ITA No. 147 of 2005 -1- IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 147 of 2005 Date of Decision: 8.12.2010 Bhupinder Dass ....Appellant. Versus Income Tax Officer, Nabha ...Respondent. CORAM:- HON'BLE MR. JUSTICE ADARSH KUMAR GOEL. HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. PRESENT: Mr. J.S. Puri, Advocate for the appellant. Mr. Tajender K. Joshi, Advocate for the respondent. AJAY KUMAR MITTAL, J. 1. This order shall dispose of four appeal being ITA Nos. 147 to 150 of 2005 as common questions of law are involved therein. 2. ITA No.147 of 2005 was admitted by this Court for determination of the following substantial questions of law:- “1. Whether the Tribunal was correct in law in holding that proceedings under Section 147/148 of the Income Tax Act, 1961 were validly initiated against the assessee? 2. Whether the Tribunal was correct in law in holding that the income derived by the assessee under the lease deed executed in ITA No. 147 of 2005 -2- favour of M/s Smith Kline Beecham Consumer Healthcare Limited was not exempted under Section 2(1-A) of the Income Tax Act?” 3. Briefly stated, the facts for adjudication as narrated in the appeal are that the assessee along with his brothers owned agricultural land measuring 27 acres 1 kanal and 10 marlas which they leased out to M/s Smith Kline Beecham Consumer Healthcare Limited (SBCHL) vide agreement dated 13.11.1997 for agricultural purposes. The assessee claimed such share of lease money out of land given to the said company as his income out of agricultural land and filed returns claiming refund of TDS which was deducted by the lessee on the lease rent paid to the assessee. The returns were processed under Section 143(1) of the Income Tax Act, 1961 (in short “the Act”) and refund of TDS was granted along with interest for all the three years, i.e. assessment years 1998-99 to 2000-01. Thereafter, the Assessing Officer initiated proceedings under Section 147 of the Act and assessed the agricultural income as claimed under the head “income from other sources” and charged tax thereon. However, the refund made was ordered to be withdrawn and interest under Sections 234A and 234B was also charged. The relevant observations read thus:- “The land was leased out to the said company for disposal of water that was being discharged from the Effluent Treatment Plant of the Company. The amount paid has been debited by the Co. in its books of account as expenditure incurred for purposes of business. The company has also deducted tax at source on the said ITA No. 147 of 2005 -3- payment u/s 194-I by treating the same as rental income. Hence the income of Rs.1,54,688/- claimed as agricultural income by the assessee is, in fact rental income received by the assessee from the said Co. Sh. B.S. Goyal C.A., however, contended that it was agricultural income since the land was used for agricultural purposes by the Co. The contention of the assessee is not acceptable. The land has been taken by the said Co. for disposal of water that was being discharged from the Co's Effluent Treatment Plant and any agricultural operations carried out by the company are also for the purpose of disposal of water. This is apparent from the letter dated 03.06.1999 which reads as under:- “We are using this land for disposal of water from our Effluent Treatment Plant growing eucalyptus trees there for evaporating the water. The payment to the land lord is booked as rent and we are deducting TDS on the said payments as per Income Tax Act.” It is apparent that growing of eucalyptus trees on the said land is only for disposal of water by evaporating the same. The land has been taken on rent for disposal of water and the payment made for the purpose has nothing to do with agricultural operations. There is no nexus between the rent income and agricultural operations as the rent is being paid to the assessee for water from the Effluent Treatment Plant. Moreover, there is case law, as per ITR 258, page- ITA No. 147 of 2005 -4- 179 in the case of B. Nagi Reedi V. Commissioner of Income-Tax. According to this case there should be nexus between the agricultural produce and the business of the concerned assessee who is claiming agricultural income.” 4. Feeling aggrieved, the assessee took the matter in appeal and the Commissioner of Income Tax (Appeals) [in short “the CIT(A)”] upheld the view of the Assessing Officer. 5. On further appeal, the Income Tax Appellate Tribunal, Chandigarh Bench “B”, Chandigarh (hereinafter referred to as “the Tribunal”) affirmed the order of the CIT (A) and dismissed the appeal of the assessee. 6. This gave rise to the assessee for filing the instant appeal. 7. We have heard learned counsel for the parties and have perused the record. 8. Learned counsel for the assessee submitted that as per agreement with the lessee, the assessee had let out the land for agricultural purposes and, therefore, the rent which was received by the assessee from the lessee was agricultural income under Section 2(1A) (a) of the Act. According to the learned counsel, the said income was exempt under Section 10(1) of the Act. He placed reliance on the judgment of the Apex Court in Commissioner of Income Tax v. Raja Benoy Kumar Sahas Roy [1957] 32 ITR 466 and that of Madras High Court in Commissioner of Income-Tax v. Sun Paper Mills Ltd. [2002] 253 ITR 709. He further submitted that the rent which was received by the assessee from the lessee was treated as “agricultural income” for three years and it was thereafter that the re-assessment proceedings ITA No. 147 of 2005 -5- were initiated. The initiation of reassessment proceedings under Section 147 of the Act were claimed to be vitiated and bad in law. 9. Controverting the aforesaid submissions of learned counsel for the assessee, the learned counsel for the revenue submitted that since the income was not agricultural income, the same had escaped assessment and, therefore, reopening of the assessment under Section 147 of the Act was valid. It was further submitted that under Section 2 (1A)(a) unless the land is used for agricultural purposes, the assessee cannot derive any benefit by treating the rent which was received, as agricultural income. 