Kochu Thommen, J.
1. A common question arises in all these cases. The petitioners are companies owning tea gardens in the State of Kerala. The tea leaves grown in their gardens are processed in their factories for the preparation of black tea. The tea thus produced is sold by them inthe market. They say that the preparation of tea is by a process leading from agriculture to manufacture, the various stages of which are described by them as follows :
'After the tea leaves are grown and plucked they are subjected to withering, rolling or crushing, tearing, and curling, fermenting, drying, grading and then packing. The entire process mentioned above is a combination of both agriculture and manufacture.'
2. The companies are assessed both under the I.T. Act, 1961 (the 'Central Act') and the Agrl. I.T. Act, 1950 (Act XXII of 1950) (the 'State Act'). The petitioners say that they are aggrieved by the deletion of the Explanation to Section 2(a)(2) of the State Act by Section 2 of the Agrl. I.T. (Amend,) Act, 1980. Section 2 of this Amendment Act reads :
'2. Amendment of Section 2.--In Section 2 of the Agricultural Income-tax Act, 1950 (XXII of 1950) (hereinafter referred to as the principal Act), in Clause (a), the Explanation shall be omitted.'
3. The reason for the omission of the Explanation, as it emerges from the Statement of Objects and Reasons as well as from the counter-amdavit filed on behalf of the State, is that subsequent to the decision of the Supreme Court in Commissioner of Sales tax v. D.S. Bist : [1980]1SCR593 , the legislative competence of the State is wide enough to 'assess the whole income from tea as agricultural income''--see para, (d) of the counter-amdavit). The Minister of Finance in his budget speech made on March 21, 1980, stated :
'......the whole income from tea would be assessed for agriculturalincome-tax by suitably amending the Act in the light of the judgment of the Supreme Court in Commissioner of Sales Tax v. D.S. Bist [1979] 44 STC 392 : AIR 1980 SCI 69.' (See the Statement of Objects and Reasons)
4. This statement of the Minister as well as the averments in the counter-affidavit indicate that the object of omitting the Explanation to Section 2(a)(2) is to widen the ambit of the State Act, so as to bring to tax the entire income from tea. Is this object consistent with the Constitution
5. Before I examine the omitted Explanation and the provisions of Section 2 of the State Act defining agricultural income, I shall briefly refer to the constitutional grant of legislative competence to the State to assess agricultural income.
6. Entry 46 of List II (State List) of the Seventh Schedule to the Constitution which reads 'taxes on agricultural income' is the source of the legislative power for the State to levy tax on agricultural income. In so far as this income is concerned. Parliament has no competence. Entry 82 of List I (Union List) which reads 'taxes on income other thanagricultural income 'confers power on Parliament to levy tax on income which is not agricultural income. The constitutional definition of agricultural income is contained in Article 366(1) which reads ''agricultural income' means agricultural income as defined for the purposes of the enactments relating to Indian income-tax'. The Constitution has thus merely referred to the enactments relating to Indian income-tax without itself giving the definition.
7. Section 2 of the I.T. Act, 1961, contains the following definition:
'2. In this Act, unless the context otherwise requires,--
(1) 'agricultural income' means-
(a) any rent or revenue derived from land which is situated in India and is used for agricultural purposes ;
(b) any income derived from such land by
(i) agriculture; or
(ii) 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
(iii) the sale by a cultivator or receiver of rent-in-kind 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 paragraph (ii) of this Sub-clause ;.....'
8. This definition ropes in any rent or revenue derived from land used for agricultural purposes as well as any income derived from such land by agriculture, or by the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed to render the produce marketable, or by the sale of such produce. This definition excludes from the concept of agricultural income any income derived from the sale of agricultural produce which has undergone a process of manufacture.
9. Section 295 of the Central Act, in so far as it is material, says :
'295. (1) The Board may, subject to the control of the Central Government, by notification in the Gazette of India, make rules for the whole or any part of India for carrying out the purposes of this Act.
