Citation Codes

Equivalent Citations

citation codes

Case Number

Miscellaneous Civil Cases Nos. 6 and 7 of 1961

Judges

P.V Dixit, C.J
K.L Pandey, J.

Acts

sub-rules (1) and (2) (a) of rule 23 of the Indian Income-tax Rules, 1922.
section 66(2) of the Indian Income-tax Act, 1922.
sun-rules (1) and (2). Sub-rule (2)
sub-rule (2). Again, sub-rule (1)
sub-rules (1) and (2) rule 23
Sub-rule (2)
sub-rule (1)

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Smart Summary

Structured Summary of the Opinion (Bhopal Sugar Industries Ltd. — Misc. Civil Cases Nos. 6 & 7 of 1961)

Factual and Procedural Background

This order disposes of two references (Misc. Civil Case No. 6 of 1961 and Misc. Civil Case No. 7 of 1961) made by the Income-tax Appellate Tribunal pursuant to directions given by this Court on applications filed by the Commissioner of Income-tax and the assessee, Bhopal Sugar Industries Ltd., Shore, under section 66(2) of the Indian Income-tax Act, 1922.

Material facts (as set out in the opinion):

The assessee is a public limited company engaged in manufacture and sale of sugar. It owned sugar-cane farms located about six to eight miles from its factory at Shore and used that cane as raw material in the factory.
The company also purchased cane from other growers who brought cane to sale centres fixed by the former Bhopal authorities.
On 22 December 1950 the Chief Commissioner of Bhopal issued a notification fixing the price payable to cultivators at Rs. 1-11-0 per maund net and expressly prohibiting the purchaser (the assessee) from making any deduction on account of transport.
On 22 January 1951 the Bhopal Government issued a notification allowing a rebate of 3 1/2 pies per maund per mile for cane drawn by road over distances in excess of 10 miles from the factory (i.e., a rebate only for cane brought over more than 10 miles).
For the assessment year 1952-53 the assessee sought to value cane grown and used by it at Rs. 2-1-5 per maund, comprising Rs. 1-11-0 (the notified price), 0-4-0 for alleged superior quality, and 0-2-5 for average transport charges.
The Income-tax Officer disallowed the transport element but accepted the superior-quality element and fixed market value at Rs. 1-15-0 per maund. The Appellate Assistant Commissioner rejected both additions. The Tribunal allowed the transport addition but disallowed the superior-quality addition. The Tribunal referred questions back pursuant to this Court's directions.

Legal Issues Presented

Whether, on the true construction of rule 23 and the Government notifications dated 22 December 1950 and 22 January 1951, transport charges can at all be taken into account in fixing the price of cane under rule 23?
If transport charges can be taken into account under question (1), whether the assessee is entitled to deduct transport charges at the average rate incurred for cane purchased from outsiders or the transport charges actually incurred by the company in respect of such cane?
Whether the assessee is entitled to add to the price of sugar-cane fixed by the Government notifications a sum on account of the superior quality of the sugar-cane grown on the company's farm?

Arguments of the Parties

Assessee's Arguments (as presented by Shri Mehta, counsel for the assessee)

Regarding transport: The assessee argued that sub-rules (1) and (2) of rule 23 require deduction of the market value of agricultural produce raised by the assessee. Because the notification of 22 December 1950 fixed the purchaser's price at Rs. 1-11-0 and did not permit the purchaser to make any deduction for transport, and because the assessee incurred transport expenditure in bringing cane from its farms, the assessee contended it could claim an addition to that price to reflect the transport charges when determining the market value of its own cane.
Regarding superior quality: The assessee argued that the Rs. 1-11-0 notified price related to cane produced by other cultivators and sold to the assessee and did not reflect the superior quality of the cane produced by the assessee. Therefore, the market value of the assessee's cane should be determined by evidence of its true market value (reflecting superior quality) rather than by reference to the flat notified price applicable to all cane.

Table of Precedents Cited

No precedents were cited in the provided opinion.

