I grow sugarcane and crush all of it in my own mill, so I never sell any cane. My cost of cultivation is higher than the market price. Can the Assessing Officer still deduct the market value of the cane under rule 7 instead of my actual costs?
Yes. Rule 7(2)(a) applies wherever the agricultural produce is of a kind ordinarily sold in the market in its raw state, and sugarcane is such a produce, so the deduction from composite profits is the average price at which cane was sold during the previous year, not the assessee's cultivation expenses. The Supreme Court held that 'market' in rule 7 does not require an open market where buyers and sellers congregate, that the controlled price under the Sugarcane Control Order is the market price, and that it makes no difference that the assessee was the only buyer in its region.
Decided by the Supreme Court (Suhas C. Sen J and S.P. Kurdukar J) on 1997-07-30, reported as (1997) 227 ITR 432 (SC); AIR 1997 SC 3575; (1997) 6 SCC 606; (1997) 93 Taxman 579; Civil Appeal Nos. 6636, 6637, 6638, 6639 and 6640 of 1983, 175-77 of 1985, 2399(NT) and 3674 of 1989, with SLP (C) No. 2611 of 1988. It bears on section 10(1), section 295, section Rule 7 of the Income Tax Act 1961, in Capital Gains Exemptions, How Tax Law Is Read and Assessment & Scrutiny matters.
This is the case that decides whether a composite-income assessee gets rule 7(2)(a) or rule 7(2)(b), and the choice is worth real money in both directions. Rule 7(2)(b) — the aggregate of cultivation expenses, land revenue or rent, and such amount as the Assessing Officer finds to represent a reasonable profit — is available only where the produce is NOT ordinarily sold in the market in its raw state, and the two clauses are mutually exclusive. The mill here wanted rule 7(2)(b) precisely because its cultivation cost exceeded the market price, which would have converted an agricultural loss into a larger business deduction; the Court refused. The point that carries beyond sugarcane is the Court's construction of 'market': a price at which a willing buyer and a willing seller are expected to transact, hypothetical if need be, a single buyer being immaterial and a statutorily controlled price counting as the market price. That kills the argument that a regulated or captive procurement destroys the market. The judgment also reproduces rule 7 in full, which is the reliable place to read sub-rule (2)(b)'s three components. Note what this judgment does and does not cover. It deals with rule 7 alone: rule 7A, rule 7B and rule 8 are not mentioned anywhere in it, and its opening frames nothing beyond the general division of composite income and the rule-making power in s.295(2)(b). Placing rule 7 in the wider scheme is the editor's cross-reference and not the Court's — a tea business is on rule 8, a rubber business on rule 7A and a coffee business on rule 7B, and rule 7 governs everything else that is partly agricultural and partly business.
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The assessment years were 1962-63 to 1967-68. The assessee company manufactured sugar. It cultivated sugarcane on its own land and on land taken on lease, consumed the whole of that cane in its factory, and in addition bought cane from other growers — for 1962-63, 1966-67 and 1967-68 it bought considerably more than it grew. Purchases were made from registered ryots under the Sugarcane Control Order, 1958 and, in small quantities, from unregistered ryots. Because the profits arose partly from agricultural and partly from manufacturing activity, the composite income had to be split. The assessee contended that the market value of its own cane fell to be determined under rule 7(2)(b) — expenses of cultivation, land revenue or rent, and a reasonable profit — because sugarcane was not a produce ordinarily sold in the market in its raw state, the Sugarcane Control Order having regulated price, distribution, crushing quantities and the grower-factory relationship. For several years its average cost of cultivation exceeded the average cost of purchase. The Revenue contended for rule 7(2)(a), the average price at which cane had been sold in the previous year. The Tribunal accepted the assessee's contention because of the Control Order; the Madras High Court took the contrary view and held rule 7(2)(a) applicable.
The appeals were dismissed with no order as to costs. Sugarcane was ordinarily sold in the market in its raw state, so rule 7(2)(a) applied and the market value of the cane produced and consumed by the assessee had to be computed on the average-price basis. The connected appeals and the special leave petition, in which a direction to the Tribunal to investigate fresh facts was sought, were also dismissed, on the ground that at the reference stage no fresh investigation into facts is permissible and the Tribunal is the final fact-finding authority.
