TMI Blog1997 (7) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... ts made by the assessee from the sale of sugar arise out of agricultural activities as well as 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 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 fra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in 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 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 has to be excluded from the 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 1,200 tons per day, the sugarcane grown by the assessee was not adequate for its requirements. 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 regi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a) will apply. If not, rule 7(2)(b) will apply. The question, therefore, is, was sugarcane ordinarily sold in the market in its 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. 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 the 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 qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, 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 Motihari jail was not a commercial activity at all. Courtney-Terrell, C.J., explained the position thus : " The object of the manufacture in jails 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 that case that purchase of aloe leaves by jails in an artificial condition had no relation to a market for agricultural produce. But in the case before us, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1966] 1 QB 247 (CA), in the following words : " What is meant by 'market value' ? 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 though 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 and sellers congregate to buy and sell goods must exist. In the instant case, the assessee-company actually bou ..... X X X X Extracts X X X X X X X X Extracts X X X X
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