Holding

State legislatures may levy agricultural income‑tax only on the portion of tea income computed as agricultural income (i.e., 60%) as defined by the central Income‑Tax Acts and Rules; they cannot extend the tax to the entire income, rendering the amendments ultra vires.

Summary

The Supreme Court examined writ petitions filed by Tata Tea Ltd. and other tea companies challenging amendments made by the West Bengal and Kerala legislatures that sought to tax the entire income from the sale of tea grown and manufactured by the assessees. The petitioners argued that only 60% of such income could be treated as agricultural income, as defined by the central Income‑Tax Acts and Rules, and that the state amendments exceeded the legislative competence under Article 246 read with Entry 82 of List I and Entry 46 of List II. The Court held that the definition of "agricultural income" under Article 366 incorporates the provisions of Rule 24 (1922) and Rule 8 (1962), which limit the agricultural portion to 60% of the tea income, and that the state statutes could not extend the tax to the whole income. Consequently, the amendments were declared ultra vires, but the petitions were not granted any specific relief; they were merely disposed of with a declaration in favour of the petitioners.

Issues considered

The constitutional validity of sections 3 and 5 of the Bengal Agricultural Income‑tax (Amendment) Act, 1980 omitting sub‑sections (2) and (2A) of section 8.
The constitutional validity of the deletion of the Explanation to clause (2) of section 2(a) of the Kerala Agricultural Income‑tax Act, 1950 by the Kerala Amendment Act, 1980.
Whether the entire income from the sale of tea grown and manufactured can be treated as agricultural income for tax purposes.
Whether Rule 24 of the Income‑tax Rules, 1922 and Rule 8 of the Income‑tax Rules, 1962 form part of the definition of "agricultural income" under Article 366 of the Constitution.
Whether the State legislatures may levy agricultural income‑tax on more than the 60% portion of tea income prescribed by the central statutes.
Whether the amendments are ultra vires on the ground of retrospectivity.

Legislation cited

Agricultural Income‑tax Act, 1950 (Kerala)s. 2(a)
Agricultural Income‑tax (Amendment) Act, 1980 (Kerala)
Bengal Agricultural Income‑tax Act, 1944s. 8
Bengal Agricultural Income‑tax (Amendment) Act, 1980s. 3, s. 5
Constitution of Indias. Article 246, s. Article 366, s. Entry 46 List II, s. Entry 82 List I
Income Tax Act, 1922s. 2, s. 59
Income Tax Act, 1961s. 2, s. 295, s. 296
Income Tax Rules, 1922s. Rule 24
Income Tax Rules, 1962s. Rule 7, s. Rule 8

Subjects

agricultural income taxtea industrystate legislative competenceArticle 246Article 366mixed incomerule‑making powerconstitutional validityWest BengalKerala

Judgment

TATA TEA LTD. & ANR. ETC. A
v.
STATE OF WEST BENGAL & ORS. ETC.

MAY 5, 1988

[R.S. PATHAK, CJI AND M.H. KANIA, J.] B

Bengal Agricultural Income-tax (Amendment) Act, 1980-Chal-
lenging constitutional validity of sections 3 and 5 of.

Agricultural Income-tax (Amendment) Act, 1980 (Kera/a Act No.

'
17 of 1980)-Challenging amendment made by-Resulting in deletion C
of Explanation after clause (2) of section 2(a) of Agricultural Income-tax
Act, 1950.

Whether entire income of assessee from sale of tea grown and
manufactured by him is subject to levy of agricultural income-tax.
D
These Writ Petitions, filed in this Court by Public Limited Com-
panies growing, manufacturing and selling tea in the States of West
Bengal and Kerala raised common questions of law.

The Writ Petitions relating to the State of West Bengal challenged
the constitutional validity of sections 3 and 5 of the Bengal Agricultural E
Income-tax (Amendment) Act, 1980, whereby sub-section (2) and (2A)
• of section 8 of the Bengal Agricultural Income-tax Act, 1944 were omit•
ted and always deemed to be omitted. The petitioners alleged that as a
result of the omission of the said Sub-sections (2) and (2A) of section 8, the
State Legislature had sought to assume the power, competence and
jurisdiction to impose agricultural income-tax on the entire income .F
from the sale of tea grown and manufactured by a seller and had
thereby transgressed the constitutional limitations contained in Article
246(3) of the Constitution of India. The petitioners contended that the
income derived from the sale of tea grown and manufactnred by them
was derived partly from agriculture and partly from mannfacture by
elaborate processes through valuable machinery. Prior to the said G ·
amendment Act, the position was that the income of an assessee who
grew, manufactured and sold tea in West Bengal, was computed under
the Indian Income-tax Act, 1922 (the Act of 1922) read with the Income-
tax Rules, 1922, and agricultural income-tax was levied only in respect
of 60 per cent of that income. After the coming into force of the Income-
tax Act, 1961 and the Income-tax Rules, 1962 also a State Legislature H
961
962 SUPREME COURT REPORTS [19881 3 S.C.R.

A
could only legislate in respect of 60 per cent of the income, treated as
agricultural income. The object of the impugned amendment Act, was
"'
to subject to the levy of agricultural income-tax, the entire income
derived by an assessee from the sale of tea grown and manufactured by
him.

B The writ petition relating to Kerala State challenged the amend-
ment made by the Agricultural Income-tax (Amendment) Act, 1980
(Kerala Act No. 17 of 1980) deleting the Explanation after clause (2) of
section 2(a) of the Agricultural Income-tax Act, 1950, with a view to
making the entire income from sale of tea earned by an assessee who

c
grew and manufactured tea in that State subject to the levy of agricul-
tural income-tax.

The petitioners urged that these amendments, in so far as they
l
purported to confer power on the respective legislatures of the States of
West Bengal and Kerala to legislate regarding taxes on the income from
the sale of tea grown and manufactured by the assessees in excess of 60
D per cent of such income computed in the manner prescribed under the
law relating to income-tax were void and beyond the legislative compe-
tence of the legislatures of the States of West Bengal and Kerala in view
of the provisions of Article 246 of the Constitution of India read with the
entry 82 in List I and Entry 46 in the List II of the Seventh Schedule to
~
the Constitution and the relevant provisions ·or the law relating to
E income-tax.

The respondents contended that Article 366(1) of the Constitution
merely stated that the term "agricultural income" had the same mean·
ing as given to it in the enactments relating to income-tax and the
definition of the said term in Act of 1922 and the Act of 1961 did not
prescribe that only a particular part of the income derived by an asses·
y
F
see from the sale of tea grown and manufactured by him could be
regarded as agricultural income, and it was open to the State Legisla·
tores concerned to levy agricultural income-tax on such entire income.

Disposing of the petitions, the Court,
G
HELD: The main question to be considered was whether the im- >-
pugned provisions in the Bengal Amendment Act of 1980 were in excess
of the legislative competence of West Bengal State Legislature, and
whether by deletion of the Explanation effected by the Kerala Amend-
ment Act of 1980, the definition of the term "agricultural income" in
H sub-section (a) of Section 2 of the Kerala Agricultural Income-tax Act
TATA TEA LTD. v. STATE OF WEST BENGAL 963

became void as in excess of the legislative competence of the State A
Legislature. [978D-EJ

A perusal of Entry 82 of the List I in the Seventh Schedule and
Entry 46 in the List II makes it clear that the Legislatures of the States
of West Bengal and Kerala can pass laws imposing taxes only in respect B
of agricultural income, and in respect of income other than the ag-
ricultural income, it is only the Parliament which has the power to
legislate in respect of taxes on such income. Sub-article (I) of Article
366 of the Constitution states that "agricultural income" means such
income as is defined as "agricultural income" for the purposes of the
enactments relating to Indian income-tax. It is significant that the
words used are not "as defined by the enactments relating Indian C
Income-tax" but are "as defined for the purposes of the enactments
relating to Indian lncome-tax"(emphasis supplied). [978F-G I