The Court set out s.10(1), the rule-making power in s.295(2)(b) and rule 7 in full. Sub-rule (1) requires the market value of agricultural produce raised by the assessee and used as raw material to be deducted in determining the part of composite income chargeable to tax, with no further deduction for expenditure incurred as cultivator; sub-rule (2) then supplies two mutually exclusive measures of market value, clause (a) the average price where the produce is ordinarily sold in the market in its raw state, and clause (b) the aggregate of cultivation expenses, land revenue or rent, and a reasonable profit where it is not. The question was therefore simply whether sugarcane was ordinarily sold in the market in its raw state, and the answer was affirmative on the Tribunal's own findings: the assessee itself bought more cane than it grew, from registered and unregistered ryots, year after year in the ordinary course. The Court rejected the argument that rule 7(2)(a) presupposes an open market where buyers and sellers congregate. 'Market' in rule 7 does not mean such a place; there was a price at which cane could ordinarily be purchased by the assessee for its business, and that price was the market price, whether or not it was controlled by the Sugarcane Control Order. Where the market is controlled by Government regulation, sale and purchase within that framework is the ordinary mode of selling, and no special significance can be read into the phrase 'ordinarily sold'. The place of purchase — here the factory gate — was immaterial, and J.M. Casey v. CIT AIR 1930 Patna 44, where a jail bought aloe leaves to keep prisoners occupied and the purchase was not a commercial activity at all, was decided on its own unusual facts. The Court then applied the general valuation principle drawn from the Gift-tax and Wealth-tax cases — Gift-Tax Officer v. Kastur Chand Jain 53 ITR 411 and Ahmed G.H. Ariff v. CWT 76 ITR 471 — that the existence of an actual open market is not a precondition and the price may be found on a hypothetical basis, and from the English decisions in Building and Civil Engineering Holidays Scheme Management Ltd. v. Post Office (1966) 1 QB 247 that market value does not connote a concourse of buyers and sellers and may exist with only one buyer or one seller.
The price paid by the assessee was the market price.
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Handle my notice → Ask a CA on WhatsAppYes. Rule 7(2)(a) applies wherever the agricultural produce is of a kind ordinarily sold in the market in its raw state, and sugarcane is such a produce, so the deduction from composite profits is the average price at which cane was sold during the previous year, not the assessee's cultivation expenses. The Supreme Court held that 'market' in rule 7 does not require an open market where buyers and sellers congregate, that the controlled price under the Sugarcane Control Order is the market price, and that it makes no difference that the assessee was the only buyer in its region. This was decided by the Supreme Court (Suhas C. Sen J and S.P. Kurdukar J) and bears on section 10(1), section 295, section Rule 7 of the Income Tax Act 1961. It is reported as (1997) 227 ITR 432 (SC); AIR 1997 SC 3575; (1997) 6 SCC 606; (1997) 93 Taxman 579; Civil Appeal Nos. 6636, 6637, 6638, 6639 and 6640 of 1983, 175-77 of 1985, 2399(NT) and 3674 of 1989, with SLP (C) No. 2611 of 1988. This is the case that decides whether a composite-income assessee gets rule 7(2)(a) or rule 7(2)(b), and the choice is worth real money in both directions. Rule 7(2)(b) — the aggregate of cultivation expenses, land revenue or rent, and such amount as the Assessing Officer finds to represent a reasonable profit — is available only where the produce is NOT ordinarily sold in the market in its raw state, and the two clauses are mutually exclusive. The mill here wanted rule 7(2)(b) precisely because its cultivation cost exceeded the market price, which would have converted an agricultural loss into a larger business deduction; the Court refused. The point that carries beyond sugarcane is the Court's construction of 'market': a price at which a willing buyer and a willing seller are expected to transact, hypothetical if need be, a single buyer being immaterial and a statutorily controlled price counting as the market price. That kills the argument that a regulated or captive procurement destroys the market. The judgment also reproduces rule 7 in full, which is the reliable place to read sub-rule (2)(b)'s three components. Note what this judgment does and does not cover. It deals with rule 7 alone: rule 7A, rule 7B and rule 8 are not mentioned anywhere in it, and its opening frames nothing beyond the general division of composite income and the rule-making power in s.295(2)(b). Placing rule 7 in the wider scheme is the editor's cross-reference and not the Court's — a tea business is on rule 8, a rubber business on rule 7A and a coffee business on rule 7B, and rule 7 governs everything else that is partly agricultural and partly business. If it applies to you, the first step is this: Ask the correct question first: not whether YOU sell the produce, but whether produce of that KIND is ordinarily sold in the market in its raw state. Para-level evidence of your own non-selling is beside the point.