Court's Reasoning and Analysis

The Court's analysis is grounded exclusively on the language and effect of rule 23 (sub-rule (1) and sub-rule (2)(a)) of the Indian Income-tax Rules, 1922. The Court proceeds as follows:

The Court identifies rule 23(1) as mandating that, for the purpose of determining that part of income chargeable to tax (where income is partly agricultural and partly business), the market value of any agricultural produce raised by the assessee and utilized as raw material in 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." The Court treats this prohibition on further deduction as categorical.
The Court explains that sub-rule (2)(a) prescribes how "market value" is to be determined for the purposes of sub-rule (1): market value "shall be deemed to be" the value calculated according to the average price at which the agricultural produce has been so sold during the year previous to that in which the assessment is made (i.e., a deemed/notional market value based on average selling prices).
Applying those sub-rules to the facts: because the notified price applicable during the relevant period was Rs. 1-11-0 per maund and the 22 December 1950 notification expressly prohibited deductions for transport, and because the rebate in the 22 January 1951 notification applied only to cane drawn from over 10 miles (while the assessee's farms were within 6–8 miles), the Court holds that the average price during the relevant period was Rs. 1-11-0 and that this determined the deemed market value of the cane raised by the assessee.
On the transport argument the Court rejects the assessee's contention: sub-rules (1) and (2) fix a notional (deemed) market value calculated by reference to the average price at which the produce was sold; that notional market value cannot be increased by adding actual transport charges incurred by the assessee. Furthermore, sub-rule (1)'s prohibition against any further deduction for expenditure incurred by the assessee forecloses considering transport under rule 23. The Court notes that the assessee might be able to claim a deduction for transport under section 10(2) (a separate statutory provision), but not under rule 23(1) and (2).
On the superior-quality argument the Court rejects the contention that the assessee can establish a different market value for its particular-quality cane: sub-rule (2) is concerned with produce raised by the assessee and requires use of the average price at which the produce in general was sold; where a flat rate was fixed by the notification without differentiation for quality, that flat rate governs the deemed market value. The Court holds that the deemed market value is a fictional, general-market based value (not the "real" value of a particular quality of produce raised by the assessee), and therefore evidence of superior quality cannot displace the deemed market value fixed under rule 23(2).
On that basis the Court concludes the plain language of rule 23 ends the matter and requires negative answers to the questions posed.

Holding and Implications

Core Holding: All three questions referred by the Appellate Tribunal are answered in the negative.

Direct consequences for the parties (as stated in the opinion):

The assessee is not entitled under rule 23(1) and (2) to add transport charges to the price fixed by the Government notification of 22 December 1950 when determining the market value of cane raised by it.
The assessee is not entitled under rule 23(1) and (2) to add any sum on account of the alleged superior quality of its cane to the notified price of Rs. 1-11-0 per maund.
The departmental side shall have the costs of these references; counsels' costs are fixed at Rs. 200.

Broader implications: The opinion rests on the plain language of rule 23(1) and rule 23(2)(a) and applies the deemed-market-value concept to the facts. The opinion does not purport to create any broader novel precedent beyond applying those sub-rules, and it does not cite any prior case law in support.

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Commissioner Of Income-Tax, M.P v. Bhopal Sugar Industries Ltd.

- This order will also dispose of Misc. Civil Case No. 7 of 1961.

These are two reference made by the Appellate Tribunal pursuant to the directions given by this court on applications filed by the commissioner of Income-tax and the assessee, the Bhopal Sugar industries Ltd., Shores, under section 66(2) of the Indian Income-tax Act, 1922. The questions referred in Misc. Civil Case No. 6 of 1961 are :

"(1) Whether on the true construction of rule 23 and the Government notification dated December, 22, 1950, and January 22, 1951, the transport charges can at all be taken into account in fixing the price of cane under the said rule ?

(2) If the answer to question No. (1) is in the affirmative whether the assessee company is entitled to deduct in respect of cane at the average rate at which such charges were incurred in respect of can purchased from outsiders or the transport charges actually incurred by the company in respect of such cane ?"

The question propounded in the other reference is :

"Whether the assessee is entitled to add to the price of sugar-cane fixed by the Government notifications a certain sum on account of the superior quality of the sugar-cane grown on the companys farm ?"

