Agricultural Income of the Minor- No clubbing required with the income of the parents for rate purpose

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Agricultural Income of the Minor- No clubbing required with the income of the parents for rate purpose

The definition of income is not an exhaustive definition in the income Tax Act.

Agricultural income is an exempt income U/s 0. There are divergent view as to the agricultural income of minor, whether it will be subject to clubbing for rate purpose also?

On the one side, MP High court in Suresh Chand Talera V Union of India (2006) 208 ITR 341 has held that it is required to be aggregated in the hands of the parents for rate purpose.

Above case of Madras high court is as under:

Madhya Pradesh High Court

Suresh Chand Talera vs Commissioner Of Income Tax on 13 December, 2005

Equivalent citations: (2006) 201 CTR MP 153, 2006 282 ITR 341 MP

Bench: A Patnaik, A Sapre

JUDGMENT

  1. This is an appeal under Section 260Aof the IT Act, 1961.
  2. The relevant facts briefly are that the appellant carries on inter alia, the business of purchase and sale of silver and gold ornaments at Mandsaur in the State of Madhya Pradesh. For the asst. yr. 1996-97, the appellant filed a return on 2nd Sept., 1996, declaring an income of Rs. 3,94,558. A survey, under Section 133Aof the IT Act (for short ‘the Act’) was conducted on 23rd Nov., 1999 and in the course of survey, the appellant made a declaration that there was a shortage of Rs. 2,28,000 in the difference of ornaments and cash. A questionnaire dt. 11th Aug., 1997 was served on the appellant requiring him to specify the basis of the valuation of the closing stock as per trading. The appellant answered the said questionnaire and thereafter the AO came to the conclusion that there was no consistency in the method adopted by the AO wherefrom true profits from his business could be worked out and, rejected the books of account of the appellant under Section 145(2)of the Act and made his own assessment of the income of the appellant determining the total income of appellant. In the said assessment, the AO also took into consideration the agricultural income of the minor son of the appellant for the purpose of determining the rate of income-tax applicable to the income of the appellant.
  3. Aggrieved by the assessment order dt. 12th March, 1999 of the AO as well as the demand, the appellant filed an appeal before the CIT(A), Bhopal, numbered as (Appeal No. 11/U-22/1999-2000). The first two grounds of appeal related to additions of Rs. 43,742 and Rs. 39,239 on account of low GP on sale of gold and silver ornaments and the appellant urged before the CIT(A) that he had maintained proper books of account and, therefore, the books of account could not be rejected under Section 145(2)of the Act by the AO but CIT(A) held that the day-to-day stock register and quantitative tally had not been made and further sales were not recorded and, therefore, the provisions of Section 145(2)of the Act were applicable to the appellant’s case. The CIT(A), however, held that the GP rates adopted by the AO were on the higher side and took the view that low GP rates should have been applied and accordingly deleted portion of the additions on account of sale of gold and silver ornaments. In the appeal, the appellant had also urged that agricultural income earned from agricultural land standing in the name of appellant’s minor son could not be taken into consideration even for rate purposes for calculation of the tax payable by the appellant on his income but the CIT(A) relying on reasons given by him in his appellate order in the case of appellant for the asst. yr. 1994-95 upheld the order of AO taking into consideration the agricultural income of the appellant’s minor son for the purpose of rate applicable to the income of the appellant.
  4. Aggrieved by the aforesaid order dt. 29th April, 1999 passed by the CIT(A), the appellant filed a second appeal before the Tribunal, Indore, numbered as ITAT Appeal No. 668/Ind/1999 contending inter alia, that the books of account of the appellant were correctly maintained and the proviso to Section 145of the Act was not applicable and that the agricultural income of the minor son of the appellant could not be taken into consideration for the purpose of determining the rate of tax applicable to the income of the appellant. By order dt. 26th March, 2002, the Tribunal held that no sales have been found outside the books by the AO and accordingly, set aside the order passed by the CIT(A) and directed the AO to accept the sales declared by the assessee and apply the GP rate of 20 per cent for gold ornaments and 32 per cent for silver ornaments. Regarding the agricultural income of the minor son of the appellant, the Tribunal observed that the issue had been decided against the appellant by the earlier order of the Tribunal in the case of appellant in appeal No. 668/Ind/1999 and accordingly decided the issue against the appellant. Aggrieved by the aforesaid order of the Tribunal, the appellant has filed this appeal before this Court.
  5. On 6th Aug., 2002, this Court while admitting this appeal formulated the following two substantial questions of law :

(1) Whether the Tribunal having accepted the correctness of the account books of the appellant-assessee, erred in invoking Sub-section (2) of Section 145 of the IT Act and put its own assessment regarding GPs on the sale of gold and silver ?

