Manchanda, J. - (1.) THIS is a case stated under Section 66 (1) of the Indian Income-tax Act 1921 hereinafter referred to as the Act. The question referred is : "Whether on a true interpretation of Rule 24 of the Income-tax Rules made under Section 59 of the Indian Income-tax Act and the 2 lease deeds executed on 8-1-1954 and 30-1-54, the assessee was entitled to claim the exemption of 60 per cent of the net income from sale of tea leaves from the Banjarwala Tea Gardens which he had taken on lease ? "
(2.) THE material facts are these. THE assessee is an individual. He had taken on sublease for a period of 16 years a tea garden known as Banjarwala Tea Garden from Shri Kaushalendra Pratap Singh and Sri Devendra Singh who had a perpetual lease, under an agreement dated the 8th January 1954. THE material covenants of this lease deed are : "Whereas the first party (lessees) are the perpetual lessees of Banjarwala Tea Estate and as such have become Bhumidhars in the area of about 200 acres grown with tea bushes and whereas the first party has agreed with the second party to sell the tea crop of the entire Banjarwala Tea garden to the second party (assessee) for a period of five years extending from 1st January 1964 to December 1958 . . . ... the parties hereto have agreed to abide by the following terms and conditions." 1. That the 1st party will sell and the 2nd party will buy all the crop of tea bushes in the aforesaid Banjarwala Tea Estate. 2. That the annual price of the tea crop of the entire garden together with grass .... will be Rs. 10,000. 5. That at present the sale of tea crop will be made for a period of five years till the end of 1958 but the second party will have the option to collect and gather tea for another two years. 7. That the possession of the tea garden will remain with the first party but the second party (assessee) . .. .. will be entitled at all times to enter and reside in the garden to pluck, pick up, gather and collect tea crop in all seasons. 9. That the hoeing (gudai) and pruning (Kalam) will be done by the first party (lessor) at his own costs but the first party will not spend more than Rs. 4000 (four thousand) annually in the said operation. If the second party will require more hoeing and pruning costing more than Rs. 4000 (four thousand) it shall be done at the cost of the 2nd party. 13. That the agricultural income on the cultivation of tea and other similar taxes will be payable by the first party but the tax on the manufacture of tea will be payable by the second party (assessee). 14. That the tea crop will be plucked, picked up, gathered and collected from the tea bushes by the second party at his own cost." This agreement was varied by the agreement dated the 30th day of January 1954 only in one respect "Whereas the second party lessor has agreed to sell the entire crop of tea bushes . . . .. .. .. tea estate to the first party (assessee) ..... .and whereas it was agreed between the parties that hoeing and pruning in the said tea garden will be done by the second party (lessor) at the maximum cost of Rs. 4000/-only and whereas the upkeep of the tea garden and the tea crop depends on the proper hoping and pruning and whereas on the matter of the extent of hoeing and cutting dispute may arise between the parties in future the parties hereto have agreed to observe and abide by the following conditions- (1) That the second party (lessor) has given a contract of hoeing and pruning of the tea cultivation in the said Banjarwala tea garden to the first party (assessee) in consideration of the sum of Rs. 40,000/- per annun from January first to the 30th December each year. (2) That the first party (assessee) will henceforward get the hoeing and pruning done at his own cost receiving from the second party (lessor) the sum of Rs. 4000 annually." The assessee. therefore, in respect of hoeing became a contractor of the lessor whose obligation it was to have it hoed at his own expense. It may be noticed that what was agreed to be sold under the aforesaid two agreements was the "tea Crop" of the entire Banjarwala tea garden to the assessee and nothing else. The tea garden had already been planted and had been in existence since some time. The assessee had the right to pluck the tea leaves and to sell them after processing. The assessee under the provisions of this "second" agreement tended the tea plants and did all the other operations which under the "first" contract the lessor was under an obligation to perform.
(3.) THE assessee returned his net income from the tea business and claimed before the Income tax Officer that under Rule 24 of the Income-tax Rules made under Section 59 (2) (a) that only 40% of the net income was liable to tax and 60% of it was exempt. Under Section 59, powers are given to make Rules, inter alia, for "Incomes derived in part from agriculture and in part from business." Pursuant thereto Rule 24 of the Indian Income-tax Rules, 1922 was framed. This reads "Income derived from the sale of tea grown and manufactured by the seller in the taxable territories shall be computed as if it were income derived from business and 40% of such income shall be deemed to be income profits and gains liable to tax To obtain the benefit of this rule an assessee must fulfil both the conditions. (1) That the tea should have been grown by the seller and. (2) It should have been manufactured by the seller. The dispute only is in respect of the first condition and that is whether the tea was grown by the seller i.e. the assessee. The Income-tax Officer refused to give him the benefit of Section 24 and assessed the entire income from the sale of tea as income from business: The Appellate Assistant Commissioner allowed the appeal. The tribunal on appeal by the Commissioner of Income-tax restored the finding of the Income-tax Officer Hence this reference under Section 66 (1) of the Act.;