Commissioner Of Income Tax-I,Chandigarh v. Rana Gurjit Singh

IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH. --- Income Tax Appeal No. 396 of 2005Date of decision: 3.2.2011 Commissioner of Income Tax-I,Chandigarh --- Appellant Versus Rana Gurjit Singh --- Respondent CORAM:HON’BLE MR. JUSTICE ADARSH KUMAR GOELHON’BLE MR. JUSTICE AJAY KUMAR MITTAL --- Present:Ms. Urvashi Dhugga, Standing Counselfor the appellant-Revenue. Mr. Akshay Bhan, Advocatefor the respondent. --- AJAY KUMAR MITTAL, J. By this order, seven appeals, i.e. Income Tax Appeal Nos.396 of 2005, 92 and 93 of 2006, 195 and 525 of 2007, 582 of 2008and 74 of 2010 are being disposed of as learned counsel for theparties are agreed that identical questions of law are involved therein,except in Income Tax Appeal No. 74 of 2010 wherein one additionalsubstantial question of law has been raised. 2.Before proceeding further, it must be mentioned at thisstage that the paper-books of the aforesaid appeals have not beenreceived from the concerned Branch as the same are said to havebeen burnt in the fire incident that took place in the premises of thisCourt on the night of 30[th] January, 2011. Learned counsel for theappellant, has made available two copies of paper-books of eachappeal to the Court for reconstruction of the files. The said copies aretaken on record and the paper books of the appeals are treated ashaving been reconstructed. For purpose of disposal, facts have beentaken from Income Tax Appeal No. 396 of 2005. 3. This appeal under Section 260A of the Income-Tax Act,1961 (for short “the Act”) has been filed by the assessee against theorder dated 23.3.2005, passed by the Income Tax Appellate TribunalChandigarh Bench ‘B’ Chandigarh (in short “the Tribunal”) in ITA Nos.303 and 536/CHANDI/2000, relating to the assessment year 1997-98. 4.The following substantial questions of law have beenclaimed, in Income Tax Appeal No. 396 of 2005 which are common inall the appeals for determination by this Court: “ i)Whether the processing of raw peas into pea seeds is aprocess ordinarily employed by the cultivator within themeaning of Section 2(1-A)(b)(ii) or 2(1A)(b)(iii) in spite ofthe admission of the assessee in his statement on oathdated 28.2.2000 that there was Hindustan Lever CanningPlant which provides ready market for raw peas?process ordinarily employed by the cultivator within themeaning of Section 2(1-A)(b)(ii) or 2(1A)(b)(iii) in spite ofthe admission of the assessee in his statement on oathdated 28.2.2000 that there was Hindustan Lever CanningPlant which provides ready market for raw peas? ii)Whether the Hon’ble ITAT has erred in holding that theassessee only employed an ordinary procedure ofassessee only employed an ordinary procedure of uprooting the plant and after thrashing and winnowing thesame converted such plant of raw peas into pea seedswith a view to take the same as fit to be taken to market asthere was no ready market available for sale of raw peas inspite of the fact that the admission of the assessee in hisstatement on oath dated 28.2.2000 that there wasHindustan Lever Canning Plant which provides readymarket for raw peas?same converted such plant of raw peas into pea seedswith a view to take the same as fit to be taken to market asthere was no ready market available for sale of raw peas inspite of the fact that the admission of the assessee in hisstatement on oath dated 28.2.2000 that there wasHindustan Lever Canning Plant which provides readymarket for raw peas? uprooting the plant and after thrashing and winnowing thesame converted such plant of raw peas into pea seedswith a view to take the same as fit to be taken to market asthere was no ready market available for sale of raw peas inspite of the fact that the admission of the assessee in hisstatement on oath dated 28.2.2000 that there wasHindustan Lever Canning Plant which provides readymarket for raw peas?same converted such plant of raw peas into pea seedswith a view to take the same as fit to be taken to market asthere was no ready market available for sale of raw peas inspite of the fact that the admission of the assessee in hisstatement on oath dated 28.2.2000 that there wasHindustan Lever Canning Plant which provides readymarket for raw peas? iii)Whether the Hon’ble ITAT has erred in holding that there isno incremental profit to be taxed as non-agriculturalincome under Rule 7(1) and 7(2) if the prevailing marketrate of raw peas is taken into consideration, whereas theassessee in his calculations before the Assessing Officeron 9.6.2000 has himself worked out the incrementalprofits.”no incremental profit to be taxed as non-agriculturalincome under Rule 7(1) and 7(2) if the prevailing marketrate of raw peas is taken into consideration, whereas theassessee in his calculations before the Assessing Officeron 9.6.2000 has himself worked out the incrementalprofits.” 