Viswanatha Chettiar Vs. Agricultural Income-tax Officer, Mercara - Court Judgment

1. In this reference under section 54 of the Coorg Agricultural Income-tax Act, 1951, to be hereinafter referred to as 'the Act', two questions of law have been referred to us for our opinion. They are :

'1. Whether there were materials for the Commissioner of Agricultural Income-tax to hold that the status of the applicant is an `association of persons' for purposes of assessment under the Coorg Agricultural Income-tax Act, 1951

2. Whether the sale proceeds of timber removed from the petitioner's estate can form part of agricultural income ?'

Hegde, J.

2. Sri E. M. Muthappa Chettiar, the former owner of the estate called the 'Cotacaudu and Jeynacaudu Estates', Sontikoppa, Coorg, by a deed of settlement dated December 19, 1955, transferred the right of ownership of the estate to his three sons in shares who continued to administer and cultivate the lands of the estate as equal partners. As the ownership of the estate was merely transferred from the father to the sons, the Agricultural Income-tax Officer, Coorg, treated the status of the assessee as that of an 'association of persons' and assessed them to tax. Being aggrieved to the assessment, an appeal was filed before the Deputy Commissioner of Agricultural Income-tax, Coorg, who remanded the case for fresh disposal, but the appellate authority upheld the stand taken by the assessing officer in so far as the question of status was concerned. As could be seen from the order of assessment passed by the Agricultural Income-tax Officer on March 14, 1960, the right of co-ownership and separate assessment was passed, but it was turned down as there was no such provision under the Coorg Agricultural Income-tax Act, 1951, analogous to section 3(3) of the Mysore Agricultural Income-tax Act, 1957, or section 9(3) of the Indian Income-tax Act, 1922.

3. The petitions filed a revision petition before the Commissioner of Agricultural Income-tax and the same was dismissed for reasons discussed in my order dated December 29, 1961. The present reference application has arisen out of this order setting out therein the following points of law :

'1. Whether there were materials for the Commissioner of Agricultural Income-tax to hold that the status of the applicants is an `association of persons' for purposes of assessment under the Coorg Agricultural Income-tax Act, 1951

2. Whether the sale proceeds of timber removed from the petitioners' estate can form part of agricultural income ?'

The deed of settlement date December 19, 1955, has transferred the right of ownership of the estate from the father to the sons. From that day onwards, the three brothers joined themselves for a common purpose, namely, to work the estate together and earn profits. This is fortified by the fact that the estate is not specifically divided and no share in the corpus is defined.

4. What constitutes an 'association of persons' has been laid out very lucidly in the decision of the Supreme Court in the case of Commissioner of Income-tax v. Smt. Indira Balkrishna. The decisions in B. N. Elias In re, Commissioner of Income-tax v. Laxmidas Devidas and Dwarakanath Harischandra Pitale, In re may also be referred to. In the present case, the association of three brothers, which is a combination of persons for promotion of joint enterprise in producing income, is an association of persons within the scope and meaning of the section 3 of the Coorg Agricultural Income-tax Act, 1951, and hence the finding of the Agricultural Income-tax Officer with reference to the status of the assessee as an association of persons was upheld by me.

5. The second question of law which the petitioner has raised is : Whether income from timber removed from the petitioners' estate is liable to agricultural income-tax

6. The definition of agricultural income as set out in Coorg Agricultural Income-tax Act, 1951, includes 'any income derived from the land which is used for agricultural purposes. The income from the sale of timber in question was derived from the estate which is used for agricultural purposes.'

7. Now, coming to the first question referred to us, the finding of the Commissioner of Agricultural Income-tax, to be hereinafter referred to as 'Commissioner', is as follows :

'The deed of settlement dated December 19, 1955, has transferred the right of ownership of the estate from the father to the sons. From that day onwards the three brothers joined themselves for a common purpose, namely, to work the estate together to earn profits. This is fortified by the fact that the estate is not specifically divided and no share in the corpus is defined.'

