1982 (12) TMI 25 - HC - Income Tax

Summary

Issues Involved:
1. Whether sugarcane used for the manufacture of sugar is ordinarily sold in the market in its raw state.
2. Applicability of Rule 7(2)(a) vs. Rule 7(2)(b) of the Income-tax Rules, 1962, in computing the income chargeable to income-tax.
3. Validity of the Tribunal's guidelines for computing reasonable profit under Rule 7(2)(b).

Detailed Analysis:

1. Whether sugarcane used for the manufacture of sugar is ordinarily sold in the market in its raw state:

The court addressed whether sugarcane can be considered an agricultural produce "not ordinarily sold in the market in its raw state." The Tribunal had concluded that sugarcane is not ordinarily sold in the market in its raw state, relying heavily on the Sugarcane Control Order, 1958. However, the court found this conclusion to be misconceived. The court stated, "The effect of the Control Order is not to convert the nature of the sugarcane as an agricultural produce." The Control Order merely regulates the market for raw sugarcane without altering its nature as a marketable agricultural product. Therefore, the court held that "sugarcane is ordinarily sold in the market in its raw state," and the Tribunal was wrong in holding otherwise.

2. Applicability of Rule 7(2)(a) vs. Rule 7(2)(b) of the Income-tax Rules, 1962:

The court examined whether Rule 7(2)(a) or Rule 7(2)(b) should apply to the computation of the non-agricultural part of the composite income. Rule 7(2)(a) applies to agricultural produce "ordinarily sold in the market in its raw state," while Rule 7(2)(b) applies to produce "not ordinarily sold in the market in its raw state." The court noted, "If a case falls under cl. (a) it cannot fall under cl. (b)." Given that sugarcane is ordinarily sold in the market in its raw state, the court concluded that Rule 7(2)(a) is applicable. The court stated, "We are, therefore, satisfied that r. 7(2)(a) will apply to this case and the Tribunal was in error in thinking that this is not so."

3. Validity of the Tribunal's guidelines for computing reasonable profit under Rule 7(2)(b):

The court criticized the Tribunal's guidelines for computing reasonable profit under Rule 7(2)(b). The Tribunal suggested that the ITO should calculate the reasonable profit by taking the average purchase price of sugarcane and then deducting cultivation costs and rent. However, the court found this approach flawed, stating, "Rule 7(2)(b), as we earlier observed, is one of two mutually exclusive categories." Rule 7(2)(b) deals with agricultural produce that has no market price in its raw state, making it impossible to use the market price as a basis for calculation. The court concluded, "We feel that the whole idea of r. 7(2)(b) has been thoroughly missed and confused by the Tribunal."

Conclusion:

The court answered all three questions of law in favor of the Department. The court held that sugarcane is ordinarily sold in the market in its raw state, thus Rule 7(2)(a) applies, and the Tribunal's guidelines under Rule 7(2)(b) were erroneous. The court directed that the ITO's computation under Rule 7(2)(a) was correct. The assessee was ordered to pay the costs of the Department, with counsel fees set at Rs. 500.