Although the Explanation has been deleted from clause (2) of
Sub-section (a) of Section 2 of the Kerala Agricultural Income-tax Act, D
and in spite of the amendments carried out by the Amendment Act of
1979 and the Amendment Act 1980 in the case of the West Bengal
Agricultural Income-tax Act, an Agricultural Income Tax Officer act-
ing under the Kerala Agricultural Income-tax Act or the Bengal
Agricultural Income tax Act has no power to levy agricultural income-
tax except in respect of 60 per cent of the income derived by an assessee
E
from the sale of tea grown and manufactured by him and computed in
the manner leid down under the relevant Income-tax Act and the rules
framed the'rennder. [984B-CI

The decision of this Court in Commissioner of Sale~ Tax, Luck-
now v. D.S. Bist, [19791 44 S.T.C. 392, relied upon by the State of
Kerala and the State of West Bengal was of no assistance to them as the F
ratio of that decision had no application to present cases. [986AI

Article 366(1) of the Constitution provides that the term "agricul-
tural income" has the same meaning as attributed to it for the purposes
of enactments relating to Indian inocme-tax, and Rule 8 of the Income-
G
tax Roles, 1962 as well as Rule 24 of the Income-tax Rules 1922, pertain
to and are bound up with the definition of the term "agricultural
income" for the purposes of laws or enactments pertaining to Indian
Income-tax and the provisions of those rules have to be taken into
account in considering the meaning of the term ''agricultural income''
under sub-article (I) of Article 366 of the Constitution. [987B-D I H
964 SUPREME COURT REPORTS [1988] 3 S.C.R.

A Clause (b) of sub-section (2) of Section 295 of the Income-tax Act,
1961 specifically confers power on the rule-making authority to make
rules relating to the manner in which and the procedure by which
income for the purposes of the Act of 1961 would be arrived at in the
case of income derived in part from agriculture and in part from busi-
ness and Rule 8 clearly provides for the manner in which computation
B of income for the purposes of the Act of 1961 is to be made in the case of
income derived from the sale of tea grown and manufactured by a seller
and it cannot be said that the said rule goes beyond the scope of the
rule-making power conferred under section 295, d contended by
counsel for the two States. [987E-F]

C Although the Explanation to Section 2(a) (2) of the Kerala
Agricultural Income-tax Act has been deleted by the Amendment Act
of 1980, the result would still be the same that the Kerala State Legisla-
ture can impose tax only in respect of 60 per cent of the income derived
by an assessee who sells tea grown and manufactured by him in India
and such income has to be computed in the manner laid down in the Act
D of 1922 and thereafter in the Act of 1961 for computation of the business
income. The same is the position in respect of the powers of the legisla-
ture of the State of West Bengal in spite of the amendments made by the
legislature by the Amendment Act of 1980 and earlier under the amend-
ing Act of 1979 which was in force for one year. It is not necessary to
strike down the said amendments because they do not directly conflict
E with the definition of the term "agricultural income" under the Con-
stitution, but they do not confer any wider power on the State Legisla-
ture to impose taxes on the agricultural income then what is stated •
earlier. [987G-H; 988A-B]

The validity of the amendments to the Bengal Agricultural
F Income-tax Act made in 1980 and the deletion of the Explanation in
Section 2(a)(2) of the Kerala Agricultural Income-tax Act were chal-
lenged as being ultra vires and invalid in law on several other grounds
but the Court did not go into those grounds in view of what it held as set
out above. [988C-D]

G Although none of the prayers in the petitions was granted in
terms, the petitioners substantially succeeded in the petitions. 1988E] ~

Karimtharuvi Tea Estates Ltd. & Anr. v. State of Kera/a & Ors.,
[1965] 48 I.T.R. 85; Anglo American Direct Tea Trading Co. Ltd. etc.
v, Commissioner of Agricultural Income-tax, Kera/a, [1968] 69 ITR
H 667; State of Tamil Nadu v, Kannan Devan Hills Produce Co. Ltd.,
TATA TEA LTD. v. STATE OF WEST BENGAL [KANIA, J.] 965

[1972] 84 I.T.R. 475; Tea Estate India P. Ltd. v. Commissioner of A
Income-tax, West Bengal II, [1976] 103 I.T.R. 785; Commissioner of
Income-lax, Madras v. R.M. Chidambaram Pillai etc., [1977] 106
I. T.R. 292; Commissioner of Sales Tax, Lucknow v, D.S. Bist & Ors.,
[19791 44 S.T.C. 392; and High Land Produces Co. Ltd. & Anr. etc. v.
Inspecting Asstt. Commr. of Agricultural Income-tax & Sales Tax (Spe-
j cial), Kottayam and Ors. etc., [1984] 148 I.T.R. 746, referred to. B

ORIGINAL JURISDICTION: Writ Petitions Nos. 5409-10,
5411-12/80, 358 & 12807-12808/84.

(Under Article 32 of the Constitution)

Dr. Devi Paul, Ms. M. Seal, H.K. Dutt for the petitioners in c
WP. Nos. 5409-12/80, 12807-12808/84.

Dr. V. Gauri Shankar, P.N. Tiwari, Manoj Arora, S. Rajappa
and S.R. Srivastava for the petitioners in WP. No. 358/84
D
P.S. Poti, V.J. Francis and N.M. Popli, for Respondents in WP.
Nos. 5411-12/80

S.C. Manchanda, B.B. Ahuja and Ms. A. Subhashini for the
U.0.1.
E
Tapas Ray, H.K. Puri, G.S. Chatterjee and Dalip Sinha for Re-
spondents in 12807-08, 5409-10/80

D .P. Mukherjee, for the Intervenor.

~ The Judgment of the Court was delivered by F

KANIA, J. These writ petitions are filed by Public Limited Com-
panies growing and manufacturing tea in the States of West Bengal
and Kerala respectively. Although, there are some differences in the
facts, the material facts are largely common and the questions raised in
the petitions can be fairly regarded as common questions of law. They G
"4, are, therefore, being disposed of together by this common judgment.

The Petitioners in Civil Writ Petitions Nos. 5409-10 of 1980 are
the Tata Tea Limited and a shareholder of the said Company. These
petitions are directed againstthe State of West Bengal, Commissioner
of Agricultural Income-tax of West Bengal, West Bengal Agricultural H
966 SUPREME COURT REPORTS [1988] 3 S.C.R.

A Income-tax Officer, Calcutta Range-I, Union of India and Income-tax
Officer, 0-Ward, Companies District-II, Calcutta. The Petitioners in
Civil Writ Petitions Nos. 5411-12of1980 are also the Tata Tea Limited
and a shareholder thereof. The Respondents are State of Kerala,
Commissioner and Assistant Commissioner of Agricultural Income-
tax at Kerala, Union of India and the concerned Income-tax Officer.
B The Petitioners in other writ petitions are Tea Companies and share-
holders thereof and the Respondents are ranged on similar lines as
above.

