1. Imposition of local cess under the Bengal Cess Act, 1880 — Dispute over whether profit accrues from mines when ore is used for manufacturing finished products. (Para 1 , 2 )
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1962 Supreme(SC) 298
SUPREME COURT OF INDIA
B.P.Sinha, C.J.I., J.C.Shah, K.N.Wanchoo, K.Subba Rao, N.Rajagopala Ayyangar, Syed Jafar Imam, JJ.
Tata Iron And Steel Company Limited: Indian Iron And Steel Company Limited: Indian Copper Corporation
Versus
State Of Bihar
Case No. : 587 , 588 of 1961, 590 , 591 of 1961 ,600 , 601 of
Date of Decision : 9/24/62
Advocates Appeared: Agrawal S.C. : Chatterjee P.K. : Chaudhury R. : Garg R.K. : Ghosh B.C. : Mukherjee D.N. : Palkhivala N.A. : Ramamurthi : Ramamurthi M.K. : Sastri A.V.Viswanatha : Setalvad M.C. : Singh D.P. : Sinha L.N. : Sinha Lal Narain : Varma S.P.
Advocates:
A.V.VISHWANATHA SASTRI, B.C.GHOSH, D.N.MUKHERJI, D.P.Singh, L.N.Sinha, LAL NARAIN SINHA, M.C.SETALVAD, M.K.RAMAMURTHI, N.A.PALKHIWALA, P.K.CHATTERJI, R.Chaudhary, R.K.GARG, RAMAMURTHI, S.C.AGRAWAL, S.P.Varma
A.V.VISHWANATHA SASTRI, B.C.GHOSH, D.N.MUKHERJI, D.P.Singh, L.N.Sinha, LAL NARAIN SINHA, M.C.SETALVAD, M.K.RAMAMURTHI, N.A.PALKHIWALA, P.K.CHATTERJI, R.Chaudhary, R.K.GARG, RAMAMURTHI, S.C.AGRAWAL, S.P.Varma
Profit from a mining operation is embedded in the profit of the final product. In an integrated business, profits can be disintegrated and apportioned to specific activities if the taxing statute targets a particular stage of production, regardless of whether the intermediate product was sold.
Headnote:(A) Bengal Cess Act, 1880 - Sections 5, 6, 72 and 76 - Imposition of local cess on immovable property - Assessment of "annual net profits from mines" - Whether profit is derived when mined ore is not sold as such but utilized as raw material for manufacturing finished products which are subsequently sold - Profit from the mining operation is embedded in the profit realized from the sale of the end product (Paras 20, 22).
(B) Integrated Business - Disintegration of profits - Whether profits resulting from a series of integrated activities can be dismembered to ascertain profit or loss attributable to a specific activity - Where a taxing statute targets profit from a single activity within an integrated process, apportionment is implicit and permissible (Paras 22, 26, 27).
(C) Legal Maxim - "No one can make a profit out of himself" - Inapplicability of the principle where the court is not treating different stages of an integrated business as separate entities trading with each other, but is instead analyzing the components of the aggregate profit realized from the final sale (Para 22).
Facts of the case:
The appellants, who own and operate mines, extract ore which is utilized in their own factories for the production of finished products. The authorities assessed a local cess on the basis of annual net profits from the mines. The appellants contended that since the ore was not sold as a commodity but consumed internally, no "profit from the mines" accrued, and that an integrated business cannot be split for the purpose of calculating profit.
Findings of Court:
The court held that the profit from the mining operation is a constituent part of the total profit realized from the sale of the finished products. The absence of a commercial transaction of sale for the raw ore does not preclude the existence of a profit attributable to the mining activity.
Issues: Whether "annual net profits from the mines" are derived when the ore is utilized for the production of finished products rather than being sold as ore; and whether the profits of an integrated business can be disintegrated to determine the profit attributable to a specific component activity.
Ratio Decidendi: The court reasoned that if the sale of an end product yields a profit, that profit is the aggregate of profits from different lines of activity. Where a statute specifically taxes the profit from an initial activity, it is necessary and legally permissible to apportion that profit from the total, even if the business is integrated. This does not constitute "trading with oneself" because it is an analysis of the components of a real profit rather than the creation of a fictional sale.
Result: The appeals fail and are dismissed with costs.
