Chandrasekhara Menon, J.
1. The questions referred to us by the Kerala Agricultural Income-tax and Sales Tax Appellate Tribunal, Trivan-drum, are in these terms :
'1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the selling of paddy at prices higher than that fixed under the Kerala Paddy (Maximum Prices) Order, 1965, and Kerala Paddy (Maximum Prices) Order, 1968, cannot be taken cognizance of by any one except by an authority constituted by the statute for implementing the penal provisions of the Control Order ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in fixing the maximum prices fixed under the Kerala Paddy (Maximum Prices) Order, 1965, and Kerala Paddy (Maximum Prices) Order, 1968, as the price at which the appellant has sold the excess paddy in the open market ?'
2. In respect of the assessment years 1964-65, 1966-67, 1967-68 and 1968-69, the assessee filed returns under the Kerala Agrl. I.T. Act, 1950. The Agrl. ITO finalised the assessments on best judgment basis and net assssable income was determined at Rs. 50,119 for 1964-65, Rs. 60,422 for 1966-67, Rs. 69,730 for 1967-68 and Rs. 74,004 for 1968-69. In fixing the net income the officer valued the net yield under paddy in excess of what was measured as levy at Rs. 2.90 per para for 1964-55, at Rs. 3.25 per para for 1966-67, at Rs. 4.20 per para for 1967-68 and Rs. 5 per para for 1968-69.
3. The assessee went up in appeal before the AAC, Alleppey, raising various contentions. The AAC made certain modifications in regard to the yield and expenses under paddy as per his common order in all the appeals dated April 7, 1970. The appellate authority, however, did not interfere with the valuation of paddy as such.
4. The matter was taken up in second appeal in A. I. T. A. Nos. 296 to 299/70 before the Kerala Agricultural Income-tax Appellate Tribunal by the assessee. One of the main points raised before the Tribunal was 'whether the assessing officer is entitled to calculate the price of paddy at a rate exceeding the nirak rate or the rate prescribed under the Kerala Paddy (Maximum Prices) Order. The finding of the Tribunal on the question is as follows:
'According to the learned counsel for the appellant, Sri Thommen, the assessing officer has fixed the price of paddy at different rates for different periods. The periods of assessment relate to Malayalam Era 1138 (1963-64), 1140 (1965-66), 1141 (1966-67), 1142 (1967-68) and 1143 (1968/69). Of these different periods, for the year 1138 the nirak rate has been prescribed by theGovernment in the Gazette and when there is no other official data to show what is the market rate of paddy, it is safer and proper to follow the nirak rate. According to the counsel for the appellant, the assessing authority has valued paddy without any basis. He has invited our attention to the order of this Tribunal in AITA Nos. 444 to 455 of 1962 dated 20-9-63, wherein this Tribunal has directed that nirak rate is to be followed. As no other official data is available we also feel that it is safer to follow the nirak rate and we direct the concerned assessing authorities accordingly......
From these wordings it is clear that these rules are mandatory and not merely directory and, as pointed out by Sri Thommen, any violation of these rules will entail the penalties prescribed by law and hence it cannot be expected that a person will be contravening these rules and selling paddy at a price higher than what is prescribed by these rules. According to Shri Thommen, it is true that there is an open market in this State where paddy is purchased and sold at higher rates but such sales are of paddy brought from the neighbouring States of Madras and Andhra Pradesh and there is nothing illegal in selling such paddy at higher rates as these Maximum Prices Control Orders are fixing the maximum prices of paddy produced in this State and not outside......
In view of these judicial pronouncements by the High Court also xve cannot expect the people of the State contravening these rules to get higher prices. If at all any one is doing it, that cannot be taken cognizance of by any authority constituted by the statute excepting for implementing the penal provisions, In these circumstances, we have to hold that the taxing authorities are not justified in fixing a higher price than what is provided by these rules and, therefore, we direct the assessing authorities concerned to modify the assessments in accordance with law by calculating the value of paddy at the nirak rates and the prices fixed by these rules for the relevant periods. For the paddy measured out to the Government as levy, the actual amount received by the appellant from Government as price will be calculated.'
5. The Commissioner of Agricultural Income-tax, Kerala, made Reference Applications Nos. 9 to 12/73 requiring the Tribunal to refer to this court certain questions of law which are said to arise from the common order in the four appeals before the Tribunal. It is on these applications that the reference has now been made on the questions earlier shown.
6. Sri K.S. Paripoornan, learned counsel for the revenue, contended that the decision of the Tribunal, that if at all any one is contravening the Maximum Prices Control Orders and got higher prices, that cannot be taken cognizance of by an authority constituted by the statute except for implementing the penal provisions, is clearly erroneous. It is on this basis that the Tribunal has held that the taxing authorities are not justified in fixinga higher price than what is provided by the Rules. He referred us to the decision of the Supreme Court in CIT v. S.C. Kothari : 82ITR794(SC) . In that case, the assessee, a registered firm, carried on business of commission agency and general merchants and also did forward business. It was a member of the Saurashtra Oil and Oilseeds Association Ltd., Rajkot. In respect of the assessment year 1958-59, the assessee claimed to have incurred a loss of Rs. 3,40,443 in certain transactions entered into with different people for the supply of groundnut oil. These transactions were delivery contracts entered into with non-members of the association. The assessee claimed that the aforesaid loss was allowable under Section 10(1) of the Indian I.T. Act, 1922, as a deduction against its other business income. The ITO came to the conclusion that the transactions in question were hit by the provisions of the Forward Contracts Regulation Act, 1952, and the rules and regulations of the Saurashtra Oil and Oilseeds Association Ltd. The officer, therefore, held that the losses were held to have been incurred in illegal transactions, and they could not be allowed in the computation of the income. According to the officer, the losses being incurred in illegal business could not be deducted from the speculative profits under Section 24 of the Indian I.T. Act, 1922. He had rejected the contention of the assessee that, even on the assumption that the losses were incurred in illegal transactions, they could be allowed in the computation of the income.