The Petitioners are Public Limited Companies growing as well as
manufacturing tea and selling the same. As far as the petitions directed
C against the State of West Bengal are concerned, the challenge therein
is to the constitutional validity of Sections 3 & 5 of the Bengal Ag-
ricultural Income-tax (Amendment) Act, 1980. The Bengal Agricul-
tural Income-tax Act, 1944 provides for the levy and collection of
agricultural income-tax in the then Province of Bengal, the predeces-
sor Province to the present State of West Bengal and, after the coming
D into force of the Constitution, the State of West Bengal. By the said
amending Act, for the first time, sub-sections (2) & (2A) of Section 8
of the Bengal Agricultural Income-tax Act were omitted and always
deemed to have been omitted. It is alleged by the Petitioners that as a
result of the omission of sub-sections (2) & (2A) of Section 8 of the
Bengal Agricultural Income-tax Act, 1944, the State Legislature has
E sought to assume the power, competence and jurisdiction to impose
agricultural income-tax on the entire income derived from the sale of
tea grown and manufactured by a seller and has thereby transgressed
the constitutional limitations contained in Article 246(3) of the Con- •
stitution of India read with Entry 46 of List II of the Seventh Schedule
to the Constitution of India.
F
In the aforesaid Writ Petitions Nos. 5409-10 of 1980 the process
of manufacturing tea has been described in some detail. To put it very
briefly, the green tea grown by the tea growers is withered by exposure
to air under natural or controlled conditions. Certain machinery and
equipment is required for the aforesaid process. The object of wither-
G ing is partial dehydration of shoots to make them leathery and flaccid
for rolling and chemical changes. The change brounght about is the
increase in caffeline, soluble sugars and amino acids. The second pro-
cess involves rupture and distortion of tea shoots into smaller ·sizes to
allow mixing of enzymes and substrates. This is known as rolling. The
process of rolling is carried out by mechanical bruising, tearing, cut-
H ting, crushing breaking and twisting tea leaves for which crank roller/
TATA TEA LTD. v. STATE OF WEST BENGAL [KANIA, J.] 967
~
rotorvane/C.T.C. machines are employed. The third process is of
A
fermentation which involves exposure to,air under controlled tempra'
ture. For this the equipment required is fermentation chamber/trags/
floor/troughs. As a result of this process, the colour of tea changes
from green to coppery. The next process is of drying or roasting for
stoppage of fermentation: dehydration to ensure keeping the quality
of the product. Drying or roasting has to be done at a temperature of B
30 degree celsius and humidity exposure to blast ·of hot air in a counter
current dryer. The equipment required for !his is a conventional tea
dryer. As a result of this process, the moisture in the tea is reduced to 4

,
per cent and it becomes black in colour. This manufacturing process is
applied to tea leaves in a factory which is situated within the garden
area owned by the Petitioner and licensed under the Factories Act. It
is averred that the carrying out of the aforesaid processes is a
c,
specialised operation involving the application of modern methods-of
bio-chemical engineering. The cleaning of the tea is then done with
machines according to various sizes like broken pekoe, broken orange
pekoe, pekoe dust, dust, churmani dust and so on. There are other
also other brands of tea produced by the aforesaid process. It is need- D
less to consider these processes in detail except to state that they are
quite elaborate and, in the cases before us, valuable machinery is
being used for carrying out these processes· which are carried out in
factories.
~
The case of the Petitioners is that the income derived from the E
sale of tea grown and manufactured as aforesaid is derived partly from
agriculture and partly from manufacture. Under the Indian Income-
• tax Act, 1922 (referred to hereinafter as "the Act of 1922") and the
Rules framed thereunder the income derived from the sale of tea
y grown and manufactured by a seller, has to be computed in the manner
laid down in Rule 24 of the Income-tax Rules, 1922 and 40 per cent of F
the income so computed is treated as income other than agricultural
income and the remaining 60per cent is treated as agricultural income.
In respect of the income other than agricultural income, it is the Union
Parliament which has and before the coming into force of the Constitu-
tion the Centre Legislature which had the power to legislate in respect
of taxes; and in respect of the agricultural income, the legislative G
power in respect of taxation was left to the Provinces under the Gov-
i emment of India Act, 1935 and to the States under the Constitution.
The Bengal Agricultural Income'tax Act, 1944 enacted by the Provin-
cial Legislature of Bengal defined agricultural income in identical
terms as contained in Section 2(1) of the Act of 1922. The Bengal
Agricult.ural Income-tax Act further provided by sub-section (2) of H
968 SUPREME COURT REPORTS I1988) 3 S.C.R.
A Section 8 that notwithstanding anything contained that Act, in the case
of tea grown in West Bengal and sold by the grower himself or his
agents after manufacture, the agricultural income derived therefrom
shall be deemed to be that portion of the income computed as
aforesaid under the Act of 1922 on which income-tax was not payable
under the Act of 1922 and agricultural income-tax was levied on the
B whole of such agricultural income. As a result of this, the position was
that the income of an assessee who grew, manufactured and sold tea in
West Bengal was computed in the manner laid down in the Act of 1922
read with Income-tax Rules, 1922 and agricultural income-tax was
levied only in respect of 60 per cent of that income. On coming into
force of the Income-tax Act, 1961 which replaced the Act of 1922, the
position remained the same. The Income-tax Act, 1961 (referred to
c hereinafter as "the Act of 1961") came into effect from 1st April,
1962. The definition of agricultural income in the Act of 1961 is con-
tained in sub-section (1) of Section 2 of that Act and is in pari materia
with the definition of the said term in the Act of 1922. Rule 8 of the
Income-tax Rules, 1962 is in pari materia with Rule 24 of the Income-
D tax Rules, 1922. As a result of this even after the Act of 1961 and the
Income-tax Rules, 1962 came into force, a State Legislature could only
legislate in respect of taxes regarding that part of the income computed
by the Income-tax Officer concerned as aforesaid which is treated as
agricultural income, namely, 60 per cent of it.

E In 1979, the Legislature of the State of West Bengal enacted the
Bengal Agricultural Income-tax (Amendment) Act, 1979. By the said
Amendment Act, sub-section (2A) was added after sub-section (2) in
Section 8 of the Bengal Agricultural Income-tax Act, 1944. Very
•
briefly put, the said sub-section (2A) gave powers to the Agricultural
Income-tax Officer to make the computation of income derived from
F tea in cases where it had not been computed for the purposes of assess-
ment of income-tax under the Act of 1961 or, although computed, the
assessment under the Act of 1961 had been annulled or set aside under
that Act and no order of assessment under Section 25 had been made
within six years from the end of the year in which the agricultural
income was first assessable in the manner and subject to the limitations
G and conditions set out in the ;aid sub-section. It is not really necessary
for us to consider this provision further in the view which we have
taken. Moreover, this Amendment Act remained in force only for the
period 1979-80 after which it was replaced by the Amendment Act of
1980. The West Bengal Legislature in 1980 amended the Bengal
Agricultural Income-tax Act by the Bengal Agricultural Income-tax
H '(Amendment) Act, 1980. By the said Amendment Act, sub-sections
TATA TEA LTD. v. STATE OF WEST BENGAL [KANIA, Li 969

(2) and (2A) of Section 8 of the Bengal Agricultural Income-tax were A
deleted and always deemed to have been deleted as already pointed
out and Section 25(4) of that Act was omitted. Section 7 of the
Amendment Act provided for cases where the asessment under the
Act of 1961 of any agricultural income derived from tea was made
before coming into force of the Amendment Act but we are not con-
cerned with that section. Under the petition, the challenge is to the B
validity of Sections 3 and 5 of the Amendment Act whereby the
aforesaid sub-sections (2) and (2A) of Section 8 were omitted with
retrospective effect and Section 25(4) was omitted. It is submitted in the
petition that, from the speech of the Finance Minister at the time of
introducing the Bill for carrying out the amendments, as well as from
the affidavit in reply filed by the State of West Bengal, it is clear that C
the entire object of the amendments was to subject to the levy of
agricultural income-tax, the entire income derived by an assessee from
the sale of tea grown and manufactured by him.

We come next to the petitions against the State of Kerala. Under
the Agricultural Income-tax Act, 1950 passed by the Legislature of the D
State of Kerala, "agricultural income" is defined in the same maner as
under the Act of 1922 and there was an Explanation after clause (2) in
Section 2 (a) stating that agricultural income derived from land used
l for agricultural purposes by the cultivation of tea leaves means that
( portion of the income derived from the cultivation, manufacture and
sale of tea as is defined to be agricultural income for the purposes of E
enactments relating to the Indian Income-tax Act. By an Act called
"The Agricultural income-tax (Amendment) Act, 1980" (Kerala Act
• No. 17 of 1980), the Kerala Agricultural Income-tax Act was amended
and the said Explanation was deleted. It was submitted that this dele-
·-'y tion was made with a view to make the entire income earned by an
: . assessee who grew and manufactured tea from the sale of tea subject to F
the levy of agricultural income-tax. Here again, it was pointed out
that, from the speech of the Finance Minister at the time of introduc-
ing the Bill concerned and the stand taken in Court by the .State of
Kerala, it was clear that the entire object of the amendment was to
make the entire income derived. by an assessee as aforestated liable
to the levy of agricultural income-tax. These submissions were adopted G
.i_ by the learned Counsel who appeared for the other Petitioners and by
Mr. Manchanda who appeare for the Union of India. It is submitted by
Dr. Paul, learned Counsel for the Tata Tea Company that the afore-
said amendments, in so far as they purport to confer power on the
respective legislatures of the State of West Bengal and the State of
Kerala to legislate regarding taxes on the income from the sale of tea H
970 SUPREME COURT REPORTS [1988) 3 S.C.R.

