scheme of the Coffee Act it can
be said that the income was only received when the payment
was received or ’when the produce was handed over to the
Coffee Board and under the mercantile system of accounting
it was entered in the books of account of the assessee
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company. If the answer is that income was received when the
crop was handed over to the Coffee Board and the entry was
made in the books of account under the mercantile system,
the judgment under appeal must be considered to be right but
if it is the other way, then the action of the Department
was correct. We shall now consider this question.
Before we proceed we shall analyse the provisions of the two
Acts with which we are concerned. The Madras Plantations
Agricultural Income Tax Act consists of 65 sections. It is
not necessary to give a full analysis of that Act. For our
purpose it is sufficient to refer to some of the provisions
only. Section 2 defines "Agricultural income", inter alia,
as any income derived from a plantation in the State and
Explanation II says that Agricultural income derived from
such plantation by the cultivation of coffee means that
portion of the income derived from the cultivation,
manufacture and sale of coffee as may be defined to be
agricultural income for the purpose of the enactments
relating to Indian Income-tax Act. "Plantation" in the Act
means any land used for growing certain crops including
coffee. Section 3 lays charge of agricultural income-tax
and for our purpose we need -read only the first sub-
section. It is :
"3. Charge of agricultural income-tax’.
(1) Agricultural income-tax at the rate or
rates specified in Part 1 of the Schedule to
this Act shall be charged for such financial
year commencing from the 1st April 1955 in
accordance with and subject to the provisions
of this Act, on the total agricultural income
of the previous year of every person
(2)
Section 4 defines "Total agricultural income" as the total
agricultural income-tax any previous year of any person
from a plantation situate within the State. We are not
concerned with the other sections. Some deal with the
computation of agricultural income, the expenses which may
be deducted, the method of accounting, exemption from the
tax under the Act and computation and carrying forward of
loss, Some others establish Income-tax Authorities,
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Appellate Tribunal and provide generally how returns of
assessment should be made and sundry matters which have no
relevance here. It is thus clear that the income, which is
sought to be taxed was the kind of income which is taxable
under the Act. This income was derived from coffee grown on
a plantation situated within the State and the only question
is in which year the income can be said to be received by
the assessee company.
To ascertain this we have to turn to the provisions of the
Coffee Market Expansion Act of 1942 because the sale of
coffee was not made directly by the assessee but by a Board
established under the Coffee Market Expansion Act. That Act
replaced an Ordinance of the Governor-General (Ordinance No.
30 of 1940) passed to assist the coffee industry by
regulating the export and sale of coffee. As a result of
the outbreak of the Second World War Indian coffee had lost
some of its important foreign markets and there arose a
great slump in the price of coffee. A Coffee Control
Conference convened to consider the situation, suggested
steps that could be taken to save the coffee industry in
India. Its recommendations- led to the passing of the
Ordinance of 1940. A second Coffee Control Conference was
held in 1941 and after its recommendations were considered
by the Standing Advisory Committee of the Legislature
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attached to the Commerce Department, the present Act was
passed. This Act has been frequently amended and today it
is called the Coffee Act after the amendment of its title in
1954. We have referred, and shall refer, to it by this
name. The, Coffee Act constituted a Board which was known
as the Indian Coffee Market Expansion Board, now called the
Coffee Board. The Coffee Board is a body corporate (having
perpetual succession and a common seal) with power to
acquire and hold property, both movable and immovable and to
contract (S. 5). The Coffee Act imposes a duty of customs
on all coffee produced in India and exported from India (s.
1 1 ) and a duty of excise on all coffee which an estate
registered under s. 14 is permitted, under a scheme of
internal sale quota allotted to it, to sell in the Indian
market, whether such coffee is actually sold or not, and on
all coffee released for sale in India by the Coffee Board
from its surplus pool (S. 12).. The proceeds of these duties
(though first credited to the Consolidated Fund of India)
may be paid to the Coffee Board and when so paid are
credited to a General Fund (s. 13). All owners of coffee
estates of not less than 10 acres are required to register
with a Registering Officer appointed in this behalf by the
State Government and the registration once made continues
till it is cancelled (s. 14). The Central Government fixes
the price or prices at which coffee may be sold wholesale or
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retail in the Indian Market and no registered owner or
licensed curer or dealer can sell coffee wholesale or retail
in the Indian market at a price or prices higher than the
price or prices fixed by the Central Government (s. 16).
