The Income-tax Appellate Tribunal, Bombay, has as required under section 66(2) of the India Income-tax Act, 1922, stated the case and referred to this court for its opinion the following question of law :
'Whether, on the true construction of rule 23 of the rules framed under the Indian Income-tax Act, 1922, and the Government Notification No. S. R. O. 3419 dated November 22, 1955, the rebate allowed under that notification can be taken into account in fixing the average price of sugarcane under the said rule ?'
The material facts, as appearing from the statement of the case, are these : The assessee is a public limited company carrying on the business of manufacture and sale of sugar which is produced in its factory at Sehore. It has its own farm for growing sugarcane but the produce is not sufficient to meet its requirements. Therefore, it has to purchase sugarcane from other farms in the neighbourhood. The assessment year are 1956-57 and 1957-58, the corresponding account periods being October 27, 1954, to November 14, 1955, and November 15, 1955, to November 2, 1956. By a notification No. S. R. O. 3419, dated November 22, 1955, the Government of India, in exercise of the powers conferred on them under clause 3 of the Sugarcane (Control) Order, 1955, fixed Rs. 1-7-0 per maund as the minimum price to be paid by the producer of sugar for sugarcane to be delivered at the factory gate. The notification further provided for a rebate of 3 pies per maund per mile subject to a maximum of annas 0-3-0 per maund for sugarcane taken by the producer by road on his own transport from the purchasing center. This notification governed both the years 1956-57 and 1957-58. For determination of income chargeable to tax in these years, the assessee claimed to deduct the market value of sugarcane grown by it in its own farms at the rates given below :
Rate fixed by Government
1-7-0 per md.
1-7-0 per md.
Average transportation charge
0-3-4-61 per md.
0-2-1-24 per md.
Difference of 15% on account of superior quality
0-3-10-80 per md.
0-3-9 per md.
1-14-3-41 per md.
1-12-10-24 per md.
The Income-tax Officer disallowed the transportation charges and the difference claimed on account of quality. Since the price of sugarcane as fixed by the relevant Government notification was Rs. 1-7-0 per maund at the factory gate, with a rebate for purchase at the outlying centers to the extent of a maximum of 3 annas per maund, the Income-tax Officer took the view that the market value had to be computed at the rate fixed by the aforesaid assessee for purchases made by it from other growers at the various outlying centres. According to the Income-tax Officer, this came to Rs. 1-4-11-15 per maund for the year 1956-57 and Rs. 1.312 per maund for the year 1957-58. The Appellate Assistant Commissioner, however held that the assessee was entitled to get the market value determined on the basis of Rs. 1-7-0 per maund as the market value of sugarcane, the minimum fixed by the Government notification. Being aggrieved, the department took the matter to the Tribunal, which set aside the orders passed by the Appellate Assistant Commissioner and affirmed those of the Income-tax Officer. As already indicated, this reference was then made at the instance of the assessee who had, upon refusal by the Tribunal, moved this court for that purpose under section 66(2) of the Act.
Having heard the counsel we have formed the opinion that the conclusion reached by the Appellate Assistant Commissioner is correct. As the question referred to us itself shows, it has to be determined upon a construction of rule 23 of the Rules framed under the Indian Income-tax Act, 1922, and the Government notification No. S. R. O. 3419, dated November 22, 1955. The relevant provisions of rule 23 are :
'(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 business in determining that part 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 incurred by the assessee as a cultivator or rent in kind.
(2) For the purpose of sub-rule (1), market value shall be deemed to be :-
(a) Where agricultural produces is originally 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 year previous to that in which the assessment is made.'
The notification just mentioned reads :
'In exercise of the power conferred by clause 3 of the sugarcane (Control) Order, 1955, the Central Government hereby fixes Rs. 1-7-0 per maunds as the minimum price to be paid by producer of sugar by vacuum pan process or his agent for sugarcane delivered at the gate of his factory and Rs. 1-5-0 per maund for sugarcane delivered at railway central, during 1955-56 crushing season :
Provided that -
(1) a rebate of 3 pies per maund per mile, subject to a maximum of 3 annas per maund may be deducted out of the minimum sugarcane price of Rs. 1-7-0 per maund, by a producer of sugar by vacuum pan process in case of sugarcane transported by such producer by road in his own transport from purchasing center to the factory gate.....'
It is plain enough that the notification, which was designed to secure a fair price to the sugarcane grower, fixed Rs. 1-7-0 per maund as the minimum price for sugarcane delivered at the factory gate and allowed the assessee to pay less or sugarcane delivered at outlying centers of purchase at some distance from the factory gate in accordance with the rate of rebate prescribed by the proviso. It must be stressed that this price was the minimum price and it did not prevent the sugarcane growers to ask for, and received, a higher price in accordance with the quality of sugarcane sold by them. It is equally plain that at any given center of purchase, the average price of sugarcane is the average of the price paid to the several sugarcane sellers.
Rule 23(2) prescribed what shall be regarded as the market value of the agricultural produce raised by the assessee and utilized as raw material for determining the income chargeable to tax. It divides such produce into two categories, one which is sold in the market in its raw state or after application to it of any process ordinarily employed by a cultivator for the purpose and another which is not ordinarily sold in the market in such state. For marketable agricultural produce, the value is required to be calculated according to the average price at which it was sold in the relevant account period. In our opinion, the expression 'average price' does not postulate the computation of the average by reducing the minimum price payable at the factory gate by the average rebate deducted by the assessee for purchases made by it from other growers at various outlying centers. So to do would not take into account any price paid in excess of the prescribed minimum. Again, in the instant case, the assessee used its own transport to deliver its sugarcane at the factory gate but it is conceivable that, being unable to do so, the assessee may deliver it at a reilhead. If so, the formula evolved on the basis of distances from the factory gate would be inapplicable. Thirdly, it is not as if sugarcane was taken for sale to regular markets. The growers actually took their produce to centers fixed by Government for that purpose, one of them being the factory gate. That being so, the factory gate itself could be regarded as a place where sugarcane was marketed. Finally, when a grower using his own transport delivered sugarcane at the factory gate and received, as he was entitled to do, the minimum price of Rs. 1-7-0 per month, we see no good reason why the assessee doing the same thing in its capacity as a grower of sugarcane, should be treated differently. For all these reasons, we are of opinion that the expression 'average price' in rule 23(2) (a) means the average of the prices paid at the centres at which the sugarcane is actually supplied by the assessee by its own transport. It follows that, in the case before us, the rebate allowable under notification No. S. R. O. 3419, dated November 22, 1955, could not be taken into account in determining the average price.
In the view we have taken, we answer the question referred to us in the manner indicated above and direct that all costs of this reference shall be paid by the department. Hearing fee Rs. 100.