5. In Income Tax Appeal No. 74 of 2010, in addition to the aforesaidquestions, the following substantial question of law has also beenclaimed: (iv)Whether on the facts and circumstances of the case and inlaw, the Hon’ble ITAT was justified in deleting the additionof Rs. 39,60,875/- made by the AO on account of boguscapital formation and directing the AO to tax Rs.25,04,762/- as short term capital gain on sale of shares,whereas the assessee had comprehensively failed toprove the genuineness of the transaction?law, the Hon’ble ITAT was justified in deleting the additionof Rs. 39,60,875/- made by the AO on account of boguscapital formation and directing the AO to tax Rs.25,04,762/- as short term capital gain on sale of shares,whereas the assessee had comprehensively failed toprove the genuineness of the transaction? 6.The facts, in brief, necessary for adjudication as narratedin the appeal, are that the respondent-assessee was, inter alia,engaged in cultivating and growing raw peas and also in the processof converting them in to pea seeds so as to render them fit for saleand also selling the processed seeds in the market and to variousgrowers. The assessee filed its return of income for the assessmentyear under reference, on 11.9.1997, declaring income of Rs.4,800/-.The assessee was, thus, having non-agricultural income as well asthe income from sale of processed seeds. In the return, the assesseeclaimed that the income from above two sources was his agriculturalincome under Section 2(1A) of the Act. The assessing officer,however, disallowed the above claim of the assessee and onobserving that the agricultural income claimed by the assessee wascovered under Rule 7 of the Income Tax Rules, 1962 and accordingly,calculated the non-agricultural income at Rs. 74,73,041/-, bringing it tothe ambit of tax. The assessment was, thus, completed at totalincome of Rs.75,21,041/-, vide order dated 29.3.2000. 7.In the appeal filed by the assessee before theCommissioner of Income Tax (Appeals) [for short “the CIT(A)”] theaction of the assessing officer was confirmed vide order dated14.3.2001. The CIT(A), however, restricted the non-agriculturalincome to the extent of 30%, i.e. at Rs.27,83,255/-, and held that theremaining 70% income formed part of agricultural income. It wasobserved that the raw peas were to undergo the process of producingpea seeds and quantity of the resultant product so procured would beless in weight due to drying in the said process. 7.In the appeal filed by the assessee before theCommissioner of Income Tax (Appeals) [for short “the CIT(A)”] theaction of the assessing officer was confirmed vide order dated14.3.2001. The CIT(A), however, restricted the non-agriculturalincome to the extent of 30%, i.e. at Rs.27,83,255/-, and held that theremaining 70% income formed part of agricultural income. It wasobserved that the raw peas were to undergo the process of producingpea seeds and quantity of the resultant product so procured would beless in weight due to drying in the said process. 8.Feeling not satisfied with the order of the CIT(A) both, theassessee and the Revenue preferred separate appeals before theTribunal. The Tribunal vide the order under appeal dismissed theappeal of the Revenue and accepted that of the assessee. It wasobserved in plain terms that the conversion of raw seeds into peaseeds could not be held as non-agricultural as the raw seeds were ahighly perishable item that might result in prospective loss in absenceof marketability there for. 9.It is how the Revenue is in appeal before this Court. 10.We have heard learned counsel for the parties andperused the record. 