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PETITIONER: THIRU AROORAN SUGARS LTD., MADRAS

       Vs.

RESPONDENT: THE COMMISSIONER OF INCOME-TAX, MADRAS

DATE OF JUDGMENT:       30/07/1997

BENCH: SUHAS C. SEN, S.P. KURDUKAR

ACT:

HEADNOTE:

JUDGMENT:                           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)                       J U D G M E N T Sen, J.      The 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. There 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.      Section 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 :      "Income    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

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    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.      (2) 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;      (b) 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;      (ii) the  land revenue or rent paid      for the area in which it was grown;      and      (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.      The assessee’s  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

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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.      The Tribunal  found that the assessee Company had grown sugarcane in  its own  land as well as lands taken on lease. Since 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. The 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).      The 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. Merely 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.      Under 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. The assessee-company  itself was buying more sugarcane, than it was producing, from registered and unregistered ryots.

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    Mr. Nariman  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 exist.      We are  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.      If the  market is  controlled by Government regulation, sale and purchase of sugarcane within the framework of these regulations will  be the ordinary mode of selling sugarcane. No  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.      Mr. Nariman 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.      This 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 or not. The 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 essential pre-requisite.      We are  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

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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. Courtney Terrel, C.J. explained the position thus:      "The 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. The Special  Bench decision of the Patna High Court does not support the case made out by Mr. Nariman in any way.      The 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:      "The 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.      In 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:      "What is  meant by  "market value"?

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    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:      "What  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.      In the  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.      It is  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. The 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. But that  is not  the case here. The High Court did not feel

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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 this stage.      These appeals  must also  fail and  are dismissed.  The Special Leave  Petition No.  2611 of 1988 is also dismissed. There will be no order as to costs.