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PETITIONER: COMMISSIONER OF SALES TAX, LUCKNOW

       Vs.

RESPONDENT: D. S. BIST & ORS.

DATE OF JUDGMENT11/09/1979

BENCH: UNTWALIA, N.L. BENCH: UNTWALIA, N.L. PATHAK, R.S.

CITATION:  1980 AIR  169            1980 SCR  (1) 593  1979 SCC  (4) 741  CITATOR INFO :  D          1988 SC1435  (38)

ACT:      U. P.  Sales Tax  Act, 1948-S.  2(i) proviso-Tea leaves after drying  and processing-Whether  remained  agricultural produce not exigible to sales tax under the proviso.

HEADNOTE:      The proviso  to s. 2(i) of the U.P. Sales Tax Act, 1948 excludes from  the  term  "turnover"  proceeds  of  sale  of agricultural or  horticultural produce  grown by a person on any land in which he has interest.      The assessee,  who  was  an  agriculturist,  owned  tea gardens in  the State.  After being  plucked from tea shrubs tea leaves  are withered  in shade in rooms, crushed by hand or foot,  roasted for 15 minutes, then covered by wet sheets for the  purpose  of  generating  fermentation,  graded  and finally roasted  again with  charcoal for  obtaining flavour and colour. The final product is sold in the market.      Before the Sales Tax Authorities the assessee contended that tea  leaves sold by him were agricultural produce grown by him  on his own land and that, therefore, the sale of tea effected by  him was exempt from sales tax under the proviso to s.  2(i) of  the Act.  The Sales Tax Authorities rejected the assessee’s  contention.  The  High  Court  answered  the reference in favour of the assessee and against the revenue.      Dismissing the appeal, ^      HELD: (per  Untwalia J.):  The High  Court was right in holding that  sales of tea leaves were not exigible to sales tax. The commodity which was sold was not different from the commodity which  was produced in agriculture and, therefore, the proviso to s. 2(i) is attracted. [600 F, 602 E]      1. Almost  every kind  of agricultural  produce has  to undergo  some   kind  of  processing  or  treatment  by  the agriculturist himself  either on  the farm  or elsewhere  in order  to   make  it   non-perishable,   transportable   and marketable. Some  minimal process is necessary to be applied to many varieties of agricultural produce. The test in these cases is  to see  whether in  relation to  that agricultural produce the process applied was minimal or was so cumbersome and long  drawn out that either in common parlance or in the

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market or  even otherwise  no one would treat the produce as an agricultural produce. The mere fact that in the case of a particular product the process is a bit longer or even a bit complicated would  not rob  the produce  of its character of being an agricultural produce. [597 B-C; F-G]      2.  All   the  processes  enumerated  by  the  Revising Authority were  necessary for  the purpose of saving the tea leaves from  perishing, making them fit for transporting and marketing. The  processes applied were all within the region of minimal  processes and  at no  point of time they crossed that limit and robbed the leaves of their character of being and continuing to be agricultural produce. [598 C-E] 594      Vol.  21   Encyclopaedia  Britannica   (1968  edition), referred to.      The State  of Madras  v. Swasthik  Tobacco  Factory  17 S.T.C., 316, The State of Madras v. Bell Mark Tobacco Co. 19 S.T.C., 129 referred to.      The State  of Madras  v. R.  Saravana Pillai  7 S.T.C., 541, Deputy  Commissioner of  Agricultural  Income  Tax  and Sales Tax,  Sough  Zone  v.  Sherneilly  Rubber  &  Cardamom Estates Ltd. & others. 12 S.T.C. 519, Commissioner of Income Tax v.  Woodland Estates  Ltd.  58  I.T.R.,  612  Rayavarapu Mrityanjaya Rao  v. The  State of  Andhra Pradesh 20 S.T.C., 417, Commissioner  of Sales  Tax, U.P.,  Lucknow v. Harbilas Rai and Sons, 21 S.T.C., 17 approved.      Killing Valley  Tea Company  Ltd. v. Secretary to State A.I.R. 1921 Calcutta, 40 distinguished. (Pathak, J. concurring).      In Killing  Valley Tea  Co. Ltd.  v. Secretary to State A.I.R. 1921  Calcutta, 40  the Calcutta  High Court  was  of opinion that  while process  of selecting  and plucking  tea leaves  from   the  tea   shrubs  could   be  deemed  to  be agriculture, the  subsequent process  which included  drying and rolling  of the leaf was a manufacturing process. If the Calcutta High  Court could be said to have laid down that as a result  of those  processes the  tea  leaf  ceased  to  be agricultural produce,  it  is  not  correct.  The  tea  leaf remained what  it always  was. It was tea leaf when selected and plucked  and it  continued to be tea leaf when after the process of  withering, crushing and roasting, it was sold in the market.  The process  applied was  intended to bring out its potential qualities of flavour and colour. The potential inhered in the tea leaf from the outset when still a leaf on the tea  bush. The  potential surfaced  in the tea leaf when the  mechanical   processes  of   withering,  crushing   and roasting,  fermenting   by  covering  with  wet  sheets  and roasting again  were applied.  At no stag, did it change its essential substance. It remained tea leaf throughout. In its basic nature  it continued  to be agricultural produce. [603 B-C]