(2) In particular, and without prejudice to the generality of the foregoing power, such rules may provide for all or any of the following matters-
(a) the ascertainment and determination of any class of income;
(b) the manner in which and the procedure by which the income shall be arrived at in the case of-- (i) income derived in part from agriculture and in part from business;...'
10. These provisions give the Board the power to make rules to prescribe the manner in which and the procedure by which income is arrived at in the case of income derived in part from agriculture and in part from business. It is only in respect of the latter, namely, income from business, that the Central Act has any application for the purpose of assessment, although, as I shall presently show, the entirety of the income is computed by means of the machinery provided under the Central Act. Out of such total income, a portion will be excluded from the purview of the Central Act for the purpose of assessment as provided under Rules 7 and 8 of the I.T. Rules, 1962, ('the Rules'). While Rule 7 is a general provision concerning income which is partially agricultural and partially from business, Rule 8 specifically deals with income derived from the sale of tea grown and manufactured by the seller. In the present case, Rule 8 alone has application, for the produce in question is tea. This rule reads :
'8. Income from the manufacture of tea.--(1) Income derived from the sale of tea grown and manufactured by the seller in India shall be computed as if it were income derived from business, and forty per cent. of such income shall be deemed to be income liable to tax...'
11. This rule is applicable only where tea is grown and manufactured by the seller and income has been derived from the sale of such produce. Where sale is of tea leaves grown by a seller, but no tea is manufactured by him, Rule 8 will have no application. In that event, the entire income derived from the sale of such leaves, without subjecting them to process of manufacture, will be treated as agricultural income falling solely within the ambit of the State Act.
12. The Central Act and Rule 8 made thereunder will thus govern only income derived from the sale of tea grown and manufactured by the seller. By a fiction, the income derived from the sale of such tea is computed as if the whole of it were income derived from business'. The relevant provisions of the Central Act, supply the machinery for computation of such income. Having arrived at the income in that manner, forty per cent. of it alone will be deemed to be income liable to tax under the Central Act. In other words, it is that 40% which is treated as income from business, and the remaining portion of sixty per cent. is thus left to the State to be taxed as agricultural income under the State Act. The application of the Central Act, in this respect, is, therefore, limited to computation of the total income for the purpose of excluding sixty per cent. of it and bringing totax under that Act, the remaining forty per cent. It is by this method of exclusion from total income, as computed by recourse to the machinery of the Central Act, that agricultural income has been defined. It is that income alone which falls within the legislative competence of the State for the purpose of levying tax on agricultural income.
13. It is by virtue of the constitutional authority to levy tax on agricultural income, as defined under the Central Act and Rules, that the State law has been made. Section 2(a) of the State Act defines agricultural income in identical terms as Section 2(1) of the Central Act, Section 2(a) of the State Act also contained an Explanation which has now been omitted by the Amendment Act of 1980. The Explanation was as follows :
'Agricultural income derived from such land by the cultivation of tea means that portion of the income derived from the cultivation, manufacture and sale of tea as is defined to be agricultural income for the purposes of the enactments relating to Indian income-tax.'
14. This Explanation was in substance in harmony with the concept of mixed income contemplated by Section 295(2)(b) of the Central Act and Rule 8, which speak of income derived in part from agriculture and in part from business by the sale of tea grown and manufactured. The Explanation under Section 2(a) of the State Act thus specifically referred to that portion of the income from tea as was defined by the Central Act and Rule 8 to be agricultural income by exclusion from the total income computed under the Central Act. So long as the Explanation stood, there was no doubt that the State Legislature did not seek to bring to tax anything in excess of sixty per cent. of the total income so computed under the Central Act. It is now contended by the State that by the omission of the Explanation from the definition of agricultural income under Section 2(a)(2) of the State Act, the legislative ambit of the State is enlarged so as to rope in the entirety of the agricultural income derived from the sale of tea. The authority for such enlarged competence is claimed to be the decision of the Supreme Court in Commissioner of Sales Tax v. D.S. Bist : [1980]1SCR593 .
