Commissioner of Income Tax vs Nizam Sugar Factory Ltd.

Obul Reddi, C.J.—In this reference at the instance of the revenue, the question that calls for determination is whether the assessee is entitled to claim the entire transport charges of sugarcane grown in its own farm as part of its manufacturing expense. The answer to this question depends upon the construction to be placed on Rule 7 of the I.T. Rules.

Rule 7 to the extent material reads:

"7. (1) In the case of income which is partially agricultural income as defined in Section 2 and partially income chargeable to Income Tax under the head '' Profits and gains of 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 or received by him as rent-in-kind and which has been utilised as a raw material in such business or the sale receipts of which are included in the accounts of the business shall be deducted, and no further deduction shall be made in respect of any expenditure incurred by the assessee as a cultivator or receiver of rent-in-kind."

The case of the revenue is that the assessee, Nizam Sugar Factory, is entitled to the cost of sugarcane as per the market value and that the market value has already been fixed by the Government of India. There fore, no further deduction on account of transport charges should be allowed. Rule 7 disallows expenditure incurred by the assessee as a cultivator or receiver of rent-in-kind. The expenditure incurred by the assessee towards transporting sugarcane from the fields to the assessee-factory is not an expenditure incurred by the cultivator for raising sugarcane or cultivating it. The assessee, apart from purchasing sugarcane from the ryots, has its own lands where it grows sugarcane and transports sugarcane to its own factory. There is no dispute regarding the fact that the price of sugarcane per ton has been fixed by the Government of India. If sugarcane is not delivered at the factory, the cost of sugarcane will be less. In other words, under the notification issued by the Government, lower price is fixed to ryots who do not deliver sugarcane at the factory gate, that is to say, the market rate is fixed having regard to the place of delivery. So far as the payment of cost of sugarcane to the ryots is concerned, the cost of trans port is allowed to be deducted. That being the case, we see no reason why the assessee who is also a cultivator of sugarcane should be treated differently from other ryots. The assessee would, therefore, be entitled to deduct transport charges from the cost of sugarcane supplied by it to its own factory. Rule 7 contemplates, as rightly pointed out by the Tribunal, adoption of market rate in the case of an assessee who is also utilising raw materials for manufacturing activity. The deduction claimed by the assessee is in conformity with Rule 7. The expenditure in respect of which deduction is claimed relates to the business of the assessee. The expenditure incurred by the assessee is as an ordinary businessman or a manufacturer and in the course of its business of production of sugarcane.

In the result, the reference is answered in the negative and in favour of the assessee. There will be no order as to costs. Advocates'' fee Rs. 250.