Commissioner of Income Tax, Madras v. R. Venkataswamy Naidu

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Not extracted

Decision Date: 17 February 1956

Coram: Bhagwati

In this matter the parties were the Commissioner of Income Tax, Madras and R. Venkataswamy Naidu, and the case was decided on 17 February 1956 by the Supreme Court of India, the judgment being delivered by Justice Bhagwati. The Commissioner of Income Tax, Madras, instituted an appeal against the judgment and order of the Madras High Court. The High Court judgment had arisen from a reference made by the Income‑Tax Appellate Tribunal under section 66(2) of the Indian Income‑Tax Act (XI of 1922) together with a certificate issued under section 66A(2) of that Act and read with articles 133 and 135 of the Constitution. The respondent, identified as an undivided Hindu family, owned approximately seventy acres of agricultural land situated at Perur near Coimbatore. The estate also kept sixty‑five cows and ten pairs of bulls. During the accounting year 1945‑46 the family sold the milk of these cows to the Co‑operative Milk Supply Union at Coimbatore and received a sum of twenty‑eight thousand rupees. For the assessment year 1946‑47 the family claimed that the profit arising from the sale of the milk constituted agricultural income and therefore should be exempt from income‑tax. No documentary material had been placed before the Income‑Tax Officer to support this claim, and the Officer consequently granted the assessee an adjournment to enable it to furnish complete evidence. Following the adjournment the assessee filed a letter dated 26 February 1947, signed by its auditors. The relevant excerpt of that letter stated that the cows were purely pasture‑fed and not stall‑fed, that the enterprise was not being run as a commercial proposition, that the animals were maintained solely for manuring and other agricultural purposes, and that only surplus milk, after meeting the family’s own needs, was sold to outsiders. The auditors also referred to the earlier decided case of Commissioner of Income‑Tax, Burma v. Kokine Dairy. The Income‑Tax Officer, by an order dated 28 February 1947, rejected the assessee’s claim. In the absence of any accounts, the Officer estimated the profit from the milk sale for the account year at four thousand rupees and accordingly assessed that amount to income‑tax. The assessee appealed this assessment to the Appellate Assistant Commissioner, who upheld the Officer’s order. A further appeal to the Income‑Tax Appellate Tribunal also resulted in confirmation of the assessment. The assessee then sought a reference of the legal question arising from the Tribunal’s order, but the Tribunal refused to state the case. Consequently the assessee applied to the Madras High Court, which directed the Tribunal, under section 66(2) of the Act, to refer for decision the question: whether, on the facts and circumstances of the case, the income received from the sale of milk during the accounting year could be characterised as “agricultural income” within the meaning of the Income‑Tax Act. The High Court heard the reference and delivered its judgment on 15 April 1953. In that judgment the Court held that there was no material available to the Tribunal to conclude that the income from the sale of milk was not agricultural income, and accordingly allowed the appeal of the assessee.

In this matter, the High Court concluded that the Tribunal possessed no material to sustain a conclusion that the income received by the assessee from the sale of milk during the relevant accounting year failed to qualify as agricultural income within the meaning of the Income‑Tax Act, and therefore the High Court allowed the assessee’s appeal. Following that decision, the Commissioner of Income‑Tax for Madras applied to the High Court for and obtained the necessary certificate of leave to appeal, and the present appeal was consequently lodged before this Court.