A grown and manufactured by an assessee in excess of 60 per cent of such
income computed in the manner prescribed under the law relating to
income-tax are void and of no legal effect as they are beyond the
legislative competence of the respective legislatures of the States of
West Bengal and Kerala respectively in view of the provisions of Arti-
cle 246 of the Constitution read with Entry 82 in List I and Entry 46 in
B List II in the Seventh Schedule to the Constitution and the relevant -{
provisions of the law relating to income-tax.

Dr. Paul, learned Counsel for Tata Tea Company and Tata
Finlay Company further submitted that, if the entire income derived
from the sale of tea grown and manufactured by an assessee were to be
C regarded as agricultural income, the result would be that the Parlia-
ment would not have any competence to legislate in respect of taxes on
the same with the result that the provisions of the Act of 1922 and the
Act of 1961 imposing the levy of income-tax on any part of such
income would become ultra vires. This particular submission was not
supported by Dr. Gauri Shankar who appeared for Petitioner in W .P.
D No. 358 of 1984 and was opposed by Mr. Manchanda who appeared for
the Union oflndia.

As far as the State of West Bengal and the State of Kerala are
concerned, they are represented by learned Counsel, Mr. Potti and
Mr. Tapas Ray respectively. It was urged by Mr. Patti and Mr. Ray
E that Article 366(1) of the Constitution merely states that the term
'agricultural income" has the same meaning as given to it in the enact-
ments relating to income-tax, that the definition of the said term in the
Act of 1922 and the Act of 1961 did not prescribe that only a particular
portion of the income derived by an assessee from the sale of tea
grown and manufactured by him can be regarded as agricultural
F income and herice it was open to the State Legislatures concerned to
levy agricultural income-tax on such entire income. Alternatively, it
was submitted by them that, in any event, in law, the entire income
derived from the sale of tea by an assessee growing and manufacturing
tea must be held to be agricultural income in view of the decision of the
Supreme Court in the case of Bist & Co. (which we propose to refer to
G more particularly hereinafter) and hence the State Legislature was
entitled to levy agricultural income-tax on the same. The Parliament
had no power to legislate in respect of such income.

In order to examine the correctness of these contentions, certain
relevant provisions of law may be noted at this stage. Under Article
H 246( 1) of the Constitution, Parliament has exclusive power .to legislate
TATA TEA LTD. v. STATE OF WEST BENGAL [KANIA, J.J 971

>- with respect to any of the matters enumerated in List I in the Seventh
A
Schedule to the Constitution which is referred to in the Con-
stitution as the "Union List". Clause (3) of that Article prescribes that
a Legislature of a State has exclusive power to make laws with respect
to any of the matters enumerated in List II in the Seventh Schedule
(referred to in ihe Constitution as the "State List"). Clause (2) of the
)- said Article provides that both Parliament and State Legislatures have B
power to make laws with respect to any of the matters enumerated in
List III in the Seventh Schedule called the "Concurrent List". Entry 82
in List I or the Union List reads "taxes on income other than
agricultural income." Entry 46 of List II (State List) reads "taxes on

, agricultural income". Article 366 of the Constitution contains defini-
lions and sub-Article (!}thereof reads as follows:

"Agricultural income means agricultural income as
defined for the purposes of the enactments relating to
Indian Income-tax Act."
c

The material portion of sub-section (1) of Section 2 of the Act of D
1922 (Indian Income-tax Act, 1922) defines agricultural income as
follows:

"Agricultural income means:

(a) any rent or revenue derived from land which is E
used for agricultural purposes, and is either assessed to
land-revenue in the taxable territories or subject to a local
• rate assessed and collected by officers of the Government
as such;

~ (b) any income derived from such land by F

(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 ren- G
der the produce raised or received by him fit to
J. 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 H
972 SUPREME COURT REPORTS [1988] 3 S.C.R.

A other than a process of the nature described in
sub-clause (ii);

x x x x x"

B Clause (c) of the said sub-section and the Proviso thereto are not
material for our purposes.

Section 59 of the Act of 1922 deals with the powers to make
rules. Sub-section (1) confers power on the Central Board of Revenue,
subject to the control of the Central Government, to make rules for
carrying out the purposes of the Act of 1922 and for the ascertainment
c and determination of any class of income. The material portion of
sub-section (2) of that section runs as follows:

"Without prejudice to the generality of the foregoing
power, such rules may
D
(a) prescribe the manner in which, and the pro-
cedure by which, the income, profits and gains shall be
arrived at in the case of

(i) incomes derived in part from agriculture and in
part from business;
E
x x x x x"

Sub-section (5) of Section 59 reads as follows:

"Rules made under this section shall be published in the
F
Official Gazette, and shall thereupon have effect as if enac-
ted in this Act."

Rule 24 of the Income-tax Rules, 1922 deals with the computa-
tion of income derived from the sale of tea grown and manufactured by
the seller and that rule runs as follows:
G
"Income derived from the sale of tea grown and man-
ufactured by the seller in the taxable territories shall be
computed as if it were income derived from business, and
40 per cent of such income shall be deemed to be income,
profits and gains liable to tax:
H
TATA TEA LID. v. STATE OF WEST BENGAL [KANIA, J.[ 973

Provided that in computing such income an allowance A
shall be made in respect of the cost of planting bushes in
replacement of bushes that have died or become perma-
nently useless in an area already planted, unless such area
has previously been abandoned."

Sub-section (1) of Section 2 of the Act of 1961 (Income-tax Act, B
1961) defines the term "agricultural income". The material portion of
that definition is similar to the definition contained in the Act of 1922
• and .runs as follows:

, "(1) "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
c

(i) agriculture; or D

(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 E

• (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". F

Clause (c) of the said sub-section is not material for our purpose.
Section 295 of the Act of 1961 deals with the power to make rules. The
relevant portion of that section runs as follows:

"(1) The Board may, subject to the control of the G
Central Government, by notification in the Gazette of
India, make rules for the whole or any part of India for
carrying out the purposes of this Act.

(2) In particular, and without prejudice to the gener-
ality of the foregoing power, such rules may provide for all H
974 SUPREME COURT REPORTS 11988] 3 S.C.R.

or any of the following matters
A
(a) the ascertainment and determination of any class
of income;

(b) the manner in which and the procedure by which
B the income shall be arrived at in the case of-

(i) income derived in part from agriculture and in
part from business;

x x x x x x"
c The Board referred to in Section 295(1) is the Central Board of Direct
taxes.

Section 296 provides inter alia that a rule framed under Section
295 shall be laid, as soon as may be after the rule is made, before each
D House of Parliament and shall have effect subject to any modification
or deletion made by both Houses of Parliament. Rule 7 of the Income-
tax Rules, 1962 made under Section 295 of the Act of 1961 deals with
income which is partially agricultural and partially from business. Rule
8 deals with income from the manufacture of tea and the said rule runs
as follows:
E
"(1) Income derived from the sale of tea grown and man-
ufactured by the seller in India shall be computed as if it •
were income derived from business, and forty per cent of
such income shall be deemed to be income liable to tax.

F (2) In computing such income an allowance shall be made
in respect of the cost of planting bushes in replacement of
bushes that have died orbecome'permanently useless in an
area already planted, if such area has not previously been
abandoned, and for the purpose of determining such cost,
no deduction shall be made in respect of the amount of any
G subsidy which, under the provisions of clause (30) of Sec-
tion 10, is not includible in the total income."