8. On this finding, which finding is binding on us, it cannot be successfully contended that the assessee are not an 'association of persons'. Sri V. Krishna Murthy, the learned counsel for the petitioners, contended that the above finding of the Commissioner is unsupported by the decision given by him in A. I. T/R. P. N./S. R./15 of 1960-61. This contention does not appear to be correct. But before going to that finding, we may first refer to section 3(1) of the Act; that section reads :

'Agricultural income-tax at the rate or rates specified in the schedule to this Act shall be charged for each financial year in accordance with and subject to the provisions of this Act, on the total agricultural income of the previous year of every individual, Hindu undivided family, Marumakkattayam tarwad or tavazhi, Aliyasanthana family or branch, firm, company, association of persons, whether incorporated or not, and institution capable of holding property.'

9. The finding of the Commissioner in his order on the point under consideration is as follows :

'From the above, it is clear that any combination of persons formed for the promotion of a joint enterprise or a combination jointly engaged in producing income is an association of persons within the scope of the expression in section 3 of the Coorg Agricultural Income-tax Act, 1951. Evidently to work the estates and produce income therefrom is the common purpose and object of the three petitioners. The joint action is this objective is also admitted as is evident from the statement that the accounts are maintained in the names of all the three brothers and the cheques are drawn by all the three brothers jointly for making any payment.'

10. In other words, the finding of the Commissioner was that the assessees, who are brothers, joined in a common venture to produce income from out of the estates settled on them by their father. Such a joint venture, in our opinion, makes them an 'association of persons' within the meaning of that expression found in section 3 of the Act. The Act is modelled on the basis of the Indian Income-tax Act, 1922. The question when joint owners become 'association of persons' has been considered in several decisions. In such cases, the true test is to see whether they had joined in a joint venture to raise produce or to earn income, profits or gains from the estate inherited or received by them. This question came up for consideration in Commissioner of Income-tax v. Laxmidas Devidas. Speaking for the court, Beaumont C.J. held in that case :

'The words `other association of individuals' in section 3 have to be construed in their plain ordinary meaning. The only limit to be imposed on the words `other association of individuals' is such as naturally follows from the fact that the word appear in an Act imposing a tax on income, profits and gains, so that the association must be one which produces income, profits or gains. An association of two or more persons for the acquisition of property which is to be managed for the purpose of producing income, profits or gains falls within the words, `other association of individuals' in section 3, and under section 9 of the Act, the association of individuals is the owner of the property, and as such is assessable.'

11. This decision was cited with approval by the Supreme Court in Commissioner of Income-tax v. Smt. Indira Balkrishna. Dealing with the point under consideration, this is what S. K. Das J., who spoke for the court, observed in paragraph 9 of the judgment :

'It is enough for our purpose to refer to three decisions : In re B. N. Elias, Commissioner of Income-tax v. Laxmidas Devidas and In re Dwarakanath Harischandra Pitale. In In re B. N. Elias, Derbyshire C.J. rightly pointed out that the word `associate' means, according to the Oxford Dictionary, `to join in common purpose, or to join in an action.' Therefore, an association of persons must be one in which two or more persons join in a common purpose or common action, and as the words occur in a section which imposes a tax on income, the association must be one the object of which is to produce income, profits or gains. This was the view expressed by Beaumont C.J. in Commissioner of Income-tax v. Laxmidas Devidas at page 589 and also in In re Dwarakanath Harischandra Pitale. In In re B. N. Elias, Costello J. put the test in more forceful language. He said : `It may well be that the intention of the legislature was to hit combinations of individuals who were engaged together in some joint enterprise but did not in law constitute partnerships....... When we find .....that there ......then I think no difficulty arises whatever in the way of saying that ....... these persons did constitute an association......'

12. Before concluding this topic we may refer to two more decisions. The decision of the Supreme Court referred to earlier arose from the decision of the Bombay High Court in Indira Balakrishna v. Commissioner of Income-tax. Therein, Chagla C.J. observed in the course of the judgment :

'In our opinion, what is required before an association of persons can be liable to tax is not that they should receive income but that they should earn or help to earn income by reasons of their association, and if the case of the department stops short of mere receipt of income then the department must fail in bringing home the liability to tax of individuals as an association of persons.'