Section 17 next provides
"17. Sale of coffee in excess of internal sale quota.
No registered owner shall sell or contract to
sell in the Indian market coffee from any
registered estate if by such sale the internal
sale quota allotted to that estate is exceeded
nor shall a registered owner sell or contract
to sell in the Indian market any coffee
produced on his estate in any year for which
no internal sale quota is allotted to the
estate."
The internal sale quota is fixed by s. 22. Under that
section the Coffee Board allots to each registered estate an
internal sale quota for the year. Unless with the previous
sanction of the Central’ Government the Coffee Board decides
that no internal sale quota shall be allotted, the Board
allots to each registered estate an internal sale quota for
the year. The internal sale quota is a fixed percentage,
common to all registered estates, of the probable total
production of the estate in the year as estimated by the
Board. For the purpose of fixing the quota the registered
owner is required to furnish such returns as the Board may
demand. The surplus pool to which we have referred means
the stock of coffee accumulated by the Board out of the
amounts delivered to the Board under s. 25. That section is
a long section of six sub-sections and they need to be
carefully considered. It provides that all coffee produced
by a registered estate in excess of the amount specified in
the internal sale quota allotted to that estate shall
delivered to the Coffee Board by the owner of the estate for
inclusion in the surplus pool. (sub-s. 1). Delivery of
coffee must be made to the Coffee Board in such places and
at such times and in such manner as the Coffee Board may
direct and the Coffee Board may give directions for partial
delivery to the surplus pool at any time whether the
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internal sale quota has been exceeded or not and the Coffee
Board may reject any defective consignment (sub-s. 2).
Coffee delivered to the Coffee Board for inclusion in the
surplus pool must represent fairly in kind and quality the
produce of the estate, and such coffee remains under the
control of the Coffee Board and the Coffee Board is
responsible for its storage, curing (when necessary) and
marketing (sub. s. 3). The Coffee Board must prepare, from
time to time, a differential sale for the valuation of such
coffee. In accordance with that scale the Coffee Board must
classify each consignment delivered for inclusion in the
surplus
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pool and make an assessment of its value based on its
quantity, kind and quality (sub-s. 4). Sub-section (5) is
not material. Subsection (6) then provides as follows
"25. Surplus coffee and surplus pool
(6) When coffee has been delivered or is
treated as having been delivered for inclusion
in the surplus, pool, the registered owner
whose coffee has been so delivered or is
treated as having been so delivered shall
retain no rights in respect of such coffee
except his right to receive the payments
referred to in section 34."
Section 34, which is here referred to, reads
"34. Payments to registered owners.
The Board shall at such times as it thinks fit
make to registered owners who have delivered
coffee for inclusion in the surplus pool
such payments out of the pool fund as it may
think proper.
(2) ’The sum of all payments made under sub-
section (1) to any one registered owner shall
bear to the sum of the payments made to all
registered owners the same proportion as the
value of the coffee delivered by him out of
the year’s crop to the surplus pool bears to
the value of all coffee delivered to the
surplus pool out of that year’s crop
Provided that in calculating the sum of all
payments made under sub-section (1) and the
value of the coffee delivered to the surplus
pool out of the year’s crop, respectively, any
payment accepted by a registered owner as
final payment in immediate settlement for
coffee delivered by him for inclusion in the
surplus pool and the value of any such coffee
shall be excluded."
We may refer to one other section and that is
section 33 which confers on the Board power to
borrow on the security of the coffee so
delivered. It reads as follows
"33. Power to borrow.
The Board may, subject to any prescribed
conditions borrow on the security of the
general fund or the pool fund for any purposes
for which it is authorised to expend money
from such fund, or on the security of the
coffee
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delivered or treated as delivered for
inclusion in the surplus pool for any purposes
for which it is authorised to expend money
from the pool fund."