10. We have given our thoughtful consideration to the respective submissions of learned counsel for the parties and do not find any merit in the submission of the learned counsel for the assessee. 11. The point for consideration in the appeal is whether the income derived from letting out the land to SBCHL by the assessee amounted to agricultural income under Section 2(1A)(a) and, thus, exempted under Section 10(1) of the Act and the action of the department to take recourse to Section 147 of the Act was justified. 12. Section 2(1A) defines agricultural income and reads thus:- “Section 2(1A): “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 ITA No. 147 of 2005 -6- 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 receive by him, in respect of which no process has been performed other than a process of nature described in paragraph (ii) of this sub clause. XXX XXX XXX” 13. It emerges from the above definition that the following essential requirements are to be satisfied so as to term a receipt as agricultural income:- (I) rent or revenue which is directly derived from any land situated in India which is used for agricultural purposes; (II) revenue which is derived must also be directly, and not indirectly, associated with the land which is used for agricultural purposes; and (III) the effective source of the receipt being from agricultural land by a process involving agricultural activity.” 14. The CIT(A) while upholding the order of the assessing authority recorded the following findings:- “13. The company is ready to bear even the taxes, if any, imposed by the Income Tax Authorities. This ITA No. 147 of 2005 -7- further shows that rent is not in relation to the value of production of agriculture produce. Rather it is in nature of charges for the use of land for business purposes of M/s. Smithkline Beecham Ltd. The operations are done by the company to comply with the statutory provisions of preventing the pollution. The basic operations which are now being done are to raise the eucalyptus trees or other plantations for the purpose of preserving the environment. The agriculture operations and preservations of environment are two distinct things. 14. It may also be noted that the lease is meant for twelve years which can further be renewed as per mutual agreement. After planting the trees, no basic operations would be needed to call it an agriculture produce. The photographs shown by the appellant indicate that the trees have attained almost full length. In fact, it is like a jungle having spontaneous growth. In fact, on facts of the case would come within the ratio of decision of Supreme Court in the case of CIT Vs. Raja Benoy Kumar Sahas Roy 32 ITR 466. The Hon'ble Supreme Court held as under:- “We are of opinion that mere performance of these subsequent operations on the products of the land, where such products have not ITA No. 147 of 2005 -8- been raised on the land by the performance of the basic operations which we have described above would not be enough to characterise them as agricultural operations, these subsequent operations must necessarily be in conjunction with and a continuation of the basic operations which are the effective cause of the products being raised from the land. It is only if the products are raised from the land by the performance of these basic operations that the subsequent operations attach themselves to the products of the land and acquire the characteristic of agricultural operations. The cultivation of the land does not comprise merely of raising the products of the land in the narrower sense of the term like tilling of the land, sowing of the seeds, planting, and similar work done on the land but also includes the subsequent operations set out above all of which operations, basic as well as subsequent, form one integrated activity of the agriculturist and the term “agriculture” has got to be understood as connoting this integrated activity of the agriculturist. One cannot dissociate the basic operations from the subsequent operations and say that the subsequent ITA No. 147 of 2005 -9- operations can constitute agricultural operations by themselves. If this integrated activity which constitutes agriculture is undertaken and performed in regard to any land that land can be said to have been used for “agricultural purposes” and the income derived therefrom can be said to be “agricultural income” derived from the land by agriculture. If the term “agriculture” is thus understood as comprising within its scope the basic as well as subsequent operations in the process of agriculture and the raising on the land of products which have some utility either for consumption or for trade and commerce, it will be seen that the term “agriculture” receives a wider interpretation both in regard to its operations as well as the results of the same. Nevertheless there is present all throughout the basic idea that there must be at the bottom of it cultivation of land in the sense of tilling of the land, sowing of the seeds, planting, and similar work done on the land itself. This basic conception is the essential sine qua non of any operation performed on the land constituting agricultural operation. If the basic operations ITA No. 147 of 2005 -10- are there, the reset of the operations found themselves upon the same. But if these basic operations are