Tata Iron and Steel Co. Ltd. Vs. The
State of Bihar [1962] INSC 260 (24 September 1962)
AYYANGAR, N. RAJAGOPALA AYYANGAR, N. RAJAGOPALA SHAH, J.C.
SINHA, BHUVNESHWAR P.(CJ) IMAM, SYED JAFFER
SUBBARAO, K. WANCHOO, K.N.
CITATION: 1963 AIR 577 1963 SCR Supl. (1) 199
CITATOR INFO :
R 1970 SC1298 (8) F 1976 SC2452 (3) RF 1977
SC1134 (3A) R 1985 SC 840 (7) D 1992 SC 959 (17)
ACT:
Cess--Annual net profits from mines--Levy of
cess thereonMine--owner extracting ore and manufacturing products therefrom--Legality
of cess on ore extracted--Bengal Cess Act, 1880 (Ben. 9 of 1880), as amended in
Bihar, ss. 5,6, 72.
HEADNOTE:
The appellant company was the owner of
certain mines in Bihar from where it extracted iron ore which it utilised in
its factory at Jamshedpur for making iron and steel. Under ss. 5 and 6 of the
Bengal Cess Act, 1880, as amended in Bihar, all immovable property situate in
any part of the State of Bihar was liable to payment of local cess which, in
the case of mines, was to be assessed on the annual net profits from them. For
the assessment year 1954-56, the company was assessed by the Cess Deputy
Collector on the basis that it had made a profit of Rs. 4-7-0 per ton of iron ore extracted. The appellant claimed that it was not liable to the levy of
cess under the Act because it did not sell any ore as such and could not
therefore be treated as having made "any profit" from the mines
within the meaning of s.6 of the Act. The question was whether the appellant
company could in law be said to have derived "Profit" from the mine
when the ore extracted was not sold by it as such but was utilised by it for
the purpose of manufacturing finished products which it sold.
Held, that on the true construction of ss.5,
6 and 72 of the Bengal Cess Act, 1880, as amended in Bihar, where activities
200 other than mere winning the ore are carried on by an assessee with a view
to convert the ore into a finished product and there is a transaction of sale
of the ultimate product, the profit derived from the working of the mine is
imbeded in the final realisation, and the profit which accrues to the assessee
from the mining operation can be disintegrated and ascertained, and a tax
levied thereon.
Kikabhai Premchand v. Commissioner of
Income-tax, Bombay, [1954] S.C.R. 219, distinguished.
Commissioner of Income-tax, Bombay v.
Ahmedbhai Umerbhai & Co., Bombay, [1950] S.C.R. 335 and Anglo-French
Textile Co. Ltd. v. Commissioner of Income-tax, Madras, [1950] S.C.R.
523, relied on:
Commissioner of Income-tax, Madras v. Dewan
Bahadur S. L. Mathias. (1938) L. R. 66 I. A. 23 and Commissioner of Income-tax,
Bombay City I, Bombay v. Bai Shirinbai K. Kooka, [1962] Supp. 3 S. C. R. 391,
considered.
CIVIL APPELLATE, JURISDICTION : Civil Appeals
Nos. 587, 588, 590, 591 600 and 601 of 1961.
Appeals by special leave from the resolution
dated May 12, 1959, of the Board of Revenue', Bihar in Cases Nos. 49, 233 and
234 of 1958 and from the judgment and Order dated February 18, 1960, of the
Patna High Court in Misc. judl. Cases Nos. 529, 530 and 531 of 1959.
M. C. Setalvad, Attorney-General for India,N.
A. Palkhivala and P. K. Chatterji, for the appellant (In C. As. Nos. 587 and
588 of 1961.) Lal Narayan Sinha and D. P. Singh, S.C. Agarwala, R.K Garg and
M.K. Ramamurthi, for the respondent (In C. As. Nos. 587 and 588 of 1961).
M. C. Setalvad, Attorney-General for India,
A. V. Viswanatha Sastri, B. Choudhri and D. N. Mukherjee, for the appellant (In
C. As. Nos. 590 and 591 of 1961).
Lal Narayan Sinha, D.P. Singh, S. C. Agarwala,
R. K. Garg and M. K. Ramamurthi, for the respondent (In C. As. Nos. 590 and 591
of 1961).
201 B. C. Ghosh and P. K. Chatterjee for the
appellant (In C. As. Nos.600 and 601 of 1961).
Lal Narayan Sinha and S. P. Varma, for the
respondent (In C. As. Nos.600 and 601 of 1961).
1962. September 24. The judgment of the Court
was delivered by AYYANGAR J.These three sets of appeals raise a common point
relating to the validity of the imposition of a cess under ss. 5 & 6 of the
Bengal Cess Act, 1880 (Bengal Act IX of 1880, as amended in Bihar), hereinafter
referred to as the Act. These provisions whose interpretation is the only point
for consideration in these appeals run in these terms:
"5. All immovable property to be liable
to local cess. From and after the commencement of this Act in any district or
part of a district, all immovable property situate therein, except as otherwise
in section 2(2) provided, shall be liable to the payment of local cess.
