BANERJEE J. - The assessee holds mining concessions for iron and manganese ores, in the District of Singhbhum, in Bihar. The ore extracted by the assessee is utilised solely for the manufacture of iron and steel and steel products at its own factories. No portion of the ore mined by the assessee is sold for profit to outsiders.
For the years 1958-59 and 1959-60 (corresponding to the accounting years, ended, respectively, on March 31, 1958, and March 31, 1959), the Cess Deputy Collector of Singhbhum computed the annual profits from the mines of the assessee, on estimation basis, at Re. 1 per ton of iron ore and Rs. 1-4-0 per ton of manganese ore and determined the cesses payable by the assessee under the Cess Act (Bengal Act IX of 1880, as amended in Bihar), at Rs. 59,222 and Rs. 1,62,540, respectively. The imposition of this cess was objected to by the assessee, inter alia, on the ground that it was not liable at all to the levy of cesses, because it did not sell any ore and could not, as such, be said to have made any profit from the mines, within the meaning of section 6 of the Cess Act, 1880. The objection did not appeal to the Cess Deputy Collector. The assessee appealed against the order of the Cess Deputy Collector, levying cesses, before the Deputy Commissioner remanded the matter to the Cess Deputy Collector for a proper estimation of the annual profit, which had not been correctly made. The order of the Deputy Commissioner was affirmed in revision by the Commissioner at Ranchi (Chhota Nagpur Division). There was a further revision petition made before the Board of Revenue, which shared the same fate. Therefore, the assessee moved the High Court at Patna against the order of the Board of Revenue, under article 226 of the Constitution, praying for the quashing of the order levying cess. The High Court rejected the writ petition. The matter was ultimately taken before the Supreme Court by the assessee. At the time the reference to this court was made, the matter was pending before the Supreme Court. Now, of course, the Supreme Court has pronounced its judgment on the dispute, along with similar disputes involved in two other matters, in one of which Tata Iron & Steel Co. Ltd. was the appellant and in the other of which the Indian Copper Corporation Ltd. was the appellant. The judgment of the Supreme Court is reported as Tata Iron & Steel Co. Ltd. v. State of Bihar. The Supreme Court was pleased to dismiss the appeal. We shall refer to some of the observations by the Supreme Court in the aforesaid appeal hereinafter.
The challenge to the imposition and levy of cess notwithstanding, the assessee paid the cesses and thereafter claimed the two sums of of Rs. 59,222 and Rs. 1,62,540 as deductions in the computation of its income, respectively, for the assessment years 1958-59 and 1959-60, under section 10(2) (xv) of the Indian Income-tax Act. The Income-tax Officer disallowed the claim. The assessee preferred two separate appeals against the assessment orders for the two years before the Appellate Assistant Commissioner, who dismissed the appeals. The assessee thereafter preferred two second appeals before the Appellate Tribunal, which were heard together and disposed of by one judgment. The question before the Tribunal was whether sub-section (4) of section 10 operated as a bar against cesses being allowed as business expenditure under section 10(2) (xv). It was contended on behalf of the assessee that sub-section (4) of section 10 was not attracted because there was no profit made by the assessee by mining operations, the mines being exploited only for the purpose of extraction of raw materials for manufacture of goods in the own factories of the assessee. This contention was sought to be repelled by the revenue with the argument that cess was payable on the 'annual net profits' and being a liability fixed on profits cess fell within the mischief of sub-section (4) of section 10. The two Members of the Tribunal differed. The Judicial Member analysed sub-section (4) of section 10 and expressed the opinion that in order to fall within the mischief of sub-section (4) of section 10 :
(a) profits or gains of any business must arise or accrue and the cess levied profits, or
(b) cess must be assessed at a proportion of or otherwise on the basis of such profits or gains.
According to the Judicial Member, it was common ground that the assessee company did not sell or trade or deal in ores; the assessee only raised the ores from its mines and transmitted the same entirely to its manufactories for manufacture of finished goods. In the opinion of the Judicial Member, to hold that the company made a profit by raising and transmitting the ores from its mines to its factories would be a negation of the well-established principal that no one can make a profit out of oneself. Further, according to the Judicial Member, the words 'profits and gains of business' in section 10(4), must be construed as having the same sense in which those identical words have been used in section 10(1), that is to say, in the sense of such profits and gains of business as are assessable to tax. The Judicial Member was of the opinion that the iron and manganese ores, raised by the assessee, had never been assessed to income-tax. That fact that the cess authorities cared to levy cess on the annual net profits from mines and quarries, under section 6 of the Cess Act, was, in the opinion of the Judicial Member, inconsequential in the context of section 10 of the Indian Income-tax Act, which must be interpreted on its own terms. On the aforesaid line of reasoning, the Judicial Member held that the sums of Rs. 59,222 and Rs. 1,62,540 had not in fact been levied on the profits or gains of any business within the limited sense in which those words were used in sub-section (4) of section 10.