11. As regards questions (i) to (iii), the primary issue forconsideration by this Court is, whether the assessee who wascultivating raw peas and converting them into pea seeds renderingthem fit for sale was carrying on an agricultural activity and the incomewhich was derived there-from, was agricultural income under Section2(1A) of the Act. 12.Learned counsel for the Revenue submitted that theTribunal has erred in holding that the activity of conversion of rawpeas into pea seeds by the assessee was an agricultural activity andthe income derived there from was exempt being agricultural income.Learned counsel relied upon State of Rajasthan and others v.Rajasthan Agriculture Input Dealers’ Association and others, (1996) 5Supreme Court Cases 479; Seth Banarasi Das Gupta vs.Commissioner of Income Tax, Delhi (Central) (1977) 106 ITR 804,Commissioner of Income Tax vs. Relish Foods, (1999) 237 ITR 59 (S.C.) and Commissioner of Income Tax v. Jalna Seeds Processingand Refrigeration Co. Ltd. (2000) 246 ITR 156 (Bombay).Controvering the aforesaid contentions, learned counsel for theassessee on the strength of principles enunciated in Commissioner ofIncome Tax, West Bengal, Calcutta v. Raja Benoy Kumar Sahas Roy,(1957) XXXII ITR 466 (S.C.), urged that the Tribunal had correctlyappreciated the legal position and the income derived by the assesseewas agricultural income. 13.We have given our thoughtful consideration to thesubmissions made by the counsel for the parties. 14. It would be advantageous to refer to the principle of lawculled out by the Apex Court in Raja Benoy Kumar Sahas Roy’scase (supra). The Supreme Court defined the scope of the term“agriculture” in following terms: “’As we have noted above, the primary sense in which theterm agriculture is understood is agar—field and cultra—cultivation, i.e., the cultivation of the field, and if the term isunderstood only in that sense, agriculture would berestricted only to cultivation of the land in the strict senseof the term meaning thereby, tilling of the land, sowing ofthe seeds, planting and similar operations on the land.They would be the basic operations and would require theexpenditure of human skill and labour upon the land itself.There are, however, other operations which have got to beresorted to by the agriculturist and which are absolutelynecessary for the purpose of effectively raising the “’As we have noted above, the primary sense in which theterm agriculture is understood is agar—field and cultra—cultivation, i.e., the cultivation of the field, and if the term isunderstood only in that sense, agriculture would berestricted only to cultivation of the land in the strict senseof the term meaning thereby, tilling of the land, sowing ofthe seeds, planting and similar operations on the land.They would be the basic operations and would require theexpenditure of human skill and labour upon the land itself.There are, however, other operations which have got to beresorted to by the agriculturist and which are absolutelynecessary for the purpose of effectively raising the produce from the land. They are operations to beperformed after the produce sprouts from the land, e.g.,weeding, digging the soil around the growth, removal ofundesirable undergrowths, and all operations which fosterthe growth and preserve the same not only from insectsand pests but also from depredation from outside, tending,pruning, cutting, harvesting and rendering the produce fitfor the market. The latter would all be agriculturaloperations when taken in conjunction with the basicoperations above described, and it would be futile to urgethat they are not agricultural operations at all. But eventhough these subsequent operations may be assimilatedto agricultural operations, when they are in conjunctionwith these basic operations could it be said that eventhough they are divorced from these basic operations theywould nevertheless enjoy the characteristics of agriculturaloperations? Can one eliminate these basic operationsaltogether and say that even if these basic operations arenot performed in a given case the mere performance ofthese subsequent operations would tantamount toperformance of agricultural operations on the land so as toconstitute the income derived by the assessee there fromagricultural income within definition of that term? We are of opinion that the mere performance ofthese subsequent operations on the products of the land,where such products have not been raised on the land by the performance of basic operations which we havedescribed above would not be enough to characterisethem as agricultural operations. In order to invest themwith the character of agricultural operations, thesesubsequent operations must necessarily be in conjunctionwith and a continuation of the basic operations which arethe effective cause of the