15. Before I consider the principle discussed by the Supreme Court in the case, it must be noticed that that decision dealt with assessment under the sales tax law of Uttar Pradesh and was not directly concerned with the point in issue here. It would, therefore, be necessary to refer, as I shall presently do, to some of the earlier decisions of the Supreme Court directly on the legislative competence of the State to levy taxes on agricultural income. These decisions, two of winch were of larger Benches, were not cited at the Bar of the Supreme Court, and were consequently not considered in D.S. Bist's case, : [1980]1SCR593 .
16. It is significant that both the Central and State Acts in identical language exclude from the definition of 'agricultural income' income derived from lands used for agriculture by the performance of any process other than what is ordinarily employed for rendering the produce marketable. This means that once the produce has been subjected to a process in excess of what is strictly required to make it fit to be taken to the market, income derived by the sale of such produce will not be wholly agricultural income, but in part business income liable to be taxed under the Central Act, In such cases, it is that portion of the income that is taxable under the Central Act, that is statutorily determined to be forty per cent. of the total income computed in the manner prescribed by Rule 8. The remaining portion alone can be taxed under the State Act, whether or not the Explanation to Section 2(a)(2) is retained or deleted from the State Act. This is because the State has no constitutional auth ority to bring to tax any income other than income specifically defined under the Central Act and the Rules made thereunder as agricultural income. The Central Act, having defined agricultural income by a process of exclusion from the total income, it is only that portion which is so excluded by the Central Act, that is available to the State (for taxation). By the insertion or deletion of any provision in the State Act, the legislative competence of the State cannot be expanded beyond constitutional limitations. The omission of the Explanation thus makes no difference to the legislative competence of the State.
17. A Constitutional bench of the Supreme Court composed of five judges considered in two cases the legislative competence of the State to levy tax on agricultural income. Both in Karimtharuvi Tea Estates Ltd. v. State of Kerala : [1963]48ITR83(SC) and in Anglo-American Direct Tea Trading Co. Ltd. v. Commr. of Agrl. I.T. : [1968]69ITR667(SC) , the Supreme Court held that the ratio fixed under Rule 8 and the computation made under the Central Act, were bound to be accepted by the authority under the State Act. This is what the Supreme Court stated in Anglo-American Direct Tea Trading Co. Ltd. v. Commr. of Agrl. I.T. : [1968]69ITR667(SC) ;
'The question arising in these appeals is whether the Agricultural Income-tax Officer, making an assessment of agricultural income under the Kerala Agricultural Income-tax Act is bound to accept the assessment of the income which has already been made by the Central Income-tax authorities under Rule 24 of the Income-tax Rules, 1922, read with Section 10 of the Indian Income-tax Act, 1922, or under Rule 8 of the Income-tax Rules, 1962, read with Sections 28 - 44 of the Income-tax Act, 1961. We think that this question should be answered in the affirmative. Income from sale of tea grown and manufactured by the seller is derived partly from business and partly from agriculture. This income has to be computed as if it were income from business under the Central Income-tax Act and Rules. 40 per cent. of the income so computed is deemed to be income derived from business and assessable to non-agricultural income-tax. Having regard to the decision in Karimtharuvi Tea Estates Ltd. v. State of Kerala : [1963]48ITR83(SC) , we are bound to hold that (a) the Explanation to Section 2(a)(2) of the Kerala Agricultural Income-tax Act adopts this rule of computation, and (b) the balance 60 per cent. of the income so computed is agricultural income within the meaning of the Central Income-tax Act, and the Constitution. The agricultural income taxable under the Kerala Act is 60 per cent. of the income so computed after deducting therefrom the allowances authorised by Section 5 of the Kerala Act, in so far as the same has not already been allowed in the assessment under the Central Income-tax Act. There is no provision in the Kerala Act, authorising the Agricultural Income-tax Officer to disregard the computation of the tea income made by the income-tax authorities acting under the Central Income-tax Act. The Agricultural Income-tax Officer in making an assessment of agricultural income is bound to accept the computation of the tea income already made by the Central income-tax authorities and to assess only 60 per cent. of the income so computed less allowable deductions as agricultural income taxable under the Kerala Act......'