6. Cess how to be assessed.-The local cess
shall be assessed on the annual value of land s and until provision to the
contrary is made by the Central Legislature on the. annual net profits from
mines and quarries, other than notified mines and from tramways, railways and
other immovable property, ascertained respectively as in this Act prescribed;
and the rate at which the local cess shall be
levied for each year shall(a) in the case of such annual net profits, be one
anna on each rupee of such profits; and (b) in the case of the annual value of
lands, be such rate as shall be determined for such year in the manner-in this
Act prescribed 202 Provided that the rate at which the local cess shall be
levied for any one year on the annual value of lands shall not be less than
the.
rate of one anna and six pies or more than
the rate of two annas on each rupee of such annual value. " The three
companies who are the appellants here own certain mines in Bihar. The Tata Iron
& Steel Co., Ltd.-appellants in Civil Appeals 587 & 588 of 1961 has
taken on lease certain iron-ore mines at Noamundi in the Singhbhum district
from where it extracts iron-ore which it utilises in its factory at Jamshedpur
for making iron & steel. Similarly, the Indian Iron & Steel Co., Ltd.,
which is the appellant in Civil Appeals Nos. 590 & 591 of 1961 holds mining
concessions for iron and manganese ore at Gua and Monoharpur in the district of
Singhbhum and the ore extracted by it is utilised for the manufacture of iron
& steel and steel products at the company's factories at Burnpur and Kulti
in the district of Burdwan. In the same manner., the Indian Copper Corporation
Ltd., which is the appellant in Civil Appeals Nos. 600-601 of 1961, has taken
on lease certain mines in the district of Singhbhum and the ore mined by it is
manufactured into copper and copper products at its factory at Moubhandar in
the same district. The question raised for decision is whether the three
appellants could be said to have derived "'annual net profits from the
mines" when the ore mined by them is not sold as such but is utilised for
the production of finished products which the appellants sell.
In view of the nature of the question raised
it would not be necessary to set out in detail the facts of each one of the
cases and we will content ourselves with narrating a few of the salient facts
which preceded the proceedings culminating in the appeals now before us
relating to the Tata Iron & Steel Co. Ltd.appellants in Civil Appeals 587
& 588 of 1961 to 203 appreciate generally the antecedent history and the
proceedings giving rise to the appeals. The Company was not assessed to the
cess on the ore mined by it till 1926, when the company sold some quantity of
iron ore extracted by it to the Bengal lion and Steel Co. Ltd. and an
assessment to cess under the Act was made against it in respect of that year.
Even though it made no sales of iron ore in later years but utilised the ore
extracted in its own factory, the company was assessed to and paid the cess on
an assumed profit of 12 as. per ton of iron ore mined by it upto 193940 and
from the next year onwards the profit was assumed to be a little higher Viz.,
at Re. 1 per ton. ThiS basis of taxation was varied in the year 1950-51 when it
was raised to Rs. 1/4/per toil by reason of an agreement between the company
and the State Government. There were some variations in the basis of the rate
at which the profit was computed during the succeeding years but it is
unnecessary to detail them.
Finally we come to the assessment in respect
of the year 1954-55 with which the present appeals are concerned. For that year
the company was assessed by the Cess Deputy Collector on the basis that it had
made a profit of Rs.
4/7/per ton of iron ore extracted. The
company filed an appeal to the Deputy Commissioner and the ground urged by the
company was that it was not at all liable to the levy of cess under the Act
because it did not sell any ore as such and could not therefore to treated as
having made " any profit from the mines" within the meaning of s.6 of
the Act.
The Deputy Commissioner rejected this
contention but considering that the cess Deputy Collector had not adopted a
proper basis for ascertaining the profits, remanded the case for an enquiry as
to the cost of extraction of iron ore and for the calculation of other working expenses.
The company then filed a revision application to the Commissioner of the Chota
Nagpur Division raising the same point 204 about its non-liability to cess but
when this was rejected, preferred a further revision to the Board of Revenue.
This application met with the same fate and thereafter the company moved the
High Court of Patna by petitions under Arts. 226 and 227 of the Constitution
for quashing the order of the Board of Revenue confirming the order of the
Deputy Commissioner remanding the proceedings to the Cess Deputy Collector for
enquiry for recomputing the net annual profits of the company for the year. The
learned judges of the High Court dismissed the Writ application but granted
leave under Art. 133 of the Constitution. Civil Appeal 587 of 1961 is the
appeal filed in pursuance of the certificate granted by the High Court. Civil
Appeal 588 of 1961 is an appeal by special leave granted by this Court against
the order of the Board of Revenue which was the subject matter of proceedings
in the Writ Petition before the High Court. The material facts of the other
appeals are similar and need not be set out. It is sufficient to add that the
writ petitions of the other two appellants were dealt with by the High Court,
along with the petition of the Tata Iron& Steel Co. Ltd. and disposed of by
a common judgment. In the case of the other two appellants also the two appeals
by each are one from the judgment of the High Court dismissing the relevant
writ petition and the other from the order of the Board of Revenue.
It will be seen from the above narration that
the question for decision is whether a person could in law be said to derive
"profit" from a mine when the ore extracted is not sold by him as
such but is utilised by him for the purpose of manufacturing a finished product
which he sells. Before setting out the argument on the basis of which the
appellants raise the contention regarding their nonliability to the cess it
would be convenient to read a few of the provisions of the Act which bear upon
the point in controversy.
205 The long title of the Act reads "'An
Act to amend and consolidate the Law relating to rating for the Construction,
Charges and Maintenance of District Communications and other Works of Public
Utility, and of Provincial Public Works." The relevant portion of the
Preamble reads "'Whereas it is expedient to amend and consolidate the law
relating to rating for the construction, charges and maintenance of district
roads and other means of communication, and of provincial public works, within
the territories administered by the Provincial Government of Bengal, and to the
levy of a local cess on immovable property situate therein, and to the
constitution of local committees for the management of the proceeds of the said
local cess, and also to provide for the construction and maintenance of other
works of public utility out of the proceeds of the said local cess It is hereby
enacted as follows" The Act consists of three Parts of which Part 1 is
concerned with the imposition and application of the cesses and we have already
extracted ss. 5 & 6 which impose the charge with which these appeals are
concerned. Part 11 deals with the mode of assessment. Chapter V of Part 11 is
headed "Valuation, Assessment and levy of Cesses on Mines, Railways and
other Immovable Property" and of these those that are material for the
point arising for decision and to which we were referred during the course of
the arguments were ss.