The Accountant Member took a different view. He was of the opinion that under section 6 of the Cess Act, the liability for payments of cess was directly related to the net profits of the business. Therefore, sub-section (4) of section 10 of the Indian Income-tax Act was bar to the claim made by the assessee. We set out below an extract from the order of the Accountant Member :
'There is no doubt that the liability to assessee directly related to the net profits as is clear from the plain reading of section 6. .... These net profits are an integral part of the business profits of the assessee and as such the cess comes within the mischief of section 10(4). It is not as if reference to net profits is only for the purposes of computation; it is, in fact, the main incident from which the liability to cess arises..... In the present case.... both as a major source of incidence and main basis for computation, the profits come into the picture. These profits from an integral part of the business profits of the assessee-company. Accordingly, section 10(4) is clearly attracted and deduction of the cess cannot be allowed.'
Consequent on the difference of opinion between the Judicial Member and the Accountant Member, the following question was referred to the President of the Tribunal, under section 5A (7) of the Indian Income-tax Act, for necessary order :
'Whether, on the facts of the present case, the amounts of Rs. 59,222 and Rs. 1,62,540 paid by the appellant as cess to the Government of Bihar are permissible allowance in the computation of the income of the assessee from business for the respective assessment year 1958-59 and 1959-60 ?'
The President agreed with the Accountant Member on the following line of reasoning :
'The assessee is carrying on an integrated business, mining and metallurgy, and the final profits it gets is attributable to both these operations. This final profits is also apportionable for income-tax purposes, if any need to do so arises, for example, if the mines are situated outside taxable territories or there is situation arising under section 42. There is profit in mining which is also capable of ascertainment if proper costing records are maintained. It is not, therefore, notional at all. Only in the absense of separate accounting the profits on the mining operations have called for a sort of estimate for cess purposes. That the cess is based on such mining profits cannot be seriously disputed. It is consequently only a proportion thereof and so comes within the prohibition in section 10(4).'
In accordance with the opinion of the majority, the Tribunal overruled the claim of the assessee, under section 10(2) (xv), for deduction of the amount of cesses paid in the computation of its income. In these circumstances the assessee obtained a reference to this court on the following question of law :
'Where, on the facts of the present case, the amounts of Rs. 59,222 and Rs. 1,62,540 paid by the assessee as cess to Government of Bihar are permissible allowances in the computation of the income of the assessee from business for the respective assessment year 1958-59 and 1959-60 ?'
On the prayer of the learned counsel for the assessee, this reference was placed for hearing immediately after Income-tax Reference No. 18 of 1963 (Commissioner of Income-tax v. West Bengal Mining Co. because in the last mentioned reference also were involved some of the grounds which the learned counsel for the assessee wanted to urge as grounds in the present reference as well. We have delivered our judgment in the case of West Bengal Mining Co. and after analysing the provision of the Cess Act and the Bengal (Rural) Primary Education Act, have expressed the opinion that road cess and education cess are not levied on the basis of a rough guess, in the absense of any machinery for ascertainment of profits but are levied on objective basis. We overruled, inter alia, the following contentions, urged on behalf of the assessee, in the case of West Bengal Mining Co., viz. :
(1) the computation of cess is made on the annual net profit from property calculated not on the basis of activities, but on the basis of average of three years annual profits, which is as bad as a rough guess;
(2) what section 10(4) of the Income-tax Act excepted was cess levied on profits or gains of business calculated on the basis of actual profits or gains, say as under the Indian Income-tax Act, and not type of profits as ascertained under Cess Act, with the following observations :
'The main fallacy in his argument lies in minimising the value of average. An average is obtained by adding all the items together and dividing the sum by the number of the items, as constrasted to the expression mean which is the figure midway between two extremes..... An average when arrived at as a good representative value or a typical value. It is true, that under the Cess Act the annual net profits, on which cess is assessed, is not the annual net profit for the year of assessment but the average of the last three years annual profit. But, nevertheless that is the representative annual net profit, typical of the annual not profit. That is not a rough guess. Where, however, the average even is not available, the Collector is to proceed under section 75 and 76 according to his best judgment, which, however, is not subjective or arbitrary but has to be objectively arrived, at. The words by such ways and means as to him shall seem expedient, mean the suitable ways and means and are controlled by the words ascertain and determine, used in the section, which do not give to the Collector the liberty to proceed as he likes. Thus, the fact that the cess is levied on profits and gains of a business arrived at on an average basis does not make the profits was gains a total stranger to actualities or make them notional.'