products being raised from theland. It is only if the products are raised from the land bythe performance of these basic operations that thesubsequent operations attach themselves to the productsof the land and acquire the characteristic of agriculturaloperations. The cultivation of the land does not comprisemerely of raising the products of the land in the narrowersense of the term like tilling of the land, sowing of theseeds, planting, and similar work done on the land but alsoincludes the subsequent operations set out above all ofwhich operations, basic as well as subsequent, from theintegrated activity of the agriculturist and the term‘agriculture’ has got to be understood as connoting thisintegrated activity of the agriculturist. One cannotdissociate the basic operations from the subsequentoperations and say that the subsequent operations eventhough they are divorced from the basic operations canconstitute agricultural operations by themselves. If thisintegrated activity which constitutes agriculture isundertaken and performed in regard to any land that land can be said to have been used for “agricultural purposes”and the income derived there from can be said to be“agricultural income” derived from the land by agriculture.”15. In the appeals preferred by both the sides, which weredisposed of by a common order, the Tribunal observed as under: can be said to have been used for “agricultural purposes”and the income derived there from can be said to be“agricultural income” derived from the land by agriculture.”15. In the appeals preferred by both the sides, which weredisposed of by a common order, the Tribunal observed as under: “9.2 So far as the contention of the assessee on accountof such processing of raw seeds into pea seeds isconcerned, the assessee has claimed that the same hasbeen made only keeping in view the fact that there was noready market for sale of huge quantity of raw seedsproduced by him and since raw seeds was a perishableitem it was processed into pea seeds keeping in view theready market as well as time of perishing of such peaseeds, on the other hand. The revenue has basicallydisputed such processing of raw seeds on the ground thatno such activity was undertaken on the land itself toenable the assessee to claim the same as agriculturalincome, whereas in the case of Sudisha Farm Nursery(supra), relied upon by the assessee, the Delhi Bench hasheld that all the operations are not necessarily carried outon the land itself. The case of Soundarya Nursery (supra),relied upon by the assessee also supports the plea of theassessee which says that it is not possible for the peas toexist without the mother plants, hence the same has to betreated as agricultural income. We also find that theHon’ble Supreme Court in the case of Raja Benoy Kumar Sahas Roy (supra) has held that integrated activity whichconstitutes agricultural is undertaken and performed inregard to any land that land can be said to have been usedfor agricultural purposes. 9.3 So far as application of provisions of rules 7(1) and 7(2) are concerned, we find that the AO while calculatingnon-agricultural income of the assessee has taken cost ofraw pea seeds at 960 kgs @ Rs.7/- per kg instead of 4000kgs @ Rs.7/- per kg without giving any reasons thereof.We also find that the CIT(A) while restricting such non-agricultural income at 30% has agreed that more raw peaseeds are required to produce pea seeds. However, whilerestricting the same at 30%, the CIT(A) has not given anybasis for the same, whereas the assessee has claimedthat it was growing 4000 kg raw pea seeds per acre,whereas pea seeds processor per acre was 960 kg. asevident from page 2 of the paper-book. Such productionof raw pea seeds and pea seeds per acre has not beenrebutted either by the AO or the CIT(A). If the prevailingmarket rate was also accepted by the AO at Rs. 7/- per kgto raw pea seed is taken into consideration, then it isapparent that the assessee had no incremental profit to betaxed as non-agricultural income u/s 7(1) and 7(2). 