1. In the 11 appeals filed by the assessee, the question raised is whether the Income-tax Appellate Tribunal was justified in sustaining assessment of part of the income derived by the appellant company from the sale of crude palm oil as “business income” under Rule 7 of the Income-tax Rules, 1961. We have heard the learned Senior Counsel Sri.A.K.J. Nambiar appearing for the assessee and the learned Senior Counsel Sri.P.K.R. Menon appearing for the respondents.
2. The appellant is a plantation company in the public sector under the control of the State Government engaged in cultivation of oil palm and processing and extraction of crude palm oil from the fruit as well as from the kernel. For several years, the appellant has been assessed only under the Kerala Agricultural Income-tax Act treating 100% of the income as “agricultural income” and, therefore, the appellant has been filing returns under the Agricultural Income-tax Act and paying tax to the State Government on the entire income. However, from the assessment year 1997-93 onwards, the Assessing Officer under the Central Income-Tax Act made assessments treating part of the income earned by the appellant Rule 7 of the Income-Tax Rules against which the appellant filed statutory appeals but without success. The Income-tax Appellate Tribunal on second appeals confirmed the assessment of part of the income as business income under Rule 7 of the Income Tax Rules and also confirmed the method of computation accepting the deduction under Section 43 B in respect of Agricultural Income Tax paid. It is against these orders of the Tribunal, the assessee has filed appeals against the assessments confirmed for the assessment years 1997-98 to 2006-07. During hearing of these appeals, the Senior Counsel appearing for the assessee brought to our notice the pendency of W.P.(C) No. 36862/2004 before this Court, which is basically against the income-tax assessments which are now impugned in the instant appeals. For the disposal of the writ petition, it is necessary that the agricultural income tax authorities under the State are also heard. At the request of the counsel for the assessee, we have ordered posting of that case before the Division Bench because the writ petition has to be disposed of based on the judgment in these appeals.
3. The short question arising for decision is whether the entire income generated by the appellant in the course of plantation and in the subsequent activity of extracting crude palm oil from palm pericarp (fruit portion excluding the kernel) and also from the kernel constitute agricultural income as defined under Section 2 (1A) of the Income Tax Act, 1961. The Agricultural income as defined under the above provision is as follows:
(1A) “agricultural income” means-
(a) any rent or revenue derived from land which is situated in India and is used for agricultural purposes;
(ii) the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by a cultivator or receiver or 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.
From the above definition, what is clear is that the agricultural activity includes any process ordinarily employed by a cultivator or a receiver of rent in kind to render the produce raised or received also fit to be taken to the market. Admittedly, the plantation activity which culminates in taking the crop with the outside fruit pericarp outside and the kernel inside is an agricultural activity and the respondent also have no dispute on that. However, dispute starts with regard to the subsequent process, that is industrial activity, wherein the appellant engages a series of process of curing and extracting oil from the pericarp (pulp) and also from the kernel in the factory. The process involved is extracted in the impugned orders particularly by the first appellate authority wherein the process is stated briefly as follows:
Details of processing:
Fresh fruit bunches received in the factory is sterilized by steaming in a large autoclave for a period of 50 minutes. After that the fruits are stripped by using a bunch stripper. After stripping the bunches the fruits are fed into the Digester to release the oil from the pericarp cells by mashing them and to raise the temperature of the mash to facilitate a subsequent pressing. By pressing with a screw press the solid portions and liquid portions of the mash are separated. The liquid portion is channeled to the Clarifier to clarify. After clarification to remove the sand and heavy waste particles and to dry the oil, the dried oil is then continuously pumped to the storage tank for final dispatch. By this processing the company produce only Crude Palm Oil and not edible oil. The whole process of extraction of oil is to convert the same as a saleable commodity. The CPO is sold to Vanaspathy manufacturers etc. for further processing and manufacture of end products, the solid portions obtained from the press is passed through the depericarper system to separate the fibre and nut for further processing. As the company do not have a Kernel Oil Extraction Plant the nut is sold a such. Approximately a quantity of 2000 ton is produced annually”.