18. This observation shows that the legislative competence of the State is limited to 60 per cent. of the income computed in terms of the provisions of the Central Act. This principle was re-stated by the Supreme Court in State of Tamil Nadu v. Kannan Devan Hills Produce Co. Ltd. : [1972]84ITR475(SC) and in Tea Estate India P. Ltd. v. CIT : [1976]103ITR785(SC) . If this is the correct position that emerges from the above observation of the Supreme Court, which I think it is, the contention of the State that it is entitled to tax the whole income derived from the sale of tea grown and manufactured by the seller as agricultural income is wrong, and that, even without the Explanation under the State Act, the definition of agricultural income under Section 2(a) thereof must be understood consistently with the ratio prescribed under Rule 8 of the I.T. Rules, 1962.
19. The Advocate-General submits that both in Karimtharuvi Tea Estates Ltd. v. State of Kerala : [1963]48ITR83(SC) and in Anglo-American Direct Tea Trading Co. Ltd. v. Commr. of Agrl. I.T. : [1968]69ITR667(SC) , the Supreme Court has referred to the Explanation to Section 2(a)(2) of the State Act, as a reason for limiting the power of the State to 60 per cent. of the income computed under the Central Act. That limitation, which, according to him, is rooted in the Explanation, is now removed by the deletion of the Explanation. It is, therefore, open to the State, he contends, to bring to tax the entire income from tea. The particular observation of the Supreme Court he relies upon is this:
'Having regard to the decision in Karimtharuvi Tea Estates Ltd. v. State of Kerala : [1963]48ITR83(SC) , we are bound to hold that (a) the Explanation to Section 2(a)(2) of the Kerala Agricultural Income-tax Act, adopts this rule of computation, and (b) the balance 60 per cent. of the income so computed is agricultural income within the meaning of the Central Income-tax Act and the Constitution. '(See Anglo-American Direct Tea Trading Co. v. Commr. of Agrl. I.T. : [1968]69ITR667(SC) ).
20. It is true that the Supreme Court has referred to the Explanation to Section 2(a)(2) of the Kerala Act, as one of the two reasons for the decision. The other, and the more important reason, is that the 'balance 60 per cent.' alone is defined to be agricultural income under the Central Act, and it is to that definition that the Constitution has referred as the specific area delimited to the State to legislate upon under entry 46 of List II. This is clear from the earlier discussions in the judgment where the Supreme Court refers to Article 366(1) of the Constitution and says that agricultural income is that income which is denned as such under the Central Act, and the rules framed thereunder. It is, therefore, futile to contend that by the deletion of the Explanation under the State Act, the legislative competence of the State which is derived from the specific constitutional entry, can be enlarged.
21. In Karimtharuvi Tea Estates Ltd. v. State of Kerala : [1963]48ITR83(SC) , the Supreme Court stated (p. 88):
'It follows, therefore, that the power of the State legislature to make a law in respect of taxes on agricultural income arising from tea plantations will be limited to legislating with respect to the agricultural income so determined. The State legislature is free in the exercise of its plenary legislative power to allow further deductions from such computed agricultural income as it considers fit, but it cannot add to the amount of the agricultural income so computed by providing that certain items of expenditure deducted in the computation of the income from a business under the provisions of the Income-tax Act be not deducted and be considered to be a part of the taxable agricultural income.'
22. The Supreme Court then, referring to the definition under Section 2 of the State Act, said (p. 89):
'This definition practically conforms to the definition of 'agricultural income' in Sub-clauses (a) and (b) of Clause (1) of Section 2 of the Income-tax Act. The Explanation added in the definition of 'agriculturalincome' in the Agricultural Income-tax Act in substance adopts what has been provided in Rule 24 of the Income-tax Rules, 1922, about the proportion, of agricultural income from tea plantations. It follows, therefore, that agricultural income from tea plantations is to be computed in the same manner as it is computed under the provisions of the Income-tax Act.'
