In Re: The Bhikanpur Sugar Concern

Miller, C.J.—This case has been referred to the High Court by the Member of the Board of Revenue of this Province under the provisions of Section 51 of the Indian Income Tax Act, 1918. The reference was made in the course of proceedings under the Act relating to the assessment to income tax of the Bhikanpur Sugan Concern. The question upon which the opinion of the High Court is sought is whether the Bhikanpur Sugar Concern is liable to pay income tax in respect to that portion of its profits derived from the sale of the finished article in so far as it is manufactured from sugarcane grown by its" own servants on its own land, or whether it is exempted on the ground that such income is agricultural income'' within the meaning of Sections 2 and 4 of the Act; By Section 4 income of this nature is not chargeable to income tax, By Section 2 agricultural income is defined. By Clause (1) (6) of that Section agricultural income includes any income derived from (i) agriculture, or (ii) the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render the produce raised or received by him fit to be taken to market.

It is contended on behalf of the factory that the income derived from the sale of the finished product manufactured by them at their factory from the raw material grown upon their own land is covered by the words of Section 2 (1) (6) which I have just quoted. In order to determine this question it is necessary to consider the circumstances under which the factory carries on its business. It is owned by a private company, the business being conducted under the direction of a manager who is also a share-holder in the company. It owns a sugar factory equipped with modern machinery by which the sugarcane is converted into refined sugar ready for domestic purposes. It carries on business on a large scale. Daring the year of assessment 7,44,398 maunds of sugarcane, of, which rather more than half was grown on the factory''s own land, passed through the mills, the remainder being purchased from cultivators of sugarcane in the neighbourhood. The gross, proceeds of this sugarcane amounted to nearly 6 lakhs of rupees and that of molasses for the same period to about Rs. 41,000. The net profits for the year were stated to be Rs. 1,75,000, on which income tax has been assessed at Rs. 10,937. The factory has lodged an, objection in respect to Rs. 7,804 of this assessment as representing a tax on the profits derived from sugar-cane grown by themselves. From the accounts it appears that the agricultural branch which deals with the cultivation of the raw material and the factory branch are kept separte. It is not stated what the profits of the agricultural branch are but these would appear to be exempt from taxation. The process of manufacture adopted by the factory is similar to that employed by other sugar refineries in other parts of the world.

The main question for determination is whether the process of manufacture carried on by the company can be said to be the performance by a cultivator of any process ordinarily employed by a cultivator to render the produce raised fit to be taken to market. In order to determine this it is necessary to enquire as to what are the processes ordinarily employed by cultivators of sugarcane. It is common ground that the vast bulk of the sugarcane in this country is cultivated by raiyats of agricultural villages. This they either sell in a raw state to middlemen or owners of factories or country mills, or they reduce it by certain simple processes of crushing and boiling to a substance known as rab a kind of molasses in a crude state, and then sell it to the factories where it is subjected to a further process of refinement, in order to make it fit for domestic use as sugar. It is also not disputed that a very small fraction of the sugarcane produced in this country is grown by the owners of factories themselves. The facts of which I have given a short summary are more fully referred to in the order of reference of Mr. McPherson, the Officiating Member of the Board of Revenue, but I have stated enough to show that the processes employed by the factory are in kind as well as in. degree vastly different from those ordinarily employed by a cultivator in order to render the produce fit for the market. Indeed the market to which the cultivator ordinarily takes his wares is not the same market as that in which the refined sugar manufactured by the factory is sold. The market of the vast majority of cultivators of sugar, cane is the sugar refinery itself or the country mill. The market of the sugar factory is the retail dealer of the finished product fit for domestic use, and in my opinion it is not possible to hold that the processes employed by a sugar factory in order to render it fit for their customers are those ordinarily employed by a cultivator to render it fit for his. It is true that the cultivator in some cases subjects the raw material to certain manufacturing processes resulting in the production of the juice or rab before disposing of it to his customers, but even assuming that the performance of these processes by the cultivator would come within the meaning of Section 2 (1) (6) (ii), the matter so far as he is concerned stops there, and a great deal more has to be done by the factories to refine and crystallise the'' product before it is fit for the market with which they deal.