Section 7 of the Bengal Agricultural Income-tax Act, 1944 deals
with the computation of tax and allowances under the head "AGRI-
CULTURAL INCOME FROM AGRICULTURE". Section 8 of that
H Act deals with the computation of tax on mixed income. Sub-section
TATA TEA LID. v. STATE OF WEST BENGAL [KANIA, J.] 975

(1) of Section 8, very briefly stated, prescribes that in case of such A
mixed income which is partly agricultural and is assessable under the
said Bengal Act and partly chargeable under the Indian Income-tax
Act of 1922 under the head "Business", agricultural income-tax would
be payable by an assessee in respect of the market value of agricultural
produce which has been raised by the assessee or received by him as
rent-in-kind and which has been utilised by him as raw material in such B
business or the sale receipts of which are included in the accounts of•
the business subject to allowances permissible under that Act. Clause
(a) of the Proviso to that sub-section makes it clear that if, for the
purposes of assessment of income-tax under the Act of 1922, the
market value of the produce had .been determined that would be
accepted as market value also for the said Bengal Act. Clause (b) of
the Proviso deals with common charges on agricultural income and C
income chargeable under the Act of 1922. The material portion of
sub-sections (2) and (3) of the said section ran as follows:

"(2) Notwithstanding anything contained in this Act,
in the case of tea the plant Camellia Thea (Linn.) grown in D
West Bengal and sold by the grower himself or his agent
after manufacture, the agricultural income derived there-
from shall, as long as for the purposes of assessment of
income-tax under the Indian Income-tax Act, 1922, the
income derived therefrom is computed under that Act in
such manner as to include agricultural income, be deemed E
to be that portion of such income as so computed on which
income-tax is not payable under that Act, and agricultural
income-tax at the rates specified in the Schedule shall be
payable on the whole of such agricultural income as so
computed.
F
x x x x x x

(3) For the purpose of the assessment of agricultural
income-tax under this section or any rule made thereunder
a certified copy of an order of an assessment under the
Indian Income-tax Act, 1922, or a certified copy of an G
order of any appellate or revising authority or of the High
Court or of the Supreme Court altering or amending such
order of .assessment under the provisions of that Act shall
be conclusive evidence of the contents of such order."

The Bengal Agricultural Income-tax (Amendment) Act, 1980 H
976 SUPREME COURT REPORTS [1988] 3 S.C.R. "

A (referred to hereinafter as "the Bengal Amendment Act of 1980") was
passed by the Legislature of the State of West Bengal and published in
the Gazette on 31st March, 1980. By Section 2 of that Act, Section 7A
was inserted into the Bengal Agricultural Income-tax Act, 1944 and
that section runs as follows:

B "7A: Notwithstanding anything to the contrary contained
in this Act, in the case of an assessee being a company or a
• firm or other association of persons, the agricultural
income of such assessee shall be computed in accordance
with the method of accounting regularly employed by such
assessee for such computation:
c Provided that if, in any case, the method of account·
ing as aforesaid is such that, in the opinion of the Agri·
cultural Income· tax Officer, the agricultural income cannot
be computed, the computation shall be made on such basis
and in such manner as the Agricultural Income-tax Officer
D may determine."

Section 3 of the Amendment Act of 1980 provides that sub·
sections (2) and (2A) of Section 8 of the Bengal Act of 1944 shall be
omitted and shall be always deemed to have been omitted. Section 7 of 1
the Bengal Amendment Act of 1980 runs as follows:
E
"(7) Notwiihstanding any judgment, decree or order
of any court, tribunal, or authority to the contrary, where •
any assessment under the Income-tax Act, 1961 of any
agricultural income derived from tea has been made before
the coming into force of this Act, the proceeding relating to y
F such assessment may be taken and continued under the
principal Act as if this Act had not been passed."

It may be mentioned here that by the Bengal Agricultural
Income-tax (Amendment) Act, 1979, sub-section (2A) was inserted
after sub-section (2) in Section 8 of the Bengal Act of 1944. That Act
G remained in force only for a period of one year. The material portion
of sub-section (2A) ran as follows: ,A_,

"(2A) Where the computation of the income derived
from tea has not been completed for the purposes of assess-
ment of income-tax under the Income-tax Act, 1961, or
H where such computation has been completed but the
TATA TEA LTD. v. STATE OF WEST BENGAL !KANIA, J.) 977

assessment under the Income-tax Act, 1961, has been
annulled or set aside under that Act and no order of assess· A
ment under Section 25 has been made within six years from
the end of the year in which the agricultural income was
first assessable, the Agricultural Income-tax Officer shall,
notwithstanding anything to the contrary contained in this
Act, assess the agricultural income derived from tea in such B
manner and within such period as may be prescribed and
shall determine the sum payable by the assessee on the
basis of such assessment:
x x x x x"

In the State of Kerala, agricultural income-tax was sought to be C
imposed by the Agricultural Income-tax Act, 1950 passed by the Legis·
lature of the State of Kerala. The definition of the term "agricultural
income" is contained in sub-section (a) of Section 2 of the Kerala
Agricultural Income-tax Act. The said definition is in line with the
definition of the said term under the Act of 1922. There was an Expla·
nation after clause (2) of sub-section (a) of Section 2. The material D
part of sub-section (a) runs as follows:

"2(a) "agricultural income" means-

(1) any rent or revenue derived from land which is used for
agricultural purposes; E

(2) any income derived from such land 1by

(i) agriculture; or

(ii) the performance by a cultivator or receiver of F
rent-in-kind of any process ordinarily employed by a
cultivator or receiver of rent-in-kind to render the
produee raised or received by him fit to be taken to
market; or

(iii) the sale by a cultivator or receiver of rent-in- G
kind of the produce raised or received by him, in
respect of which no process has been performed othet
than a process of the nature described in sub-clause.
(ii);

x x x x x" H
978 SUPREME COURT REPORTS [1988) 3 S.C.R.

A The Explanation referred to above, which followed clause 2 ran
as follows:

"Agricultural income derived from such land by the culti-
vation of tea means that portion of the income derived
from the cultivation, manufacture and sale of tea as is
B defined to be ~gricultural income for the purposes of tbe
enactments relating to Indian Income-tax"

By Section 2 of the Agricultural Income-tax Amendment Act,
1980 (Kerala Act 17 of 1980), the said Explanation was omitted with
effect from 1.4.1980. The affidavit in reply filed on behalf of the State
of Kerala as well as the speech of tbe Finance Minister of the said State
c at the time of introducing of tbe Bill which was passed as the Kerala
Amendment Act of 1980, make it clear that the intention behind delet-
ing of Explanation was to make the entire income earned by a person
from the sale of tea grown and manufactured by him in the State liable
to the levy of agricultural income-tax.
D
The main question which we have to consider is whether the
aforesaid provisios in the Bengal Amendment Act of 1980 are in excess
of the legislative competence of the West Bengal State Legislature. It
will also have to be considered whether by reason of tbe deletion of the
aforesaid Explanation effected by the Kerala Amendment Act of 1980
E the definition of the term "agricultural income" in sub-section (a) of
Section 2 of the Kerala Agricultural Income-tax became void as in
excess of the legislative competence of the State Legislature. ..
A perusal of Entry 82 of List I in tbe Seventh Schednle and Entry
46 in List II makes it clear the respective Legislatures of the State of _..,,
F West Bengal and the State of Kerala could pass laws imposing taxes f
only in respect of agricultural income; and in respect of income otber
than agricultural income, it is only Parliament which has the power to
legislate in respect of taxes on such income. sub-article (1) of Article
366 of tbe Constitution states that "agricultural income" means such
income as is defined as "agricultural income" for the purposes of
G enactments relating to Indian income-tax. It is significant that the
words used are not "as defined by the enactments relating to Indian j
income-tax" but "as defined for the purposes of the enactments relating
to Indian income-tax." (emphasis supplied). We have already set out
the definition of the term "agricultural income" under the Act of 1922
as well as that in the Act of 1961 which replaced foe Act of 1922. If
H these definitions are read by tbemselves, it would be difficult to say
TATA TEA LTD. v. STATE OF WEST BENGAL [KANIA, J.J 979
t-
that there is any conflict between them and the definition of the term A
"agricultural income" contained in the Bengal Agricultural Income-
tax Act, 1944 after its amendment in 1980 or the definition of the said
term in the Kerala Agricultural Income-tax Act of 1950, even after the
deletion of the aforesaid Explanation. However, it must be realised
that Section 59 of the Act of 1922 and Section 295 of the Act of 1961
both deal with rule making powers. Under the Act of 1922 that power B
is given to the Central Board of Revenue and under the Act of 1961
that power is given to the Central Board of DireGt Taxes. Clause (a) of
sub-section (2) of Section 59 of the Act of 1922 specifically confers
powers on the Central Board of Revenue to make rules prescribing the
manner in which and the procedure by which income, profits and gains

