THIRU AROORAN SUGARS LTD., MADRASversusCOMMISSIONER OF INCOME TAX, MADRAS

            THIRU AROORAN SUGARS LTD., MADRAS                                  A
                                     v.
           COMMISSIONER OF INCOME TAX, MADRAS
                                              .
                              JULY 20, 1997

             [SUHAS C. SEN AND S.P. KURDUKAR, JJ.]                             B

      Income Tax Act 1961: Sections 2(1-A) & 10(1)-Agricultural income
to be excluded f omt total income of assessee.

    . Section 295(2)(b)-fncome de1ived partly from agriculture and partly C
from business-Computation of income-Liable to be taxed.

       Income Tax Rules 1962: Rule 7(1)-Computation of income charge-
able to income tax-Market value of agricultural produce used as raw material
in busines:r-To be deducted.
                                                                               D
      Rule 7(2)(a}-Market value-Detemiination of-Average price during
relevant previous year--Of goods ordinarily sold in the market-To be deemed
market value.

      Sugarcane Control Order : Regulation of production, distribution and
plice of sugarcane-Whether sugarcane ceases to be an agricultural produced E
'ordinarily sold' in the market?-No.

      Words and Phrases : 'Market and 'ordinarily sold'-Meaning o~In the
context of Rule 7 of the Income Tax Rules 1962 :

      The assess.ee company engaged in the manufacture of sugar, cul- F
tivated sugarcane in its own cane fields. The entire quantity of sugarcane
produced by the assessee was consumed by the assessee itself. The assessee
also purchased raw sugarcane for crushing from the market, as the
quantity produced by it was not adequate for its requirement. During the
period relevant for assessment years 1962-63, 1966-67 and 1967-68, when G
the Sugar-cane Control Order was in force, the quantity of sugarcane
purchased by the assessee, from registered and non registered ryots far
exceeded that produced by it.

     The contention of the assessee was that since at the relevant time the
sugar-cane prices were controlled by the Sugar-cane Control Order, the H
                                   151
    152                  SUPREME COURT REPORTS [1997] SUPP. 3 S.C.R.
A market value of the sugarcane produce, to be deducted from its income
    chargeable to income tax, was to be determined not according to clause (a)
    but as per clause (b) of sub-rule 2 of rule 7 of the income tax rules.
    Upholding this contention, the Tribunal took the view that sugarcane could
    not be treated as agricultural produce ordinarily sold in the market,
B   during the relevant previous years.

          Taking a contrary view the High Court held that merely because the
    market for sugar-cane was regulated by the Sugar-Cane Control Order,
    the product itself did not cease to be an agricultural produce ordinarily
    sold in the market, and therefore the market value of the sugarcane
C   produced by the assessee had to be computed in the manner laid down in
    Rule 7(2)(a). Aggrieved by this, the assessee company preferred ihe
    present appeal.

        It was argued on behalf of the assessee that rule 7(2)(a) is applicable
D only where there exists an actual market where sugarcane is ordinarily
  sold and where buyers and sellers congregate for the sale and purchase of .
  goods, and that the market value of goods could not be determined in the
  absence of such a market.

          Dismi.ssing the appeal and upholding the decision of the High Court,
E this Court
         HELD : 1. The High Court has come to a right decision in holding
    that Rule 7(2)(a) was applicable in this case. The market value of the
    sugarcane produced and consumed by the assessee company was to be
    computed accordingly. [157-A]
F
        2. The product itself does not lose its identity or nature or character
  of an agricultural produce sold in the market merely because the price,
  distribution, production and relationship between the grower and pur-
  chaser thereof, were subject to elaborate government/regulations.
G                                                                    [156-G-H]
        2.1. The assessee was itself purchasing sugarcane for its manufac-
  turing purposes in the ordinary course of business. Thus, raw sugarcane
  was ordinarily sold in the market within the framework of Govt. regula-
  tions and the market value of the same had to be determined as provided
H in rule 7(2)(a). [158-E]
               1HIRU AROORAN SUGARS LID. v. C.l.T.                       153

      3. For determining the market value of the sugarcane produced by A
the assessee, the fact that the price of such goods was controlled was
immaterial. The price at which the assessee bought sugarcane must be
taken as the market price. [160-F]

      3.1. If the price is controlled by government regulations, the control-
led price at which the buyer and seller are reasonably expected to transact     B
business, will be taken as the market price. [160-G] .

