TMI Blog1970 (3) TMI 32X X X X Extracts X X X X X X X X Extracts X X X X ..... . Aggrieved by this disallowance the petitioner-company preferred an appeal to the Appellate Assistant Commissioner, D-Range, Hyderabad, the respondent herein. During the course of hearing of the appeal the respondent expressed the view that the question of allowing any notional agricultural profit by way of exemption from the income returned does not arise on the correct application of the provisions of the Income-tax Act, and the Rules made thereunder. Being of that view, the respondent thereafter issued a notice No. I.T.A. Com. 18/67-68 dated 29th July, 1967, calling upon the assessee-company to show cause on or before August 24, 1967, why its income should not be enhanced by adding the following amounts : 1. Profit from agricultural operations 14,59,415 2. Provision for depreciation on fixed assets in the agricultural operations account 60,308 3. Expenses pertaining to the previous years 60,090 --------------- Total 15,69,813 --------------- It is stated that on July 29, 1967, the Appellate Assistant Commissioner expressed th e view that the sugarcane produced by the assessee-company on its own farm was utilized by it as raw material by its factory and ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istinct entity. It is also stated that separate accounts are maintained and separate balance-sheets are prepared for these operations, while the manufacturing establishment is treated as separate from the farm. The income derived from the agricultural farm is agricultural income not liable to tax while the income derived from the manufacture of sugar for which separate accounts and balance-sheets are maintained is subject to income-tax. The income from these two heads are distinct and are ascertainable without reference to one another. The sugarcane produced by the petitioner-company is not sold but is utilized for its sugar manufacturing business. As there is no sale of sugarcane produced by the asessee-company the respondents contended that the market value thereof cannot be exempted under rule 7 of the Rules, when there is no sale, no hypothetical estimate of the agricultural income of the assessee-company could be made and deduction be allowed. It is also contended that rule 7 has no application as according to them the income returned by the assessee is not "derived in part from agriculture and in part from business". In view of section 295(2)(b), the respondent pleaded that r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resaid, 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 Income-tax Officer finds, having regard to all the circumstances in each case, to represent a reasonable profit." Agricultural income is defined in section 2(1) of the Income-tax Act, 1961, as follows : " 2. (1) Agricultural income means- (a) any rent or revenue derived from land which is used for agricultural purposes and is either assessed to land revenue in India or is subject to a local rate assessed and collected by officers of the Government as such ; (b) any income derived from such land by- (i) agriculture ; or (ii) the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by a cultivator or receiver of rent-inkind to render the produce raised or received by him fit to be taken to market ; or (iii) the sale by a cultivator or receiver of rent-in-kind of the produce raised or received by him in respect of which no process has been performed other than a process of the nature described in paragraph (ii) of this sub-clause ..." It is submitted in the counter tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e exemption of the price so paid for the purchase or sugarcane in calculating the income for which the assessee-company is liable to be assessed to tax. The price received by the growers-of sugarcane is admittedly not liable to tax for it is their agricultural income althoug that sugar cane also serves as raw material for the production of sugar in the factory. If that be so, the sugarcane produced by the assessee-company which was also used as raw material in its own factory, must also have certain value and the value thereof would be its agricultur al income within the meaning of section 2(1)(b) of the Act. That agricultural income is mingled with the income derived by the factory from the production of Sugar by utilising that sugarcane as raw material for the production of sugar. The sugar that is ultimately produced by the factory is from the raw material (s arcane) raised by the assessee-company on its own farm and also purchased by it from other growers. That agricultural income is thus inextricably mixed up with the income dei ived by the assessee-company by the sale of sugarcane produced by it. The amount realised by the sale of sugar represents not only the income derived ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carried on by the assessee himself. In other words, it deals with cases where there is no sale of the agricultural produce raised by the assessee but is ploughed into the business carried on by it as raw material. That being so, to contend that rule 7 cannot apply except when there is a sale, is to nullify the purpose for which it is framed and to defeat the object it is sought to achieve. Obviously, when the assessee raises agricultural produce and uses it as raw material, there cannot be a sale by the assessee to the assessee himself ; but yet the agricultural produce raised by the assessee would constitute agricultural income within the meaning of section 2(1) of the Act and this income is not liable to tax. It is precisely because that income is ploughed into the business as raw material and the ultimate profits or gains of the business comprises partly of this agricultural income which was ploughed into it in the form of raw material, the necessity to calculate the quantum of this agricultural income arises, for agricultural income has to be excluded under section 10(1) of the Act in computing the assessee's total income that is liable to tax. If the income derived by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t price. If it is not ordinarily marketable, the cost required to be incurred for raising it together with a reasonable margin of profits is fixed as the basis for calculating the market value that has to be exempted as "agricultural income". Thus, in view of the above rule to determine whether a particular income from the agricultural produce is agricultural income or not, it is not necessary that there should be a sale. In Dooars Tea Co. Ltd. v. Commissioner of Agricultural Income-tax , their Lordships of the Supreme Court considered the question whether agricultural produce itself is " agricultural income" within the meaning of clause (i) of section 2(1)(b) of the Bengal Agricultural Income-tax Act (IV of 1944). Under that Act de agricultural income " was defined somewhat in similar terms as it is defined in the Income-tax Act, 1961. Section 2(1)(b)(i) of that Act reads as follows : "Any income derived from such land by- (i) agriculture, or (ii) the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render the produce raised or received by him fit to be taken to market, or (iii) the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the context which would justify the importing of the concept of sale in the relevant clause, but as we have just indicated the indication provided by clauses (ii) and (iii) is all to the contrary. What this clause seems clearly to have in view is agricultural produce itself which has been used by the assessee. In the present case, it is common ground that the appellant has utilised for its business the agricultural produce in question and we feel no difficulty in agreeing with the High Court when it held that the agricultural produce utilised by the appellant for its business constitutes income under section 2(1)(b)(i). If the agricultural produce used by the appellant was not intended to be included within the definition of income under section 2(1)(b) we apprehend that the whole clause would have been very differently worded. Where income deived from sale was intended to be prescribed the legislature has done so in terms by clause (iii) of section 2(1)(b). Where the marketable condition of the produce resulting from the employment of the specified processes and income derived from the adoption of such processes was intended to be included in the income the legislature has done ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which the assessee obtains benefit of the commodity may be deemed to give rise to income." In view of the above, their Lordships in that case held that merely because the assessee herein received produce of his plantations in the earlier years, he could not be said to have earned any "agricultural income" .That produce was held to have yielded agricultural income in the year in which it was sold. According to the assessee in that case the agricultural produce was raised by him in several years but was sold only in the previous year ; he was, therefore, held to have realised the " agricultural income " only in the year in which he sold that produce and not in the year in which he raised it. While holding so the Supreme Court laid down that consumption of such agricultural produce or its use for the business of the assessment would also render that produce as "agricultural income." These two decisions of the Supreme Court clearly lay down that the sale of agricultural produce is not necessary in order that the agricultural produce may be held to have yielded an income. It was enough if the agricultural produce is either disposed of by sale or by its use in the manufacture or oth ..... X X X X Extracts X X X X X X X X Extracts X X X X
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