9.4 We, therefore, based on above facts andcircumstances of the case and considering the totality offacts of the present case, various judgment of the courts, orders for subsequent assessment years, the calculationmade by the AO and the CIT(A) while working out non-agricultural income in the hands of the assessee, find thatsuch addition/disallowance in the hands of the assesseeon account of non-agricultural income is not justified, asthe conversion of raw seeds into pea seeds cannot be heldas non-agricultural merely on the ground that there was acomplete change from raw seeds into pea seeds whichwas not justified keeping in view the fact that the assesseechanged such raw seeds into pea seeds, observing thatthe same was a highly perishable item which would haveresulted in prospective loss in absence of marketability forthe same. 9.5So far as observations of the AO in treating suchsale of pea seeds as non-agricultural income is concerned,we find that he has treated the same as non-agricultural onthe following two grounds:- a)It required processing in the form of drying,thrashing, winnowing, etc. and thrashing, winnowing, etc. and 9.5So far as observations of the AO in treating suchsale of pea seeds as non-agricultural income is concerned,we find that he has treated the same as non-agricultural onthe following two grounds:- a)It required processing in the form of drying,thrashing, winnowing, etc. and thrashing, winnowing, etc. and b)Peas have marketability in raw form and anyproduce that has marketability in raw form ifprocessed becomes partly agricultural and partlynon-agricultural.produce that has marketability in raw form ifprocessed becomes partly agricultural and partlynon-agricultural. The AO has further observed that the assessee in thiscase has failed on two tests as laid down u/s 2(1A) (B)(ii):- i)The process employed by the assessee in converting raw peas into pea seeds is not ordinarily employedby a cultivator; and by a cultivator; and ii)It is not employed to render the produce the peasraised by the assessee if to be taken to market. We, however, from perusal of different process ofconverting raw peas into pea seeds employed by theassessee, find that he has not employed any substantialtechnique or mechanism to convert raw peas into peaseeds and such conversion of raw peas into pea seedshas only been made keeping in view the fact that therewas no ready market available for sale of raw peas andraw peas being perishable item was converted into peaseeds by just uprooting the plaint as a whole and then bysimply drying, thrashing and winnowing such uprooted peaplant converted into pea seed for which ready market wasavailable and such pea seeds have a comparable long lifethan raw peas. Before coming to any conclusion, we find itpertinent to mention here below the definition of‘agricultural income’, as laid down u/s 2(1A)(B)(ii), as alsoconsidered by the AO, which reads as under:- “ … the performance by a cultivator or receiver ofrent-in-kind of any process ordinarily employed by acultivator or receiver of rent-in-kind to render the produceraised or received by him fit to be taken to market.” The above definition clearly says that the performance bya cultivator ordinarily employed to render the produce raised or received by him fit to be taken to marketsuggests that in the present case also the assessee onlyemployed an ordinarily procedure of uprooting the plantand after thrashing and winnowing the same convertedsuch plant of raw peas into pea seeds with a view to takethe same as fit to be taken to market as there was noready market available for sale of raw peas. We also findthat apart from the above activity employed by theassessee, the revenue has not pointed out any othermechanism used by him for conversion of raw peas intopea seeds. Hence, in our considered view, the AO as wellas the CIT(A) were not justified in treating such sale of peaseeds by the assessee as non-agricultural income in viewof the facts that the assessee only employed ordinaryprocedure for converting his product raw peas into peaseeds keeping in view the marketability of the same.Hence, we feel that the assessee was entitled for claim ofagricultural income u/s 2(1A)(b)(ii) of the Act. 9.6We also do not find any justification in the order ofthe CIT(A) in sustaining 30% of sale of pea seeds byinvoking rule 7(1) and 7(2), keeping in view theabove discussion and considering the fact that thecalculation made by the AO was not correct and ifcorrect calculation would have been done, there wasno incremental profit available to the assessee andhence the CIT(A) was not justified in sustaining thethe CIT(A) in sustaining 30% of sale of pea seeds byinvoking rule 7(1) and 7(2), keeping in view theabove discussion and considering the fact that thecalculation made by the AO was not correct and ifcorrect calculation would have