       4. 'Market' in the context of Rule 7 does not mean an open market
where buyers and sellers congregate to buy and sell goods. To apply Rule
7 (2)(a) it is sufficient that the product is bought and sold for a price, in   C
the ordinary course of business. (157-E-F]

      4.1. The place of sale or purchase or delivery of the goods is im-
material for deciding whether there was a market for sugarcane or not.
The position would not differ even if the assessee is the only buyer in the
region where its factory is located. [160-E; H]                                 D

      Ahmed G.H. Arif! & Ors. v. CWT, Calcutta, 76 ITR 471, relied on.

     Gift Tax Officer, Calcutta & Am: v. Kastur Chand Jain, 53 ITR 411,
approved.
                                                                                E
     J.M. Casey v. CIT, Bihar & Orissa, AIR (1930) Patna 44, distin·
guished.

      Building & Civil E11gi11ee1i11g Holidays Scheme Management Ltd. v.
Post Office, (1966) 1 QB 247, referred to.                                      F
     CIVIL APPELLATE JURISDICTION : Civil Appeal No. 6635 of
1983 Etc. Etc.

     From the Judgment and order dated 7.12.82 of the Madras High
Court in T.C. No. 373 of 1977.                                                  G

      F.S. Nariman, R.F. Nariman and P.H. P,arekh for the Appellants.

      T.L.V. Iyer for the Respondent.

      The Judgment of the Court was delivered by                                H
    154                    SUPREME COURT REPORTS [1997] SUPP. 3 S.C.R.

A          SEN, J. The assessment years in this group of appeals (C.A. No.
    6636/83, 6637/83, 6638/83, 6639/83, 6640/83 and 175-77/85) are 1962-63 to
    1967-68. The assessee-company, Thiru Arooran Sugar Ltd., is a manufac-
    turer of sugar which purchases sugarcane from the market for crushing. It
    also has its own cane fields where it cultivates sugarcane which is entirely
B   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
C   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
    mcome.

          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
D   previous year of any person under the Income-tax, 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
E   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-

F            (1) In the case of income which is partially agricultural income as
             defined in section 2 and partially income chargeable to income-tax
             under head "Profits and gains of business", in determining the part
             which is chargeable to income-tax the market value of any agricul-
             tural produce which has been raised by the assessee or received
             by him as rent-in-kind and which has been utilised as a raw
G
             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.

H             (2) For the purposes of sub-rule (1) "market value" shall be deemed
          THIRU AROORAN SUGARS LTD. v. C.l.T. [SEN, J.]                   155
        to be -                                                                  A
             (a) Where agricultural produce is ordinarily sold in the
             market in its raw state, or after application to it of any
             process ordi11arily 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 B
             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 process
             aforesaid, the aggregate of -
                                                                                 c
             (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        D
                     regard to all circumstances in each case, to 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 E
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 F
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 deter-
mined in the manner laid down in sub-rule (2)(b) of Rule 7. The contention G
of the Revenue is that the procedure laid down in clause (a) of sub-rule
(2) will be the right procedure to follow. The Tribunal was of the view that
the procedure laid down in clause (b) had to be resorted to because the
price of sugar was controlled by the Sugarcane Control Order at the
material time. The High Court was of the view that the Sugarcane Control
Order notwithstanding there was a market for sugarcane and even if the H
    156                   SUPREME COURT REPORTS (1997] SUPP. 3 S.C.R.

A assessee consumes the entire quantity of sugarcane raised by it the market
    price of such sugarcane is ascertainable and this price has to be excluded
    from profit 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
B
  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
C 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.
D The Tribunal was of the view that sugarcane could not be treated as
  agricultural produce ordinarily sold in the market during the relevant
   pervious 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).
E
         The High Court took a contrary view. The High Court took note 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
F 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
G 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 regulation, it could not be said that the product
H itself lost either its identity or its nature or its character of an agricultural
           TIIIRU AROORAN SUGARS LTD. v. C.I.T. [SEN, J.]                157

produce sold in the market. The High Court held that Rule 7(2)(a) will          A
clearly apply in this case and market value r:>f 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.         B
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,      C
than it was producing, from registered and unregistered ryots.