It was contended on behalf of the objector that the words process ordinarily employed" have reference to the processes ordinarily employed by sugar factories or anyone else, if they happen to be cultivators, in rendering the produce fit for the market and that if a person is a cultivator and employs such processes in the ordinary course of his business, he comes within the exemption created by the section. I do not think the Section can be read in this sense. It refers to the performance by a cultivator of a process ordinarily employed by a cultivator, which I think means in ordinary use amongst cultivators and not to a process ordinarily employed by anybody else, and had the meaning been that contended for it is difficult to see what operation can be given to the words by a cultivator or receiver of rent-in kind."

It is next contended that as this is a taxing Statute, it should be strictly construed in favour of the subject and if there is any ambiguity in the meaning he should be allowed the benefit of the doubt. I do not think the construction of the Section gives rise to any difficulty. The real question for determination is one of fact, iz., whether the process employed by the factory is that in ordinary use by cultivators, and in my opinion the evidence shows that it is clearly not.

It is further contended that the history of the assessment to taxation of the income of the Bhikanpur Factory throws some light Upon the intention of the Legislature. In 1912 the Commissioner of Tirhut on an objection by the factory exempted them from assessment on the profits of their homegrown produce, his decision being based upon an opinion expressed by Sir G. C. Paul, Advocate-General of Bengal, in the year 1886 relating to the assessment of indigo and tea concerns. We have no information as to the processes adopted by indigo or tea planters and are unable to judge how far that opinion may be relevant to the facts of the present case, bat it is contended that notwithstanding the decision of the Commissioner of Tirhut the Legislature in passing the Act of 1918 re enacted in Section 2 the provisions of the previous Acts in practically identical language and must, therefore, be taken to have concurred in the interpretation placed upon the Act by the Commissioner of Tirhut in 1912. It appears, however, that in 194 the Board of Revenue were not satisfied with this decision and placed the matter before the Local Government and finally before the Government of India, with the result that the Bhikanpur Factory was assessed on the whole of its profits for the year 1916-1917. This assessment has been paid under protest and a suit is still pending in connection with it, which it has been agreed shall abide the result of the present reference. I agree where there has been a long course of decisions determining the construction of a Statute, this may be taken into consideration in construing anew enactment passed in the same terms as, pre existing Statutes, but a, single decision such as that referred to cannot, in my opinion, form the basis of any presumption as to the intention of the Legislature in the present case. Moreover, as is pointed out by Mr. McPherson in the order of reference the word "factory," which appears in the proviso to Sub-clause (c) of Section 5 of the old Act, has been omitted from Section 2 (1) (b) (iv) of the present Act "presumably lest its presence might lend, colour to any claim of the nature now under, consideration."

It is further contended that the factory was never taxed before the year 1916-1917 and for many years they have made an income from sugar. There is, however, no evidence, on the record to show how long the manufacture of sugar by this factory has been going on. We are told that it turned its attention to sugar in the year 1906, as did also many indigo planters at a time when the synthetic process of indigo manufacture in Europe materially interfered with the business of indigo planters in this country, What the process of manufacture adopted-by the Bhikanpur Factory at that time was we do not know, but in any case I do not think the fact that it has escaped taxation in the past is in itself a good reason why it should still escape, unless it is ,in, fact-exempted by the Income Tax Act itself. In my opinion they are not exempted under the clauses of the Act relied on for the, reasons above given, and I would answer in the affirmative the question submitted to us whether the Bhikanpur Concern is liable to income tax in respect to that portion of its produce which is derived from sugarcane grown by its servants on its own land and in the negative the question whether it is exempted by reason of the provisions contained in Section 2 (1) (b) (ii) of the Act.