JUDGMENT:      CIVIL APPELLATE  JURISDICTION: Civil  Appeal Nos. 2361- 2364 of 1972.      Appeals by  special leave  from the  Judgment and Order dated 17-5-72  of the Allahabad High Court in Sales Tax Ref. Nos. 693 to 696/70.      S. C. Manchanda, Shiv Pujan Singh and M. V. Goswami for the Appellant. (In all the appeals)      V. S. Desai and Rameshwar Nath for the Respondent.      The following Judgments were delivered:      UNTWALIA, J. The Commissioner of Sales Tax, Lucknow has

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filed these  four  appeals  by  special  leave  against  the judgment of the Allahabad High Court given in four sales-tax references under  the U.P.  Sales Tax Act, 1948, hereinafter referred to as the Act. 595      The assessee-respondent  owns some  tea gardens  in the State of  U.P. The tea-leaves grown by the respondent in his gardens are  sold in  the market  after being  processed and packed. The  stand taken  on his  behalf before  the  taxing authorities was  that the  tea-leaves sold by the respondent are agricultural  produce grown  by himself  and, therefore, the sales  were not exigible to sales-tax. The contention of the  assessee  was  not  accepted  and  the  final  Revising Authority made  four  references  in  respect  of  the  four periods to the High Court on the following question of law:-      "Whether on  the facts  and circumstances  of this case      the article  ceased to  be an  agricultural produce and      whether the  tea produced  by  the  assessee  would  be      exigible to sales tax?" The High  Court has  answered the reference in favour of the assessee and against the revenue. Hence these appeals by the department.      Under section  3, the  charging section,  of the Act it was the  turn-over for  each assessment  year determined  in accordance with  the various  provisions of  the Act and the Rules framed  thereunder, which was chargeable to sales-tax. The definition  of ’turnover’  given in  section 2(i) of the Act at the relevant time stood as follows:-      " "Turnover" means the aggregate amount for which goods      are supplied  or distributed  by  way  of  sale(or  are      sold), or  the aggregate  amount for  which  goods  are      bought,  whichever  is  greater  by  a  dealer,  either      directly or  through another,  on  his  account  or  on      account of others, whether for cash or deferred payment      or other valuable consideration:           Provided that the proceeds of the sale by a person      of agricultural  or  horticultural  produce,  grown  by      himself or  grown on  any  land  in  which  he  has  an      interest  whether  as  owner,  usufructuary  mortgagee,      tenant or  otherwise, or poultry or dairy products from      fowls or animals kept by him shall be excluded from his      turnover." The above  proviso was meant to exempt an agriculturist or a horticulturist from  the charge  of sales-tax  in respect of his agricultural  or horticultural  produce grown by himself in his  land in  which  he  has  an  interest  of  the  kind mentioned in the proviso. The short question which falls for our determination,  therefore,  is  whether  the  assessee’s transactions of  sale came  within the ambit of the proviso. Indisputably   and   undoubtedly   the   assessee   was   an agriculturist, the 596 tea-leaves grown  by  him  in  his  land  were  agricultural produce, and  he had sold them after processing and packing. In other words the assessee made them marketable and fit for consumption by the consumers and then sold them. If the tea- leaves so sold substantially retained the character of being an agricultural  produce, it  is plain  that the  assessee’s sales will  not be  exigible to  sales-tax. If, on the other hand,  the  leaves  had  undergone  such  vital  changes  by processing that  they  lost  their  character  of  being  an agricultural produce  and became  a different commodity then the sales made by assessee were exigible to sales-tax.      The High  Court has  extracted the  primary findings of fact recorded  by the  Revising Authority  in its revisional