       Mr. Nariman on behalf of the assessee had 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 when   D
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 E
Rule 7 does not inean an open market where buyers and sellers get
together for the purpose of purchase and sale of goods. The assessee-com-
pany 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 F
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.
                                                                                G
      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 utilises
sugarcane grown by it in its own field for its factory and also purchases a H
    158                  SUPREME COURT REPORTS (199 /)SUPP. 3 S.C.R.

A considerable amount of sugarcane from outside. Therefore, it is not the
    case of the 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
B 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 marked for sugarcane. In the facts 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
C   this Contention, Mr. Nariman relied on a Special Bench decision of the
    Patna High Court in the case of J.M. Casey v. Commissioner of Income-ta.x,
    Bihar & Orissa, AIR (1930) Patna 44.

          This argument again is misconceived. The place where the sugarcane
D 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 doorsteps. The point that has to be borne is mind is that in order
    to apply Rule 7(2)a), existence of an open market where buyers and sellers
E   come together to do business is not an esser•.ial 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.
F 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 a real centre
  of economic exchange. The implication of this observation has to be
  understood in the facts of that case. Motihari Jail purchased aloe plants,
G the principal use of which was to provide hedges. Manual production of
  fibre out of these plants involved a very rough, laborious and uneconomic
  procedure. Motihari Jail bought a small quantity of 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.
H Courtney Terrel, C.J. explained the position thus :
            TillRU AROORAN SUGARS LID. v. C.l.T. (SEN, J.)                   159

         "The object of the manufacture in jails is not the conducting of an A
         economic process which shall render profitable the cultivation of
         the aloe plant but merely to keep the pr:rnners employed on
         sufficiently laborious arid punitive work."

         It was held in the facts of that case that purchase of aloe leaves by B
  jails in an artificial condition had no relation to a 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.                                                C

       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 D
 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. v. Kastur Chand Jain, 53 ITR 411, E
 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, and section 7(1) of the Wealth-Tax
          Act, 1957. The valuer has to find "the price which .... .it would fetch   F
          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. Arif! & Ors. v. Commissioner of Wealth-
Tax, Calcutta, 76 ITR 471 explaining the phrase "if sold in the open market" G
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 H
    160                     SUPREME COURT REPORTS [1997] SUPP. 3 S.C.R-

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 the market price there has to be an
    actual market where there will be 'a concourse of buyers and sellers'. This
B   argument was specifically rejected by Lord Pearson L.J. in the case of
    Building and Civil Engineering Holidays Scheme Management Ltd. v. Post
    Office, (1966) 1 QB 247 in the following words :

            "What is meant by "market value"? It is not reasonable to suppose
C           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."

D 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"
E            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 though
             one or both may be hypothetical rather than real''.

F          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 the market value, there is no pre-requisite that an open market where
    buyers and 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 year after year in ordinary course of business. The price
G   at which it buys sugarcane must be taken to be 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 willing seller are expected to transact business. As Lord Denning pointed
    out, it does not make any difference to this position that the assessee was
H   the only buyer in the region where its factory located.
           TIIIRU AROORAN SUGARS LTD. v. C.l.T. [SEN,J.)                161

      In the facts of this case, we are of the view that the High Court has    A
come to a right decision. The appeals are without any merit and are
dismissed. There will be no order as to costs.

CA. No. 3674/1989, CA. No. 2399 (NT)/1989 and S.L.P. No. 2611/1988

                                                                               B
       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 inves-
tigate those facts.

       It is not possible to accede to this prayer. Certain questions of law   C
on the basis of the facts and circumstances found by the Tribunal have been
referred to the High Court for its opinion. The High Court has given 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 facts found by the Tribunal. It was for the assessee ·to raise      D
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 any difficulty in   E
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.
                                                                               F
       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.

R.C.                                           Appeals/Petition dismissed.     G