K.K. Desai, J.
1. In this reference under section 66(2) of the Indian Income-tax Act, 1922, similar questions of law in respect of five assessment years, viz., 1951-52, 1953-54, 1954-55, 1955-56 and 1956-57, arise for decision. In connection with the question which relates to the claim for deduction of the entire managing agency commission and other overhead expenses in respect whereof one-third was disallowed as being attributable to agricultural income, the parties are now agreed that the answer will have to be in favour of the assessee-company in accordance with the decision of this court in the case of Commissioner of Income-tax v. Maharashtra Sugar Mills Ltd. : [1968]68ITR512(Bom)
2. The two other questions relate to (1) ascertainment of the true value of sugarcane grown by the assessee-company on its plantations and (2) ascertainment of the true value of closing stock of sugar. This second question arises only in the last three years of assessment mentioned above.
3. The relevant facts appear in the statement of the case.
4. The facts on which reliance is placed and which require to be noticed are as follows :
The primary business of the assessee-company is to manufacture sugar from sugarcane grown on its sugarcane farms, though, occasionally, it purchased small quantities of sugarcane grown by others for the purpose of the company crushed 1,44,837 tons of sugarcane. The purchase from outsiders was only of 61 tons. In the last four years of assessment referred to above the company crushed sugarcane which varied in quantity between 1,84,892 tons and 1,63,106 tons. In the assessment years ending September, 1952, and September, 1955, the quantities purchased from outsiders were respectively 22,101 tons and 11,388 tons. In the other two years very small quantity of sugarcane was purchased from outsiders. The company never sold any of its produce of sugarcane to outsiders and its entire production of sugarcane was utilised for the purpose of its sugar manufacturing business. The activities of the company of producing sugarcane in its farms and manufacturing sugar are described in the assessment proceedings as composite activity. A part of its business consisted in agricultural operations and the other part in manufacturing operations. As regards the income that the company derived by agricultural operations, as defined in section 2(1) of the Act, the company was and is totally exempt from income-tax under section 4(3)(viii) of the Act. The company was not liable to pay any tax on its agricultural income under the heading 'business income'. The determination of the company's agricultural income on the one hand and its business income on the other was the problem for the income-tax authorities. In connection with this problem, the parties agreed before the authorities that the company's agricultural income was liable to be ascertained in accordance with the provisions in rule 23(2)(a) of the Income-tax Rules, 1922. The relevant part of rule 23 runs as follows :
'23(1). In the case of income which is partially agricultural income as defined in section 2 and partially chargeable to income-tax under the head 'Business', in determining that part which is chargeable to income-tax the market value of any agricultural produce which has been raised by the assessee...and which has been utilised as a raw material in such business..... shall be deducted, and no further deduction shall be made in respect of any expenditure incurred by the assessee as a cultivator.....
(2) For the purposes of sub-rule (1) 'market value' shall be deemed to be :- (a) where agricultural produce is originally sold in the market in its raw state, ..., 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.....'
5. In connection with the above five years of assessment, the company claimed that its sugarcane production should be valued in accordance with the provision in the above rule and the market value of the produce was liable to be calculated at the following respective rates for each of the above five years, viz., Rs. 48, Rs. 58, Rs. 46-4-0, Rs. 51-12-0 and Rs. 51-12-0. The main case of the company in claiming valuation of its sugarcane produce at the above respective rates for the five years was that the above rate had been fixed as the proper rate and proper market value for the years in question by the circulars issued by the Deccan Sugar Factory Association for each of the above years. In connection with its case for the application of the above rates, the company relied upon the stocks of sugarcane it had purchased from outsiders and the average price which the company paid for making the above purchases. The average price at which the company purchased sugarcane stocks from outsiders for each of the above respective five years was stated by the company respectively at Rs. 48, Rs. 58, Rs. 46-4-0, Rs. 51-12-0 and Rs. 51-12-0. The company further submitted that the quality of the sugarcane grown by the company on its own farm was superior to the quality generally obtained in the market and hence 10 per cent. weightage should be given in connection with the market value of the sugarcane produced by the company. These submissions of the company were negatived by the Income-tax Officer in the assessment orders passed by him for the above five years.