We need not repeat further the reasons which weighed with us, in the case of West Bengal Mining Co. in holding that cesses under the Cess Act of 1880 and the Bengal (Rural) Primary Education Act, 1930, fell within the prohibition as in section 10(4) of the Indian Income-tax Act, being cesses levied on profits and gains of a business or otherwise on the basis of such profits or gains. We adopt the same reasoning as in the case of West Bengal Mining Company in coming to the same conclusion in this reference as well.
It must be said in fairness that Mr. Sukumar Mitra, learned counsel for the assessee, did not rely so much on the arguments advanced in West Bengal Mining Companys case and repelled by our judgment in that case, in this reference. He submitted that, in order to attract the provision of section 10(4), which reads - 'noting in clause (ix) or clause (xv) of sub-section (2) shall be deemed to authorise the allowances of any sum aid of account of any cess, rate or tax levied on profits or gains of any business, profession or vocation or assessed, at a proportion or otherwise on the basis of any such profits or gains', it must be established that cess was levied on the profits or gains of any business, profession or vocation or assessed at a proportion or otherwise on the basis of such profits or gains. In other words, according to Mr. Mitra, cesses should be allowable as business expenditure, under section 10(2) (xv) unless it was of the type falling under section 10(4) Of the Indian Income-tax Act. He further submitted that, in the instant case, cess was not levied on any profit of business, namely, the mining part of the business of the assessee, because there was none, and that the onus of showing that there was some must lie on the authorities, which onus, according to him, the revenue failed to discharge. He also submitted that, in case of any doubt as to whether there was any profit from the mining business, the benefit of doubt should go to the assessee and the answer should be made in favour of the assessee.
The Supreme Court judgment in Tata Iron & Steel Co. Ltd. v. State of Bihar takes the wind out of the argument of Mr. Mitra. In the case before the Supreme Court, the imposition of cess under the Cess Act upon the assessee was resisted on the theory that the assessee made no profit out of mining operations, because the assessee used the ores mined in the manufacture of its goods in its factories. The form in which the question arose for consideration before the Supreme Court was whether a person could in law be said to derive 'profit' from a mine, when the ore extracted was not sold by him, as such, but was utilised by him for the purpose of manufacturing a finished product which he sold. Contending for a negative answer to the question, it was argued before the Supreme Court, on behalf of the assessee, that under section 6 of the Cess Act, which has to be read with section 72 of the same Act the tax imposed by the Act was not a tax on mines as such but on the 'annual net profits' derived from the mine. In order that a person may derived profit from a mine, it was contended, the mine must be worked and ores extracted but even those by themselves were insufficient. The extractions of ores involve expenditure and 'profits' may be said to derived from the mine only when the extracted ores are sold and the amount relised by the sale of ores is in excess of the cost of extracting the ore. A sale of the ore, it was contended, is thus an essential ingredient or a sine qua non for the emergence of a profit on which alone the cess is levied. In the case of assessee, like the appellant before the Supreme Court, the business of winning the ore and of converting the ore own into finished product, it was contended, should not by any means be conceived as made up of two distinct business, conducted by them bust only as a single integrated undertaking for the production of steel and steel products. Unless it could be postulated, firstly, that the business of winning the ore was a separate business from that of converting the ore own into steel and, secondly, it could be nationally treated that the ore extracted was being sold by the first business to the second, it would not be possible to conceive of any profit being derived from the working of the mine. it was submitted that there was no factual basis for the first postulate, viz., that there were two separate business and, secondly, even assuming that it were possible to separate the two activities, in the course of which goods produced in one business were consumed in the other, still no 'profit' can in law result by such use, because 'profits' could accure only by the sale of the product and the consumption by the same individual of his own goods could not result in a 'profit', because a person cannot sell to himself or trade with himself.