The assessment years were 1962-63 to 1967-68. The assessee company manufactured sugar. It cultivated sugarcane on its own land and on land taken on lease, consumed the whole of that cane in its factory, and in addition bought cane from other growers — for 1962-63, 1966-67 and 1967-68 it bought considerably more than it grew. Purchases were made from registered ryots under the Sugarcane Control Order, 1958 and, in small quantities, from unregistered ryots. Because the profits arose partly from agricultural and partly from manufacturing activity, the composite income had to be split. The assessee contended that the market value of its own cane fell to be determined under rule 7(2)(b) — expenses of cultivation, land revenue or rent, and a reasonable profit — because sugarcane was not a produce ordinarily sold in the market in its raw state, the Sugarcane Control Order having regulated price, distribution, crushing quantities and the grower-factory relationship. For several years its average cost of cultivation exceeded the average cost of purchase. The Revenue contended for rule 7(2)(a), the average price at which cane had been sold in the previous year. The Tribunal accepted the assessee's contention because of the Control Order; the Madras High Court took the contrary view and held rule 7(2)(a) applicable. The matter was decided on 1997-07-30 by the Supreme Court (Suhas C. Sen J and S.P. Kurdukar J). On those facts the Supreme Court held as follows. The appeals were dismissed with no order as to costs. Sugarcane was ordinarily sold in the market in its raw state, so rule 7(2)(a) applied and the market value of the cane produced and consumed by the assessee had to be computed on the average-price basis. The connected appeals and the special leave petition, in which a direction to the Tribunal to investigate fresh facts was sought, were also dismissed, on the ground that at the reference stage no fresh investigation into facts is permissible and the Tribunal is the final fact-finding authority.
The Court set out s.10(1), the rule-making power in s.295(2)(b) and rule 7 in full. Sub-rule (1) requires the market value of agricultural produce raised by the assessee and used as raw material to be deducted in determining the part of composite income chargeable to tax, with no further deduction for expenditure incurred as cultivator; sub-rule (2) then supplies two mutually exclusive measures of market value, clause (a) the average price where the produce is ordinarily sold in the market in its raw state, and clause (b) the aggregate of cultivation expenses, land revenue or rent, and a reasonable profit where it is not. The question was therefore simply whether sugarcane was ordinarily sold in the market in its raw state, and the answer was affirmative on the Tribunal's own findings: the assessee itself bought more cane than it grew, from registered and unregistered ryots, year after year in the ordinary course. The Court rejected the argument that rule 7(2)(a) presupposes an open market where buyers and sellers congregate. 'Market' in rule 7 does not mean such a place; there was a price at which cane could ordinarily be purchased by the assessee for its business, and that price was the market price, whether or not it was controlled by the Sugarcane Control Order. Where the market is controlled by Government regulation, sale and purchase within that framework is the ordinary mode of selling, and no special significance can be read into the phrase 'ordinarily sold'. The place of purchase — here the factory gate — was immaterial, and J.M. Casey v. CIT AIR 1930 Patna 44, where a jail bought aloe leaves to keep prisoners occupied and the purchase was not a commercial activity at all, was decided on its own unusual facts. The Court then applied the general valuation principle drawn from the Gift-tax and Wealth-tax cases — Gift-Tax Officer v. Kastur Chand Jain 53 ITR 411 and Ahmed G.H. Ariff v. CWT 76 ITR 471 — that the existence of an actual open market is not a precondition and the price may be found on a hypothetical basis, and from the English decisions in Building and Civil Engineering Holidays Scheme Management Ltd. v. Post Office (1966) 1 QB 247 that market value does not connote a concourse of buyers and sellers and may exist with only one buyer or one seller. In the words reproduced by the source cited on this page: "The price paid by the assessee was the market price." The decision followed or applied CIT, Madras v. Thiru Arooran Sugars Ltd. (Madras High Court, 7 December 1982) — affirmed; Gift-Tax Officer, Calcutta v. Kastur Chand Jain 53 ITR 411 — applied on valuation; Ahmed G.H. Ariff v. Commissioner of Wealth-Tax, Calcutta 76 ITR 471 (SC) — applied; J.M. Casey v. CIT, Bihar & Orissa AIR 1930 Patna 44 — distinguished.