72, 72A, 73 to 76 and these run in these
terms :
"72. Notice to return profits.-(1) On
the commencement of this Act in any district, and thereafter before the close
of each year, the Collector of the district shall cause a notice to 206 be
served upon the owner, chief agent, manager or occupier of every mine or quarry
other than a notified mine and of every tramway, railway and other immovable
property not included within the provisions of Chapter II, and not being a
tramway or railway on which local cess is not leviathan. Such notice shall be
in the form in Schedule (2) contained, and shall require such owner, chief
agent, manager or occupier to lodge in the office of such Collector within two
months a return of the net annual profits of such property, calculated on the
average of the annual net profits thereof for the last three years for which
accounts have been made up.
(2)..........................................................
(3) The Collector may in his discretion
extend the time allowed for lodging any return referred. to in this section.
72A. Penalty for omitting to make a return.(1)
Any owner., chief agent, manager or occupier who, without sufficient cause
being shown to the satisfaction of the Collector, refuses or omits to lodge the
required return in the office of the Collector within two months from the date of
the service upon him of a notice under section 72 or, within any extended time
which may have been allowed by the Collector for lodging such return, shall be
liable to a fine which may extend to fifty rupees for every day after
expiration of such time or extended time until such return is furnished or
until the annual net profits of or the annual dispatches of coal and coke from
the property in respect of which the notice has been served shall have been
otherwise ascertained and determined by the Collector as hereinafter provided.
207 (2) The amount of such fine accruing due
from time to time may be levied by the Collector as provided in section 98 or
section 99, and the fact of an appeal against such fine being pending shall not
avail to prevent the levy of any such fine pending the disposal of the appeal,
unless the Commissioner otherwise directs.
(3) Whenever the amount levied in respect of
any such fine exceeds five hundred rupees, the Collector shall report the case
specially to the Commissioner; and no further levy for such default shall be
made otherwise than by authority of the Commissioner.
73. When property lies in different districts.
Whenever any property assessable under this Chapter lies in two or more
districts, the notice to furnish a return under section 72 shall be served on
the owner , chief agent, manager or occupier of such property by or through the
Collector of the district in which such owner, chief agent, manager or occupier
may reside or have his chief place of business, and one return for the whole of
such property shall suffice.
74. When a property is partly in and partly
outside Bengal.-Whenever any property assessable under this Chapter lies partly
within and partly outside the territories administered by the Lieutenant-Govemor
of Bengal, the return furnished as required by section 72 shall state the total
annual net profit accruing from, and the total annual despatches of coal and
coke despatched from such property, calculated as aforesaid, and also the
proportion of such profits and despatches which mayreasonably be calculated to
accrue in or to be despatched from the territories administered by the
LieutenantGovernor of Bengal.
208
75. If return not furnished or incorrect,
Collector to make valuation.-If such return be not furnished within the period
of two months from the date on which such notice was served, or within any
extended time allowed by the Collector of the district or if such Collector
shall deem that any return made in pursuance of such notice is untrue or incorrect,
such Collector shall proceed to ascertain and determine by such ways or means
as to him shall seem expedient the annual net profits of or the annual
despatches of coal and coke from such property calculated as aforesaid.
76. Valuation on value of property.-If such
Collector be unable to ascertain the annual net profits, or the annual
despatches, as aforesaid, of or from any property assessable under this
Chapter, he may by such ways or means as to him shall seem expedient, ascertain
and determine the value of such property, and shall thereupon determine six
percents on such value to be the annual net profits thereon or, in the case of
the annual dispatches, shall determine such quantity as having regard to all
the circumstances of the case he considers just and proper to be the annual
despatches there from." The form of notice prescribed under s. 72 is set
out in Sch.
E to the Act.
The material words of the notice run
"The owner is required to lodge in the office of the Collector of the
district of a return in the form hereunto annexed, showing the net profits of
the calculated on the average of the profits of the last three years for which
accounts have been made up... "Form of Return.
Detail of yearly profits of mines,, quarries,
railways and tramways, or other immovable property 209 in the possession or
under the control of the person submitting the return.
------------------------------------------------------------1
2 3 4 ------------------------------------------------------------District
Parganas Name of Annual net proholder or fits per annum In which the property
manager on the average lies of the last three years of which accounts have been
made up.
-----------------------------------------------------------The
argument addressed to us by the learned Attorney-General for the appellants was
substantially the same as was put forward before the learned judges of the High
Court and which they rejected. Briefly stated, the submission was this. Under
s. 6, which has to be read with s. 72, the tax imposed by the Act is not a tax
on the mine as a species of immovable property, but on the "'annual net
profits" derived from the mine. In order that a person may derive
"'profit" from a mine, the mine must be worked and the ore extracted,
but even that by itself is insufficient. The extraction of the ore involves
expenditure and "'profits" could be said to be derived from the mine
only when the extracted ore is sold and the amount realised by the sale of the
ore is in excess of the cost of extracting the ore. A sale of the ore is thus
an essential ingredient or a sine qua non for the emergence of a profit on
which alone the cess is levied.
