GODAVARI SUGAR MILLS LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS reference has been made under S. 66(2) of the Indian IT Act, 1922, pursuant to an order passed by this Court. There are two sets of questions referred to us for determination. The first set of common questions relate to the asst. yrs. 1952 53, 1953 54, 1955 56 and 1956 57 and they are as under :

(2.) THE assessee is a company carrying on business of manufacturing and sale of sugar. The crushing of sugarcane was carried out by the assessee in its own two factories situated at Sakarwadi and Laxmiwadi in Ahmednagar District, which are on either side of the river Godavari. Also in the vicinity of these sugar factories there are other factories belonging to half a dozen other companies engaged in the manufacture of sugar. The assessee had its own sugarcane farms which are situate in close vicinity of these factories. The assessee had also one other farm known as Somayya Farm which is about 15 to 20 miles away from these factories. A substantial portion of the sugarcane that was required for the manufacture of sugar in the factories was obtained by the assessee from its own farms and a small portion by purchase from other cane producers. The assessee had two composite activities which gave its income. One of the activities was the cultivation of sugarcane for crushing and the other was cane crushing and manufacture and sale of sugar. The income derived by the assessee from the former activity was agricultural income which was exempt from payment of income tax under S. 4(3)(xiii) of the Indian IT Act, 1922, and the income from the latter activity was business income chargeable to income tax under S. 10 of the Indian IT Act, 1922. The profit and loss account of the assessee company showed an overall profit. The company also submitted separate profit and loss accounts showing the results in the manufacturing operations and the agricultural operations. The assessee was showing loss in the manufacturing business and huge profits in the agricultural business. In the course of examination of the details furnished by the assessee the ITO found that the assessee had debited to the profit and loss account of the manufacturing activity several expenses which were patently of an agricultural character; that large sums of expenditure incurred in the factories pertained to the agricultural operations of the company and miscellaneous expenses debited to two factories included several expenses common to the agricultural activity as well as manufacturing activity.

(3.) IN the assessments before the ITO for the several years under consideration, the ITO required the assessee to state the basis on which it has claimed the price for the sugarcane cultivated by it on its own farms and crushed by it in its own factories. The assessee submitted that since the sugarcane cultivated by it on its own farms and used by it for crushing was of a superior quality, it was entitled to claim higher rates for it than the market rates. The ITO declined to accept those prices but actually fixed the market prices at lower rates. The ITO also took into account that, since the income of the assessee company was partly agricultural and exempt from payment of income tax and partly non agricultural and chargeable to income tax, the market value of the agricultural produce had to be determined as contemplated by r. 23(2)(a) of the Indian IT Rules.