been done, there wasno incremental profit available to the assessee andhence the CIT(A) was not justified in sustaining the 9.6We also do not find any justification in the order ofthe CIT(A) in sustaining 30% of sale of pea seeds byinvoking rule 7(1) and 7(2), keeping in view theabove discussion and considering the fact that thecalculation made by the AO was not correct and ifcorrect calculation would have been done, there wasno incremental profit available to the assessee andhence the CIT(A) was not justified in sustaining thethe CIT(A) in sustaining 30% of sale of pea seeds byinvoking rule 7(1) and 7(2), keeping in view theabove discussion and considering the fact that thecalculation made by the AO was not correct and ifcorrect calculation would have been done, there wasno incremental profit available to the assessee andhence the CIT(A) was not justified in sustaining the order of the AO to the extent of 30% sale of peaseeds. We, therefore, delete the addition sustainedby the CIT(A) on account of non-agricultural incomeand accept the grounds raised by the assessee andreject the sole ground raised by the revenue in thisregard.” 16. A perusal of the aforesaid observations shows that theTribunal had recorded finding that the assessee was involved in theprocess of converting the raw peas into pea seeds wherein nosubstantial technique or mechanism was to be employed and theconversion of raw peas into pea seeds had only been done keeping inview that there was no market readily available for sale of raw peas. Itis further clear from the above observations that the raw peas beingperishable item was converted into pea seeds by just uprooting theplant as a whole and then by drying, thrashing and winnowing suchuprooted pea plant for which ready market was available. In view ofthese observations, it was held that the assessee was carrying onagricultural activities and the income derived from that was hisagricultural income. The findings recorded by the Tribunal noticedabove deleting the addition sustained by the CIT(A), have not beenshown to be perverse. After considering the matter in entirety andapplying the principles laid down in Raja Benoy Kumar Sahas Roy’scase (supra), we are of the opinion that the income derived by theassessee from the pea seeds was agricultural income and, thus, notexigible to tax. 17.Referring to the judgments relied upon by the learnedcounsel for the Revenue, suffice it to notice that the same were basedon individual fact situation involved therein and are of no assistance tothe revenue. 18. Accordingly, question Nos. (i) to (iii) noticed above areanswered in favour of the assessee and the Income Tax Appeal Nos.93 of 2001, 92 of 2006, 396 of 2005, 195 and 525 of 2007, and 582 of2008 are dismissed. 19.The additional question in Income Tax Appeal No. 74 of2010 is, whether the transaction made by the assessee who hadallegedly purchased the shares of M/s. Rassi Cement Ltd. for Rs.14,56,512/- on 3.12.1997 and had sold the same for Rs. 39,61,275/-on 29.1.1998, was a genuine transaction?20.It is not disputed that M/s. Rassi Cement Ltd. was acompany which was not listed on the Stock Exchange. Learnedcounsel for the assessee could not show that the said company whichwas not listed on the Stock Exchange, had the appreciation in thevalue of its share as claimed by the assessee during the period of lessthan two months i.e., from 3.12.1997 to 29.1.1998. Further, as per thematerial on record, in spite of the sale of shares having taken place inthe year 1998, the payment thereof was made to the assessee in thenext assessment year, the detail of which is given below: 21.Furthermore, no explanation, much less a plausibleexplanation had been furnished by the assessee as to why thepayment was delayed for about one year and three months. Thefindings recorded by the Tribunal are not based on material and, thus,stands vitiated. The submission of the learned counsel for theappellant that the same is legally not sustainable being based on mis-appreciation of evidence is accepted. Accordingly, it is held that thetransaction of purchase and sale of shares of M/s. Rassi Cement Ltd.was not a genuine transaction. Consequently, question No.(iv) raisedin Income Tax Appeal No. 74 of 2010 is answered in favour of theRevenue and against the assessee. The appeal is, thus, partlyallowed in the manner indicated above. (AJAY KUMAR MITTAL) JUDGE February 3, 2011*rkmalik* (ADARSH KUMAR GOEL) JUDGE