Where, however, the ore extracted is not sold
but is used by the owner in the production of other finished products there is
no question of the owner of the ore realising a "profit" from the
mine. In these of an assessee like the appellants the business of winning the
ore and of converting the ore won into a finished product is not by any means
to be conceived of as made up of two distinct 210 businesses conducted by them
but only as a single integrated undertaking for the production of steel and
steel products.
Unless one could postulate first that the
business of winning the ore was a separate business from that of Converting the
ore won into steel, and secondly, could nationally treat the won ore as having
been sold by the first business to the second, it would not be possible to
conceive of any profit being derived from the working of the mine. He submitted
that there was no factual basis for the first postulate, viz., that there were
two separate businesses and secondly, even assuming that it were possible to
separate the two activities in the course of which goods produced in one
business were consumed in the other, still no "profit" can in law
result by such use because "profits" could accrue only by the sale of
the product and the consumption by the same individual of his own goods could
not result in a "profit" because a person cannot sell to himself or
trade with himself.
A further submission that was made was that
though the Act had made provision for the levy of a cess or rate based upon
mere beneficial occupation without perception of rent from a third party
occupier, in the case of "land". it had deliberately made no such
provision for computing the beneficial occupation of mines such as the ones now
under discussion and that this was itself an indication that without the actual
receipt of "profit" a mere beneficial occupation of the mine was not
sufficient to enable a charge to be imposed. There were a few other minor and
ancillary points suggested, but we shall refer to them later.
It would be convenient to deal with the above
two submissions separately. So far as the main and the principal point which we
have set out earlier is concerned, it is manifest that it hinges on the
acceptance of the proposition that no "profit" accrues from a mine to
an owner unless the ore extracted is sold by him to a third person and the
somewhat related proposition that where a person carries on a multiple but 211
nonetheless an integrated activity that produces an entire profit, the total
profits derived by him cannot be disintegrated and apportioned between the
different activities unless the relevant statute under which the tax is imposed
makes specific provision for such purpose.
Before entering on a discussion of this
question it is necessary to notice an argument advanced before us by Mr. Sinha,
the learned Government Advocate who appeared for the respondent. His submission
was that it was s. 5 of the Act which created the charge and imposed the
liability and that s. 6 and the other related provision in s. 72 merely
provided the yardstick or the measure of that charge and that as the mine was
immovable property within the district it was subject to the cess at the rates
specified in ss. 6 & 72. We consider that the submission provides no answer
to the problem before us. It matters little whether in technical language the
charging section is S. 5 or ss. 5, 6 and 72 read together. When once it is
conceded, as it must be, that in the case of a mine there is no liability to
pay the tax unless the. mine were worked and the workingproduced a
"profit", the question would still have to be answered as to whether
the mine can be said to produce an "annual net profit" on the basis
of which alone the cess Could be levied when the ore won is not sold as such
but it is converted into a finished product and is sold thereafter The learned
Attorney-General concentrated on the meaning of' the expression
"profit" occurring in s. 6 and the related provisions of the Act.
"Profit" according to him, arises only when a commodity produced,
obtained or acquired is the subject of a commercial transaction of sale and
represents the difference between the expense or cost of production or
acquisition and the amount realised on the sale, and the main submission was
that as there was no sale by the mine-owner of the product of the mine as such,
no "'Profit" 212 could in law be deemed to have accrued to him from
the mine.
In further elaboration of this point,
reliance was placed on the fact that what was brought to charge-or rather what
was taken to be the taxable event-was "the annual net profit," and
this computed on the basis of the average of "annual net profit for three
years" (vide ss. 6 & 72 of the Act). This last circumstance however
does not obviously advance the case far, because, if it is possible to conceive
in law of a profit or a net profit being derived when the mined ore is utilised
by a mine-owner in his factory, neither in logic nor on principle is there any
difficulty in there being an "annual net profit", particularly seeing
that the operation of mining is a continuous process extending for years
together.
In support of his basic submission the
learned AttorneyGeneral called in aid the principle laid down by the House of
Lords in Styles v. The New York Lift, Insurance Company (1) that no-one can
make a profit out of himself'. He also referred us to the following passage in
the judgment of.
Rowlatt, J., in Thomas v. Richard Evans &
Co., Ltd. (2) :
"It is true to say a person cannot make
a profit out of himself, if what is meant is that he may provide himself with
something at a lesser cost than that at which he could buy it, or if he does
something for himself instead of employing somebody to do it. He saves money in
those circumstances, but he does not make a profit." He further invited
our attention to Ostime v. Pontypridd (3) and to the passage in the speech of
Viscount Simon in the House of Lords :
"The identity of the source with the
recipient prevents any question of profits arising." His next submission
was that this principle had been accepted by this Court in Kikabhai Premchand
v. Commissioner of Income Tax, Bombay (4) and that (1) (1889) 2 T. C. 460. (2)
(1927) 11 T. C. 790, 822.
(3) (1946) 28 T. C. 261, 278. (4) [1954] S.
C. R. 219.
213 the reasoning underlying, this, decision
compelled a decision in his favour.
It is not necessary to examine the scope of
the maxim that a person cannot make a profit out of himself or ascertain
whether the principle; is subject to any exceptions. It might here be pointed
out that it has been held by the House of Lords in Sharkey v. Wernher (1) that
the general proposition that no one could trade with himself and make in its
true sense or meaning taxable profits by dealing with himself is not
universally true and, that there are situations in which a man could be said to
make a profit 1 out of the consumption of his own goods. However, as the
principle underlying the decision of this Court in Kikabhai Premchand's case
(2) runs counter to the decision of the House of Lords in Sharkey v. Wernher
(1) vide Commissioner of Income-tax, Bombay City 1, Bombay v. Bai Shirinbai K. Kooka
(3) we are bound to proceed on the basis that on facts similar to those in
Kikabhai's case () the principle applies and negatives the idea of 'a taxable
profit emerging.