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The failure to register, contravention of s. 25, making of a
false return, obstruction and contravention of the other
provisions of the Coffee Act, some of which we have not
found necessary to mention here, are constituted offences
and there is provision for punishment and penalty. The
Coffee Board is also given the power to seize coffee
withheld from inclusion in the surplus pool. In this way,
the marketing of coffee is made the duty of the Coffee Board
and the right of a party who has made contributions to the
surplus pool is merely to receive payment for coffee which
is handed over. The quantum of payment is determined, at
first according to the differential scale of valuation
prepared by the Coffee Board. It must be remembered that
under s. 34(2) the payment is in the proportion which the
value of coffee delivered by the owner bears to the value of
all coffee delivered to the surplus pool out of one year’s
crop. But an owner need not wait and may accept an im-
mediate settlement for his coffee. It follows that coffee
delivered to the Coffee Board becomes the property of the
Board no sooner it is delivered. The Coffee Board can
borrow money by pledging it and is not required to return
any part of that coffee to the producer. It only sells it
and gives to the planter price proportionate to the value of
all coffee in the surplus pool for that year, unless the
planter settles for an immediate payment.
The appellant Company maintains its accounts on the mer-
cantile system. When it handed over coffee to the Coffee
Board it entered the price of the coffee according to the
valuation of the Coffee Board in its books of account
although it did not receive payment immediately because as
has been shown above the payment is delayed unless immediate
settlement is made. The payment for coffee handed over
before April 1, 1954 was received after that date. No doubt
actual payment was received in the previous years relevant
to the two assessment years, but coffee was handed over to
the Coffee Board in the earlier years for which no tax could
be demanded. Was there a sale to the Coffee Board ? The
answer must be in the affirmative. The Coffee Board is
neither a trustee nor even an agent of the planter. It is
not accountable to the owner, except as to payment for
coffee received and valued according to the differential
prices. All coffee which the Coffee Board obtains under the
Coffee Act is put in a pool and gets mixed up with other
coffee. Coffee in the pool is disposed of on behalf of the
Coffee Board. The Coffee Board only pays a proportionate
100
price to the planter. Even though the planter does not
actually sell coffee to the Coffee Board there is in reality
a sale by operation of law as a result of which the planter
ceases to be the owner of coffee the moment he has handed
over his produce to the Coffee Board. He is then entitled
to receive payment and is not concerned any more with his
coffee. The unsold coffee is not returned to him and he
does not enjoy any rights of ownership in it. The Coffee
Board can pledge it and sell it as and when it likes. In
these circumstances it is plain that the handing over of
coffee by the planter amounts to a sale to the Coffee Board
and the payment of the price is from the sale of all the
coffee in the surplus pool unless the planter settles for
immediate payment. The system of account must make a
difference. If it were a cash system income would be
taxable when actually received but in the mercantile system
it would be taxable in the year in which the relevant entry
is made about the sale of coffee to the Coffee Board.
We were referred to some rulings of the Madras and the
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Kerala High Courts. In Puthuthottam Estates (1943) Limited
v. Agricultural Income-Tax Officer, Coimbatore,(1)
Rajagopalan J. held that there was nothing in the Madras
Plantations Agricultural Income-tax Act or the Rules
thereunder, which exempted produce gathered earlier than 1st
April, 1954 from taxation if payment was received in any
previous year relevant to an assessment year under the
Madras Plantations Agricultural Income-tax Act. The
judgment of Rajgopalan J. was reversed on appeal in
Puthuthottam Estates (1943) Ltd., v. Agricultural Income-Tax
Officer(1). Rajamannar C.J., and Jagadisan J. held that, if
the sale took place after 1st April 1954, tax was payable no
matter if the produce was of an earlier year but if the sale
took place earlier than that date, tax would not be payable
even if the price was realized later. In the Kerala High
Court distinction was made between entries under cash and
mercantile systems of bookkeeping. In Amalgamated Coffee
Estates Ltd. v. State of Kerala(3) the assessee followed the
mercantile system and payments entered in the accounting
period April 1, 1953 to March 31, 1954 were held not taxable
even though actually received after April 1, 1955. The
reasoning in these two cases is the same as in this
judgment. It is, therefore, not necessary to refer to them.
The judgment under appeal follows the earlier decision of
the same Court and the Divisional Bench decision of the
Madras High Court, and in our opinion the High Court have
taken the right view of the matter.
(1) 34 I. T. R. 764.
(2) 45 I. T. R. 87.
(3) 45 T. T. R. 353.
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The High Court was thus right in holding that there was no
sale in the years relevant to the assessment years for which
the tax demanded. The sale had taken place in the earlier
years over which the Agricultural Income-tax Act did not
operate. The appeals will therefore be dismissed with
costs. One set of hearing fees.
Appeals dismissed..
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