6. Before referring to the assessment orders passed, as regards the above second question of law, it requires to be stated that the facts appear in paragraph 9 of the statement of the case. The question relates to the correct valuation of the closing stock and arises only in connection with the last three years of assessment mentioned above.
7. It is not necessary to mention the facts and contentions relating to this question, because Mr. Mehta for the company has at our instance rightly stated that in effect the question has become academic. He has, therefore, submitted that this question regarding the correct valuation of the closing stock need not be answered.
8. The assessment order in respect of the year ending September 30, 1950, is dated December 20, 1955, and is annexure 'E' to the statement of the case. In connection with its claim that the value of its sugarcane produce should be made at the rate of Rs. 48 per ton, the company relied upon the circular of the Sugar Factories Association dated August 21, 1950. The Income-tax Officer held that the rate mentioned by the Association had no sanctity attached to it. As the company purchased only 61 tons from outsiders, he further held that for ascertaining the market value it would not be correct to adopt the rate of outside cane purchases as the basis, as it would not give a fair idea of the market value. He referred to the fact that in that particular year of assessment the cultivators were utilising sugarcane for preparing jaggery and the prices charged were unusually high being up to Rs. 50 per ton. Though the average purchase rate of the company was Rs. 50 per ton, the company had claimed valuation at Rs. 48 per ton as fixed by the Association. In that connection, the Income-tax officer held that this was an interesting fact and by claiming at the reduced rate the company had laid aside the theory of the superiority of its own cane. On the ground that the rate claimed was only on the basis fixed by the Association and was without any consideration of actual yield of sugar from sugarcane and without making any increase in the rate on account of the alleged superiority of cane, he refused to make the valuation at the rate claimed by the company. He then referred to the fact about the rate fixed for assessing other companies and that it had been decided to apply the rate of Rs. 42 per ton in the case of other companies operating in the Deccan area. He valued the company's produce at the above rate of Rs. 42. The company's claim in the remaining four assessment years was that its produce should be valued at the rate fixed by the Association by circulars issued for each of the years. In these five years also the company relied upon the fact of the purchases made from outsiders and the average price paid in each year to these outsiders. The company also contended that the sugarcane produced by the company should be given weightage of 10 per cent. as its produce was of higher quality. These contentions of the company were rejected by the assessment orders for each of the above years made respectively on December 20, 1995, February 21, 1958, March 31, 1958, April 11, 1958, and August 22, 1958.
9. It requires to be noticed that in rejecting the company's contentions it was observed on the question of quality and 10 per cent. weightage claimed by the company that '..... it is no use splitting hairs over effect of quality on price. What one has to see is what the cane produced on own farm would fetch in market.' The further observations were that, ordinarily, the cultivator was at the mercy of the buyers in the cane market and this market was always a buyer's market. This had been the reason for the Government's intervention for fixing floor prices from year to year. For this reason, in connection with arriving at reasonable and average market prices, reliance was placed on the floor prices fixed by the Government. In connection with purchase price paid by the company, it was observed that the quantity of purchase was small and was possibly made under extraneous circumstances not expected to be prevailing in free market. Reliance was placed on the fact that the company had been showing huge losses in its manufacturing business showing large profits in agriculture. For each year, in fixing the average rate for ascertaining the true value of the sugarcane produced of the company, reference was made to decisions in other comparable cases where companies manufacturing sugar had accepted the rates fixed by the tax authorities as correct. This was referred to for the reason that the valuation should be reasonable and in fact was made reasonably.