wanting the subsequent operations do not acquire the characteristic of agricultural operations. All these operations no doubt require the expenditure of human labour and skill but the human labour and skill spent in the performance of the basis operations only can be said to have been spent upon the land. The human labour and skill spent in the performance of subsequent operations cannot be said to have been spent on the land itself, though it may have the effect of preserving, fostering and regenerating the products of the land. This distinction is not so important in cases where the agriculturist performs these operations as a part of his integrated activity in cultivation of the land. Where, however, the products of the land are of spontaneous growth, unassisted by human skill and labour, and human skill and labour are spent merely in fostering the growth, preservation and regeneration of such products of land, the question falls to be considered whether these ITA No. 147 of 2005 -11- subsequent operations performed by the agriculturist are agricultural operations and enjoy the characteristic of agricultural operations. It is agreed on all hands that products which grow wild on the land or are of spontaneous growth not involving any human labour or skill upon the land are not products of agriculture and the income derived therefrom is not agricultural income. There is no process of agriculture involved in the raising of these products from the land. There are no agricultural operations performed by the assessee in respect of the same, and the only work which the assessee performs here is that of collecting the produce and consuming and marketing the same. No agricultural operations have been performed and there is no question at all of the income derived therefrom being agricultural income within the definition given in section 2(1) of the Indian Income Tax Act. Where, however, the assessee performs subsequent operations on these products of land which are of wild or spontaneous growth, the nature of those operations would have to be determined in the ITA No. 147 of 2005 -12- light of the principles enunciated above.” 15. The facts of appellant's case are that there are no basic primary operations intended to earn income from agriculture operations. The trees are having spontaneous growth. 16. To sum up the receipt in the hands of the lessees would be income from other sources in view of the following points:- I) The rent received is not in connection with the value of agriculture produce which can be raised during any assessment year, but in the nature of receipts for allowing the use of land for business necessities of M/s. SmithKline Beecham Ltd., II) The primary purpose of use of land is for disposal of water in effluent treatment plant to comply with laws relating to pollution. III) The growth of trees is spontaneous growth and not meant to be cut for earning some revenue. Rather it is meant for preserving the environment which is a different concept than agricultural operations. IV) Increase of lease money after every three years establishes that income generated is for use of land for business purpose. 17. In this case the eucalyptus are grown not for ITA No. 147 of 2005 -13- the purpose of selling in the market but to remain in the land for the purpose of effluent treatment plant. The rent derived from land which the appellant are claiming to be the agriculture income is in fact an annual charges on the land. Once the trees are grown that there is spontaneous growth of trees, thus not involving any amount of labour and operation as envisaged by the Hon'ble Supreme Court. On the facts and circumstances of the said case, the action of the assessing officer is confirmed.” 15. The tribunal on appreciation of material on record had also concluded that the income derived by the assessee was not agricultural income. The observations of the tribunal while affirming the order of CIT(A) reads as under:- “27. We, after observing the above discussion and considering the above decisions of various courts and after taking into consideration various terms of the deed of agreement, are of the opinion that the agreement between the assessee and SBCHL was meant for use of land by SBCHL basically for its business operation on some terms and conditions and on a fixed annual charges to be increased by 25% after every three years without considering any use of such land for agricultural purposes by the lessee and knowing the primary intention of the lessee to use the said land for releasing its water on ITA No. 147 of 2005 -14- land and, therefore, also included a clause 18, which contained that in case lessor were subjected to income-tax the same will be borne by the lessee. We have also considered the fact that the trees which were being grown on the said land had spontaneous growth which was to be cut and harvested by the lessee only after expiry of the agreement, as evident from clause 14 of said agreement and such spontaneous growth was not to be considered as agricultural income in view of the above judgments. 28. All above terms and conditions of deed of agreement and the prevailing facts in this case clearly suggest that the lease of land by the assessee was meant for granting rights to SBCHL to use the same for its business operation and, therefore, was rightly treated as 'income from other sources'. We, therefore, based on our above discussion and keeping in view the totality of facts and circumstances of the present case, find that the CIT(A) while sustaining the action of the AO, has passed a well reasoned and speaking order which does not call for any interference from our side. We, therefore, uphold the same and reject the ground raised by the assessee.” 