It was decided by the Supreme Court on 1997-07-30 and is reported as (1997) 227 ITR 432 (SC); AIR 1997 SC 3575; (1997) 6 SCC 606; (1997) 93 Taxman 579; Civil Appeal Nos. 6636, 6637, 6638, 6639 and 6640 of 1983, 175-77 of 1985, 2399(NT) and 3674 of 1989, with SLP (C) No. 2611 of 1988. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 10(1), section 295, section Rule 7, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The appeals were dismissed with no order as to costs. Sugarcane was ordinarily sold in the market in its raw state, so rule 7(2)(a) applied and the market value of the cane produced and consumed by the assessee had to be computed on the average-price basis. The connected appeals and the special leave petition, in which a direction to the Tribunal to investigate fresh facts was sought, were also dismissed, on the ground that at the reference stage no fresh investigation into facts is permissible and the Tribunal is the final fact-finding authority. It arises in Capital Gains Exemptions, How Tax Law Is Read and Assessment & Scrutiny matters, on section 10(1), section 295, section Rule 7 of the Income Tax Act 1961, and was decided by Suhas C. Sen J and S.P. Kurdukar J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. If you are arguing for rule 7(2)(b), you must establish that there is no ordinary market for the raw produce at all. A regulated price, a controlled distribution, or a single buyer in the region will not do it after this judgment. Where rule 7(2)(a) applies, fix the average price at which the produce was so sold during the relevant previous year and apply it to the quantity consumed in manufacture. That figure is the deduction. Remember the closing words of rule 7(1): once the market value is deducted, no further deduction is allowed for expenditure incurred as cultivator or receiver of rent-in-kind. Do not claim cultivation expenses twice. Do not take the Tribunal's route of computing 'reasonable profit' under rule 7(2)(b)(iii) by starting from an average market price — the Supreme Court's affirmed High Court judgment describes that as missing the basis of the clause entirely.
Validity check could not be completed. Validity check could not be completed. Later treatment of this judgment was NOT checked — indiankanoon's search endpoint returned HTTP 429 on the citator queries attempted. The text of rule 7 relied on is the text reproduced in the judgment itself, which post-dates the 1962 Rules; it was cross-read against the Income-tax Department's current published description of rule 7, which states the same deduction of market value of produce used as raw material and the same bar on any further deduction for expenditure incurred as cultivator. No line-by-line comparison of the current rule 7 against the 1997 text was performed, so a reader relying on sub-rule (2)(b)'s three components for a current year should check the rule as it now stands. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The Supreme Court judgment was read in full from the indiankanoon print view and reproduces rule 7 in its entirety, which is why it has been preferred to the underlying High Court decision. The reproduced rule 7(2)(b) carries two visible slips in the source — 'in its raw state or after application to it of any state or after application to it of any process aforesaid' (a duplicated phrase) and 'the represent a reasonable profit' for 'to represent a reasonable profit'. Those are in the report as printed and have not been corrected. The judgment does not name the date of the High Court decision appealed from. The Madras High Court judgment of 7 December 1982 in CIT, Madras v. Thiru Arooran Sugars Ltd. (indiankanoon /doc/103671/, read in full for this entry) contains the identical reasoning on the Sugarcane Control Order, with Mr Nariman appearing for the assessee in both, and the civil appeal numbers here are of 1983; the identification is therefore near certain but is not stated in either judgment and is recorded as an inference. The name of the assessee is misspelt 'Thiru Arooran Sugras Ltd.' in the indiankanoon heading of the High Court report. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeals were dismissed with no order as to costs. Sugarcane was ordinarily sold in the market in its raw state, so rule 7(2)(a) applied and the market value of the cane produced and consumed by the assessee had to be computed on the average-price basis. The connected appeals and the special leave petition, in which a direction to the Tribunal to investigate fresh facts was sought, were also dismissed, on the ground that at the reference stage no fresh investigation into facts is permissible and the Tribunal is the final fact-finding authority.
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