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order. As  is well-known  tea-leaves are  plucked from  tea- plants as  green tea-leaves.  The tea-leaves  so plucked are not fit for consumption and are not sold in the open market. They are often purchased by big tea concerns from the owners of the  gardens and  after processing  and packing them they (the concerns) sell them in the market. Since in their cases the proviso  will not  apply the  sales will  be exigible to sales tax.  But when  the producer  himself does the same or similar kind of job, then the question arises whether it can be justifiably  said that  he also  cannot take advantage of the proviso?      The primary  facts as  extracted by the High Court from the order of the Revising Authority are the following:-           (1)  "The tea-leaves  were first  of all subjected                to withering  in shadow  in rooms on a wooden                floor for about 14 hours."           (2)  "then they  were crushed-by  hand or foot and                were then roasted for about 15 minutes."           (3)  "Later they were roasted on mats for about 15                minutes."           (4)  And then they were "covered by wet sheets for                generating fermentation.  During this process                the colour  of leaves  was changed from green                to yellowish."           (5)  "the leaves  were then  subjected to  grading                with  sieves   of  various   sizes.   Fanning                machines are  also  used  in  completing  the                grading process."           (6)  "The produce  was then  finally roasted  with                charcoal for  obtaining suitable  flavour and                colour." 597           (7)  "It  is   this  final   product   which   was                eventually sold by the assessees."      The  question  for  consideration  is  whether  on  the findings aforesaid  it can  be justifiably  held in law that the leaves  lost their  character of  being an  agricultural produce  and   became  something  different.  It  should  be remembered that  almost every  kind of  agricultural produce has to  undergo some  kind of processing or treatment by the agriculturist himself  in his  farm or elsewhere in order to bring them  to a  condition of non-perishability and to make them transportable  and marketable.  Some minimal process is necessary to  be applied  to many  varieties of agricultural produce. As  for example, when wheat stalks are cut from the farm, threshing  and winnowing  have to be done. The product so obtained  has to  be dried  for a  few days. The husk and dust have  to be  separated. Thereafter packing the wheat in bags or  other containers  it is  taken to  the markets  for sale. One  can never  suggest  that  such  a  wheat  product becomes  a  commodity  different  from  the  one  which  was produced in  the process  of  agriculture.  To  pursue  that example further, if the agriculturist who produces the wheat has a  flour mill  and crushes  the wheat produced by him in that mill  and then  if the flour so produced is sold by him one can  never reasonably suggest that the flour sold by him is an  agricultural produce,  because  in  that  event,  the manufacturing process  goes beyond  the limit  of making the agricultural produce  fit for marketing as such and turns it into a  different commodity altogether i.e. flour. But there may be  some  other  kinds  of  agricultural  produce  which required some  more processing to make it marketable. In the case of  such a  commodity what  one has to judge is to find out whether  in relation  to that  agricultural produce  the process applied was minimal or was it so cumbersome and long

