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TMI Blog1982 (12) TMI 25X X X X Extracts X X X X X X X X Extracts X X X X ..... entre and from the States. It only means that there must be a break-up of the composite income into that part which is agricultural and that part which is non-agricultural, enabling a tax to be levied by the States under the State tax law on the agricultural part of the composite income, and by the Central tax law on the non-agricultural part of the composite income. The one must be separated from the other. That is all. The Central I.T. Act makes provision for separating the non-agricultural income, which is taxable under the Act, from the agricultural income derived from composite businesses. The Act leaves the break-up methods to be prescribed by rules. Rule 8 is a special rule relating to income from manufacture of tea. Rule 7 is a general rule applicable to all other income which is in part agricultural and in part non-agricultural. This rule lays down how the taxable non-agricultural part of the income has to be computed out of the composite income. It lays down a simple method. Under the rule, the composite income will have to be taken as a base and from that a deduction has got to be made as and towards the agricultural part of the income. Although this is the broad prin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business. The ITO accordingly applied r. 7(2)(a) of the I.T. Rules, 1962. Applying this rule, the ITO took the average annual price of sugarcane and applied it to the sugarcane utilised by the assessee in the manufacture of sugar during the year and deducted this amount from its composite profit in order to arrive at the non-agricultural income. The assessee's objection then was that r. 7(2)(a) does not apply because the rule only applies to a case where agricultural produce is ordinarily sold in the market in its raw state. According to the assessee, sugarcane cannot be regarded as agricultural produce ordinarily sold in the market in its raw state. The ITO rejected this contention also. On appeal, however, the Tribunal accepted the assessee's contention. The Department have now come before this court on a reference questioning the decision of the Tribunal. The limited question before this court is whether sugarcane can be said to be an agricultural produce " not ordinarily sold in the market in its raw stage " A question of this kind might possibly be regarded as a question of fact. For, whether sugarcane is ordinarily sold in the market in its raw state or not could onl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he grower and the purchaser, are all the subject of elaborate Government regulation, it cannot be said that the product itself loses either its identity or its nature or its character as a market produce. Indeed, the inference must be the other way about. The Sugarcane Control Order saw to it that the market for raw sugarcane is not subjected to any distortions by the free-play of unbridled economic forces of purchase and demand. The effect of controlling all factors relating to the production, distribution and marketing of sugarcane as a raw product is to keep the world safe for the growers of the raw product and not to destroy its identity. The Tribunal has completely missed, not only the objective of the Control Order, but also its impact, as well as the nature and marketability of raw sugarcane as an agricultural produce in itself. All that the Control Order brought about was this. Sugarcane as raw produce became a controlled commodity in its raw state from an uncontrolled commodity in its raw state. 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. Mr. Nariman for the assessee mentioned that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e which is taxed under the Central I.T. Act, there is no question of the object assisting the one without at the same time assisting the other. This being so, even an object-oriented interpretation of the rule could thus be subserved by giving to the words their natural meaning. We have earlier observed that " produce ordinarily sold in their raw state " must only mean the kind of produce which are ordinarily sold. The phrase is not to be applied according to the individual fact-situation of each case, but according to the nature of the produce. In this case, there has never been any doubt that sugarcane as such is a raw produce ordinarily sold in its raw state in the market. We do not think that even the Tribunal had any misgivings as to the nature of the produce. The reason why the Tribunal thought that r. 7(2)(a) did not apply was because, according to the Tribunal, the Sugarcane Control Order had the effect of destroying the market for raw sugarcane. This, we have earlier explained, is misconception. We are, therefore, satisfied that the ITO was quite right in arriving at the taxable income from the assessee's business by deducting from the net profits of its business the value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s is as follows: " If the answer to question No. 2 is in the affirmative, whether the Appellate Tribunal was right in law in giving directions to compute the reasonable profit on the lines indicated by it in para. 17 of its order ? " As might have been seen, even on the language of the second question, the Tribunal gave directions to the ITO to calculate the deduction under r. 7(2)(b) of the Rules. But in view of our determination that that rule does not apply, it would follow that any directions given by the Tribunal to the ITO as though in implementation of that rule must be regarded as erroneous in point of law. Our answer to the last question is also against the assessee. We may, however, make one remark on the fundamental error committed by the Tribunal in drawing up what they called " guidelines " for the ITO to make calculations under r. 7(2)(b). This rule says that where agricultural produce is not ordinarily sold in the market in its raw state, the amount to be deducted from the assessee's profits for arriving at the taxable non-agricultural income must be the sum total of three amounts, namely, (i) cultivation expenses ; (ii) rent or revenue payable by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X
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