16. Learned counsel for the assessee was unable to point out any illegality or perversity in the aforesaid finding of fact which may ITA No. 147 of 2005 -15- warrant interference by this Court. 17. Further, there are no two opinions on the principle of law enunciated in the judgments relied upon by the learned counsel for the assessee. However, the same has no applicability to the present case being on individual fact situation. Once it is held that the income derived by the assessee was not agricultural income, the department was justified in taking recourse to Section 147 of the Act as the income had escaped assessment. 18. In view of the above, we do not find any merit in these appeals and the same are hereby dismissed. (AJAY KUMAR MITTAL) JUDGE December 8, 2010 (ADARSH KUMAR GOEL) gbs JUDGE ITA No. 147 of 2005 -16- IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 148 of 2005 Date of Decision: 8.12.2010 Varinder Dass ....Appellant. Versus Income Tax Officer, Nabha ...Respondent. CORAM:- HON'BLE MR. JUSTICE ADARSH KUMAR GOEL. HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. PRESENT: Mr. J.S. Puri, Advocate for the appellant. Mr. Tajender K. Joshi, Advocate for the respondent. AJAY KUMAR MITTAL, J. The appeal is dismissed. For reasons, see the detailed order of even date recorded in ITA No. 147 of 2005 (Bhupinder Dass v. Income Tax Officer, Nabha). (AJAY KUMAR MITTAL) JUDGE December 8, 2010 (ADARSH KUMAR GOEL) gbs JUDGE ITA No. 147 of 2005 -17- IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 149 of 2005 Date of Decision: 8.12.2010 Preetinder Dass ....Appellant. Versus Income Tax Officer, Nabha ...Respondent. CORAM:- HON'BLE MR. JUSTICE ADARSH KUMAR GOEL. HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. PRESENT: Mr. J.S. Puri, Advocate for the appellant. Mr. Tajender K. Joshi, Advocate for the respondent. AJAY KUMAR MITTAL, J. The appeal is dismissed. For reasons, see the detailed order of even date recorded in ITA No. 147 of 2005 (Bhupinder Dass v. Income Tax Officer, Nabha). (AJAY KUMAR MITTAL) JUDGE December 8, 2010 (ADARSH KUMAR GOEL) gbs JUDGE ITA No. 147 of 2005 -18- IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 150 of 2005 Date of Decision: 8.12.2010 Rupinder Dass ....Appellant. Versus Income Tax Officer, Nabha ...Respondent. CORAM:- HON'BLE MR. JUSTICE ADARSH KUMAR GOEL. HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. PRESENT: Mr. J.S. Puri, Advocate for the appellant. Mr. Tajender K. Joshi, Advocate for the respondent. AJAY KUMAR MITTAL, J. The appeal is dismissed. For reasons, see the detailed order of even date recorded in ITA No. 147 of 2005 (Bhupinder Dass v. Income Tax Officer, Nabha). (AJAY KUMAR MITTAL) JUDGE December 8, 2010 (ADARSH KUMAR GOEL) gbs JUDGE ITA No. 147 of 2005 -19- Having regard to the above interpretation of agricultural income and the income, to be agricultural income, should be derived from land and the land should be used for agricultural purposes. In other words, there must be nexus between the income, land and agricultural operations, by which is meant something done to the land by human or mechanical agency to produce out of the land any crop, tree, plantation or other produce or product. The immediate source of income must be land of the description or character mentioned in the definition. 22. Similar situation arose before the Hon'ble Madras High Court in the case of CII V.K. S. Imam Saheb reported in 71 ITR 742, wherein under the terms of a lease of certain coconut thopes, the assessee was allowed to enjoy the fruits of the coconut trees for a stipulated period on payment of a fixed annual sum. In some cases, there was a stipulation that the lease did not include the land. At the end of the term, the assessee had to deliver possession of the trees to the lessor. On these facts, it was held by the Tribunal, that the income from the lease was agricultural income. On a reference the High Court held that the nexus between the income and the land was missing as the connection of the income was with the trees themselves without reference to the ITA No. 147 of 2005 -20- land or agricultural operation; and, therefore, the sums in question were not agricultural income. 23. Apart from above, we are also of the view that unless there is some measure of cultivation of the land, some expenditure of skill and labour upon it, land cannot be said to have been used for agricultural purposes, as held in the case of Raja Mustata Ali Khan v. CII reported in 16 ITR 330 (PC). What, therefore, is essential is some basic primary operation, prior to germination of the produce, involving expenditure of human skill and labour on the land itself, and not on the growth, subsequent post-generation operations, i.e. weeding, digging of the soil around the growth, etc. by themselves would not constitute agricultural, as held in the case of Raja Benoy Kumar Sahas Roy (Supra), as also relied upon by the ld. DR, wherein it was held as under:- “Agriculture in its primary sense denotes the cultivation of the field and is restricted to cultivation of the land in the strict sense of the term, meaning thereby tilling the land, sowing of the seed, planting and similar operations on the land. These are basic operations and require the expenditure of human skill and labour upon the land itself.” “The mere performance of these ITA No. 147 of 2005 -21- subsequent operations on the products of the land, where such products have not been raised on the land by the performance of the basic operations, would not be enough to characterize them as agricultural operations; in order to invest them with the character of agricultural operations these subsequent operations must necessarily be in conjunction with and in continuation of the basic operations which are the effective cause of the products being