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drawn that  either in  common parlance, or in the market, or even otherwise,  any body  would not treat the produce as an agricultural produce.  The mere  fact that  in the case of a particular product the process is a bit longer or even a bit complicated will  not rob  the produce  of its  character of being an  agricultural produce.  Largely the inference to be drawn from  the primary  facts of  processing, one  may say, will be  an inference of fact. But it is not wholly so. In a given case  it will  be a mixed question of fact and law. If wrong tests  are applied  in drawing  the inference that the agricultural produce  has lost  its character  of being  so, then it  will be  a question  of law and the High Court will have jurisdiction  in an  appropriate reference,  as in  the present case  it had,  to decide whether the case came under the proviso to section 2(i) of the Act. 598      Unlike many  agricultural products  tea-leaves are  not marketable in the market fresh from the tea gardens. No body eats tea-leaves.  It is  meant to  be boiled  for extracting juice  out  of  it  to  make  tea  liquor.  Tea-leaves  are, therefore, only  fit for marketing when by a minimal process they are  made fit  for human  consumption. Of  course,  the processing may  stop at  a  particular  point  in  order  to produce inferior  quality of  tea and  a  bit  more  may  be necessary to be done in order to make it a bit superior. But that by  itself will  not substantially change the character of the  tea-leaves, still  they will  be known as tea-leaves and sold  as such  in the  market. In my opinion all the six processes enumerated above from the primary findings of fact recorded  in  the  order  of  the  Revising  Authority  were necessary for  the purpose  of saving  the  tea-leaves  from perishing, making  them fit  for transporting  and marketing them. The  process applied  was minimal. Withering, crushing and roasting  the tea-leaves  will be  surely necessary  for preserving  them.  The  process  of  fermentation  or  final roasting with  charcoal for  obtaining suitable  flavour  or colour and also the process of grading them with seives were all within  the region of minimal process and at no point of time it  crossed that  limit and  robbed the tea-leaves, the agricultural  produce,  of  their  character  of  being  and continuing as  such substantially. In my opinion, therefore, the view  expressed by the High Court is quite justified and sustainable in law.      In Volume 21 of Encyclopaedia Britannica (1968 edition) under the  head  ’Tea’  are  dealt  with  at  page  739  the processes of  cultivation and  manufacture of tea. Under the sub-head ’Cultivation’ it is found stated:-           "Tea leaves  are plucked  either by  hand or  with      special shears.  In  the  tropical  areas  of  southern      India,  Ceylon,   and  Indonesia,   harvest   continues      throughout the  year, but in the subtropical regions of      northern India  and China and in Japan and Formosa, the      harvests are  seasonal. The  flavour and quality of the      tea-leaves vary  with the  climate, soil,  age  of  the      leaf, time of harvest (even from season to season), and      method of preparation." Then comes  the sub-head  ’Manufacture’ which enumerates the categories  of   three  classes  of  teas  and  then  it  is mentioned:-           "Most stages of processing are generally common to      the three  types, of  tea. First, the fresh leaves, are      withered by  exposure to the sun or by heating in trays      until pliable  (usually 18-24  hours). Next  the leaves      are rolled by hand 599

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    or machine  in  order  to  break  the  leaf  cells  and      liberate the  juices and  enzymes. This rolling process      may last  up to  three hours.  Finally, the  leaves are      completely dried either by further exposure to the sun,      over fires, or in a current of hot air, usually for 30-      40 minutes." In making  black tea,  the leaves,  after being  rolled, are fermented in  baskets or  on glass  shelves or cement floors under  damp   cloths.  "The   process  of  fermentation,  or oxidation, reduces  the astringency  of the leaf and changes its colour and flavour." About green-leaves it is mentioned- "Green tea  is made  by steaming  without fermentation  in a perforated cylinder  or boiler,  thus retaining  some of the green colour.  The leaves are lightly rolled before drying." It would  thus be  seen that  the tea-leaves as plucked have got to  pass through stages of processing of one kind or the other in order to make them fit for human consumption, as in the case  of paddy  and many  other commodities dehusking in the case  of former and some other kind of process in regard to the  latter has  got to  be done  in order  to make  them marketable and fit for consumption.      There are two decisions of the Madras High Court in The State of  Madras v.  R. Saravana  Pillai(1)  and  N.  Deviah Gowder v.  Commercial Tax  Officer,  Coimbatore(2)  where  a similar question  arose with  respect to  arecanuts. At page 544 of  the first  case which  was followed  in  the  second occurs a passage which may be usefully quoted here:-           "As we have pointed out, it was common ground that      there is  no market  in  Coimbatore  or  elsewhere  for      arecanuts as  they are when plucked from the trees, and      it should be remembered they are gathered when they are      still unripe. The proviso to section 2(i) of the Act is      obviously conceived in the interests of agriculturists.      It excludes  from any  tax liability under the Act sale      of agricultural  and horticultural produce, the primary      condition to be satisfied being that it must be produce      of the  land which  either belongs  to the seller or of      the land  in which  he has  an interest as specified by      section 2(i).  To restrict  that concession  to sale of      arecanuts, for  instance, only  if those  arecanuts are      sold in  the state  in which  they are  immediately  on      being  gathered   from  the  trees,  would  render  the      statutory exclusion meaningless." I approve of this decision. 600      There are  two decisions of the Bombay High Court given in relation  to the  question of  sugarcane being  converted into jaggery. They are:-R. B. N. S. Borawake v. The State of Bombay(1) and  Commissioner of  Income-Tax,  Poona  v.  H.G. Date.(2) In the former case it was observed at page 11:-           "It is  true that  gur cannot  be regarded  as  an      agricultural produce  grown on  land.  But  if  gur  is      prepared out of the agricultural produce which is grown      on land,  in the  absence  of  any  indication  to  the      contrary suggesting  that the agricultural produce must      be sold  in the  form in  which it is grown, we will be      justified in  holding  that  an  agriculturist  who  is      exclusively selling  agricultural produce  grown on the      land either  in the form in which it is grown or in the      form in  which it  is  converted  for  the  purpose  of      transportation or  preventing deterioration  is  within      the exception  provided by section 2(6). In the present      case, with  a view to prevent deterioration and for the      purpose of  facilitating  transportation  the  assessee      converted the sugar-cane grown by him into gur and sold