10. In the appeal filed before the Appellate Assistant Commissioner for the year of assessment 1951-52, whilst rejecting the company's above contentions and the rate claimed by the company as the correct rate, the A.A.C. in his order dated September 30, 1959, observed : 'I asked the company to show how this rate was worked out, but the company was not able to satisfy me.' In connection with the rate adopted by the Income-tax Officer he observed that he had already given reasons why the company's rate could not be accepted, but the officer's estimate was more reasonable in the circumstances of the case. He, therefore, rejected the appeal. This question came up for decision before the Tribunal and by its order dated July 27, 1960, the Tribunal dealt with all the above five years of assessment. In rejecting the contentions made by the company the Tribunal observed that the rate adopted by the Income-tax Officer had been adopted in similar cases and had been accepted in 3 out of 6 or 7 cases. The Tribunal referred to the fact that the company sought to base its claim merely on its claim that the sugarcane grown by the company was superior, but the company had not furnished any data to support its rates. In that connection, it referred to the observation of the Appellate Assistant Commissioner in the order already cited above. The Tribunal found : '.....the company is not in a position to substantiate its adopted rates......'. The Tribunal also held that the company's purchases from outsiders were very insignificant and could not be relied upon to represent any average market value. The Tribunal's criticism was : 'Further, no material is placed before us as to when the assessee made purchases, whether they were fairly spread over the season or made within a short duration, and, lastly, whether they were made in an open market'. In adopting the rate fixed by the Income-tax Officer as correct, the Tribunal referred to the fact that the assessment made had been accepted in other cases and that fact established that the rate adopted was reasonable.
11. Now, in this reference, Mr. Mehta for the company has again relied upon the following facts : The purchases of diverse quantities of sugarcane made by the company from outsiders in the above five years of assessment. The fact that the company had paid prices for these purchases and the average rate of the price paid was as claimed by the company had never been in dispute. Having regard to these facts, his submission was that there was justification in rejecting this average price as proved by the company as irrelevant and not applicable. In that connection, he submitted that under the above rule 23(1)(a) the company was entitled to have the value of its produce fixed at the price which the company would have to pay to get the very same quantity of sugarcane in its factory for crushing. In that connection, he also relied upon the fact that the company's claim that its sugarcane produce was of higher quality had not been disputed. He also relied upon the observation of the Income-tax Officer in the order of assessment dated December 20, 1955, where it was stated : 'During this period the cultivators were mostly utilising sugarcane for preparing jaggery and hence the prices charged were unusually high being up to Rs. 50 per ton.' His submission was that this was an admission about the average price for which sugarcane had to be purchased in the assessment year 1951-52. Having regard to these facts, his submission was that under the scheme of rule 23(2)(a) it was not permissible for the tax authorities to reject the rate that was claimed by the company and arbitrarily to fix the rate as adopted by the Income-tax Officer. The rate claimed by the Company was lower than the rate at which the company had made purchases. This was average price proved by the company and accordingly the rate claimed by the company should have been accepted. There was no justification in rejecting that rate.
12. Now, there is no substance in these submissions made by Mr. Mehta. There is no dispute between the parties that the market value of the produce of the company was liable to be ascertained in accordance with the scheme contained in rule 23(2)(a). There is no dispute also as regards the true construction and effect of this rule. Admittedly, under the scheme of the rule, because the sugarcane is an agricultural produce which could be sold in the market in its raw state, market value was to be ascertained in accordance with the following provision in the rule, i.e., '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 burden on the company, therefore, was to prove that the rate claimed by the company was the average price at which sugarcane was sold in the market during the year in question. Towards discharging this burden, apparently, the company has not made any efforts at all. In that connection, the observations made by the tax authorities in the various orders have already been cited above. In three of the five years in question the quantity purchased from outsiders was respectively 60 tons, 1,649 tons and 1,390 tons which was extremely small quantity and the price paid for purchase of that quantity could not be the basis for ascertaining the average price within the meaning of the above rule. In the other two years the quantity purchased was respectively 22,101 tons and 11,388 tons, but this quantity also may rightly be considered as small quantity for finding out average price within the meaning of the above rule. The difficulty in accepting