Sugars Ltd., Madras Vs. The Commissioner of Income-Tax,
Madras  INSC 629 (30 July 1997)
C. SEN, S.P. KURDUKAR
W I T
H (C.A. No. 6636/83, 6637/83, 6638/83M
6639/83, 6640/83, SLP (C) No. 2611/88, C.A.
No. 2399/89, 175-77/85 & 3674/89) Sen, J.
assessment years in this group of appeals (C.A. No. 6636/83, 6637/83, 6638/83M
6639/83, 6640/83, & 175-77/85) are 1962-63 to 1967-68. The assessee-company,
Thiru Arooran Sugar Ltd., is a manufacturer of sugar which purchases sugarcane
from the market for crushing. It also has its own cane fields where it
cultivates sugarcane which is entirely consumed by its factory. Since the profits
made by the assessee from the sale of sugar arises out of agricultural
activities as well as the manufacturing activities, the income earned by the assessee
has to be divided into two parts. No tax is leviable under the Income Tax Act
on agricultural income but the profit generated by the non- agricultural
activities is liable to be taxed under the Act.
is no dispute that the income attributable to the agricultural activities must
be excluded from the income earned by the assessee from the sale of sugar. But
the problem is of computation of such income.
10(1) of the Income-tax Act lays down that the agricultural income shall not be
taken into computation of the total income of a previous year of any person
under the Income-tax Act, 1961. Section 295 of the Act which empowers the Board
to make rules for carrying out the purposes of this Act has specifically
empowered the Board by sub-section (2)(b) of Section 295 to frame Rules for the
manner in which and the procedure by which the income shall be arrived at in
the case of, inter alia, income derived in part from agriculture and in part
from business. In exercise of this power Rule 7 of the Income-tax Rules, 1962
was framed which lays down :
which is partially agricultural and partially from business - (1) In the case
of income which is partially agricultural income as defined in section 2 and
partially income chargeable to income-tax under the head "Profits and
gains of business", in determining the part which is chargeable to income-
tax the market value of any agricultural produce which has been raised by the assessee
or received by him as rent-in-kind and which has been utilised as a raw
material in such business or the sale receipts of which are included in the
accounts of the business shall be deducted, and no further deduction shall be
made in respect of any expenditure incurred by the assessee as a cultivator or
receiver of rent-in-kind.
For the purposes of sub-rule (1) "market value" shall be deemed to be
- (a) Where agricultural produce is ordinarily sold in the market in its raw
state, or after application to it of any process ordinarily employed by a
cultivator or receiver of rent-in-kind to render it fit to be taken to market,
the value calculated according to the average price at which it has been so
sold during the relevant previous year;
Where agricultural produce is not ordinarily sold in the market in its raw
state or after application to it of any state or after application to it of any
process aforesaid, the aggregate of - (i) the expenses of cultivation;
land revenue or rent paid for the area in which it was grown;
(iii) such amount as the (Assessing) Officer finds, having regard to all the
circumstances in each case, the represent a reasonable profit." Sub-rule
(1) of Rule 7 lays down that market value of the agricultural produce raised by
the assessee will have to be deducted from the business account of the assessee.
The `market value' spoken of in sub-rule (1) will have to be determined in the
manner laid down in sub-rule (2). Sub-rule (2) lays down in clause (a) the
well-known formula of average price of the goods ordinarily sold in the market
as market value of the goods. The formula contained in clause (b) will only
apply in cases where agricultural produce is not ordinarily sold in the market
in its raw state or after any process applied to it to make it marketable.
contention is that the market value of the sugarcane which has been produced
and consumed by the assessee must be determined in the manner laid down n sub-
rule (2)(b) of Rule 7. The contention of the Revenue is that the procedure laid
down in clause (a) of sub-rule (2) will be the right procedure to follow. The
Tribunal was of the view that the procedure laid down in clause (b) had to be
resorted to because the price of sugar was controlled by the Sugarcane Control
Order at the material time. The High Court was of the view that the Sugarcane
Control Order notwithstanding there was a market for sugarcane and even if the assessee
consumes the entire quantity of sugarcane raised by it the market price of such
sugarcane is ascertainable and this price of such sugarcane is ascertainable
and this price has to be excluded from profits and gains of business of the assessee.
Tribunal found that the assessee Company had grown sugarcane in its own land as
well as lands taken on lease.
the crushing capacity of the assessee's factory was 1200 tons per day, the
sugarcane grown by the assessee was not adequate for its requirement. It had,
therefore, purchased sugarcane from other growers. The sugarcane purchased by
the assessee was much more than the sugarcane produced by it for the assessment
years 1962-63, 1966-67 and 1967-68. The assessee purchased sugarcane from the
registered ryots according to the provisions of the Sugarcane Control Order and
also from non-registered ryots.
quantity of sugarcane purchased from the non-registered ryots was negligible
compared to the quantity of sugarcane purchased from the registered ryots
except during the periods relevant for assessment years 1962-63, 1963-64 and
1966-67. The Tribunal was of the view that sugarcane could not be treated as
agricultural produce ordinarily sold in the market during the relevant previous
years. Therefore, it upheld the contention made on behalf of the assessee-company
that sugarcane produced by it had to be valued in accordance with Rule 7(2)(b).
