Agricultural income taxation for tea income stays limited by the Central scheme; State competence cannot extend to the full amount.

Deletion of the Explanation to section 2(a)(2) of the Kerala Agricultural Income-tax Act, 1950 did not enlarge State legislative competence to tax the entire income from tea grown and manufactured by the assessee. Agricultural income remains limited by article 366(1) and the Central Act and Rules; under rule 8 of the Income-tax Rules, 1962, only 40% of tea income is treated as taxable business income under the Central Act, with the balance 60% retaining agricultural character. The omission therefore could not authorise assessment of the whole tea income as agricultural income, and the State could tax only the portion recognised under the Central scheme.

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Issues: Whether deletion of the Explanation to section 2(a)(2) of the Kerala Agricultural Income-tax Act, 1950 enlarged the State's legislative competence so as to tax the whole income from tea grown and manufactured by the assessee.

Analysis: The constitutional scheme reserves taxation of agricultural income to the States, but only to the extent that such income is agricultural income as defined by article 366(1) of the Constitution of India and as determined under the Income-tax Act, 1961 and the Rules made thereunder. In the case of tea grown and manufactured by the seller, rule 8 of the Income-tax Rules, 1962 treats the income as business income for computation and deems only 40 per cent. taxable under the Central Act, leaving the balance 60 per cent. as agricultural income. The earlier Supreme Court decisions relied on the constitutional definition and the Central Act and Rules as the source of the State's competence, so omission of the Explanation in the State Act could not expand that competence. The decision in Commissioner of Sales Tax v. D. S. Bist did not alter this position, as it dealt with sales tax and not the constitutional allocation governing agricultural income.

Conclusion: The omission of the Explanation did not authorise the State to assess the entire tea income as agricultural income; only the portion recognised under the Central Act and Rule 8 remained taxable by the State.

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