(2) Whether the Tribunal erred in law in adding the agricultural income of minor son to the income of the appellant-assessee even when Section 10 of the IT Act expressly excluded such an income ?

After formulating the aforesaid two substantial questions of law, the Court also observed in order dt. 6th Aug., 2002 that all other questions proposed in the memo of appeal do not arise as they are mainly questions of fact. We have accordingly confined the hearing of this appeal on the aforesaid two questions of law as framed in the order dt. 6th Aug., 2002 by this Court.

  1. Mr. Saxena, learned senior counsel appearing for the appellant, submitted that the Tribunal having accepted the correctness of the books of account of the appellant should have held that the books of account were not liable to be rejected under Section 146of the Act and the Tribunal should not have directed the AO to apply the GP rate of 20 per cent for gold ornaments and 32 per cent for silver ornaments to the sales declared by the appellant. Mr. R.L. Jain, learned senior counsel appearing for the Department, on the other hand, submitted that a plain reading of the impugned order of the Tribunal would show that the Tribunal has not accepted the books of account of the appellant to be correct but has only observed that no sales have been found outside the books of account of the appellant by the AO. He submitted that the direction of the Tribunal to the AO to apply the GP rate of 20 per cent for gold ornaments and 32 per cent for silver ornaments was correct in the facts and circumstances of the case.
  2. The finding of the Tribunal on the aforesaid point in question is quoted hereinbelow :

We have considered the rival submissions carefully and perused the orders of authorities below. We find some force in the contention of learned Authorised Representative. From the records, it is clear that assessee had surrendered a sum of Rs. 2,28,000 during the survey, so whatever discrepancies were there are covered by this surrender to some extent. We also find that no sales have been found outside the books by AO, therefore, we set aside the order of CIT(A) and direct the AO to accept the sales declared by the assessee and apply the GP rate of 20 per cent for gold ornaments and 32 per cent for silver ornaments.

It is clear from the aforesaid finding of the Tribunal that the Tribunal has found that the AO has not found any sales outside the books of account of the appellant but the Tribunal has not given any clear finding as to whether the accounts of the appellant were correct and complete or from the method of accounting Mowed by the appellant the income of the appellant could not be properly deduced. Section 145 of the Act would be attracted only to a case where either the accounts are not correct or complete to the satisfaction of AO or the method of accounting employed is such that in the opinion of the AO the income of the appellant could not be properly deduced from such accounts maintained by the appellant. Thus, it is only in a case where accounts were not correct or complete or where accounts are correct and complete but method employed in such accounting is not such as to enable the AO to deduce the income of the appellant properly, the assessment of the income of the appellant could be made in such manner as the AO may determine. The case of the appellant was that he had maintained the accounts correctly and the accounts were also complete and, therefore, his income (sic). We have seen that both the AO and the CIT(A) in their respective orders took the view that the accounts of appellant were not correct and complete. Aggrieved by the said finding of the AO and the CIT(A), the appellant had gone up in appeal before the Tribunal and urged that the accounts of the appellant had been correctly maintained and the Tribunal although held that the AO had not found any sales outside the books of the appellants had not given any clear finding as to whether the appellant had correctly and completely maintained the accounts or that from the accounts maintained by the appellant, his income could not be correctly deduced and yet has directed the AO not to compute the income of the appellant in accordance with his books of account but to apply GP rate of 20 per cent for gold ornaments and 32 per cent for silver ornaments. In our considered opinion, the Tribunal should have recorded a clear finding as to whether or not the account books of the appellant were correct and complete or whether or not from the accounts maintained by the appellant his income could not be properly deduced. Such a finding can be recorded only on consideration of the account books of the appellant and, therefore, we are not in a position to decide this issue. We thus direct that this issue will be decided by the Tribunal afresh on remand.

