IMPORTANT POINT
In order to apply Rule 7(2)(a) of Income Tax Rules, existence of an open market where buyers and sellers come together to do business is not an essential pre-requisite.

JUDGMENT

Sen, J.-The assessment years in this group of appeals (C.A.No. 6636/83, 6637/83, 6639/83, 6640/83 & 175-77/85) are 1962-63 to 1967-68. The assessee company, Thiru Arooran Sugar Ltd., is a manufacturer of sugar which purchases sugarcane from the market for crushing. It also has its own cane fields where it cultivates sugarcane which is entirely consumed by its factory. Since the profits made by the assessee from the sale of sugar arises out of agricultural activities as well as the manufacturing activities, the income earned by the assessee has to be divided into two parts. No tax is leviable under the Income Tax Act on agricultural income but the profit generated by the non-agricultural activities is liable to be taxed under the Act. There is no dispute that the income attributable to the agricultural activities must be excluded from the income earned by the assessee from the sale of sugar. But the problem is of computation of such income.

2. Section 10(1) of the Income-tax Act lays down that the agricultural income shall not be taken into computation of the total income of a previous year of any person under the Income-tax Act, 1961. Section 295 of the Act which empowers the Board to make rules for carrying out the purposes of this Act has specifically empowered the Board by sub-section (2) (b) of Section 295 to frame Rules for the manner in which and the procedure by which the income shall be arrived at in the case of, inter alia, income derived in part from agriculture and in part from business. In exercise of this power Rule 7 of the Income-tax Rules, 1962 was framed which lays down:

" Income which is partially agricultural and partially from business-

(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 the 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.

(2) For the purposes of sub-rule (1) "market value" shall be deemed to be-

(a) Where agricultural produce is ordinarily sold in the market in its raw state, or after application to it of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render it fit to be taken to market, the value calculated according to the average price at which it has been so sold during the relevant previous year;

(b) Where agricultural produce is not ordinarily sold in the market in its raw state or after application to it of any process aforesaid, the aggregate of -

(i) the expenses of cultivation;

(ii) the land revenue or rent paid for the area in which it was grown; and

(iii) such amount as the (Assessing) Officer finds, having regard to all the circumstances in each case, to represent a reasonable profit."

Sub-rule (1) of Rule 7 lays down that market value of the agricultural produce raised by the assessee will have to be deducted from the business account of the assessee. The market value spoken of in sub-rule (1) will have to be determined in the manner laid down in sub-rule (2). Sub-rule (2) lays down in clause (a) the well-known formula of average price of the goods ordinarily sold in the market as market value of the goods. The formula contained in clause (b) will only apply in cases where agricultural produce is not ordinarily sold in the market in its raw state or after any process applied to it to make it marketable.

3. The assessee s contention is that the market value of the sugarcane which has been produced and consumed by the assessee must be determined in the manner laid down in sub-rule (2