Madhava Reddy, J.
1. The Nizam Sugar Factory Ltd., Hyderabad, the petitioner herein (hereinafter referred to as 'the assessee-company') filed the return of its income for the year 1962-63 claiming therein an exemption of Rs. 3,01,34,942 as income from agriculture calculated under Rule 7 of the Income-tax Rules, 1962. The Income-tax Officer, however, allowed an exemption of only Rs. 2,95,99,969. 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 :
Rs.1.Profit from agricultural operations14,59,4152.Provision for depreciation on fixedassets in the agricultural operations account60,3083.Expenses pertaining to the previous years 60,090
2. It is stated that on July 29, 1967, the Appellate Assistant Commissioner expressed the view that the sugarcane produced by the assessee-company on its own farm was utilized by it as raw material by its factory and therefore no exemption could be given in respect of the market value of that sugarcane. In the notice also he referred to the discussion which he had with the representative of the petitioner-company. In these circumstances, the petitioner-company alleges that the Income-tax Officer had already formed an opinion against the assessee and that, therefore, no useful purpose would be served by making any representations to him in pursuance of his notice. It is claimed by the petitioner-company, that its income is comprised partially of profits and gains of business and partially of agricultural income. As the agricultural income which comprises of sugarcane produced by the assessee-company is used as raw material for the production of sugar which is the business carried on by the petitioner-company, the income-tax authorities are bound to grant exemption of this income under Rule 7, read with Section 2(1) and Section 10(1) of the Act 43 of 1961, in determining the taxable income. The assessee-company claims that it is entitled to the exemption of the total market value of the agricultural produce raised and utilized by it as raw material in the business carried on by it, the income from which business is assessed to tax under the head of profits and gains from business. It is contended that the Appellate Assistant Commissioner is acting without jurisdiction and illegally in proposing to include the agricultural income earned by the assessee-company and that imposition of tax on agricultural income violates Article 246(1) of the Constitution of India. The petitioner apprehends that if the respondent is allowed to proceed to revise the assessment, various complications would arise and the assessee-company would be burdened with the liability of paying a heavy tax which is not legally due and the imposition of which is wholly unconstitutional. The assessee-company has therefore invoked the jurisdiction of this court for the issuance of a writ of prohibition or any other appropriate writ or direction restraining the respondent from taking further action in pursuance of the aforesaid notice.
3. In the counter-affidavit filed on behalf of the respondent, it is stated that for the convenient and profitable conduct of its business the assessee-company operates a farm where it raises sugarcane. It is, however, contended that the farm is a separate establishment and is run as a distinct 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 as 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 assessee-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 Rule 7 would apply only where the income is partly from agriculture and partly from business and not otherwise. It is also further averred that the Appellate Assistant Commissioner had merely formed a prima facie opinion at the time of issuing the impugned notice and it was still open to the assessee-company to make its representation and satisfy that it was entitled to exemption under Rule 7 of the Income-tax Rules, 1962. On that ground it is urged that the assessee-company is not entitled to invoke the extraordinary jurisdiction of this court.
4. In view of the arguments advanced by the learned counsel the first question that falls for consideration is whether the income of the petitioner-company comprises of partly agricultural income and partly of profits and gains of business.
5. Rule 7 of the Income-tax Rules, 1962, lays down the method of determination of income where income of an assessee comprises partly of agricultural income and partly of business income and where such assessee uses this agricultural produce as raw material for the business carried on by him. Rule 7 reads as follows :
'7. 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 income chargeable to income-tax under the head 'profits and gains of 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 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 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 Income-tax Officer finds, having regard to all the circumstances in each case, to represent a reasonable profit.'
6. 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-in-kind to render the produce raised or received by him fit to be taken to market; or
(iii) the sale by a cultivator or receiver or 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. . .'
7. It is submitted in the counter that the exemption that is now claimed is in respect of the agricultural produce raised by the assessee-company on its farm. As agricultural income defined under Section 2(1)(b) of the Act also includes any income derived from such land by agriculture, the sugarcane raised by the assessee-company would be agricultural income. If nothing further was done by the assessee-company, it is not disputed by the respondent, that this agricultural produce or income would not be liable to tax in view of Section 10 of the Act which lays down that in computing the total income of a previous year of any person, any income falling within any of its Clauses, Clause (1) of which refers to agricultural income, shall not be included.