  1. On the second substantial question of law, Mr. Saxena, learned senior counsel appearing for appellant, vehemently submitted that Section 10of the Act expressly provided that in the computation of total income for the previous year of a person his agricultural income shall not be included and, therefore, such agricultural income of the minor cannot be included in the income of appellant under Section 64(1A)of the Act. He cited the decision of Madras High Court in the case of V. Devki Ammal v. Asstt. CED wherein it has been held that the legislature cannot overlook the definition of “estate duty” occurring in Article 366(9) of the Constitution and the charging section as well as the deeming provisions contained’ in Sections 6 to 16 of the ED Act cannot be interpreted so as to subject an item specifically exempted from tax for the purpose of determining the rate of tax. He referred to the provisions of Section 4 of the Act to show that the income-tax is to be charged on the income of a person in accordance with and subject to the provisions of the Act. According to Mr. Saxena, Section 10 of the Act provided that the agricultural income was not to be included in the income for the purpose of levying income-tax and accordingly, agricultural income of the minor of the appellant cannot be included under Section 64(1A) of the Act even for the purpose of determining the rate of income-tax that is applicable to the income of the appellant.
  2. Mr. Jain, learned Counsel appearing for Department, on the other hand, submitted that the agricultural income of the minor is not being included in the income of the appellant for the purpose of levying any income-tax on the same but has been included by the AO only for the purpose of determining the rate that is to be applicable to the income of the appellant. He submitted that since the Finance Act, 1973, every Finance Acthas been making such provision for taking into consideration the agricultural income of the assessee for the purpose of determining the rate that would be applicable to the income of the assessee. He further submitted that Section 64(1A)of the Act expressly provides that in computing the total income of any individual, there shall be included all such income as arises or accrues to his minor child.
  3. Section 64(1A)of the Act is quoted hereinbelow :

64(1A).–In computing the total income of any individual, there shall be included all such income as arises or accrues to his minor child.

The language of Sub-section (1A) of Section 64 makes it clear that in adopting the total income of individual, all such income as arising or accruing to his minor son shall be included. The question to be decided in this case is whether income arising or accruing to a minor child from agricultural land would be included in the income of the individual for the purpose of determining the rate of tax applicable to the total income of any individual.

  1. The word “income” has been defined in Section 2(24). The said Section 2(24)starts with the words “income includes”. Amongst the items included as income in Section 2(24), agricultural income has not been specified. But the word “includes” makes it clear that the definition of income in Section 2(24)is not exhaustive. Hence, the fact that agricultural income has not been specified as one of the items in Section 2(24) does not mean that agricultural income is not included in the word “income” wherever the word “income” has been used in the Act. Section 10 of the Act provides that in computing the income for the previous year of a person, any income falling in any of the clauses mentioned therein shall not be included and the first clause mentioned therein is “agricultural income”. Thus, Section 10 of the Act on which great reliance has been placed by Mr. Saxena makes it clear that agricultural income is income but by express provision therein agricultural income has been excluded from the total income of an assessee for the purpose of levy of income-tax.
  2. Section 4of the Act which is titled as charge of income-tax provides in Sub-section (1) as follows :

4.(1)–Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions (including provisions for the levy of additional income-tax) of, this Act in respect of the total income of the previous year of every person.

The aforesaid charging section thus provides that where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with and subject to the provisions of the Act in respect of the total income of the previous year of any person. Section 4(1) thus means that while the total income of a person is to be determined in accordance with the provisions of the Act, the rate or rates at which such income-tax will be paid on such incomes for any assessment year will be stipulated in the Central Act. In accordance with the provisions of Section 4 of the Act, the Finance Act (Central Act) has been stipulating rate or rates at which income-tax is to be charged (in) the particular assessment year. For the asst. yr. 1996-97, the Finance Act, 1996, clearly provides under Chapter II, Section 2 that the net agricultural income shall be taken into account in the manner provided therein for the purpose of determining the rates of income-tax applicable to the income of the assessee. In view of the said clear provisions in Section 4 of the Act, Chapter II and Section 2 of the Finance Act, 1996, we have no doubt in our mind that agricultural income of an assessee has to be taken into consideration for the purpose of determining rate of tax that is applicable to his income. We accordingly answer the second question in the negative and hold that the Tribunal did not err in law in coming to the finding that the agricultural income of the minor son of the appellant had to be included in the income of the appellant for the purpose of determining the rate of income-tax applicable to the income of the appellant.