The material facts are that the assessee is a public limited company carrying on the business of manufacture and sale of sugar. It has its own sugar-cane farms at a distance of six to eight miles from its factory situated a that Shore. The sugar-cane grown by the assessee is used in the manufacture of sugar in the factory. The company also made purchases of sugar-cane from other growers. The growers used to bring sugar-cane to the various centres fixed by the former Bhopal authorities for sale. By a notification issued on 22nd December, 1950, by the Chief Commissioner of Bhopal, the price to be paid to the cultivators for sugar-cane sold by them to the assessee was fixed at Rs. 1-11-0 per maund net. The notification expressly prohibited the assessee from making any deduction on account of transport. By another notification issued on 22nd January, 1951, by the Bhopal Government the assessee company was allowed a rebate of 3 1/2 pies per maund per mile

"over a distance of 10 miles on all cane drawn by road from distance over 10 miles from the factory, out of the minimum cane price of Rs. 1-11-0 per maund"

In determining the "income" chargeable to income-tax for the year 1952-53, the assessee claimed to deduct the market value of sugar-cane grown by it and utilised by it and utilise by it as raw material in its sugar factory at the rate of Rs. 2-1-5 per maund made up of Rs. 1-11-0, the price payable to the cultivators under the notification dated 22nd December, 1950, 0-4-0 per maund on account of the superior quality of the sugar-cane grown by it and 0-2-5 on account of the average transport charges. The Income-tax Officer disallowed the claim on account of transport charges. He, however, accepted the claim of the assessee in respect of the alleged superior quality of its sugar-cane and fixed the market value of that sugar-cane at Rs. 1-15-0 per maund. Both these claims were rejected in appeal by the Appellate Assistant Commissioner. The matter then went up before the Income-tax Appellate Tribunal. The assessees claim for addition of transport charges to the price fixed by the notification of 22nd December, 1950, was allowed by the Tribunal. The addition on account of the superior quality of sugar-cane was, however, not permitted by the Tribunal.

It is common ground that the questions stated have to be answered with reference to sub-rules (1) and (2) (a) of rule 23 of the Indian Income-tax Rules, 1922. The plain language of these sub-rules ends the matter and there can be no real doubt as to the answer to the questions propounded. They must all be answered in the negative. The two sub-rules run as follows :

"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 utilized 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 originally sold in the market in its raw state, or after application to it of tank 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."

The first sub-rule distinctly lays down that the market value of any agricultural produce which has been raised by the assessee and utilised as raw material in the assessees business shall be deducted in determining that part of the assessees income which is chargeable to income-tax; and that no further deduction shall be made in respect of any expenditure incurred by the assessee as a cultivator. The "market value" of the agricultural produce has to the determined in a accordance with Sub-rule (2). That sub-rule says that for the purposes of sub-rule says that for the purposes of sub-rule (1) the market value of the agricultural produce shall be deemed to be "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". Now, here the price of sugar-cane was fixed at Rs. 1-11-0 by the notification issued on 22nd December, 1950. By the other notification a rebate on account of transport was allowed only in respect of sugar-cane brought from distances exceeding ten miles from the factory. The assessees sugar-cane farms are all within a distance of six to eight miles from its factory. The first notification also expressly prohibited the assessee from making any deduction on account of transport. During the year previous to that in which the assessment was made the average price of sugar-cane sold was thus Rs. 1-11-0 per maund; and it is at this price that the market value of sugar-cane produced by the assessee had to be determined.

The matter is plain enough from the above rules. But Shri Mehta, learned counsel for the assessee, argued that under sub-rules, (1) and (2) the deduction had to be of the market value of the agricultural produce grown by the assessee and that as the notification dated 22nd December, 1950, by which the price of sugar-cane was fixed at Rs. 1-11-0 per maund did not allow the purchaser to make any deduction on account of transport and further as to assessee did incur an expenditure for transporting the sugar-cane from its farms, it could claim can addition on account of transport charges to the price of Rs. 1-11-0 for determinating the market value of its agricultural produce. It was said that transport charges could not be excluded from the market value of the produce. The contention cannot be accepted in the face of the clear language of sun-rules (1) and (2). Sub-rule (2) fixes a notional market value and not the actual "market value" of an agricultural produce and the fictional market value has to be calculated according to the average price at which it has been no sold. So, if the average price during the material period has been Rs. 1-11-0 and the purchase could not make any deduction at all on account of transport charges, the transport charges incurred by the assessee cannot be taken into account while determining the market value under Sub-rule (2). Again, sub-rule (1) expressly prohibits any deduction over and above the market value. It categorically says that no further deduction shall be made in respect of any expenditure incurred by respect of any expenditure incurred by the assessee as a cultivator. The assessee may be able to claim a deduction on account of transport charges under section 10 (2), but it cannot claim a deduction on that account under sub-ruler (1) and (2) of rule 23. The assessees claim in respect of an addition on account of the transport charges to the price of Rs. 1-11-0 fixed by the notification dated 22nd December, 1950, is altogether untenable.