7. The Gujarat High Court, when the matter came before it on reference, referred to various English decisions as also to Wheatcroft's Law of Income Tax and Simon's Income Tax for supporting the view that even where a trade is illegal it would still be a trade within the meaning of the income-tax law and if any profits are derived from such trade they would be assessable to tax. Theree is in principle no distinction between profits and losses of a business and if the profits of an illegal business are assessable to tax equally the losses arising from illegal business must be held to be liable to be taken into account in computing the income of the assessee.
8. In considering the question when it came before the Supreme Court Grover J., speaking for the court, said (p. 802) :
'If the business is illegal neither the profits earned nor the losses incurred would be enforceable in law. But, that does not take the profits out of the taxing statute. Similarly, the taint of illegality of the business cannot detract from the losses being taken into account for computation of the amount which can be subjected to tax as 'profits' under Section 10(1) of the Act of 1922. The tax collector cannot be heard to say that he will bring the gross receipts to tax. He can only tax profits of a trade or business. That cannot be done without deducting the losses and the legitimate expenses of the business. We concur in the view of the High Court that for the purpose of Section 10(1) the losses which have actually beenincurred in carrying on a particular illegal business must be deducted before the true figure relating to profits which have to be brought to tax can be computed or determined.'
9. Certainly there cannot be any controversy that if profits or losses had been made on account of illegal transactions that ought to be taken into account in computing the income and the Tribunal was certainly not right in stating that if any one is doing an illegal transaction that cannot be taken cognizance of by an authority constituted by the statute excepting for implementing the penal provisions. But this mistake committed by the Tribunal cannot be of help to the revenue in this case, because here the Agrl. ITO has not proceeded on the basis that the assessee has actually sold the paddy at a rate exceeding the nirak rate or the rates prescribed under the Kerala Paddy (Maximum Prices) Order. There is no finding by the officer with regard to that. He only presumes that paddy could have been sold at that rate and, therefore, fixed the price of paddy at different rates for different periods at a rate higher than that fixed under the Kerala Paddy (Maximum Prices) Order. That one would have been able to sell at prices in excess of the legally fixed rates did not necessarily imply that the assessee also did break the law by selling his paddy at prices in excess of the rates fixed by the Maximum Prices Order.
10. As Justice Rajagopalan pointed out in A.S. Swan Pillai v. CIT : 34ITR328(Mad) , 'there is no presumption in favour of any illegality of a transaction. In fact, the presumption is the other way about. There must be evidence to show that the assessee did sell goods in excess of the legally fixed rates.'
11. Moreover, to fix the price at a rate higher than that under the Kerala Paddy (Maximum Prices) Order in a best judgment assessment would be to rely on circumstances which are matters of pure conjectures, suspicions and surmises. The notoriety that paddy is sold for higher price at that time would be merely a background of suspicion and an assessee should not be held to have indulged in such illegal practices without any evidence. The mere possibility of the assessee getting higher prices would be a matter of pure conjecture. It might be noted in this connection that it is really unlawful for any person to sell paddy at a rate higher than that fixed in the Kerala Paddy (Maximum Prices) Order. Paddy is an essential commodity and the various orders promulgated under the Essential Commodities Act regulate the price of the foodgrains. The Kerala Paddy (Maximum Prices) Order fixes the maximum price beyond which it is unlawful to sell paddy or buy it. Justice Madhavan Nair has pointed out in the Full Bench decision in State of Kerala v. Annam : AIR1969Ker38 that:
'By the Maximum Prices Orders made on September 3, 1965, the, State Government has fixed maximum prices, at which rice or paddy might' be sold by any person in the State. When such an order has been issued any violation of it becomes a wrong punishable under Section 7(1)(a)(ii) of the Act with a prison-term which may extend to 5 years and with fine. When such fixation of maximum price is in force the market price cannot rise above it: It may be anything equal to or less than the maximum price. Any sale at a price above it will not be lawful and, therefore, cannot afford a standard for 'just equivalent' for the commodity. The word 'just' in 'just equivalent' seems to repel consideration of any illegal transaction as its standard. If dealings with racketeers or other anti-social elements in black market are to rule the price of paddy procured for equitable distribution, the object of the Act and the Levy Order--'for, securing availability at fair prices'--is certain to be defeated. They cannot afford a standard for governmental action or judicial considerations.'
12. In the light of the above discussion our answer to the first question is, in the negative and as regards the second question in the positive. We> direct the parties to bear their respective costs.