From the above, the assessee’s fairly concedes that the whole activity of processing and extraction of oil is in a factory done through mechanical and other process and the assessee has also made massive investment in the factory. There can be no controversy that the sophisticated process engaged in by the appellant is one which no ordinary cultivator can engage in and further the assessee is the sole company in the State engaged in extraction of palm oil from palm kernels and the pericarp (fruit). In fact, the small growers supply the fruit to the appellant/assessee, which alone has the processing facility for extraction of oil. In our view, the processing covered by sub-clause (ii) of Section 2 (1A)(b) is only so much of the process which a cultivator ordinarily engaged to make the product fit for marketing. Normally the process engaged by cultivators are curing, drying, garbling etc. and not any industrial activity which is possible only in a factory. So much so, going by the complicated process involved in extraction of crude palm oil from pericarp and kernel, we conclude that so much of the activity carried out by the appellant in the extraction of oil from the fruit/from the kernel is an industrial activity and, therefore, income from such activity is assessable as its “profits and gains of business” under Section 28 of the Income Tax Act.
4. Rule 7 of the Income Tax Rules visualizes the situation where the income from various activities constitute partly agricultural income and partly business income. For easy reference, Rule 7 is extracted hereunder:
“Rule 7. Income which is partially agricultural and partially from business.
(1) In the case of income which is partially agricultural income as defined in Section 2 and partially income chargeable to income-tax under the head “Profits and gains of business” in determining that part which is chargeable to income-tax the market value of any agricultural produce which has been raised by the assessee or received by him as rent-in-kind and which has been utilized as a raw material in such business or the sale receipts of which are included in the accounts of the business shall be deducted, and no further deduction shall be made in respect of any expenditure incurred by the assessee as a cultivator or receiver of rent-in-kind.
(2) For the purpose of sub-rule (1) “market value” shall be deemed to be:-
a) where agricultural produce is ordinarily sold in the market in this raw state, or after application to it of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render it fit to be taken to market, the value calculated according to the average price at which it has been so sold during the relevant previous year:
(b) where agricultural produce is not ordinarily sold in the market in its raw state or after application to it of any process aforesaid, the aggregate of –
(i) the expenses of cultivation;
(ii) the land revenue or rent paid for the area in which it was grown; and
(iii) such amount as the Assessing Officer finds, having regard to all the circumstances in each case, to represent a reasonable profit.”
5. So much so, so much of the income attributable to agricultural operations, as per sub-rule (2) above stated, that is the market value of the agricultural produce; which in this case is the fruit with the pulp and the kernel therein, has to be excluded and business income has to be computed only for the value added product namely crude palm oil extracted and sold. There is no serious controversy with regard to the computation of business income done by the assessing authority under the Income Tax Act by applying Rule 7. Even though, it would be desirable to provide a ratio for bifurcation of income as is done in Rule 7A in the case of rubber, under Rule 7B for coffee, and under Rule 8 for tea, the Central Government has not chosen to make any specific provision for computation of income in the case of palm oil. We, therefore, feel that assessment by applying Rule 7 is perfectly in order. Since the computation made by the officer and modified in first appeal and by the Tribunal is not in contest, we do not go into the correctness of computation and apportionment of income for assessment under the Central Act and the State Act. So far as the appellant’s grievance against double assessment of part of the income inasmuch as they have filed returns and paid tax under the Agricultural Income Tax Act on the entire income as agricultural income, we feel eligible relief can be considered only in the writ petition pending and not in these statutory appeals filed by the appellant under Section 260A of the Income Tax Act; wherein we have considered the substantial question of law arising from the orders of the Tribunal.
For the reasons above stated, the appeals are dismissed upholding the orders of the Tribunal leaving freedom to the appellant to raise the grievances on double assessment in the writ petition pending.