High Court took a contrary view. The High Court took not of the fact that for
some of the years under consideration in this case the average cost of
cultivation shown by the assessee was more than the average cost of purchase.
The assessee was really trying in those years to get deductions of a higher
figure than the market value of the sugarcane produced by it. The High Court
pointed out that the Tribunal had not come to a finding of fact that sugarcane
was not ordinarily sold in the market in its raw state in the area where the
factory of the assessee was located. Sugarcane, as a matter of fact, was sold
in the market in raw state, even before the Sugarcane Control Order came into
force. Because of the Control Order, sugarcane did not cease to be a produce
ordinarily sold in the market. The Control Order merely regulated the market
for raw sugarcane.
because the price, the distribution, the production, the relationship between
the grower and the purchaser, were all subjected to elaborate Government
regulations, it could not be said that the product itself lost either its
identity or its nature or its character of an agricultural produce sold in the
market. The High Court held that Rule 7(2)(a) will clearly apply in this case
and market value of sugarcane produced and consumed by the assessee-company had
to be computed accordingly.
Rule 7(1), in computing the profits and gains of business, market value of an
agricultural produce in raw state has to be deducted from the profits of partly
agricultural and partly industrial products. Sub-rule (2) lays down the method
of computation of market value. If the agricultural produce is ordinarily sold
in the market, Rule 7(2)(a) will apply. If not, Rule 7(2)(b) will apply. The
question, therefore, is was sugarcane ordinarily sold in the market in raw
state? The answer must be in the affirmative.
itself was buying more sugarcane, than it was producing, from registered and
on behalf of the assessee has argued that in order to invoke Rule 7(2)(a) it
has to be found that a market exists where sugarcane is ordinarily sold. This
implies that there will be a market of a nature where buyers and sellers
congregate. If such a market does not exist, the provisions of Rule 7(2)(a)
will not apply. Sub-rule (b) was framed by the Board to determine the value of
agricultural products where such markets for agricultural products did not
unable to uphold this argument. "Market" in the context of Rule 7
does not mean an open market where buyers and sellers get together for the
purpose of purchase and sale of goods. The assessee-company regularly, year
after year, in ordinary course of business bought sugarcane from registered and
unregistered ryots. Whether the purchase was at a price controlled by the
Sugarcane Control Order or not is quite immaterial. There was a price at which
sugarcane could ordinarily be purchased by the assessee for the purpose of its
own business. The price paid by the assessee was the market price. It is by now
well-settled that market does not have to be one open place of business where
buyer and seller congregate.
market is controlled by Government regulation, sale and purchase of sugarcane
within the framework of these regulations will be the ordinary mode of selling
special significance can be read into the phrase `ordinarily sold'. It is not
disputed that the assessee utilised sugarcane grown by it in its own field for
its factory and also purchases a considerable amount of sugarcane from outside.
Therefore, it is not the case of assessee that sugarcane growers do not sell
sugarcane in ordinary course of their business in the region where the assessee
carries on business.
next contended that the assessee was buying sugarcane at its own factory gate.
There is no other factory in the region where the assessee's factory was
situated. The area adjoining the factory gate could not be treated as market
for sugarcane. In the fact of this case there was no way to find out the
average price of the sugarcane which was being sold in the market in ordinary
course during the previous years. In support of this contention, Mr. Nariman
relied on a Special Bench decision of the Patna High Court in the case of J.M.
Casey vs. Commissioner of Income-tax, Bihar & Orissa AIR 1930 Patna 44.
argument again is misconceived. The place where the sugarcane was bought and
sold is quite immaterial for deciding whether there was a market for sugarcane
place of delivery of the goods may be decided by the buyer and seller by mutual
consent, express or implied. The assessee might have purchased and taken
delivery of the goods from the seller's doorstep. The point that has to be
borne in mind is that in order to apply Rule 7(2)(a), existence of an open
market where buyers and sellers come together to do business is not an
unable to uphold the contention of Mr. Nariman that where the buyer was only
one and the sellers were many it cannot be said that the sale was in a market
and the price was market price. The case of J.M. Casey (supra) was decided by a
Special Bench of the Patna High Court in the special and unusual facts of that
case. The Special Bench considered the scope and effect of Section 2(1)(b) of
the Indian income-tax Act. It was observed that the word "market" in
that section implied area centre of economic exchange. The implication of this
observation has to be understood in the facts of that case. Motihari Jail
purchased aloe leaves from cultivators not for any commercial purpose but to
keep the prisoners occupied. The purchase by the jail was not a commercial
activity at all.
Terrel, C.J. explained the position thus:
object of the manufacture in jail is not the conducting of an economic process
which shall render profitable the cultivation of the aloe plant but merely to
keep the prisoners employed on sufficiently laborious and punitive work."