23. Referring to Expln. 2 to Section 5 of the State Act, which was not consistent with either the Explanation to Section 2(a)(2) of the same Act, or with the mode of computation provided under the Central Act and the Rules, the Supreme Court stated (p. 90):
'Explanation 2 (to Section 5), if applied to income from tea, would create an agricultural income which is not contemplated by the Income-tax Act and the Constitution and would then be void.'
24. The emphasis was thus not on the Explanation under Section 2 of the State Act, which only stated what was even otherwise explicit from the constitutional provisions. The reason for the decision was the Constitution and the Central Act, and that reason cannot be changed by any amendment of the State Act. The Supreme Court then stated (p. 91) :
'It is not disputed for the respondent that the power of the State Legislature to enact a law in respect of agricultural income relates only to such agricultural income as is defined in Article 366 of the Constitution.'
25. The Supreme Court also rejected the contention that for the definition mentioned under Article 366 one has to look for the definition of 'agricultural income' solely in the I.T. Act, and not in the Rules made thereunder. The Rules being part of the Central Act, the proportion prescribed under Rule 8 necessarily governs the determination of the respective incomes under the two enactments.
26. In State of Tamil Nadu v. Kannan Devan Hills Produce Co. : [1972]84ITR475(SC) , the Supreme Court, referring to earlier cases, reaffirmed the principle that an assessment made by the Central ITO, before the income was assessed by the State officer, was binding on the latter in the matter of computation of income for the purpose of arriving at the agricultural income represented by 60 per cent. The court, however, left open the question whether in every case the State officer was bound to accept the computation made by the Central income-tax authority and allow only additional deductions which could be permitted under the State Act. See also Tea Estate India P. Ltd. v. CIT : [1976]103ITR785(SC) , to the same effect. What is left open by the court is the actual computation of theincome--the arithmetical working--and not the principle. These decisions leave no doubt that in respect of agricultural income derived from tea grown and manufactured by the seller, the legislative competence of the State is limited to 60 per cent. of such income as computed under the Central Act and the Rules.
27. The question, however, is whether this position stands altered, as now contended by the State, by the decision of the Supreme Court in Commr. of Saks Tax v. D.S. Bist : [1980]1SCR593 . As stated earlier, that was a case which arose under the Uttar Pradesh Sales Tax Act, 1948. The question which the court answered was:
'Whether, on the facts and circumstances of this case, the article ceased to be an agricultural produce and whether the tea produced by the assessee would be exigible to sales tax ?'
28. Dismissing the appeal by the Revenue, against the judgment of the High Court, which answered the question in favour of the assessee, the Supreme Court stated that the 'turnover' as denned under the Act, excluded agricultural produce. The proviso to the definition of 'turnover' under the Uttar Pradesh Act stated as follows (p. 394 of 44 STC):
'Provided that the proceeds of the sale by a person of agricultural or horticultural produce, grown by himself or grown on any land in which he has an interest......shall be excluded from his turnover.'
29. Referring to this definition, the Supreme Court stated (p. 394):
'Indisputably and undoubtedly, the assessee was an agriculturist, the tea leaves grown by him in his land were agricultural produce, and he had sold them after processing and packing. In other words, the assessee made them marketable and fit for consumption by the consumers and then sold them. If the tea leaves so sold substantially retained the character of being an agricultural produce, it is plain that the assessee's sales will not he exigible to sales tax. If, on the other hand, the leaves had undergone such vital changes by processing that they lost their character of being an agricultural produce and became a different commodity, then the sales made by the assessee were exigible to sales tax.'