This decision was cited with approval by a Bench of this court in Civil Petition No. 88 of 1957. Hence, the decision on the question whether the assessee in this case are an 'association of persons' does not depend on the fact that they jointly own the coffee estate in question, but on the fact that they earn or help to earn income by reason of their association. On this point, the finding of the Commissioner is clear and unambiguous and the same is against the assessees.

13. The learned counsel for the assessees placed strong reliance on the decision of the Labour High Court in Nizam-ud-din Amir-ud-din of Lahore, In re. Therein, the assessees, who were the co-heirs of a Mohammadan, inherited after his death under Mohammadan law specific shares of the property left by him. The assessees did not partition the property and rent deeds stood in their joint names. They had jointly employed a munshi to manage the property and collect the rents and the income; after deducting the cost of collection and other expenses, the balance was distributed in accordance with their respective shares. In the assessment year 1937-38 the income-tax authorities assessed the assessee as an 'association of individuals.' The court held, on a reference, that the assessees did not form an association of individuals and they should be separately assessed on their individual shares. It may be noted that in that case the only two relevant facts established were : (1) the assessee jointly owned the property; and (2) that they jointly managed that property. On the basis of those facts, the assessees could not have been held to be an association of persons. We do not think that decision is of any assistance to the assessees. We are already of the opinion that, on the facts found by the Commissioner, the assessees must be held to an 'association of persons'.

14. Now coming to the second question of law set out earlier, the case for the assessees is that the timber that was cut and sold was not planted by any human agency; the same had grown spontaneously and therefore the income realised by the sale of that timber cannot be considered as 'agricultural income'.

'Agricultural income' is defined in section 2(1)(a) of the 'Act'. It says :

'`Agricultural income' means -

(1) any rent or revenue derived from land which is used for agricultural purposes and is either assessed to land revenue in all the States of India or subject to a locate rate assessed and collected by officers of the State Government as such;

(2) 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);

(3) any income actually derived from any building owned and occupied by the receiver of rent or revenue of any such land or occupied by the cultivator, or the receiver of the rent-in-kind, or any land with respect to which, or the produce of which, any operation mentioned in paragraphs (ii) and (iii) of sub-clause (2) is carried on.'

This definition is a faithful reproduction of the definition of 'agricultural income' in the Indian Income-tax Act, 1922. Therefore, the decisions rendered on the latter provisions bear on the point under consideration.

15. But, before going to the decisions in questions, it is necessary to state that the contention of the assessees was, as mentioned earlier, that the timber sold had spontaneously grown. It was not the case of the department that the timber in question was grown with the aid of human agency. It is for the department to establish that the income, which is tried to be reached by the department, is eligible to tax. In other words, it is for the department to establish that the timber sold was not spontaneous growth. Having said this much, we may now proceed to consider the decision bearing on the point.

16. We shall first refer to the decision of the Judicial Committee in Raja Mustafa Ali Khan v. Commissioner of Income-tax. Therein the Judicial Committee held that, though it must always be difficult to draw a line yet, unless there is some measure of cultivation of the land, some expenditure of skill and labour upon it, it cannot be said to be used for agricultural purposes within the meaning of the Income-tax Act, 1922. Their Lordships further held that the income from the sale of forest trees growing naturally and without the intervention of human agency, even if the land is assessed to land revenue, is not agricultural income within the meaning of section 2(1)(a). To the same effect is the decision of the Judicial Committee in Sri Rajah Ravu Venkata Mahipathi Gangadhara Rama Rao Yuvarajah of Pithapuram v. Commissioner of Income-tax.

17. For the reasons mentioned above, our answer to the first question referred to us is in the affirmative and against the assessees. Our answer to the second question referred to is in the negative and in favour of the assessees.

18. The parties will bear their own costs.