It was held in the facts of the case that purchase of aloe leaves by jails in
an artificial condition had no relation to market for agricultural produce. But
in the case before us, the purchases of sugarcane made by the factory were
purely commercial transactions controlled by market forces within the framework
of the Sugarcane Control Order.
Special Bench decision of the Patna High Court does not support the case made
out by Mr. Nariman in any way.
principle that value of a property will be the price which it will fetch if sold
in the open market is a well-known method of valuation which has been adopted
in a large number of statutes in England and also in India. It is well-settled that existence
of an open market is not a pre- condition for application of this principle.
There may or may not be an actual market where buyers and sellers congregate to
purchase and sell goods. Where there is no such open market an estimate of the
market price will have to be done on a hypothetical basis. In a case under the
Gift-Tax Act, Gift-Tax Officer, Calcutta & Anr. vs. Kastur Chand Jain 53
ITR 411, dealing with Section 6(1) of that Act, R.S. Bachawat, J. observed:
basic principle of valuation is embodied in section 6(1) of the Gift-Tax Act,
1958, and in the corresponding section, section 36 of the Estate Duty Act,
1953, an section 7(1) of the Wealth-Tax Act, 1957. The valuer has to find
"the price which....it would fetch if sold in the open market". The
measure of value of the property is the price which the hypothetical buyer in
an open market would pay for it." In the case of Ahmed G.H. Ariff &
Ors. v. Commissioner of Wealth-Tax, Calcutta 76 ITR 471, explaining the phrase
"if sold in the open market" in Section 7(1) of the Wealth- Tax Act,
it was observed by Grover, J. speaking for the Court that the phrase did not
contemplate actual sale or the actual state of the market, but only enjoined
that it should be assumed that there was an open market and the property could
be sold in such a market and, on that basis, the value had to be found out. It
was a hypothetical case which was contemplated and the tax officer must assume
that there was an open market in which the asset could be sold.
view of the aforesaid, it is very difficult to uphold the contention of Mr. Nariman
that in order to find out the market price there has to be an actual market
where there will be `a concourse of buyers and sellers'. This argument was
specifically rejected by Lord Pearson L.J. in the case of Building and Civil
Engineering Holidays Scheme Management Ltd. vs. Post Office (1966) 1 QB 247 in
the following words:
is meant by "market value"? It is not reasonable to suppose that for
the purposes of this proviso there is no market value unless there is a
concourse of buyers and sellers. There is no need to infer that there must be
an open market, or that there must be a price fluctuating according to the
pressures of supply and demand." In that case Lord Denning also explained
the concept of market value in the following words:
is the "market value" of these stamps? It does not connote a market
where buyers and sellers congregate. The "market value" here means
the price at which the goods could be expected to be bought and sold as between
willing seller and willing buyer, even though there may be only one seller or
one buyer, and even thought one or both may be hypothetical rather than
real." These are the principles universally applied to find out the price
at which the goods are ordinarily sold in the open market. For determination of
market value, there is no pre-requisite that an open market where buyers ad
sellers congregate to buy and sell goods must exist. In the instant case, the assessee-company
actually bought sugarcane from a large number of growers years after year in
ordinary course of business. The price at which it buys sugarcane must be taken
to the market price. If the price is controlled by Sugarcane Control Order the
controlled price will be taken as the market price because it is at this price
that a willing buyer and a wiling seller are expected to transact business. As
Lord Denning pointed out, it does not make any difference to this position that
the assessee was the only buyer in the region where its factory was located.
facts of this case, we are of the view that the High Court has come to a right
decision. The appeals are without any merit and are dismissed. There will be no
order as to costs. C.A. No. 3674/1989, C.A. No. 2399(NT)/1989 AND S.L.P. NO. 2611/ 1988 Mr. Nariman
has argued that there are certain facts in these cases which were not brought
to the notice of the Tribunal. Therefore, in these cases, there should be a
direction by this Court to the Tribunal to investigate those facts.
not possible to accede to this prayer. Certain questions of law on the basis of
the fact and circumstances found by the Tribunal have been referred to the High
Court for its opinion. The High Court has give its opinion on those questions
on the basis of facts found by the Tribunal.
Tribunal is the final fact finding authority. The High Court cannot go behind
the fats found by the Tribunal. It was for the assessee to raise questions of
fact at the time of hearing of the appeal before the Tribunal. At the reference
stage, no fresh investigation into facts is permissible. There may be cases
where the Court feels that it is unable to answer the question of law referred
because findings of fact are incomplete. In such cases, the Court may call for
a supplementary statement from the Tribunal.
that is not the case here. The High Court did not feel any difficulty in
answering the question on the basis of the facts found. The assessee's prayer
is for a direction to the Tribunal to consider new questions of fact which were
not raised before the Tribunal at all. We see no reason to grant this prayer at
appeals must also fail and are dismissed. The Special Leave Petition No. 2611
of 1988 is also dismissed.
will be no order as to costs.