The parties did not dispute several basic facts. The assessee owned a tract of land measuring seventy acres, which was employed for agricultural use. A portion of this land was cultivated, yielding produce valued at Rs 32,220, while another portion was used as pasture. On the premises the assessee kept sixty‑five cows and ten pairs of bulls. During the accounting year, the assessee sold milk amounting to a value of Rs 28,000 to the Co‑operative Milk Supply Union at Coimbatore and paid a sales tax of Rs 235 for the year ending 31 March 1946. The assessee failed to present any documentary evidence before the Income‑Tax Officer to demonstrate that the milk revenue constituted agricultural income. Specifically, the assessee did not show how much of the seventy acres was devoted to crop cultivation versus pasture, what quantity of chaff, grain or oil‑cakes was supplied to the cows apart from their grazing, the number of servants employed to tend the cattle, the total expenditure incurred on the sixty‑five cows, or the amount of manure actually required for the agricultural operations. The assessee asserted that the cows were purely pasture‑fed and not stall‑fed, that they were maintained chiefly for the production of manure and other agricultural purposes, and that the sale of milk represented only the disposal of surplus after satisfying the assessee’s own needs, not a commercial enterprise. No evidence was adduced to support any of these contentions, and the Income‑Tax Officer’s consideration was limited to the bare allegations contained in the auditors’ letter dated 26 February 1947.

The assessee placed particular reliance on the legal position articulated in Commissioner of Income‑Tax, Burma v. Kokine Dairy, Rangoon, quoting the passage of Chief Justice Robert at page 509, which states that for the purpose of determining whether income from a dairy farm is agricultural, it is necessary to examine whether the cattle are kept in an urban area and are stall‑fed, or whether they are pastured on land. The passage further observes that where cattle are wholly stall‑fed and not pastured at all, the activity is undoubtedly trade and not an agricultural operation; however, where the cattle are exclusively or mainly pastured and are only occasionally fed with small amounts of oil‑cake or similar feed, the income derived from the sale of their milk may well be considered agricultural income. The assessee also invoked the dictum of Lord Wright in Lord Glanely v. Wightman, which emphasizes that the rearing of animals, being products of the soil and sustained by the soil, constitutes a source of profit from the occupation of land, irrespective of whether the animals are kept for food, for the provision of food, for recreation, or for other uses.

The Court examined the argument that where cattle are kept entirely as a trade and no agricultural activity is carried on, the income from milk is taxable, but where the cattle are chiefly pastured and only minimally supplemented with oil‑cake or similar feed, the proceeds of milk sales may be treated as agricultural income. The assessee relied heavily on several authorities to support this view. First, it cited the judgment in Commissioner of Income‑tax, Burma v. Kokine Dairy, Rangoon, specifically the passage authored by Robert, C.J., at page 509, which states that “it is trade and no agricultural operation is being carried on; where cattle are being exclusively or mainly pastured and are nonetheless fed with small amounts of oil‑cake or the like, it may well be that the income derived from the sale of their milk is agricultural income.” The assessee also referred to the dicta of Lord Wright in Lord Glanely v. Wightman, wherein Lord Wright observed that the rearing of animals must be regarded as products of the soil because they draw their sustenance from the soil and live upon it, and therefore the profit from such animals originates from the occupation of land. He further explained that this principle applies irrespective of whether the animals are kept for food, for the provision of food, for recreation, or for utilitarian purposes such as draft work, and that “all these animals are appurtenant to the soil, in the relevant sense for this purpose, as much as trees, wheat crops, flowers or roots, though no doubt they differ in obvious respects.” The Court also considered the observations of Viswanatha Sastri, J., in Commissioner of Income‑tax Act, Madras v. K. E. Sundara Mudaliar, who held that the term “agriculture” in section 2 of the Income‑tax Act should be given a wide meaning to include the raising of useful or valuable products that obtain their nutriment from the soil with the aid of human skill and labour. He explained that this definition embraces horticulture, intensive cultivation of land for fruits, flowers or vegetables, as well as the growing of trees or plants whose development requires human effort such as ploughing, sowing, planting, pruning, manuring, watering and protecting, citing Spencer, J.’s reasoning in Panadai Pathan v. Ramaswami Chetty. Consequently, the word “agriculture” applies to the cultivation of soil for food products or any other valuable growth and is broad enough to cover the rearing, feeding and management of livestock that live on the land and draw their sustenance from it. Additionally, the Court noted the passage from the judgment of Bose, Acting C.J., in Mahendralal Choudhary v. Commissioner of Income‑tax C.P. and Berar, where it was stated that the term “agriculture” is not a technical term of art in the Act but must be given its ordinary meaning, as defined in Webster’s Dictionary as “the art or science of cultivating the harvesting of crops, and the rearing and management of livestock; tillage, husbandry, farming.” On the basis of these authorities, the assessee argued that the fifty‑six cows involved in the present case were appurtenant to the soil, drew their sustenance from the soil, and that the milk produced by the sixty‑five cows should be regarded in the same sense as the fruit of trees, thereby qualifying as income “derived from land by agriculture” within the meaning of section 2(1)(b)(i) of the Act.