30. The question, in that case, was whether the turnover which was chargeable to sales tax included the proceeds of sale of the tea leaves grown and sold by the assessee. On the facts of that case the court said that the assessee did not process the leaves in excess of what was strictly necessary for making them marketable and fit for consumption. The leaves had not undergone any vital change so as to lose their character of being an agricultural produce. As they did not cease to be an agricultural pro-duce, the definition of 'turnover' did not include the sale proceeds of those leaves and they were not, therefore, exigible to sales tax. None of the observations in the judgment can be read to mean that the entirety of the income derived from the sale of tea grown and manufactured by the assessee would be chargeable to agricultural income-tax, for such a construction would not only be unwarranted by the facts and reasoning of that case, but would also be directly in conflict with the Central statute and the principle laid down by a larger Bench of five judges of the Supreme Court in the two cases cited earlier and subsequently followed in its other decisions.
31. Referring to the following observation of the Supreme Court in Anglo-American Direct Tea Trading Co. : [1968]69ITR667(SC) ;
'There is no provision in the Kerala Act, authorising the Agricultural Income-tax Officer, to disregard the computation of the tea income made by the income-tax authorities acting under the Central Income-tax Acts',
32. the Advocate-General contends that, with the deletion of the Explanation, the link with the Central Act is snapped, and, in terms of the other provisions of the State Act, agricultural income, which is a subject falling within the exclusive domain of the State, can be assessed independently of the Central Act. This argument, for the reason which I have already stated, is unsustainable, for the State can tax only such agricultural income as is defined under the Central Act, to which the Constitution has made a specific reference. It is only with reference to the Central Act and the Rules can agricultural income be computed where the income has been derived in part from agriculture and in part from business. This result is not because of the State Act but because of the Constitution.
33. If, however, the income derived is solely from agriculture, and no part of it is traceable to any process beyond the degree referred to in Section 2 of the State Act or the Central Act, i.e., the process ordinarily employed to render the produce fit to be taken to the market, in such cases, and in such cases alone, the income has to be computed solely with reference to the State Act, and the entirety of the income so computed is taxable solely under the State Act. Such cases may, however, seldom arise in regard to tea as tea leaves have little value when they have not been subjected to the necessary manufacturing process to produce the different brands.
34. Where tea leaves which are grown and manufactured are sold, the relevant provisions of the Central Act and the Rules would immediately come into play, for the purpose of computation, thereby depriving the State of 40 per cent. of the total income so computed. In a case where the computation has already been made by the Central ITO, that computation is, as stated by the Supreme Court, binding upon the State authority in regard to the quantification and the proportion. The question whether it would be open to the State to independently make a computation, in accordance with the relevant provisions of the Central Act, before the Central ITO made the computation, or whether the assessment under the State Act must necessarily wait till the assessment under the Central Act is completed, does not call for consideration in the present case. It must, however, be pointed out that any attempt on the part of the State officer to pre-empt or foreclose or forestall an assessment under the Central Act, by making an assessment in advance under the State Act, after arbitrarily recording a finding that the entire income arose from agriculture and no part of it was derived from business, the evidence to the contrary notwithstanding, would undoubtedly tantamount to constitutional violation and would be void.
35. I do not propose to deal with the contention urged on behalf of the State that Rule 8 is arbitrary and ultra vires. The validity of the Central Act or the Rules made thereunder does not arise for consideration in this proceeding. I must, therefore, proceed on the basis that Rule 8, the principle of which has stood the test of time, is perfectly valid. This rule, which is derived from Section 295(2)(b) of the Central Act, read with Article 366(1) of the Constitution, is a binding fetter on the legislative competence of the State.
36. The Advocate-General rightly points out that the State Legislature is perfectly competent to omit any provision which it has enacted and it is not open to the petitioners to question the validity of the Amendment Act, deleting the Explanation. But the question is not whether the State Legislature is competent to omit the Explanation or any other provision of the State Act, which it undoubtedly is, but whether the State Legislature is competent to assess such portion of the total income, derived from the sale of tea grown and manufactured by the seller, as is, or as is liable to be, treated as income from business. The answer is clearly no. It is so declared.
37. The original petitions are accordingly allowed in the above terms. I make no order as to costs.