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    it." It appears  to me  that this case has gone a bit too far and on  an   appropriate  occasion   it  may   require   further consideration. Nonetheless,  in the  instant  case  one  can safely conclude, as I have done, that with a view to prevent deterioration and  for the purpose of facilitating transport and making  it marketable  the  assessee  himself  did  some processing to  the plucked  tea-leaves and  hence  the  High Court was right in holding that such sales were not exigible to sales-tax.  Similar or  identical  principles  have  been applied by  other High  Courts also  in respect of different commodities such  as  rubber,  sole  crepe,  casuarina,  pig bristles  etc.   The  cases   are-Deputy   Commissioner   of Agricultural  Income-Tax   and  Sales-Tax,   South  Zone  v. Sherneilly Rubber  &  Cardamom  Estates  Ltd.  &  Others(3). Deputy Commissioner  of Agricultural  Income-Tax and  Sales- Tax, Quilon  v. Travancore  Rubber  and  Tea  Co.,  Ltd.;(4) Commissioner of  Income-Tax  v.  Woodland  Estates  Ltd.;(5) Rayavarapu Mrityanjaya Rao v. 601 The State  of Andhra  Pradesh(1) and  Commissioner of  Sales Tax, U.P.,  Lucknow v.  Harbilas Rai  and Sons.  (2) Broadly speaking these cases have been decided on application of the correct principles of law.      Reliance on behalf of the Revenue was placed upon a few cases. None  of them supports the department’s contention. I may notice  only two or three of them. In Killing Valley Tea Company, Ltd.  v. Secretary  to State(3)  the  question  for consideration related  to the  tax liability  of the Killing Valley Tea  Company under  the Income  Tax Act, 1918. If the whole of  its  income  was  derived  from  agriculture,  the assessee was  not liable to pay income-tax. If, however, the activities  of  the  Company,  which  produced  income  were attributable  partly   to  agriculture  and  partly  to  its manufacturing activities, then the whole of the amount could not have  been taxed  under the Income-Tax Act. The stand of the Company  was-"the actual  leaf of the tea plant, without the addition thereto of the processes above described, is of no value as a market commodity." On behalf of the Revenue it was contended  "that the manufacturing processes carried out in a  modern tea factory, with scientific appliances and up- to-date  machinery,  are  different  from  those  ordinarily employed by a cultivator to render the produce raised by him fit to  be taken  to market."  The High Court held-"that the process in its entirety cannot be appropriately described as agriculture. The  earlier part of the operation when the tea bush is  planted and  the young  green leaf  is selected and plucked may well be deemed to be agriculture. But the latter part of  the process  is  really  manufacture  of  tea,  and cannot,  without  violence  to  language,  be  described  as agriculture. The green leaf is not marketable commodity for immediate use as an  article of  food, but it is a marketable commodity to be  manufactured   by  people   who  possess  the  requisite machinery  into   tea  fit  for  human  consumption."  After referring to  some authoritative  books  on  Tea,  the  view expressed by  the High Court was "that the entire process is a combination  of agriculture and manufacture." Hence only a part of  the income  was held  to be taxable. In the instant case the  problem is  quite distinct  and different. Here we are concerned  with the question whether the commodity which the assessee  sold as  tea was  his agricultural  produce or not. He  had not sold his tea-leaves from his gardens to any manufacturing tea 602