'
shall be arrived at in the case of income derived in part from agri-
culture and in part from business. A similar power is conferred under
c
Section 295 of the Act of 1961 on the Central Board of Direct Taxes to
make rules in respect of income derived in part from agriculture and in
part from business. The only difference between Section 59 of the Act
of 1922 and Section 295 of the Act of 1961 in this conrrection, to which
our attention was drawn by Mr. Potti, is that sub-section (5) of Section D
59 provides that the rules made under the said Section shall be
published in the Official Gazette and shall thereupon have effect as if
enacted in the Act of 1922 whereas Section 296 of the Act of 1961
provides that the rules made under the Act of 1961 have to be laid
~ before each House of Parliament in the manner prescribed in Section
296 and both Houses of Parliament are entitled to make such changes E
therein as they may resolve or they might direct that the rule should
not be given effect to. This, however, does not make much difference.
Rule 24 of the Income-tax Rules, 1922 and Rule 8 of the Income-tax
Rules; 1962 framed under Section 295 of the Act of 1961 are in pari
'\.( materia.
F
It may be mentioned here that Rule 7 of the Income-tax Rules,
1962 deals with the computation of income which is partially agri-
cultural and partially from business and Rule 8 is the specific rule
dealing with income derived from the sale of tea grown and manu-
factured by the seller in India. Under sub-rule (1) of Rule 8, it is

•
providep that such income shall be computed as if it were .income G
derived from business and 40 per cent of such income is .deemed to be
income liable to tax.

A perusal of the aforesaid Rule 8(1) makes it clear that under the
said rule, income from the sale of tea grown and manufactured by a
seller in India has to be computed as if it were income derived from H
980 SUPREME COURT REPORTS [1988) 3 S.C.R.

business which would imply that the deductions allowable under the
A
Act of 1961 in respect of income derived from business would be
allowable in the case of income derived from the sale of tea grown and
manufactured by a seller and further allowance would be granted as set
out in Rule 8(2) and 40 per cent of the income so computed would be
deemed to be income liable to the levy of income-tax and the balance
B of the income would be liable to tax as agricultural income subject to
such further deductions as the law pertaining to the levy of agricultural
income-tax might allow. The question is whether Rule 24 of the
Income-tax Rules, 1922 and Rule 8 of the Income-tax Rules, 1962 can
be said to form part of the definition of the term "agricultural income"
under the Act of 1922 and the Act of 1961 respectively.
c . In Karimtharuvi Tea Estates Ltd. & Anr. v. State of Kera/a &
Ors., [1965) 48 I.T.R. 85 a .Bench comprising of five learned Judges of
this Court was called upon to consider the question of the power of a
State Legislature to make a law in respect of taxes on agricultural
income arising from tea plantations and the Bench took the view that
D the power of the State Legislatures in this connection is limited to
legislating with respect to agricultural income determined in accord-
ance with Rule 24 of the Indian Income-tax Rules, 1922, under which
income derived from the sale of tea grown and manufactured by the
seller is first to be computed under Section 10 of the Act of 1922, as if
it were income derived from business. Any expenditure by the asses-
E see, not being an allowance described in clauses (i) to (xiv) of Section
10(2) of the Act of 1922 and not being in the nature of.capital expendi-
ture or personal expenses of the assessee, laid out or expended wholly
and exclusively for the purposes of such business would be deductible.
Of the income so computed, 40 per cent, being under Rule 24 of the
Indian Income-tax Rules, 1922 treated as income liable to income-tax,
f the other 60 per cent alone will be "agricultural income". The State
Legislature is free in the exercise of its plenary legislative power to
allow further deductions from such computed agricultural income in
the case of tea plantations as it considers fit but it cannot add to the
amount of agricultural income so computed by providing that certain
items of expenditure deducted in the computation of the income from
G business under the provisions of the Indian Income-tax Act, 1922 be
not deducted and be considered to be a part of the taxable agricultural
income. The State Legislature cannot enact such a provision which
would make agricultural income from tea plantations higher than what
it would be if computed in accordance with Rule 24 read with Section
10 of the Indian Income-tax Act. In that case, the provision of the
H Kerala Agricultural Income-tax Act which had to be considc;_red was
TATA TEA LTD. v. STATE OF WEST BENGAL (KANIA, J.) 981
t Explanation 2 to Section 5 added by an amending Act in 1961 which
A
deals with the computation of agricultural income. The provisions of
Section 2 of the Kerala Agricultural Income-tax Act which defines
"agricultural income" for the purposes of that Act and the Explana-
tion to clause (2) of sub-section (a) of that Section, which Explanation

,, has now been deleted by the impugned Amendment Act, were also
considered. It was pointed out (p. 91 of the Report) that: B
" 'Agricultural income' as defined in the Constitution
means 'agricultural income for the purpose of the enact-
ments relating to income-tax'. One such enactment is the

r Income-tax Act. Rule 24 of the Income-t_ax Rules 1922 has
been made under the power conferred by-Section 59 of the
Income-tax Act and has effect as if enacted in that Act. c
When Section 59 of the Income-tax Act provides for the
Rules made under that Act to prescribe the proportions of
income from business and income from agriculture in the
entire income derived in part from agriculture and in part
from business, the proportion so prescribed must be', taken D
to be prescribed by the Act. These rules were in existence
in 1950 when the Constitution inc9rporated the definition
of "agricultural income" from the Income-tax Act by refer-
ence. The definition of the term wa.i' bound up with the
~- Rules." (emphasis supplied).
E
It was pointed out by Mr. Patti that there is a reference in the

- aforesaid judgment to the said Explanation contained in Section
2(a)(2) of the Kerala Agricultural Income-tax Act, which is now
deleted, and which substantially incorporated the provisions of Rule
24 of the Income-tax Rules, 1922 about the computation of income
-~· derived by an assessee from the sale of tea grown and manufactured
F
by him and the respective proportions of the same which could be
regarded as agricultural income and other income respectively. It is,
however, not possible to say that the aforesaid decision is essentially
based on the said Explanation as contended by Mr. Patti.

The question whether computation of income by the Central G
Income-tax authorities could be disregarded. by an Agricultural
~ Income-tax Officer acting under the Kerala Agricultural Income-tax
Act came up for consideration before another Bench of five.learned
Judges of this Court in Anglo-American Direct Tea Trading Co. Ltd.
etc. v. ·Commissioner of Agricultural Income-tax, Kerala, [1968] 69
I.T.R. 667. In that case the year in question were 1958-59 to 1961-62, H
982 SUPREME COURT REPORTS [1988) 3 S.C.R.