It is, therefore, necessary to examine the
precise scope of the decision in Kikabhai's case (2). The case arose under the
Indian Income-tax Act and the question 'related to the computation of the
income and profits of a bullion merchant.
The assessor had, during the accounting-year,
withdrawn some 'bullion from his stock-in-trade and transferred it to a trust
which he had created. The assessee valued the bullion withdrawn at the price at
which he had bought it, so that no profit was shown to have resulted to him by
reason of the transfer of this stock-in-trade. This was objected to by Revenue
whose contention was that the bullion withdrawn had to be valued at the market
price of the commodity on the day of the transfer. This Court, accepting the
contention of the assessee, allowed his appeal and the ratio of this (1) [1956]
A.C. 58. (2) [1954] S.C.R. 219.
(3) [1962] Supp. 3 S.C. R. 391.
214 decision is to be found in the following
passage in the judgment of Bose, J., who spoke for the. majority :
"We are of opinion that it is unreal and
artificial to separate the business from its owner and treat them as if they
were separate entities trading with each other and then by means of a fictional
sale introduce a fictional profit which in truth and in fact is non-existent.
Cut away the fictions and you reach the position that the man is supposed to be
selling to himself and thereby making a profit out of himself which on the face
of it is not only absurd but against all canons of mercantile and income-tax
law." This was slightly expanded in the illustration given of a trader in
rice withdrawing rice from his stock-intrade for the purpose of consumption by
his family. The learned judge added that if the trader in rice transferred some
stock to a private godown:
"What he chooses to do with the rice in
his godown is no concern of the Income-Tax Department provided always that he
does not sell it or otherwise make a profit out of it. He can consume it, or
give it away, or just let i t rot...... How can he be said to have made an
income personally or his business a profit, because he uses ten bags out of his
godown for a feast for the marriage of his daughter ?" It would be seen
from the above that the stock withdrawn was not the subject of any commercial
transaction but was, so to speak, lost to the business. But that is not the
position here. Though the mined ore was not itself the subject of a sale, it
was converted into a commodity which was the subject of a sale.
The question, therefore, arises whether when
a sale or a commercial transaction which might result 215 in a profit takes
place not of the commodity itself but of something into which it is
transformed, "a profit" could be said to accrue by reason of the
acquisition of the basic commodity. Let us now analyse the concept underlying
this situation. It could not, for instance, be that unless the mined ore was
sold as it came out of the mine there could be no profit and that if the ore
underwent any modification from the state in which it was when mined, say by
being reduced to convenient sizes or by being broken up into small fragments or
even pulverised, there could be no profit arising out of the sale of the ore so
dressed. it is needless to add that in such a case the cost of the dressing or
the pulverising for the market could be an item of expenditure which would have
to be taken into account in ascertaining the profit from the sale of the ore.
If one is right so far that profit could result from the sale of the mined ore
so dressed up for the market, could there be any logic in the contention which
denies the existence of profit from the mined ore when not the dressed ore but
some product of the dressed ore is sold. No doubt where the mined ore undergoes
some processing before it is marketed, the process being either cleaning or
dressing etc., the processed product might continue to be commercially known as
ore. But the question would then arise "Is it essential for a 'profit' to
result from the working of the mine that there should be an identity in a
commercial sense between the commodity which is the subject of sale and the
commodity which is won from the mine ?" In other words, is it the position
that if there is loss of that identity the concept of "a profit"
arising from the production of that commodity also disappears ? We find it
difficult to appreciate the ratio behind the contention that if the mined ore
is processed, and the processed product commercially goes under another name ,
because the processing results in extensive modifications of the Yaw material,
then the sale of the finished product can in law yield no "Profit"
from the working of the mine.
216 At this stage it is necessary to bear in
mind a fact that what we have here is not a consumption in the-sense of
dissipation of the ore won as a result of which the commodity is entirely lost,
as would be the case where, for instance, grain produced by an agriculturist is
consumed in his own family-this' being the very illustration referred to by
Bose, J.,, in Kikabhai Premchand's case(1). The situation here is that there
has been a sale of the end product and the contention is that notwithstanding
the sale and therealisation of profit from the sale of that end product, there
is no profit attributable to the product of the mine. In this connection the
learned Attorney-General referred us to the decision of this Court in Doors Tea
Co.
Ltd. v. The Commissioner of Agricultural
Income-tax West Bengal(2) . The question raised for decision was whether the
value of bamboos, fuel timber etc. grown by an assessee, but which were
utilised by himfor the purposes of his tea business could be taken ; into
account in computing "his income, profits and gains" for the purposes
of the Bengal Agricultural Income Tax Act. This Court held that it could be and
that even if that item did not fall within the word "Profits or
gains", it was certainly ""income" which was of wider
import. It may be pointed out that the learned, judges did not expressly
negative the item being "'Profits", and the decision is authority
only in regard to the broad sweep of the expression "Income" in the,
statute there interpreted.
It could not be disputed that factually the
profit from the mining operation and the winning of the mineral is embedded in
the profit realised from the sale of the end product. A simple illustration
would demonstrate this. Let us assume that the cost of winning the ore is Rs.
50/a ton and the market price of similar ore which would have to be used in the
absence of the ore mined is Rs. 60/-per ton. There could not be any doubt that
this difference of Rs. 10/per ton of ore would be reflected in the (1) [1954]
S.C.R 219.
(2) (1962) 3 S.C.R. 157.