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company. He  had himself  applied some  indigenous and crude manufacturing process in order to enable him to sell his tea in the  market. In  such a situation I have no difficulty in holding that the sale was of his agricultural produce.      In The  State of  Madras v. Swasthik Tobacco Factory(1) the question  before this  Court was whether the respondent- firm which  purchased raw  tobacco and  converted  it  by  a manufacturing process  into chewing  tobacco and  sold it in small paper packets was entitled to deduction of excise duty paid by  it on  the raw  tobacco from  the gross turnover of sales of  chewing tobacco  under rule  5(1)(i) of the Madras General Sales  Tax (Turnover and Assessment) Rules, 1939. It would be  found mentioned  at page  318:-"Both the advocates argued, on  the basis  of the  factual  position,  that  the packets of chewing tobacco were goods different from tobacco from which  the  said  goods  were  manufactured."  On  that footing, by interpretation of the rule it was held that only excise duty  paid on  the goods  sold  by  the  assessee  is deductible from  the gross turnover, and not the excise duty paid on  raw tobacco.  This case was followed by the Supreme Court in  The State of Madras v. Bell Mark Tobacco Co.(2) In the instant  case I  have held  that the commodity which was sold was not different from the commodity which was produced in agriculture.      The view  expressed by  the Allahabad High Court in the judgment under  appeal which  is reported  in D.  S. Bist  & Sons, Nainital  v. Commissioner  of Sales Tax, U.P.(3) is on the  lines  of  the  preponderance  of  views  expressed  by different High  Courts in relation to different commodities. I approve  of the case and dismiss these appeals with costs- hearing fee-one set only.      PATHAK,  J.   I  agree   that  the  appeals  should  be dismissed.      But I  should like  to say  a few  words in  regard  to Killing Valley  Tea Company,  Ltd. v. Secretary to State.(4) That was  a case  where the Killing Valley Tea Company, Ltd. had a  tea plantation  and after  selecting and plucking the young green  leaf from  the tea  bush by  hand  it  was  put through a  process of  drying and  rolling. The  Income  Tax Department alleged  that the process actually applied to the dry leaf was a manufacturing process carried out in a modern tea  factory  with  scientific  appliances  and  the  latest machinery. The 603 Calcutta High  Court, on  a consideration  of the respective cases of the parties, observed that the entire process could not be  described  as  agriculture,  and  that  the  process applied to  the tea  leaf after  it had  been plucked  was a manufacturing process.  It observed  that the green tea leaf was a  marketable commodity to be manufactured by people who possessed the  requisite machinery  into tea  fit for  human consumption. It was of the opinion that while the process of selecting and  plucking the  tea leaf  from the  tea  shrubs could be  deemed to  be agriculture,  the subsequent process which  included  drying  and  rolling  of  the  leaf  was  a manufacturing process.  The High  Court drew  a  distinction between the  two processes  for the  purpose of apportioning the income  between agricultural income and non agricultural income. The question before us is whether after the tea leaf had been  put through  the process  of withering,  crushing, roasting and  fermentation it  continued to  be agricultural produce. If the Calcutta High Court can be said to have laid down that as a result of those processes the tea leaf ceased to be agricultural produce, I am unable to agree with it. To my mind,  the tea  leaf remained  what it always was. It was

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tea leaf  when selected  and plucked. and it continued to be tea leaf  when after  the process of withering, crushing and roasting it  was sold in the market. The process applied was intended to bring out its potential qualities of flavour and colour. The  potential inhered  in the  tea  leaf  from  the outset when  still a  leaf on  the tea  bush. The  potential surfaced in  the tea  leaf when  the mechanical processes of withering, crushing  and roasting,  fermenting  by  covering with wet  sheets and  roasting again  were applied.  The tea leaf was  made fit for human consumption by subjecting it to those processes.  At no  stage. did  it change its essential substance. It  remained a  tea leaf throughout. In its basic nature, it continued to be agricultural produce.      The appeals  fail and  are dismissed  with costs. Costs are awarded as one set only. P.B.R.                                    Appeals dismissed. 604