P.K. Ammini, Judicial Member -
(1.) THESE appeals by the revenue are directed against the order of the CIT (Appeals) dated 18-3-1994, for the assessment years 1989-90 and 1990-91.
(2.) The assessee is a firm of tobacco merchants at Quilon. The assessee purchased beedi tendu leaves from M/s. Orissa Forest Corporation Ltd. The contention of the assessee is that processed tendu leaves should not be treated as forest produce. In this case, the Orissa Forest Department is the planter of tendu leaves. They plant tendu saplings every year. The plants are cut, retaining the roots. The leaves are then collected and made into bundles of 50 each. These are then left for drying in fields or river beds for 7 to 14 days (without exposure to direct sunlight). Later these bundles are removed to the godown of the Forest Department for binding. Thereafter water is sprayed into bundles and after a time gap of 24 hours, the tags are removed and bundles are sorted/graded into different varieties. These are then bundled into 5 kg. lots and put into sacks of 60 kgs. (5 x 12). The processed goods are then handed over by the Orissa Forest Department to Orissa Forest Corporation Ltd. for auction sale. It is these processed leaves that were purchased by the assessee and then transported to Kerala. Hence, the assessee contended before the Assessing Officer that tendu leaves are not 'forest produce' and Section 44AC is not applicable to the assessee's case. The Assessing Officer did not accept the above contention of the assessee. Placing reliance on a tax deduction certificate Issued by the Orissa Forest Corporation Ltd. wherein it is certified that the assessee has purchased (tendu leaves) that is 'any other forest produce not being timber', the Assessing Officer held that the assessee had purchased only tendu leaves which is a forest produce. He further held that even otherwise the processed tendu leaves are treated as forest produce and the provisions of Section 44AC will be attracted in this case. The assessee had purchased tendu leaves to the tune of Rs. 59,96,936 from Orissa Forest Corporation Ltd. Holding that Section 44AC is applicable to this purchase, the Assessing Officer computed the deemed profit from this purchase at 35% of the purchase price. This worked out to Rs. 20,98,928 for the assessment year 1989-90 and Rs. 26,49,175 for the assessment year 1990-91. The assessee carried the matter in appeal before the CIT (Appeals). The CIT (Appeals), after referring to the processes to which tendu leaves were subjected, held that the processed tendu leaves can no longer be regarded as 'forest produce'. He noticed that the Assessing Officer has in para 9 of his order for the assessment year 1989-90 excluded the purchase of processed tendu leaves made by the assessee from private parties from the application of the provisions of Section 44AC of the Income-tax Act. He further noticed that in a communication dated 23-1-1989 addressed to the President, Maharashtra Tendu Leaves Merchants Association, the CBDT had clarified that traders of tendu leaves who sell the leaves after the process operations of drying and sprinkling of water etc. on the leaves would not fall within the ambit of Section 44AC or Section 206C. On the same token, he held that the purchase made by the assessee of tendu leaves from Orissa Forest Corporation Ltd. would not be hit by the provisions of Section 44AC. The revenue is aggrieved.
Shri Balakrishnan, the learned departmental representative contended that though the Income-tax Act has not defined the term 'forest produce', yet the Law Lexicon has referred to the definition of the forest produce in the following terms:
'Forest produce' includes (a) the following when found in, or brought from a reserved forest or public forest-land, that is to say - (i) trees and leaves, flowers and fruits, and all other parts or produce not hereinafter mentioned of trees; (ii) plants not being trees (including grass, creepers, reeds and moss), and all parts of produce of such plants; (iii) wild animals and skins, tusks, horns, bones, silk cocoons, honey and wax, edible birds' nests, bats' guano, and all other parts or produce of animals; and (iv) peat, surface-soil, rock and minerals [including limestone laterite, mineral oils and all products of mines or quarries]; and (b) the following whether found in, or brought from, any such forest or forest-land, or not, that is to say - timber, charcoal, caoutchouc, catechu, wood-oil, resin, natural varnish, bark, lac, mahua flowers and myrabolarns.
Hence, tendu leaves are forest produce. He contended that the mere act of drying and sprinkling water on the leaves would not change the character or the nature of produce itself. The CIT (Appeals)' reliance on the communication of the CBDT, cited above, is misplaced. According to the learned departmental representative, the communication was to the effect that if the traders dried the tendu leaves and sprinkled water on the same and sold such processed leaves, the purchases from such traders will not be hit by the provisions of Section 44AC. This cannot be applied to purchases made from the forest department or forest corporation. Further, the assessee has not placed any material on record to show as to what was the representation before the Board in response to which the Board has sent such communication. On the other hand, the Minister of State for Finances (Revenue) in his letter dated 30-12-1991 addressed to the Member of Parliament has clarified as follows :
(3.) CLARIFICATION dated 23-1-1989 to the Maharashtra Tendu Leaves Merchants' Association was sent by the Board after detailed consideration of the issue that drying and sprinkling of water on tendu leaves for making them fit for rolling beedies amounts to 'processing', and therefore traders who sell these leaves after carrying on the above process on them would not fall within the purview of these sections. However, traders, who purchase processed tendu leaves and sell them, would come within the purview of these sections.
Therefore, the learned departmental representative submitted that the CIT (Appeals) erred in holding that the assessee's case was not hit by the provisions of Section 44AC of the Income-tax Act.
4. Shri Krishnan, the learned chartered accountant of the assessee, produced a video cassette of the operation of growing, cutting and processing done on tendu leaves and video film was witnessed by the Tribunal, departmental representatives and the chartered accountant of the assessee. On the basis of the video film, he contended that tendu leaves as such were not sold to the assessee upon being plucked from the plants. They were subjected to certain processes and as a result of such processing, the leaves were made fit for manufacture of beedies. Tendu leaves in their original form were not sold to the assessee. They are not usable for manufacturing purposes. It is only the processed tendu leaves that were purchased by the assessee from the Orissa Forest Corporation. Even the Forest Corporation is only a trader, though a privileged trader - privileged in the sense of being a Government corporation. If a trader in Maharashtra is considered exempt from the provisions of Section 44AC because he sells the tendu leaves after drying and sprinkling water on it, it passes one's comprehension as to how the assessee will be hit by the provisions of Section 44AC when he purchases the tendu leaves after such processing. Further he submitted that the provisions of Section 44AC should be understood in the context of Section 206C of the Income-tax Act, and has a limited application, as has been held by the Punjab & Haryana High Court in 183 ITR 375 (sic] and the Andhra Pradesh High Court in A. Sanyasi Rao v. Government of AP  178 ITR 31. The Kerala High Court in its decision in T.K. Aboobacker v. Union of India  177 ITR 358 only dealt with the constitutionality of the provisions of Section 44AC and has not engaged itself on the modus operandi of the assessment in the case of traders in tendu leaves. The gross profit in this trade is less than 3% as seen from the accounts for several years. Shri Balakrishnan, the learned departmental representative, joined issue by stating that the Kerala High Court has unequivocally held that the Legislature has devised a fiction for treating the percentage of purchase price paid by the assessee as income falling under the head 'Profits & gains'. Therefore, the decision of the Kerala High Court should be followed.;