The Supreme Court negatived the contention on behalf of the assessee with the observation :
'The question, therefore, arises whether when a sale or a commercial transaction which might result in profits takes place not of the commodity itself but of something into which it is transformed, a profit could be said to accrue by reason of the acquisition of the basis commodity.... It could not, for instance, be that unless that the mind ore was sold as it came out of the mine there could be no profit and that if the ore under went any modification from the state in which it was when mined, say, by being reduced to convenient sizes or by being broken up into small fragments or even pulverized, there could be no profit arising out of the sale of the ore so dressed. It is needless to add that in such a case the cost of the dressing or the purlversing for the market could be an item of expenditure which would have to be taken into account in ascertaining the profit from the sale of the ore. If one is right so far that profit could result from the sale of the mined are so dressed up for the market, could there be any logic in the contention which denies the existence of profits from the mined ore when not the dressed ore but some product of the dressed ore is sold. No doubt where the mined ore under goes some processing before it is marketed, the process being either cleaning or dressing, etc., the processed product might continue to be commercially known as ore. But the question would then rise : 'Is it essential for a 'profit' to result from the working of the mine that there should be an identity in a commercial sense between the commodity which is the subject of sale and the commodity which is won from the mine ?' In other words, is it the position that if there is loss of that identity the concept of a profit arising from the production of that commodity also disappears When find it difficult to appreciate the ratio behind the contention that if the mined ore is processed, and the processed product commercially goes under another name, because the processing results in extensive modifications of the raw material, then the sale of the finished product can in law yield no profit from the working of the mine...... When analysed it is found that the profit is the aggregate or the resultant of the profits from different lines of activity. If arithmetically the total represents the resultant aggregation of different items of activity we fail to see how it could be said that the profit from each item which results in that total is a notional and not an actual or real profit. In the interest of clarity, we should add that the principle would be the same when the sale of the end product yields not profit, but results in a loss, only n such a case, the relevant component, viz., the disintegrated profit or loss resulting from the mining operation would diminish the loss if that were a profit, or add to the loss if that were also a loss. No doubt, there was a further contention urged that you cannot dissect the final profit in order to ascertain it is components, but it is quite a different one from that now under consideration and we shall deal with it in its proper place. But what we are now concerned to point out is that if it is capable of dismemberment or disintegration into its components, it would not be correct use of language to designate the profit so apportioned and ascertained as attributable to each line of activity any the less real than the aggregate profit realised from all the ventures. In the way in which we have approached the problem there could be no question involved of any departure from the principle that a man cannot trade with himself..... Undoubtedly, in order to ascertain the profits from the mine there would have to be disintegration of the gross profits which finally emerge from the sale of the finished steel or steel products. What we desire to point out is that this involves no distingration of the business affording scope for the contention based upon the principle that a person cannot trade with himself, but the one far removed from it, viz., whether when a profit has been made as a conjoint result of different but integrated operations, the profits so derived could be broken up so as to permit the attribution of specific amount of profits to each or any of the several operations or activities..... In our opinion therefore the principle of apportionment resting on the disintegration of the ultimate profits realised by the assessee is implicit in a provision like that n section 6 of the Act under which the profits derived from an initial activity is brought to charge where further activities are realised by an assessee with reference to the ore won and a profits is realised by the sale of the end product.'
The view to which the Supreme Court ultimately subscribed was that in order that profit might result from the mining activity it was not necessary that the ore won from the mine should be the subject of sale in the same condition as it was when it came out of the mine. Even if the ore own was subjected to process, so as to convert them into the finished products, there would be still then a profit from mining activity. There could, therefore, in law be an annual profit from the mines in cases where the ore produced from them was not sold as ore but was utilised as a raw material for the manufacture of other products, which were sold.
Now that the Supreme Court has held that there can be in law annual profit from mines in cases where the ore produced from them are not sold as ore but are utilised as raw material for the manufacture of those products, which are sold, and since we have ourselves held in the case of West Bengal Mining Company that cess is assessed on such profits on an objective bass, we have further to hold that the type of cess with which we are concerned must fall within the prohibition of section 10(4), being cess levied on profits and gains of business. The question of onus, if any, upon the revenue is not very material, because profits arises in law from in operations,, when mined ores are utilised in the manufacture of goods which the assessee sells for profit. The first branch of the argument of Mr. Mitra must, therefore, fail.
Mr. Mitra next contended that cess should have been allowed as deductions, under sub-section (1) of section 10, even if section 10(4) debarred the application of section 10(2) (ix) thereto. In support of this argument he railed upon the following observations by the Supreme Court n Badridas Daga v. Commissioner of Income-tax :
'The result is that when a claim s made for a deduction for which there is no specific provision in section 10(2) whether it is admissible or not will depend on whether, havning regard to accepted commercial practice and trading principles, it can be said to arise out of the carrying on of the business and to be incidental to it. If that is established, then the deduction must be allowed, provided, of course there is no prohibition against it, express or implied, in the Act.'
Now, payment of cess does not depend upon any accepted commercial practice or trading principles. This expenditure was originally claimed as business expenditure under section 10(2) (xv). Falling to establish that claim, it is now not open to the assessee to clam the deduction under any accepted commercial practice or trading principle. The invocation of section 10(1) is, therefore, irrelevant in the present context. We, therefore, overruled this branch of the argument of Mr. Mitra as well.
In the view that we take, we answer the question referred to us in the negative.
The assessee must pay costs of this reference to the Commissioner o Income-tax.
K. L. Roy J. -I agree
Question answered in the negative.