Obul Reddi, C.J.
1. In this reference at the instance of the revenue, thequestion that calls for determination is whether the assessee is entitled toclaim the entire transport charges of sugarcane grown in its own farm as part of its manufacturing expense. The answer to this question depends upon the construction to be placed on Rule 7 of the I.T. Rules.
2. Rule 7 to the extent material reads:
'7. (1) In the case of income which is partially agricultural income asdefined in Section 2 and partially income chargeable to income-tax underthe head ' Profits and gains of business ', in determining that part which ischargeable to income-tax the market value of any agricultural producewhich has been raised by the assessee or received by him as rent-in-kindand which has been utilised as a raw material in such business or the salereceipts of which are included in the accounts of the business shall bededucted, 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.'
3. The case of the revenue is that the assessee, Nizam Sugar Factory, isentitled to the cost of sugarcane as per the market value and that themarket value has already been fixed by the Government of India. Therefore, no further deduction on account of transport charges should be allowed.Rule 7 disallows expenditure incurred by the assessee as a cultivator orreceiver of rent-in-kind. The expenditure incurred by the assessee towardstransporting sugarcane from the fields to the assessee-factory is not anexpenditure incurred by the cultivator for raising sugarcane or cultivatingit. The assessee, apart from purchasing sugarcane from the ryots, has itsown lands where it grows sugarcane and transports sugarcane to its ownfactory. There is no dispute regarding the fact that the price of sugarcaneper ton has been fixed by the Government of India. If sugarcane is notdelivered at the factory, the cost of sugarcane will be less. In other words,under the notification issued by the Government, lower price is fixed toryots who do not deliver sugarcane at the factory gate, that is to say, themarket rate is fixed having regard to the place of delivery. So far as thepayment of cost of sugarcane to the ryots is concerned, the cost of transport is allowed to be deducted. That being the case, we see no reason whythe assessee who is also a cultivator of sugarcane should be treateddifferently from other ryots. The assessee would, therefore, be entitled todeduct transport charges from the cost of sugarcane supplied by it to itsown factory. Rule 7 contemplates, as rightly pointed out by the Tribunal,adoption of market rate in the case of an assessee who is also utilising rawmaterials for manufacturing activity. The deduction claimed by the assesseeis in conformity with Rule 7. The expenditure in respect of which deductionis claimed relates to the business of the assessee. The expenditure incurredby the assessee is as an ordinary businessman or a manufacturer and in thecourse of its business of production of sugarcane.
4. In the result, the reference is answered in the negative and in favour of the assessee. There will be no order as to costs. Advocates' fee Rs. 250.