8. Mr. Anantha Babu, learned standing counsel for the revenue, however, contended that the agricultural farm operated by the assessee-company and the sugar factory as such are two distinct entities maintaining separate accounts and preparing separate balance-sheets and, therefore, the income derived by the sale of sugar produced by it cannot be deemed to be partly comprised of agricultural income and partly of business income. In view of the admitted facts in this case, we are unable to agree with this contention. As already pointed out, when it is admitted in the counter-affidavit that the assessee-company operates a farm where it raises sugarcane only for the convenient and profitable conduct of its business, it is difficult to hold that it is entirely a separate establishment unconnected with the production of sugar. Merely because accounts are maintained separately for the farm and separate balance-sheet is prepared, it cannot be held that the agricultural farm has no connection whatsoever with the main business of production of sugar carried on by the assessee-company. Nor does the sugarcane production by the assessee-company on its farm cease to be agricultural income merely because that income is ploughed into the sugar factory as a raw material for the production of sugar. For the production of sugar, the assessee-company admittedly purchases the sugarcane from other growers in the factory zone and it has to pay such price as is agreed to between the assessee-company and the growers of sugarcane which prices shall not be less than the minimum price fixed by the Government in this behalf. It is not disputed that the petitioner is entitled to the exemption of the price so paid for the purchase of sugar-cane 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 although 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 thereof would be its agricultural 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 (sugarcane) 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 derived 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 from the operation of the factory but also of the farm in which the raw material was produced. Merely because separate accounts are maintained by the assessee-company for the agricultural farm and sugar factory as such, the farm income derived does not cease to be agricultural income and become solely profits and gains of business. The assessee-company, for a better management of its various activities, may maintain separate accounts so that it may be able to ascertain as to whether a particular activity is carried on profitably or not. That by itself does not make it a totally different venture unconnected with the business. The agricultural income may be ascertainable from the accounts separately maintained by it, still, in these circumstances, it cannot be said that that income has been kept separately and carried on as an' activity unconnected with the production of sugar, for, even as admitted by the respondents, it is for the 'convenient and profitable conduct of its business' that it (assessee-company) operated a farm. That being so, it must be held that the income of the assessee-company comprises partly of agricultural income as defined in Section 2(1) and partly of income chargeable to income-tax under the head 'profits and gains of business'. The two incomes are not wholly distinct items of income unconnected with each other. In our opinion, the separate maintenance of accounts by the assessee-company does not lead to any different conclusion. The contention of Mr. Anantha Babu that Rule 7 has absolutely no application must, therefore, be rejected.
9. The next contention on behalf of the department is that there is no sale of sugarcane by the assessee-company and unless there is a sale the assessee-company cannot claim exemption of the market value of the agricultural produce raised by it in the determination of income chargeable to tax and that, therefore, the claim of the assessee-company must be rejected. We are unable to agree with this contention.
10. Rule 7, which has been extracted above, occurs under the head 'D.--Special Cases' in part II of the Rules relating to determination of income for the purpose of assessment of tax where the income of the assessee is derived partly from agriculture and partly from business and where the agricultural produce which forms the agricultural income is not sold but is utilised as raw material for the business 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 assessee-company is determined without excluding this income, then it would have comprised of not merely the income derived' from business but also partly of agricultural income which has to be excluded under Section of the Act and the taxation of which is also not within the competence of the Union. Charging any portion of the agricultural income to income-tax would be violative of Article 246(1) of the Constitution of India. If the agricultural income has to be excluded, by the mere fact that there has been no sale of the agricultural produce by the assessee, the income-tax authorities are not entitled to include that in the taxable income of the assessee. It is for this very reason that Rule 7 prescribes as to how the agricultural income is to be determined. If there were to be a sale of agricultural produce raised by the assessee-company the amount realised by such sale could have been easily ascertained and excluded even if the accounts were mixed up. It is only where there is no sale by the assessee-company that the rule lays down that the market value of such agricultural produce shall be deducted. For the determination of the market value, in Rule 7(2), the agricultural produce is divided broadly into two categories, (1) that agricultural produce which is ordinarily sold in the market in its raw state, and (2) that agricultural produce which is not ordinarily so sold. It is not in dispute that sugarcane is an agricultural produce which is ordinarily sold in the market in its raw state. In fact, most of the growers in all the factory zones sell sugarcane in its raw state to the factories. The market value of the sugarcane could, therefore, be calculated at the average price at which it was sold during the relevant previous year as laid down in Rule 7(2)(a) of the Rules. For the purposes of Rule 7, it is not necessary that the agricultural produce raised by the assessee should be sold. In fact, Rule 7 applies only to cases where such agricultural produce is utilised by the assessee as raw material for the business carried on by him and not when such produce is sold. Whether such produce is sold or not it has some value. The utilisation of this produce as raw material tantamounts to purchase of such raw material for the manufacture of sugar. The value thereof has to be ascertained. If it is marketable agricultural produce, it is according to the market 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, : 44ITR6(SC) . 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 '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 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 item (ii).'