  1. In the result, the appeal is partly allowed and the matter is remanded to the Tribunal to decide the issue on the first question of law as discussed in this judgment. The parties will appear before the Tribunal, Indore Bench, on 9th Jan., 2006 and the Tribunal may either hear the appeal on that day or fix a date of hearing and thereafter decide the issue.

There is a Contrary view in Babita P.Kanungo V DCIT (2005) 277 ITR (AT) 177 (Mum) wherein it is held that the agricultural income don’t attract clubbing provisions.

The case is as under:

Smt. Babita P. Kanungo vs Deputy Commissioner Of Income Tax on 17 May, 2004

Equivalent citations: 2005 277 ITR 177 Mum, (2005) 96 TTJ Mum 573

Bench: T Sharma, A Garodia

ORDER A.K. Garodia, A.M.

  1. This is an assessee’s appeal directed against the order of the learned CIT(A)-XXXIX, Mumbai, dt. 17th July, 2000, for asst. yr. 1997-98. The grounds of appeal are as under :

“1. That on the facts and in the circumstances of the case, the learned AO and also the learned CIT(A) has erred in law as well as in facts in holding that agricultural income pertaining to minors are liable to be clubbed Under Section 64 of the IT Act, 1961, in the hands of the assessee (parent) for the rate purposes.

  1. That the learned AO has erred in clubbing the agricultural income of the minors in the hands of the appellant Under Section 64at Rs. 36,000 ignoring the provisions of Section 10(1)read together with Section 2(24) and Section 64 of the IT Act, 1961, and the provisions of the Finance Act, 1997, which do not provide for clubbing of agricultural income of minor sons in the hands of their parents, being the agricultural income of minors is not the income which is the subject-matter of Section 64, the clubbing provisions. The learned CIT(A) has also erred in upholding the finding given by the lower authority and case law relied by his is inapplicable to the facts of the case of the assessee appellant.”
  2. Both these grounds relate to only one issue, i.e., whether agricultural income pertaining to minors are liable to be clubbed Under Section 64of the IT Act, 1961, in the hands of the assessee (parent) for rate purposes. It was contended by the learned Authorised Representative of the assessee that sub-Section (1A) of Section 64is relevant for the purpose of clubbing of minor’ s income with the income of his or her parent. Our attention was drawn to the provisions contained in Section 64(1A) and it was contended that as per this section, only total income of a minor has to be clubbed with the total income of the parent. Regarding total income, it was contended that Chapter III of the IT Act, 1961, deals with incomes, which do (not) form part of total income and our attention was drawn to Section 10(1), which is reproduced below :

“10. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included-

(1) agricultural income.”

  1. It was contended that agricultural income does not form part of total income as per the provisions of Section 10(1). Our attention was also drawn to the definition of total income as per Section 2(45), which is also reproduced below:

‘total income’ means the total amount of income referred to in Section 5, computed in the manner laid down in this Act.”

  1. It was contended that as per the definition of total income also, the same has to be computed in the manner laid down in this Act and, therefore, in view of the provisions of Section 10(1), agricultural income cannot be included in total income and, therefore, it cannot be clubbed under Section 64(1A). It was also contended that judgment of Hon’ble jurisdictional High Court rendered in the case of CIT v. Abhay L. Khatauand followed by the learned CIT(A) is not applicable in this case because the facts are different. In this judgment, dividend income accrued on shares transferred by the assessee to his wife whereas in the present case, there is no transfer of asset by the assessee to his minor children.
  2. As against this, it was contended by the learned Departmental Representative of the Revenue that no finding is given either by AO or the learned CIT(A) regarding sources of agricultural land in the hands of minor children of the assessee and, therefore, applicability of the judgment in the case of CIT v. Abhay L. Khatau(supra), can be decided only after proper examination of the facts as to how the lands in question were acquired by the minor children. It was also contended that as per the provisions of Section 64(1A), all income which arises or accrues to a minor child has to be clubbed excluding only those incomes; which are specifically excluded by the provisions of this section.
  3. We have considered the rival submissions and perused the materials on record. We find that this is not the case of Department that the agricultural lands were transferred by the assessee to his minor children and, therefore, we are in agreement with the learned Authorised Representative of the assessee that the judgment in the case of CIT v. Abhay L. Khatau(supra), is not applicable in.this case. Further, even if it is accepted that the lands in question were transferred by the assessee to his minor children, the agricultural income of minor children cannot be clubbed in the hands of the assessee (parent) because as per Section 2(45)r/w Section 5 and Section 10(1), agricultural income does not form part of total income and as per Section 64(1A), only total income of minor has to be clubbed with the income of the parent. For this reason also, this judgment is not applicable in the present case because in this judgment, income in question was dividend income, which was forming part of total income in the relevant assessment year being asst. yr. 1966-67.
  4. Now, we examine the provisions of Section 64(1A)and for the purpose relevant portion of the same is reproduced below :

