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Facts
The assessee, engaged in tea growing and manufacturing, filed a return showing a total loss. The PCIT initiated revisionary proceedings under Section 263, arguing that the Assessing Officer (AO) had erroneously computed income by not properly distinguishing between business income and agricultural income as per Rule 8 of the Income Tax Rules. The PCIT noted that Rs. 2,74,52,602/- was purely agricultural income from the sale of tea leaves, which should be treated separately.
Held
The Tribunal held that the income from the sale of green tea leaves, amounting to Rs. 2,74,52,602/-, is purely agricultural income and not part of the profit or loss from the business of growing and manufacturing tea. Therefore, it cannot be subjected to the provisions of the Income Tax Act under Rule 8. The Tribunal cited a Supreme Court decision in support of its view, stating that income from the sale of green tea leaves is agricultural in nature and not taxable under the Income Tax Act.
Key Issues
Whether the PCIT validly exercised revisional jurisdiction u/s 263 of the Income Tax Act, 1961, when the income from the sale of tea leaves is purely agricultural and exempt from taxation, and whether the AO's assessment was erroneous or prejudicial to the revenue.
Sections Cited
263, 143(3), 144B, Rule 8 of the Income Tax Rules, 1962, Section 8 of the 1944 Act
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “A” BENCH, KOLKATA
Date of concluding the hearing : 09.02.2026 Date of pronouncing the order : 06.03.2026 O R D E R Per Rajesh Kumar, AM
The present appeal filed by the assessee arises from order dated 19.03.2025 passed u/s 263 of the Income Tax Act, 1961 (hereafter “the Act”) by the Ld. Principal Commissioner of Income Tax, Siliguri [hereafter “the Ld. PCIT].
The only issue raised by the assessee is against the invalid exercise of revisionary jurisdiction u/s 263 of the Act by the PCIT and also the consequent revisionary order u/s 263 of the Act is invalid and deserved to be quashed.
The facts in brief are that the assessee filed return of income showing total loss of Rs. 56,82,610/- on 28.01.2021. The assessee is engaged in the Debpara Tea Co. Ltd. business of growing and manufacturing of tea. The assessee owns and operates Tea Estate in Dooars, West Bengal. The case of the assessee was selected for scrutiny and accordingly assessment was framed u/s 143(3) r.w.s. 144B of the Act vide order dated 05.09.2022 by making addition of Rs. 97,333/- on account of PF/GST liability. On perusal of the assessment records, the PCIT observed that the income of the assessee needs to be computed as per Rule 8 of the Income Tax Rules, 1962 whereby 40% of income shall be treated as taxable income and remaining 60% shall be treated as agricultural income which is exempt from taxation. The Ld. PCIT noted that during the year the net profit from business was Rs. 85,42,565/- and accordingly net profit of Rs. 34,17,026/- being 40% was taxable as business income. However, in the assessment order, the AO determined loss of Rs. 55,85,277/- and therefore, the assessment order framed by the AO is erroneous and prejudicial to the interest of the revenue. Accordingly, show cause notice issued to the assessee u/s 263 of the Act. The assessee replied by specifically submitting that the net profit as Profit & Loss Account of Rs. 85,42,565/- was arrived as under:
3) Sir, for your ready reference the detailed calculation of income as per the Income Tax Act has been attached with this reply for your perusal. The Net profit as per Profit & Loss Account of Rs. 85,42,565/- consist of following five types of income: a) Tea growing & Manufacturing Business Income Rs. (1,95,74,644/-) b) Trading Business Income Rs. 3,18,838 c) Purely Agricultural Income Rs. 2,74,52,602/- (other than Tea manufacturing) d) Interest Income Rs. 1,65,769/- e) Rental Income Rs. 1,80,000/- Total Net Profit Rs. 85,42,565/- 4. The Ld. AR submitted that Rs. 2,74,52,602/- was purely agricultural income by way of sale of tea leaf and therefore, cannot be subjected to Rule 8 of the Rules and therefore, the income as per the assessment order is Debpara Tea Co. Ltd. correctly computed by the AO. The contention of the assessee did not find favour with the Ld. PCIT and he revised the assessment by directing the AO to frame the assessment afresh after taking into account and conducting enquiry into the issues as mentioned in the order u/s 263 after affording a reasonable opportunity of being heard to the assessee.
The Ld. DR on the other hand, relied on the order of PCIT.
After hearing the rival contentions and perusing the materials on records we find that Rs. 2,74,52,602/- was purely on account of sale of Tea leaves and is not part of the profit or loss and therefore are not subject matter of the provision of Income-tax Act. In other words, the same cannot be considered while computing the taxable income of the assessee under Rule 8 of the Income Tax Rules. Consequently , the order passed by the Ld. PCIT. even without understanding the factual legal aspect of the matter is wrong. In our considered view the order passed by the AO is neither erroneous nor prejudicial to the interest of revenue. The case of the assessee is squarely covered by the decision of Hon’ble Supreme Court in the case of Union of India & Anr. Vs. Belgachi Tea Company Ltd. & Ors dated 09.05.2008. Similar issue has been decided by the Hon’ble Court as under:
“Now the question which arises for adjudication is whether the agricultural income be taxed under the 1961 Act? It is true that both rule 8 of the Income Tax Rules, 1962 and section 8 of the 1944 Act provide how the mixed income from the growing tea leaves and tea manufacturing can be taxed. Mixed income means the income derived by an assessee from the combined activities Le. growing of tea leaves and manufacturing of tea. Therefore, for the purpose of computation of income under the 1961 Act, it should be the mixed income from 'tea grown and manufactured by the assessee.
If the income is by sale of green tea leaves by the assessee it cannot be called income assessable under the 1961 Act for the purpose of 40:60 share between the Centre and the State. In both the provisions i.e. rule 8 of the Income Tax Rules, 1962 and section 8 of the 1944 Act, the word used is income derived from the sale of tea grown and manufactured".
The income from sale of green tea leaves is purely income from the agricultural product. There is no question of taxing it as incidental income of the assessee when there is a specific provision and authority to tax that income i.e. the State, under Debpara Tea Co. Ltd. the 1944 Act. In this view of the matter, the agricultural income cannot be taxed under 1961 Act 22. It is also pertinent to mention that the Income Tax Officer has assessed the income of tea manufactured by the assessee from 1977-78 to 1980-81 to the tune of Rs.1,44,250/- Rs.4,28,040/-, Rs 54.450/-and Rs.92.351/- respectively and income of the assessee from the sale of green tea leaves was more than Rs. 10 lakhs in each accounting year (1977-78 and 1978-79). In this view of the matter, the income of the assessee from the sale of tea leaves can never be incidental to business.
On careful analysts of this argument of the assessee, we find the same to be devoid of any merit. In a given case the assessee can process only 10% of green tea leaves and 90% of green tea leaves can be sold directly in the market. Can that income from sale of green tea leaves be treated incidental to the business? This can never be the intention of legislature.”
Therefore, the revisionary jurisdiction has been invalidly exercised by the Ld. PCIT as the assessment is neither erroneous nor prejudicial to the interest of revenue. Accordingly, we quash the order passed u/s 263 of the Act.
In the result, the appeal of the assessee is allowed.