11. In that case a large tract of land under lease from the local Government grew bamboos, thatching grass and fuel timber by agricultural operations which were carried on by its servants and labourers. After they were grown they were not sold but were utilised by the appellant for the purpose of its tea business. Their Lordships of the Supreme Court held :
'.... that the agricultural produce used by the appellant in its business constituted agricultural income under Section 2 of the Bengal Agricultural Income-tax Act, 1944.'
12. Their Lordships of the Supreme Court also considered Rule 4(2) of the Bengal Agricultural Income-tax Rules, 1944, which is as follows :
'4. (2) If the agricultural produce has not been sold in the market, the market value shall be deemed to be-
(a) where such produce is ordinarily sold in the market in its raw state, or after the performance 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 such produce has been so sold in the locality during the previous year in respect of which the assessment is made ;
(b) where such produce is not ordinarily sold in the market in the manneer referred to in Sub-clouse (a), 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 Agricultural Income-tax Officer finds, having regard to all the circumstances in each case, to represent a reasonable rate of profit on the sale of the produce in question as agricultural produce.'
13. Their Lordships held that Rule 4(2) of the Rules applies to agricultural produce which was not sold and that the value of the agricultural produce utilised by the appellant in its business had to be ascertained under that Rule. In coming to the conclusion, their Lordships observed as follows ':
'Is there anything in the context which requires the introduction of the concept of sale in interpreting this clause as suggested by the appellant In our opinion this question must be answered in the negative. Not only is there no indication 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 derived 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 so by Clause (ii) ; and so those two cases having been specifically provided for by the two respective Clauses there would be no justification for introducing the concept of sale in construing Clause (i) of Section (2)(1)(b). The words in Section 2(1)(b)(i) are, in our opinion, wide, plain and unambiguous and they cannot be construed to exclude agricultural produce used by the appellant for its business.'
14. Mr. Anantha Babu, however, argues that the observation of the Supreme Court was based only on Rule 4(2) of the Rules in which the procedure to calculate the market value of the agricultural produce where it was not sold in the market was laid down required to be calculated (sic). That does not, however, appear to be correct for their Lordships held independently of Rule 4 that the words under Section 2(1)(b)(i) were wide, plain and unambiguous', and they cannot be construed to exclude agricultural produce used by the appellant for its business. As already discussed, above Rule 7 of the Income-tax Rules also is calculated to meet a situation where there has been no sale and where the agricultural produce raised by the assessee has been utilised by it as a raw material for its business. In S.S. Rajalinga Raja v. State of Madras, : 63ITR617(SC) the Supreme Court affirmed the view expressed by it in Dooars Tea Co. Ltd. v. Commissioner of Agricultural Income-tax. In that case, dealing with a case arising under the Madras. Plantations Agricultural Income-tax Act, 1954, the Supreme Court held :
'Section 3 of the Act read with the definition of 'agricultural income' charges to tax the monetary return either as rent or revenue or as agricultural produce from a plantation. The expression 'income' in its, normal connotation does not mean mere production or receipt of a commodity which may be converted into money. Income arises when the commodity is disposed of by sale, consumption or use in the manufacture or other processes carried on by the assessee qua that commodity. There is no reason to think that the expression 'income' has any other connotation in that Act. A tax on income whether agricultural or non-agricultural is, unless the statute otherwise provides, a tax on monetary return--actual or notional ..... It is not necessary, however, for income to accrue that there must be a sale of a commodity : consumption or use of a commodity in the business of the assessee from which the assessee obtains benefit of commodity may be deemed to give to income.'
15. 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.'
16. 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 other process carried on by the assessee to make it 'agricultural income'.
17. In view of the above dicta of the Supreme Court we must hold that the sugarcane raised by the assessee-company became its 'agricultural income' when it used it as a raw material for the manufacture of sugar. The assessee-company was, therefore, entitled to the deduction of the market value of such sugarcane in accordance with Rule 7(2) of the Rules :
In view of above, the Appellate Assistant Commissioner must be held to have acted without jurisdiction in issuing the notice to show cause why profit from agricultural operations should not be included in the taxable income of the assessee-company and, therefore, must be restrained' from proceeding further pursuant to the said notice. The question as to whether the appellant is entitled to a deduction of Rs. 3,01,34,942 or only an amount of Rs. 2,95,99,969 is a matter which requires to be determined in the appeal preferred by the assessee-company. It would be open to the Appellate Assistant Commissioner to consider that question and dispose of the same on merits. But so far as the proceedings which he proposes to take pursuant to the impugned notice are concerned they are wholly without jurisdiction and cannot be allowed to continue.
18. In the result the writ petition succeeds and is accodingly allowed with costs. Advocate's fee Rs. 200.