In this case the assess­see argued that the milk obtained from its goats and the eggs laid by its fowls should be treated as income “derived from land by agriculture” as defined in section 2(1)(b)(i) of the Act, or alternatively as income derived from such land “by the sale by a cultivator of the produce raised by him in respect of which no process has been performed other than a process of the nature described in sub‑clause (ii)” within the meaning of section 2(1)(b)(iii). The Income‑tax Officer, the Appellate Assistant Commissioner and the Income‑tax Appellate Tribunal all rejected this contention. They held that the assessee had not furnished the necessary material evidence and had failed to meet the burden placed on it to prove that the income obtained from selling milk during the relevant accounting year was agricultural income. While they correctly placed the burden of proof on the assessee, the High Court, the commentary notes, framed the issue in a negative manner and shifted the burden onto the tax authorities to demonstrate that the milk income was not agricultural. To obtain an exemption from income‑tax on the basis that the income was agricultural, the assessee was required to present to the tax authorities appropriate documentary material that would enable the authorities to conclude that the income in question qualified as agricultural income. It was not the role of the tax authorities to prove the opposite. The erroneous approach adopted by the High Court in allocating the burden of proof, the text observes, vitiated its judgment and led to an incorrect conclusion. The Court further explains that it is not called upon to decide whether “agriculture” is synonymous with “husbandry” or to evaluate the correctness of the various passages cited earlier. Its view is that the assessee failed to provide the tax authorities with the requisite material evidence necessary for a determination of the agricultural nature of the milk income. The bare allegations, unsupported by any specified evidence or by any books of account relating to the maintenance of the sixty‑five cows and the marketing of what the assessee claimed as surplus milk after meeting its own needs, were insufficient to satisfy the burden of proof. In contrast, the regularity with which the assessee sold milk to the Co‑operative Milk Supply Union at Coimbatore, the average monthly value of the milk sold—approximately Rs 2,500—and the payment of sales tax amounting to Rs 235 for the year ended March were highlighted as indicative of a commercial activity rather than an agricultural one.

In this case, the Court observed that the evidence dated 31, 1946 demonstrated that the assessee was engaged in a regular activity of producing milk and selling it on a commercial basis. Consequently, the activity constituted a business rather than agricultural operations. The Court then noted that the assessee bore full responsibility for the lack of documentary material because it failed to provide any documents to the Income‑tax Officer, even though the Officer had granted an adjournment for that purpose. The counsel for the assessee, as a final measure, requested that the matter be remitted to the High Court so that a further statement of case could be taken from the Income‑tax Appellate Tribunal. The Court declined to consider that request because it was made at a very late stage, and the assessee had not taken advantage of the opportunity offered by the Income‑tax Officer earlier in the enquiry. Moreover, the assessee had relied solely on legal arguments drawn from the judgment of Robert, C.J., in Commissioner of Income‑tax, Burma v. Kokine Dairy, Rangoon. As a result, the Court held that the appeal should be allowed and that the decision of the High Court should be set aside. The Court clarified that the income in question did not qualify as agricultural income within the meaning of the Income‑tax Act. Regarding costs, the Court ordered that, as agreed by the Commissioner of Income‑tax, the appellant must pay the respondent’s costs of the appeal, provided that the required certificate from the High Court is obtained. Accordingly, the appeal was allowed.