A
with the result that the provisions of the Act of 1922 as well as the Act
of 1961 and of the Income-tax Rules, 1922 as well as the Income-tax '"'
Rules, 1962 had to be taken into account. This Court followed its
decision in the case of Karimtharuvi Tea Estates Ltd. & Anr. v. State of
Kera/a & Ors., [1965) 48 I.T.R. 85 and held that income from the sale
of tea grown and manufactured by an assessee is derived partly from
B business and partly from agriculture. This income is computed as if it
were -income from business under the Central Income-tax Act and the
Rules made thereunder. Of the income so computed as aforesaid, 40
per cent is deemed to be income derived from business and assessable

1
to non-agricultural income-tax. The balance of 60 per cent of the
income so computed is agricultural income within the meaning of the
c Central Income-tax Act and the Constitution of India and the power of
the State Legislature to make a law in respect of taxes on agricultural
income arising from tea plantations is limited to legislating with
respect to the agricultural income so determined. It was also pointed
out that the Explanation to Section 2(a)(2) of the Kerala Agricultural
Income-tax Act, 1950 adopted this rule of computation. It was held in
D that case that the Agricultural Income-tax Officer acting under the
Kerala Act was bound to accept the computation of the tea income
already made by the Central Income-tax authorities and to assess only
60 per cent of the income so computed, less deductions allowable
under Section 5 of the Kerala Act in so fat as the same had not been _.
allowed in the assessment under the Central Income-tax Act. The
E Court also held that if, before Agricultural Income-tax Officer pro-
ceeds to make the assessment under the Kerala Act, an assessment of
income by the Income-tax Officer under Rule 24 of the Income-tax
Rules, 1922 or Rule 8 of the Income-tax Rules, 1962 had been made,
then the Agricultural Income-tax Officer acting under the Kerala Act
is bound to accept the computation of the tea income already made by
F the Central Income-tax Authorities as aforesaid. In the case of State
y
of Tamil Nadu v. Kannan Devan Hills Produce Co. Ltd., [1972) 84
l.T.R. 475 a Division Bench comprising of two learned Judges of this
Court followed the aforesaid decisions.

In the case of Tea Estate India P. Ltd. v. Commissioner of
G Income-tax, West Bengal II, [1976) 103 I.T.R. 785 a Bench comprising
of two learned Judges of this Court observed (at P. 795) as follows:
l
"Income which is realised by sale of tea by a tea company
which grows tea on its land and thereafter subjects it to
manufacturing process in its factory is an integrated in-
H come. Such income consists of two elements or com-
TATA TEA LTD. v. STATE OF WEST BENGAL [KANIA, J.J 983

ponents. One element or component consists of the
A
agricultural income which is yielded in the form of green
leaves purely by the land over which tea plants are grown.
The second element or component consists of non-agricul-
tural income which is the result of subjecting green leaves
which are plucked from the tea plants grown on the land to
a particular manufacturing process in the factory of the tea B
company."

The decisions in the cases of Karimtharuvi Tea Estates Ltd. &
Anglo-American Direct Tea Trading Co. Ltd., [1968) 69 I.T.R. 667,
[1965) 48 I.T.R. 85 referred to earlier have been cited with approval
by a Division Bench of this Court in Commissioner of Income-tax,
Madrasv.R.M. ChidambaramPillai, etc., [1977) 106!.T.R.292,
c
A reading of Article 245 of the Constitution with Entry 82 of List
I and Entry 46 of List II in the Seventh Schedule makes it clear that the
State Legislature has exclusive jurisdiction to legislate in respect of
taxes on agricultural income; and in respect of taxes on other income, D
it is Parliament alone which can legislate. The term "agricultural
income" used in that Entry has to be construed in accordance with the
definition of the said term in Article 366(1) of the Constitution of
India and that sub-article states that agricultural income means "ag-
ricultural income as defined for the purposes of the enactments relat-
ing to Indian Income-tax". A scrutiny of the aforesaid decisions of this E
Court in Karimatharuvi Tea Estates Ltd. (supra) and Anglo-American Direct
Tea Trading Co. Ltd., [1968) 69 I.T.R. 667 shows that this Court has
consistently taken the view that the definition of the term "agricultural
income" for the purposes of the Act of 1922 and tha Act of 1961, being
Acts pertaining to the levy of income-tax, has to be considered in the
light of Rule 24 of the Income-tax Rules, 1922 in the case of the Act of F
1922 and Rules 7 and 8 of the Income-tax Rules, 1962 as far as the Act
of 1961 is concerned. An analysis of the said decisions shows that this
Court has taken the view that, in case of income from the sale of tea
grown and manufactured by an assessee, Rule 24 of the Income-tax
Rules, 1922 and Rule 8 of the Income-tax Rules, 1962 although at first
glance they appear to be rules of apportionment and computation, G
must be treated as incorporated in the definition of the term
"agricultural income" in the J\ct of 1922 and the Act of 1961 respec-
tively. It is true that in both the cases, Karimtharuvi Tea Estates Ltd.
(supra) & Anglo-American Direct Tea Trading Co. Ltd., [1968)
48 I.T.R. 83 it has been noticed by this Court that the said Expla-
nation to Section 2(a)(2) to the Kerala Agricultural Income-tax Act H
984 SUPREME COURT REPORTS [198&1 3 S.C.R.

A was in line with the provisions of Rule 24 of the Income-tax Rules,
1922 and Rule 8 of the Income-tax Rules, 1962 but that by itself does
not make any difference and the reading of the aforesaid decisions
makes it perfectly clear that even without that Explanation the posi-
tion would have been the same. The conclusion which must follow is
that although the Explanation has been deleted from clause (2) of
B
sub-section (a) of Section2 of the Kerala Agricultural Income-tax Act
and in spite of the amendinents carried out by the Amendment Act of
1979 and thereafter the Amendment Act of 1980 In the case of the
Bengal Agricultural Income-tax Act, an Agricultural Income-tax
Officer acting under the Kerala Agricultural Income-tax Act or the
-
Bengal Agricultural Income-tax Act has no power to levy agricultural
c income-tax except in respect of 60 per cent of the income derived by an
assessee from the sale of tea grown and manufactured by him and
computed in the manner laid down under the relevant Central Income-
tax Act and the Rules framed thereunder.

b It was, however, contended by Mr. Potti on behalf of the State of
Kerala and Mr. Tapas Ray on behalf of the State of West Bengal that
the position as emerging from the aforesaid decisions of this Court has
been altered by the decision of this Court in the case of Commissioner
of Sales Tax, Lucknow v. D.S. Bist & Ors., [1979]' 44 S.T.C. 392. In
that case the assessee owned some tea gardens in the State of U .P. and
E sold the tea-leaves grown by him in his gardens after processing and
.packing the same. A question arose whether the tea leaves sold by the
assessee were agricultural produce grown by himself and the sales
were, therefore, not exigible to sales tax under the Proviso to Section
2(i) of the U.P. Sales Tax Act, 1948. The contention of the revenue
was that the goods in question, namely, tea leaves grown and proces-
-
.F sed ?s afordestated hthad cefased to be an agricultural produce after pro-
cessmg an were, ere ore, exigible to sales tax. The processes to
which tea-leaves were subjected by the. assessee was described by the
Revising Authority as follows (p. 394):

"(1) The tea-leaves were first of all subjected to withering
G in shadow in rooms on a wooden floor for about 14
hours.

(2) Then they were crushed by hand or foot and were then
roasted for about 15 minutes.

H (3) Later they were roasted on mats for about 15 minutes.
TATA TEA LTD. v. STATE OF WEST BENGAL [KANIA, J.J 985

(4) And then they were covered by wet sheets for genera!- A
ing fermentation. During this process the colour of
leaves was changed from green to yellowish.

(5) The leaves were then subjected to grading with sieves
of various sizes. Fanning machines are. also used in
r completing the grading process. B

(6) The produce was then finally roasted with charcoal for
obtaining suitable flavour and colours.