217 profit or loss resulting from the sale of
the steel. It is needless to add that if in a given case the mined product
costs more than the market price of the commodity, there would be a loss on the
mining operation notwithstanding that there is a profit realised from the sale
of the end productsteel, but these are matters of calculation not relevant at
the present stage, for we are endeavoring to ascertain whether there could in
law be a profit when the mined ore is converted into steel in the mills of the
mining-company, If thus factually the profit from the mine or from the mining
operation is imbedded in the profit from the sale of the steel is there any
principle of law which prevents effect being given to this factual position ?
The learned AttorneyGeneral submitted that in such. a situation the
"'Profit" is not a real or an actual profit but is one which is
merely notional, and that when the Act spoke of a "profit" it meant
an actual, real and realised profit and: not a merely notional
"profit". We find ourselves unable to accept this submission. We
start with the premise that by the sale of the end product a real
"'Profit" has been realised. When analysed it is found that profit is
the aggregate or resultant of the profits from different lines of activity.
if arithmetically that total represents the
resultant aggregation of different items of activity we fail to see how it
could be said that the profit from each item which results in that total is a
notional and not an actual or real profit. In the interests of clarity,
we-should add that the principle would be the same when the sale of the end
product yields no profit, but results in a loss, only in such a case, the
relevant component, viz, the disintegrated profit or loss resulting from the
mining operation would diminish the loss if that were a profit, or add to the
loss if that were also a loss. No doubt, there was a further contention urged
that you cannot dissect that final profit in order to ascertain its.
components, but it is quite a different one from that now under consideration
and we shall' deal with it 'in its proper place.
218 But what we are now concerned to point
out is that if it is capable of dismemberment or disintegration into its components,
it would not be correct use of language to designate the profit so apportioned
and ascertained as attributable to each line of activity any the less real than
the aggregate profit realised from all the ventures. In the way in which we
have approached the problem there could be no question involved of any
departure from the principle that a man cannot trade with himself. In fact, the
principle of dichotomy is brought in by the learned Attorney General by first
disintegrating the business of the appellant into two-first as a mine-owner
winning the ore and later by a Steel Manufacturing Co., consuming the won ore
and then posing the question as to whether the transfer of the ore from the
mining section to the manufacturing one could in law involve a sale of the
product so as to yield a "profit". It would be apparent that if one
proceeded on the basis of treating the businesses as a single and integrated
one, as the learned Attomey-General desired us to do, as one unbroken chain
from the start of the mining operation to the sale of the finished steel or
steel products by the company no question of a person trading with himself
would arise, but the very different one as to whether there could be a
disintegration of the profits of an integrated business, between the component
constituents which go to make it up.
Undoubtedly, in order to ascertain the
profits from the mine there would have to be a disintegration of the gross
profits which finally emerge from the sale of the finished steel or steel
products. What we desire to point out is that this involves no disintegration
of the business affording scope for the contention based upon the principle
that a person cannot trade with himself, but the one far removed from it, viz.,
whether when a profit has-been made as a conjoint result of different but
integrated operations, the profits so derived could be broken up so as to
permit the attribution of 219 specific amounts of profit to each or any of the
several operations or activities.
This takes to the point as to whether there
is anything in law to preclude the disintegration of profits in order to
ascertain the profit or loss attributable to each line of activity where the
sale of the final end product results in a profit or loss for the entire
venture. It was submitted by the learned Attorney-General that there was no
general principle of law that profits resulting from a series of integrated
activities could be dismembered or disintegrated for ascertaining the profit or
loss from each of the several activities from whose total operation an
ascertained profit accrued to an individual. The argument was that for the
disintegration of profits in such a situation there should be express statutory
provision there for and that in its absence there could be no "artificial"
cutting up of the businesses for the purpose of ascertainment of the profits
from each of the activities.
For the position that there could be a
disinter gration of profits for ascertaining the quantum, if any attributable
to one of the related and constituent activities, the learned Counsel for the
respondent placed reliance particularly on two decisions of this Court:
Commissioner of Income Tax, Bombay v. Ahmedbhai Umarbhai, & Co. Bombay(1),
and Anglo French Textile Co. Ltd. v. Commissioner of Income Tax, Madras (2),
where the Court effected an apportionment of the income for the purpose of
levying income-tax. It is unnecessary to go into the details of those decisions
because, as was correctly pointed out by the learned Attorney-General, the Court
was concerned in them not with the general principle of apportion ability of
"the incomes, profits or gains" accruing from connected activities
but with the interpretation of the specific provisions of the Excess Profits
Act, 1940, and the Indian Income-tax Act, 1922. On the other hand, in support
of his submission (1) [1950] B.C.R. 335,353.
(2) [1954] S.C.R. 523.
220 that in the absence of statutory
provision there for there could be no disintegration of profits the learned Attorney
General relied on a passage from the judgment of Patanjali Sastri J., as he
then was, in the first of these decisions where the learned judge said :
"While it may well be a 'fallacy', while
in applying a taxing statute which directs attention to the situation of the
source of income as the test of chargeability, to ignore the initial stages in
the production of the income and fasten attention on the last stage when it is
realized in money, it may be open to question whether it is in consonance with
business principles or practice, in the absence of any statutory requirement to
that effect, to cut business operations arbitrarily into two or more portions
and to apportion, as between them, the profits resulting from one continuous
process ending in a sale." He sought further support for his submission in
a passage to a like effect in Commissioner of Income Tax, Madras v. Diwan
Bahadur S. L. Mathias(1) where Sir George Rankin stated :
"But the green coffee itself cannot be
regarded as income, profits or gains within the meaning of the Actit is grown
for purposes of sale and in order that profit may be earned. The business
operations cannot be arbitrarily cut into two portions, but must be regarded as
a whole." We are unable to agree that these two passages afford assistance
to the contention urged before us by the learned Attomey-General. It is
sufficient to take up the second of the above quotations as it typifies the
principle' it would be seen that it was directed to pointing out that where the
profits arising from the sale of-an end, product or as the result of an
ultimate (1) (1938) L.R. 66 I.A. 23, 34.