the contention of the company that the price paid by it for purchasing these quantities was average price is that the quality of the sugarcane purchased, whether the purchase was made in season and out of season and in what months has not been mentioned. Apparently, under the above rule, the market value was liable to be determined by ascertaining average price of sugarcane sold in open market. In this connection, the ex-farm price and/or the price ex-factory of the purchaser was not to be relevant. The market must to be one which would be nearest to the factory of the manufacturer concerned. It has been admitted at the Bar that the company has stated the purchase price from transactions which were all for delivery of sugarcane at the company's factory. Now, this price must involve the cost of transport and such incidental other costs. It is not possible from the facts disclosed on the record to find out as to how much of the price paid by the company involved the cost of freight and other incidental expenses. In this connection, it is relevant to notice that the A.A.C. called upon the company to explain how the rate on which the company relied was worked out. His observation was that the company failed to explain the details. It was rightly observed that the rate that was mentioned by the Deccan Sugar Factories Association must have been fixed to safeguard the interests of its members. No basis or reason why the particular rate was fixed by the Association was explained on behalf of the company. There was also no clear evidence on record to support the company's case that the quality of sugarcane grown by the company was superior and entitled the company to 10 per cent. or any other weightage as claimed by the company. The company did not base its arguments in that connection on any figures of actual yield of sugar in proportion to the sugarcane produced by the company. The facts proved by the company were thus insufficient to make a finding that the rate claimed by the company as proper rate was in fact average price within the meaning of the above rule for calculation of the market value of the sugarcane produced by the company.
13. The question is as to whether, under the above circumstances, the tax authorities were not justified in arriving at the market value of these goods by fixing and adopting the rates which for the reasons mentioned in the assessment orders as well as the orders of the A.A.C. and the Tribunal appear to be reasonable. In this connection, it was permissible for these authorities to refer to the fact of the Government notifications fixing the minimum rate which the purchasers were liable to the cultivators for sale of sugarcane. It was also permissible to refer to the fact assessments made in respect of the other sugarcane companies which were similarly situated. It was also permissible to refer to the fact that these other companies accepted the rate which were being applied in the case of the assessee-company. Thus, in the order of assessment dated March 31, 1953, for the year of assessment 1954-55, reliance was rightly placed on the facts relating to the assessment of other companies in the following words :
'I have looked into the other sugar company cases and found that the average fluctuates a little. In another company which is assessed here and of which the assessee is presumably aware the average purchase price of cane was Rs. 36-4-6 per ton and this gives a clear idea of the prevailing market.'
14. The Tribunal in its order dated July 27, 1960, similarly rightly relied upon the other cases. With reference to that year, the same rate has been adopted as was done in other cases and they were accepted by 3 sugarcane cultivating companies of this region.
15. It is difficult to reject the findings made in the several orders of the authorities which we have referred to above that the rate arrived at by these authorities in the above manner was more reasonable than the rate claimed by the company. Now, in this connection, it requires to be added that as other reliable evidence of average price of sugarcane in the area in question had not been produced by the company, the authorities were justified in referring to the fact which had come to their notice whilst assessing other sugarcane cultivating companies. It was not for the authorities to go into the market and bring on record the fact relating to the average price that could be obtained in each year of assessment. We cannot accept the contention that the authorities were not right in relying upon the facts which had been ascertained in the assessment of other sugarcane cultivating companies in arriving at a reasonable rate for calculating the market value of the produce of the company.
16. In the result, only one question common to all the assessment years which requires to be answered relates to the ascertainment of the correct market value of the produce of the company. The value has been ascertained in the best manner possible and the value ascertained must be held to be correct. The question in respect of each of the years which is question (a) is accordingly answered in the affirmative. The question (b) which relates to the expenses of managing agency and overhead expenses is, having regard to the decision in the case of Commissioner of Income-tax v. Maharashtra Sugar Mills Ltd. : [1968]68ITR512(Bom) , answered in the affirmative. The question No. (c) is not pressed and is accordingly not answered. No order as to costs.
17. Questions (a) and (b) answered in the affirmative.