The addition claimed on account of the alleged superior quality of the sugar-cane grown by the assessee is also unsubstantial. The argument of Shri Mehta was that the price of Rs. 1-11-0 per maund which had been fixed by the notification dated 22nd December, 1950, was of the sugar-cane produced by other cultivators and sold to the assessee; that the price so fixed did not take into account the quality of sugar-cane and it was certainly not the price of be sugar-cane produced by the assessee which was not sold in the market; and that therefore the market value of the sugar-cane produced by the assessee should have been determined not with reference to the price of Rs. 1-11-0 per maund fixed by the notification dated 22nd December, 1950, but on such evidence as the assessee might have produced to establish its market value. The argument ignores altogether the effect of Sub-rule (2) and is based on an assumption that the said sub-rule is for determining the market value of an agricultural produce not grown by the assessee but purchased by it. Sub-rule (2) is concerned with the determination of the market value of only that agricultural produce which is grown by the assessee and no other. Under sub-rule (1) the deduction made is in respect of the market value of any agricultural produce which has been raised by the assessee and utilized by him as raw material in his business. Sub-rule (2) contains a provision for determining the market value of such an agricultural produce. As the agricultural produce raised by the assessee is utilized as raw material in his business and not sold, it is clearly impossible to determine its market value on the basis of any "average selling", that is to say, the average selling price of the agricultural produce of any particular kind or quality raised by the assessee. As the agricultural produce raised by the assessee is not sold at all but utilized by the assessee as raw material, its market value can be determined only one a fictional basis. That is not sold at all but utilized by the assessee as raw material, its market value can be determined only on a fictional basis. That is why Sub-rule (2) uses the words "market value" shall be deemed to be". The deemed market value is clearly with reference to the value of the agricultural produce in general which is sold in the market and no with reference to the value of the agricultural produce of the particular kind and quality raised by the assessee. It is, therefore, altogether fallacious to say that under Sub-rule (2) it is permissible for the assessee establish by evidence the market value of the agricultural produce of the specific kind and quality raised by it and to ignore altogether the average price at which the agricultural produce concerned was in general sold. Under Sub-rule (2) the market value of an agricultural produce raised by an assessee must necessarily be determined according to the average price at which the agricultural produce in general was actually sold in the market. It is true that where an agricultural produce can be of different qualities and is sold at different rates according to its quality, them the average price of the produce general on a particular day will be mean of the daily average rates. But the notification dated 22nd December, 1950, did not fix different rates and the average price during a certain period will be the men of the daily average rates. But the notification dated 22nd December, 1950, did not fix different rates for-cane of different qualities. It fixed a flat rate for all sugar-cane purchased by the assessee-factory from the cultivators without any reference to the quality oil sugar-cane. It may be that a flat rate of Rs. 1-11-0 was fixed by the notification fair all kinds of sugar-cane deliberately on the footing that there was no difference in the quality of sugar-cane produced by the various cultivator in the region; or it may be a case of cases omissus. Whatever it maybe the notification having fixed a flat rate of Rs. 1-11-0 irrespective of the quality of sugar-cane, the price must govern the determination of the market value under sun-rule (2) of the sugar-cane grown by the assessee. On the language of sub-rules (1) and (2) rule 23 it is not open to the assessee to contend that the market value of sugar-cane raised by it is the real value of the produce and not the value calculated according to the price paid by the assessee for sugar-cane purchased from other towers. In our judgment, the assessee is not entitled to make any addition to the price of Rs. 1-11-0 fixed for sugar-cane under the notification dated 22nd December, 1950, on account of any superior quality of the sugar-cane grown by it.

9. For all these reasons our answer to all the three questions is in the negative. The departmental shall have the costs of these references. Counsels fixed at Rs. 200.

Questions answered in the negative.

Commissioner Of Income-Tax, M.P v. Bhopal Sugar Industries Ltd.

Structured Summary of the Opinion (Bhopal Sugar Industries Ltd. — Misc. Civil Cases Nos. 6 & 7 of 1961)

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Assessee's Arguments (as presented by Shri Mehta, counsel for the assessee)

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Commissioner Of Income-Tax, M.P v. Bhopal Sugar Industries Ltd.

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