Legal Category Hierarchy
Table of Contents
2. Whether profit from mines requires sale of ore to third parties — Contention that integrated businesses cannot be disintegrated to create notional profits. (Para 7 , 8 , 23 )
3. Profit from mining is embedded in the final product's sale — Integrated business profits can be apportioned to specific activities for taxation purposes. (Para 10 , 19 , 20 , 22 , 24 , 25 , 26 , 27 , 30 )
4. Profit from a mine accrues when the extracted ore is converted into a finished product and sold, as the mining profit is embedded in the final realization. (Para 22 , 27 )
5. Appeals dismissed with costs. (Para 33 )
6. Does the concept of profit from a mine require the sale of ore as a raw commodity?
No. Profit can accrue even if the ore is not sold as such but is converted into a finished product and sold, as the profit from the mining operation is embedded in the final sale of the end product. (Para 20 , 22 )
7. Can profits of an integrated business be disintegrated for tax purposes?
Yes. Where a statute taxes profit from a specific activity within an integrated process, the total profit can be apportioned to determine the amount attributable to that specific activity, similar to the separation of agricultural and business income. (Para 22 , 26 , 27 )
8. Does the maxim that a person cannot trade with himself prevent the attribution of profit to an internal production stage?
No. The maxim applies to fictional sales of the same commodity to oneself; it does not apply when a raw material is transformed into a different commodity and sold to a third party. (Para 19 , 22 )
9. Does the absence of specific statutory machinery for profit apportionment invalidate a charging section?
No. The lack of express machinery does not render a charging provision inane, as assessing authorities can determine profits through enquiry or utilize residuary valuation provisions provided in the Act. (Para 30 )
N.R.AYYANGAR, J.
(1) THESE three sets of appeals raise a common point relating to the validity of the imposition of a cess under ss. 5 & 6 of the BENGAL CESS ACT , 1880 (Bengal Act IX of 1880, as amended in Bihar), hereinafter referred to as the Act. These provisions whose interpretation is the only point for consideration in these appeals run in these terms: `5. All immovable property to be liable to local cess. From and after the commencement of this Act in any district or part of a district, all immovable property situate therein, except as otherwise in section 2(2) provided, shall be liable to the payment of local cess. 6. Cess how to be assessed.-The local cess shall be assessed on the annual value of land s and until provision to the contrary is made by the central Legislature on the. annual net profits from mines and quarries, other than notified mines and from tramways, railways and other immovable property, ascertained respectively as in this Act prescribed; and the rate at which the local cess shall be levied for each year shall(a) in the case of such annual net profits, be one anna on each rupee of such profits; and (b) in the case of the annual value of lands, be such rate as shall be determined for such year in the manner-in this Act prescribed Provided that the rate at which the local cess shall be levied for any one year on the annual value of lands shall not be less than the. rate of one anna and six pies or more than the rate of two annas on each rupee of such annual value. `
(2) THE three companies who are the appellants here own certain mines in Bihar. The Tata Iron & Steel Co., Ltd.-appellants in Civil Appeals 587 & 588 of 1961 has taken on lease certain iron-ore mines at Noamundi in the Singhbhum district from where it extracts iron-ore which it utilises in its factory at Jamshedpur for making iron & steel. Similarly, the Indian Iron & Steel Co., Ltd., which is the appellant in Civil Appeals Nos. 590 & 591 of 1961 holds mining concessions for iron and manganese ore at Gua and Monoharpur in the district of Singhbhum and the ore extracted by it is utilised for the manufacture of iron & steel and steel products at the companys factories at Burnpur and Kulti in the district of Burdwan. In the same manner., the Indian Copper Corporation Ltd., which is the appellant in Civil Appeals Nos. 600-601 of 1961, has taken on lease certain mines in the district of Singhbhum and the ore mined by it is manufactured into copper and copper products at its factory at Moubhandar in the same district. The question raised for decision is whether the three appellants could be said to have derived `annual net profits from the mines` when the ore mined by them is not sold as such but is utilised for the production of finished products which the appellants sell.
(3) IN view of the nature of the question raised it would not be necessary to set out in detail the facts of each one of the cases and we will content ourselves with narrating a few of the salient facts which preceded the proceedings culminating in the appeals now before us relating to the Tata Iron & Steel Co. Ltd.appellants in Civil Appeals 587 & 588 of 1961 to appreciate generally the antecedent history and the proceedings giving rise to the appeals. The Company was not assessed to the cess on the ore mined by it till 1926, when the company sold some quantity of iron ore extracted by it to the Bengal lion and Steel Co. Ltd. and an assessment to cess under the Act was made against it in respect of that year. Even though it made no sales of iron ore in later years but utilised the ore extracted in its own factory, the company was assessed to and paid the cess on an assumed profit of 12 as. per ton of iron ore mined by it upto 1939- 40 and from the next year onwards the profit was assumed to be a little higher Viz., at Re. 1 per ton. ThiS basis of taxation was varied in the year 1950-51 when it was raised to Rs. 1/4.00 per toil by reason of an agreement between