221 activity are brought to tax, there is no
principle of law by which there could be a disintegration for the purpose of
confining the taxable profit to that which resulted from the ultimate activity
alone. The assessee in that case grew coffee on his own lands in the State of
Mysore and the raw coffee was brought into Mangalore, then in the State of
Madras, where it was cured and processed and then sold, the sale proceeds being
received within the "'taxable territory".
The assessee contended that as he had already
received the raw coffee in the Mysore State the value of that product should be
excluded in computing the profit made by the sale of the cured coffee. It was
this contention that was rejected and the reasoning in the passage, extracted
earlier, was directed to that purpose.
Cases where the profit resulting from sales
of end products are brought to tax, could be divided into broad groups. The
first would comprise those where the entirety of the profit is liable to tax,
i. e., without the elimination of income, profits etc., derived at any earlier
intermediate stage.
The Mathias Case (1) dealt with by the Privy
Council is an illustration of this class. The other group would comprise those
in which there is either non-liability or a specific exemption of the
"income, profits and gains" accruing up to a defined stage, and this
class which is really the converse of the one we are now dealing with, we shall
have to consider in more detail. We are saying that this is the converse,
because, whereas in 'the case before us, the profit from the later or
manufacturing activity is not brought to tax by the Act but only the profit
from the earlier mining operation, in the second of the groups mentioned
before, the profit from the later activity is alone brought to tax there being
either non-liability or a statutory exemption in favour of the income or profit
derived at an antecedent stage from an earlier activity. In this latter group,
there is necessarily implicit a (1) (1938) L. R. 66 1. A. 23, 34.
222 dichotomy brought about by the manner in
which the statute operates and brings to charge only that attributable to the
later activity. This was precisely the principle of' commercial accountancy on
which the decision of this Court in Commissioner of Income Tax v. Kooka (1)
rests.
It is in the same ratio that underlies r. 23
of the Income tax Rules to which we shall advert later. The taxing enactment
now under consideration having brought to tax solely the profit derived from a
single activity there has necessarily to be an apportionment between what is
attributable to that activity and that which is attributable to the further
processes which result in the conversion of the ore won, into steel and allied
products.
That even in cases where the profit resulting
from an ultimate activity is brought to tax there could be an apportionment if
there were an exemption in respect of the profits resulting from distinct
activities at earlier stages is illustrated by the provisions of the Indian
Income-tax Act itself. Thus in the case of, say, a sugar mill which grows its
own cane, in the absence of any exemption for the income derived from
agriculture i. e., from the production of the cane, the entire profit of the
mills from the sale of the sugar would have to be included in the taxable
profits under s. 10 of the Income-tax Act. But s. 4 (3) (viii) exempts
agricultural income as defined in s. 2 (1). The result therefore is that there
is a disintegration or dichotomy of the "incomes, profits or gains"
of the business and of agricultural income, so that there has to be an
apportionment between the two in order to determine the taxable income of an
assessee. It is on account of this situation that s. 59 (2) of the Income-tax
Act provides for rules being made for prescribing the manner in which and the
procedure by which incomes derived in part from agriculture and in part from
business shall be arrived at.
In exercise of the rule-making power thus (1)
[1962] Supp. 3 S.C. R. 391, 223 conferred r. 23 has been framed laying down the
principles on which the apportionment should take place whose terms we shall
set out merely for illustrating this principle :
"23. (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 "Business," in determining
that 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 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 an y
expenditure incurred by the assessee as a cultivator or receiver of rent in
kind.
(2) For the purposes of sub-rule (1)
"market value" shall be deemed to be :(a) where agricultural produce
is originally 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 year previous to that in
which the assessment is made;
(b) where agricultural produce is not ordinarily
sold in the market in its raw state, the aggregate of (1) the expenses of
cultivation;
(2) the land revenue or rent paid for the
area in which it was grown; and (3) such amount as the Income-tax Officer
finds, having regard to all the circumstances in 224 each case, to represent a
reasonable rate of profit on the sale of the produce in question as
agricultural produce." In our opinion therefore the principle of
apportionment resting on the disintegration of the ultimate profits realised by
the assessee is implicit in a provision like that in s. 6 of the Act under
which the profit derived from an initial activity is brought to charge where
further activities are undertaken by an assessee with reference to the ore won
and a profit is realised by the sale of the end product.
The second principal submission of the
learned Attorney General was that the Act by its provisions contained
unmistakable indications that the expression "Profit" was used in ss.
6, 72 and the other relevant provisions in the narrow sense and confined it to
profit from the sale of the won ore as such. In support of this submission, he
drew attention to the parallel provisions of the Act in relation to the determination
of "the annual value of lands" which was another item which along
with the annual net profit from mines and quarries was brought to charge for
the imposition of the cess under s. 6. "Annual value" would, he said,
have normally included only the profit derived from land, not the benefit
accruing to the owner from his own occupation. In order to include the latter
category also, the Act contained a definition of 'annual value' which ran:
"4. Interpretation clause.-In this Act,
unless there be something repugnant in the subject or context,'Annual value of
land, etc.'-"Annual value of any land, estate or tenure' means the total
rent which is payable, or if no rent is actually payable, would on a reasonable
assessment be payable during the year by all the cultivating raiyats of such
land, estate, or tenure, or by other persons in the actual use and occupation
thereof..
