Agricultural produce is not income on receipt alone; pepper value could not be taxed until sold, consumed, or used.

Agricultural produce does not become assessable income merely on receipt; income arises only when it is sold, consumed, or otherwise used. On that basis, the value of pepper harvested in the previous year but neither sold nor consumed nor used could not be included in the relevant year's agricultural income, and the assessment against the assessee was incorrect. The Kerala HC also held that Commissioner of Income-tax v. A. Krishnaswami Mudaliar was inapplicable because that case concerned assessability under a cash system of accounting, whereas no income had arisen at all in the present year. The reference was answered in favour of the assessee, with costs.

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Issues: (i) Whether the value of pepper produced during the previous year but not sold, consumed or used could be included in the assessable agricultural income for that year; (ii) Whether the decision in Commissioner of Income-tax v. A. Krishnaswami Mudaliar applied to the facts of the case.

Issue (i): Whether the value of pepper produced during the previous year but not sold, consumed or used could be included in the assessable agricultural income for that year.

Analysis: Agricultural produce obtained by the assessee does not constitute income merely on receipt. Income arises when the commodity is disposed of by sale, consumption, or use in the assessee's business. Since the pepper had neither been sold nor consumed nor used, no income arose in the relevant year. The mode of accounting did not alter this position because receipt of produce, without more, did not create taxable income.

Conclusion: The inclusion of the value of 1,484 lbs. of pepper in the assessable income for the year in question was not permissible, and the finding against the assessee was incorrect.

Issue (ii): Whether the decision in Commissioner of Income-tax v. A. Krishnaswami Mudaliar applied to the facts of the case.

Analysis: That decision concerned assessability of income in the context of a taxpayer following the cash system of accounting. Here, the prior question was whether any income had arisen at all during the relevant year. As no income had been derived from the pepper during that year, the issue of assessability under a particular accounting system did not arise, and the earlier decision was inapplicable.

Conclusion: The decision in Commissioner of Income-tax v. A. Krishnaswami Mudaliar did not apply to the facts of this case.

Final Conclusion: The reference was answered in favour of the assessee on both questions, and the assessee's entitlement to costs was affirmed.

Ratio Decidendi: Agricultural produce becomes taxable income only when it is sold, consumed, or used, and mere receipt of produce does not by itself amount to income for agricultural income-tax purposes.

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