(7) It is this final product which was eventually sold by the
assessee."
c
It was observed by the Supreme Court that if the tea-leaves sold
by the assessee substantially retained the character of being an
agricultural produce, the assessee's sales would not be exigible to sales
tax. If, on the other hand, the leaves had undergone such vital changes
by processing that they lost their character of being an agricultural D
produce and became a different commodity, then the sales made by
the assessee were exigible to sales tax. The Court held that, on the
findings recorded by the revising authority, it could not be justifiably
). held in law that the tea-leaves lost their character of being an
agricultural produce and became something different. All the proces-
ses applied by the assessee were necessary for the purpose of saving E
the tea-leaves from perishing, making them fit for transporting and
marketing them, It was submitted by learned Counsel that this deci-
sion laid down that the processes involved in producing marketable tea
were only such as would be carried out by an agriculturist to make his
- \.; produce marketable and hence the entire income derived from the sale
. of such tea leaves should be regarded as agricultural income. In our F
view, it is impossible to accept this contention. In the first place, the
question before the Court in that case was not relating to agricultural
income-tax at all but relating to sales tax. Moreover, what the Court
was called upon to consider, and what it did to consider, was only
whether the tea-leaves after undergoing the processes set. out earlier
continued to be agricultural produce or whether they became a diffe- G
~ rent commodity which could not be regarded as an agricultural pro-
duce. It is significant that the aforesaid decisions rendered by Benches
comparising five foarrled Judges of this Court in Karimathllruvi and
Anglo-American's, Cases, as well the other decisions referred to
earlier, have not been referred to in that decision at all, a.nd rightly so,
because the Divi~ion Bench in Bist's ~ase }Vas called upon to consider H
986 SUPREME COURT REPORTS [1988] 3 S.C.R. "

A a question which was essentially a different question. The ratio of the
decision in Bist's Case has no application to the cases before us. That
decision is, therefore, of no assistance to learned Counsel for the State
of Kerala and the State of West Bengal.

We find that the judgment in Bist's Case referred to above has
8 been distinguished by a learned Single Judge of the Kerala High Court
in High Land Produces Co. Ltd. & Anr. etc. v. Inspecting Asstt.
Commr. of Agricultural Income-tax & Sales Tax (Special), Kottayam,
and Ors. etc., [1984] 148 I.T.R. 746 in considering the scope of the
power of the State Legislature to tax agricultural income. That case
arose after the aforesaid amendment of Section 2(a) of the Kerala
Agricultural Income-tax Act, 1950 whereby the Explanation at the end
c of Section 2(a)(2) thereof was deleted. It has been pointed out by the
learned Judge that the Explanation to Section 2(a) of the Kerala
Agricultural Income-tax Act, 1950 was, in substance, in harmony with
the concept of mixed income contemplated by Section 295(2)(b) of the
Act of 1961 and Rule 8 of Income-tax Rules, 1962. The Explanation
D specifically referred to that portion of the income from tea as was
defined by the Central Act and Rule 8 to be agricultural income by
exclusion from total income computed under the Central Act. This
Explanation bas been omitted by the Amendment Act of 1980. The
State Legislature is perfectly competent to omit any provision which it ·-i
has enacted. However, it cannot thereby widen the ambit of the State
B Act so as to bring to tax the entire income derived from the sale of tea
grown and manufactured by an assessee. It has been pointed ouf by
the learned Judge in his judgment that none of the observations in
Bist's Case could be read to mean that the entirety of the income
derived from the sale of tea grown and manufactured by the assessee
would be chargeable to agricultural income-tax, for such a construe- 'fl
F tion would not only be unwarranted by the facts and reasoning of that
case, but would also be directly in conflict with the Central statute and
the principle laid down by a larger Benches comprising five learned
Judges of the Supreme Court in the aforesaid two decisions.

It was contended by Mr. Patti and Mr. Ray, learned Counsel for
G the Respondent States that Rule 8 of the Income-tax Rules, 1962 was
not a part of an enactment and could not be regarded as an enactment "'
and hence it need not be taken into account in considering the defini-
tion of the terrn "agricultural income" under the Constitution. It was
pointed out by them that, unlike sub-section (5) of Section 59 of the
Act of 1922 which provided that the roles made under the said section
H would have effect, after publication in the Gazette, as if enacted in
t TATA TEA LTD. v. STATE OF WEST BENGAL [KANIA, J.] 987

that Act, Section 296 of the Act of 1961 merely provided inter alia that
A
a rule framed under Section 295 had to be laid, as soon as may be .
before each House of Parliament while it is in Session for a total period
of thirty days and unless it was directed to be deleted or amended by
both Houses of Parliament it would be given effect to. It was pointed
out by them that Rule 8, therefore, could not be said to be an enact-
,/
ment and hence it could not affect the definition of the term B
"agricultural income" under Article 366(1) of the Constitution. We
are unable to accept this submission. What Article 366( 1) provides is
that the term "agricultural income" has the same meaning as attri-
buted to it for the purposes of enactments relating to Indian income-
tax and in our view, it is quite clear that Rule 8 of the Income-tax

'
Rules, 1962 as well as Rule 24 of the Inoome-tax Rules, 1922, pertain
to and are bound up with the definition of the term "agricultural
c
income" for the purposes of laws or enactments pertaining to Indian
income-tax and hence the provisions of those rules have to be taken
into account in considering the meaning of the term "agricultural
income" under sub-article (1) of Article 366 of the Constitution.
D
It was next contended by Mr. Potti & Mr. Ray that Rule 8 went
beyond the scope of the rule making power conferred by Section 295 of
the Act of 1961 and hence was ultra vires. This submission has to be
~ rejected. Clause (b) of sub-section (2) of Section 295 specifically con-
fers power on the rule making authority to make rules relating to the
manner in which and the procedure by which income for the purposes E
of the Act of 1961 would be arrived at in the case of income derived in
part from agriculture and in part from business and Rule 8 clearly
provides for the manner in which computation of income for the
purposes of the Act of 1961 is to be made in the case of income derived
\.; . from the sale of tea grown and manufactured by a seller in India and
hence we totally fail to see how it can be said that the said rule goes F
beyond the scope of the rule-making power Jnterred under Section
295.

In view of what we have discussed above, it appears to us that
although the Explanation to Section 2(a)(2) of the Kerala Agricultural
Income-tax Act, 1950 has been deleted by the Amendment Act of G
~ 1980, the result would still be the same, namely, that the Kerala State
Legislature can impose tax only in respect of 60 per cent of the income
derived by an assessee who sells tea grown;md manufactured by him in
.India and such income has to be computed in the manner laid down in
the Act of 1922 and thereafter in the Act of 1961 for computation of
business income, The same is the position in respect of the powers of fl
988 SUPREME COURT REPORTS [1988) 3 S.C.R. ~

A the legislature of the State of West Bengal in spite of the amendments
made by the said legislature by the Amendment Act of 1980 and
earlier under the amending Act of 1979 which was in force only for one
year as. we have stated before. It is not necessary to strike down the
said amendments because they do not directly conflict with the defini-
tion of the term "agricultural income" under the Constitution as we
B have pointed out earlier, but we may make it clear that they do not
confer any wider power on the State Legislature to impose taices on
agricultural income than what we have set out earlier. •
Before parting with the matter, it must be mentioned that the
validity of the aforesaid amendments to the Bengal Agricultural
Income-taic Act, 1944 made in 1980 and the deletion of the Explana-
C tion in Section 2(a)(2) of the Kerala Agricultural Income-taic Act were
challenged as being ultra vires and invalid in law on several other
grounds. We have not thought it necessary to go into these grounds in
view of what we have held, as set out above. Dr. Pal on behalf of Tata
Tea Co. and Tata Finlay Co. also challenged the amendment carried
D out in 1980 in the Bengal Agricultural Income-taic Act on the ground
of being its retrospective in operation. It also appears to us unneces-
sary to go into this question in view of what we have already held.

In the result, although none of the prayers in the petitions is
granted in terms, the Petitioners substantially succeed in the Petitions.
E There will be a declaration in terms of the last but one paragraph in
favour of the Petitioners. Considering the facts and circumstances of
the case, however, we feel that the parties should bear and pay their •
own costs and we direct accordingly.

S.L. Petitions disposed of. ;.I