225 Explanation. For the purposes of the
foregoing definition, whatever is lawfully payable or deliverable, or would on
a reasonable assement be lawfully payable or deliverable..
in money or in kind, directly to the
Government,(a) by raiyats cultivating land in a Government estate-on account of
the use or occupation of the land, or (b) by other persons in the actual use
and occupation of land in such an estate, shall be deemed to be
"'rent"." The position of a mine owner who consumes the ore won
in his factory was it was submitted analogous to the case of a land-owner in
beneficial occupation of his own land who thereby though undoubtedly obtains a
benefit, derives no "profit" from the land. On this line of reasoning
the argument was that in the absence of a Specific provision as regards those
mine-owners who did not sell the ore won, there was no liability to charge under
the Act. We feel unable to accede to this argument. The fact that in the case
of other immovable property beneficial occupation by the owner is treated as on
a par with the receipt of rents and profits, is some indication that the former
was not outside the contemplation of the framers. It is no doubt possible that
at the date when the statute was enacted its framers might not have had in mind
cases such as those of the appellants before us, but that by itself is hardly
sufficient for the inference that they were outside the scope of the charging
section. What is crucial and of sole relevance are the words and the width and
scope of the charging provision% and if the appellants are within it matters
little that cases such as" these might not have been actually envisaged by
the framers of the enactment.
The learned Attorney-General sought aid from
the rule of construction that there was no equity in a 226 taxing statute and
that unless the tax-payer was squarely brought within the, charging section, no
tax could be imposed. In ultimate analysis this, merely means that in the case
of an ambiguity in the construction of a taxing statute if according to one
construction a tax is leviable, while on another it is not, the tax-payer is
entitled to the benefit of the doubt. In the view,, however,, that we entertain
regarding the construction of the relevant provisions of the Act we consider
there is no scope for the application of this rule of construction.
It was further submitted to us that the Act
was defective in that it did not provide any specific machinery for the type of
cases now on hand and that owing to this lack of machinery there could be no
imposition of the charge. In support of this reposition reliance was placed on
the well-known decision of the House of Lords in Colquboun v. Brooks (1). We do
not consider that there is force in this argument. We have already held on a
construction of ss. 5, 6 and 72 that where activities other than mere winning
the ore are carried on by an assessee and there is a transaction of sale of the
ultimate product and the profit, if any derived from the working of the mine
is, so to speak, embedded in the final realisation, a profit may accrue to the
assessee from the mining operation which can be disintegrated and ascertained
and a tax levee thereon. We are not here concerned with the manner in which
this disintegration should take place or the components or items which would
have to be taken into account in arriving at "the annual profit" from
the mine for the purpose of being brought to tax under ss. 6 and 72. Those will
be the subject-matter of enquiry by the relevant competent authorities by vitue
of the order of remand passed by the Board of Revenue in these cases' As we
have pointed out earlier, what we are concerned with in these appeals is merely
whether there could in law be an annual (1) (1889) 14 App. Cas. 493.
227 profit from, the mine in cases where the
ore produced from the mine is sold not as ore but is utilised as the raw material
for the manufacture of other products which are sold. When once it is conceded,
as it has to be, that in order that profit may result from the mining activity,
it is not necessary that the ore should be the subject of sale in the same
condition. as it was when it came out of the mine, but that even if the won ore
is subjected to processes to make it more useful or attractive to a buyer and
then sold, there would be a profit,. and that in the latter event the expenses
of processing would be a legitimate outgoing for computing the profit, it appears
to us to follow that if the ore is so processed as to turn it into a different
commodity and then sold there would be no negation of the concept o "a
profit " from the mine, and the question would be only as regards the
elimination of the further expenses involved and principles on which these
could be ascertained. It is the function of the relevant assessing authorities
to determine the annual profits in case of dispute and besides, there is a
residuary provision contained in s. 76 of the Act under which in cases where
the Collector' is unable to ascertain the annual net profits he may determine
it on the basis of 6 per cent of the value of the mine. It is for these reasons
that we are unable to accede to the submission that the charging provisions should
be rejected as inane because of the want of an express machinery for
determining the basis of apportionment in cases where the ore is sold not as
ore but is converted into other products which are the subject of sale.
The learned Attorney-General directed
considerable criticism towards the reasoning of the judgment of the learned
judges of the High Court on which they based their conclusions and particularly
the decisions upon which they relied in support of their conclusions. We
consider it, however, unnecessary to deal with these since we are satisfied
that, for the reasons stated already, the conclusion of the High Court that the
228 case of the appellants was within the charging sections of the Act is
correct.
Mr., B. C. Ghose-learned Counsel for the
appellants in Civil Appeals Nos. 600-601 of 1961-while adopting the submissions
of the learned Attorney-General on the main part of the case, submitted that as
there was no, market for copper-ore which was the product won by his clients,
there could be no determination of the market. price for the ore and hence no
possibility of ascertaining the profit derived from the mining operation. We
consider that this submission has no relevance in 'these appeals which are
concerned not with ascertaining how the profit from a mining operation is to be
determined, but solely with the legal point as to whether, where a mine-owner
does not sell the ore as such but converts it into a finished product which he
sells, there could in law be any profit from the mining operation. We therefore
consider that the submission is not pertinent at the present stage and have
refrained therefore from dealing with the merits of that contention, The
appeals fail and are dismissed with costs. One set of hearing fees.
Appeals dismissed.
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