“(1A) In computing the total income of any individual, there shall be included all such income as arises or accrues to his minor child, not being a minor child suffering from any disability of the nature specified in Section 80U”

From the above, we find that in computing total income of an assessee, all such income as arises or accrues to his minor child is to be clubbed. The words “all such income” in this section refer to total income and we are of the considered opinion that for giving effect to this section, first the total income of the minor children is to be computed and then such total income only of the minor children is to be clubbed with the income of the parent. In view of our above finding that agricultural income does not form part of total income as defined in Section 2(45) r/w Section 10(1), we find that Section 64(1A)cannot be applied to agricultural income of ‘minor children’.

  1. The AO has considered the agricultural income of minor children as income of the assessee for rate purposes. We find that for including the agricultural income for rate purposes, it has to be done as per Section 2(2)of the Finance Act, 1997, which is reproduced below :

“In the cases to which para A of Part I of the First Schedule applies, where the assessee has, in the previous year, any net agricultural income exceeding six hundred rupees, in addition to total income, and the total income exceeds forty thousand rupees, then,-

(a) the net agricultural income shall be taken into account, in the manner provided in cl. (b) that is to say, as if the net agricultural income were comprised in the total income after the first forty thousand rupees of the total income but without being liable to tax, only for the purpose of charging income-tax in respect of the total income; and

(b) the income-tax chargeable shall be calculated as follows :

(i) the total income and the net agricultural income shall be aggregated and the amount of income-tax shall be determined in respect of the aggregate income at the rates specified in the said para A, as if such aggregate income were the total income;

(ii) the net agricultural income shall be increased by a sum of forty thousand rupees, and the amount of income-tax shall be determined in respect of the net agricultural income as so increased at the rates specified in the said para A, as if the net agricultural income as so increased were the total income;

(iii) the amount of income-tax determined in accordance with sub cl. (i) shall be reduced by the amount of income-tax determined in accordance with sub-cl. (ii) and the sum so arrived at shall be the income-tax in respect of the total income.”

  1. From the above, it can be seen that the agricultural income can be included for rate purposes only when the assessee has, in the previous year, any net agricultural income exceeding Rs. 600. Now the question arises whether, agricultural income of minor children can be said and taken as agricultural income of the assessee. We find that the provision of Section 64(1A)is in respect of clubbing of total income of a minor child with the income of his parent. Total income is defined by Section 2(45)which says that total income means the total amount of income referred to in Section 5, computed in the manner laid down in this Act. In Chapter III, Section 10(1) of this Act clearly says that agricultural income is not to be included in total income. Here, it is pertinent to note that as per Section 2(2) of the Finance Act, 1997, also, only agricultural income of the assessee has to be considered for rate purposes and it does not say that agricultural income of minor children is also to be considered for rate purposes. In view of this, we are of the considered opinion that the agricultural income of the minor children of the assessee cannot be clubbed with the agricultural income of the assessee Under Section 64(1A) and it cannot be said that the agricultural income of the minor children of the assessee is agricultural income of the assessee and, therefore, in view of Section 2(2) of the Finance Act, 1997, this agricultural income of the minor children of the assessee cannot be included into the income of the assessee for rate purposes. We hold accordingly and both these grounds of the assessee are allowed.
  2. In the result, the assessee’s appeal is allowed.

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