A further point was taken by the learned Advocate-General on behalf of the Board of Revenue, viz., that a company in the position of the Bhikanpur Concern cannot be said to be a cultivator within the meaning of Section 2 of the Act. He pointed out that the company really consisted of two distinct entities, one interested only in the production of sugarcane and the other in the manufacture of refined sugar, and the accounts hew that the factory branch really bought from the agricultural branch the raw sugarcane at a fixed valuation of 7 annas permaund, which was credited to the agricultural Branch in the factory accounts, and that in such circumstances the cultivation of the'' raw material was only ancillary to the manufacture of the finished product, whereas in the case of a cultivator contemplated by the Act the process of manufacture, Such as it is, is merely ancillary to the cultivation of the raw produce in order to make it fit for'' the market. In support of this contention the case of the Stamp Reference 5 A. 360 : A. W. N. (1833) 113 : 2 Ind. Dec. 987, was relied upon. That case dealt with the meaning of the term cultivator in the Second Schedule of the Stamp Act of 1879 and held that it did not include farmers, middlemen or lessees even though cultivation was to some extent carried on by them fn the area covered by their lease but included only those persons who actually cultivated the soil themselves or by ''members of their household or by hired labour and with their own or hired stock. The question in that case'' was whether a kabuliyat executed by a lessee of certain land, the greater portion of which was not cultivable or susceptible of being treated as a cultivator''s holding, was exempted from stamp duty under the Act of 1879. The Court found that although some small portion of the land might have been brought under cultivation by the lessee, he was not a cultivator within the meaning of the Act, having regard to the purposes for which the land was held. That case does not in my opinion support the contention of the learned Advocate-General in the present case. Having regard td the purposes for which the company''s land was used and the fact that they did cultivate itfoi1 their own purposes by their own servants, I think they must be held to be cultivators within the ordinary meaning of that term. But in so far as they were carrying on a business that processes used by them for that purpose were those ordinarily employed by cultivators for the purpose of rendering the produce fit to be taken to market. The troth is, in my opinion, that the Bhikanpur Concern was really acting in a dual capacity. In so far as they were cultivators of sugarcane, their operations ceased when they handed over the raw material to their factory branch. In so far as they were manufacturers of refined sugar, they were carrying on a business which required the adoption of manufacturing process not ordinarily used by cultivators before disposing of their produce in the market. In fact there is no evidence to shew that any other sugar factories of this nature convert into refined sugar produce grown on their own farms but even assuming that there may be a few isolated instances in which this is done, it cannot in my opinion be said that this process of manufacture is one ordinarily employed by a cultivator.

Atkinson, J.

I concur in the judgment just delivered by the learned Chief Justice.

I desire, however, to add a few observations of my own.

The question for decision is, whether the Bhikanpur Sugar Concern is exempt from liability to income tax under the provisions of Section 4, read with Section 2, Clause (b) (ii), of the Indian Income Tax Act, Act VII of 1918?

Before we consider the construction of Section 2 (b) (ii) with a view of imposing liability on the Bhikanpur Sugar Company for the payment of income tax, it is necessary to ascertain two facts.

First, is the Bhikanpur Sugar Concern a cultivator of land? And secondly, is the process which the sugar company employ in the manufacture of sugar the process ordinarily employed by a cultivator in order to render the produce raised by him fit to betaken to the market?

The Bhikanpar Concern is a private" company carrying on two separate and different classes and kinds of business. The company carry on an agricultural business in respect of a large area of land which they hold as Makarraridars; and secondly, the company also carry oh a very large and extensive business in the manufacture and refining of sugar for sale to consumers generally.

The respective branches of the company''s business are independent of each other and are presumably worked and managed by independent staffs.

In the reference the position of the Bhikanpar Company with regard to its different businesses is stated to be as follows:

1.The Concern is divided into two brandies; an agricultural branch, which deals with the cultivation and purchase of the cane; and a factory branch, which is concerned solely with the manufacture of sugar"

The sugar business of the company is managed by a European manager; and for the purpose of carrying on the business of the sugar factory, the company buy sugarcane from ordinary raiyats and cultivators at the price of four annas per maund; and in addition to the purchases of sugarcane made by the company from raiyats, the sugar factory also buys from its agricultural branch such sugarcane as that branch produces from the land under its cultivation.

The Board of Revenue found in the reference that the cane which is purchased by the company from cultivators is purchased at the rate of four annas permaund, and the cane grown by the Bhikanpur Company itself in the course of its agricultural business is transferred '' from the agricultural branch to the factory branch at a uniform valuation of seven annas per maund; and it is further stated in the reference that the amount of sugarcane purchased by the sugar factory from the Bhikanpur agricultural undertaking is debited in the books of the sugar factory in favour of its agricultural branch.

Thus the position seems to be that the sugar factory purchases from its agricultural branch the sugarcane produced by it at a price higher than the ordinary market price payable for sugarcane to the ordinary cultivating raiyat. This being the situation, in my opinion the sugar factory cannot be said to be the cultivators of the sugarcane produced by the agricultural branch of its business. The sugar factory in my view is in the position of an ordinary purchaser from its agricultural branch business, just in the same way as the sugar factory purchases sugarcane from individual cultivators.

They (the sugar factory) convert the product of the agricultural business into stock, suitable and convenient for the carrying on of their manufacture of sugar referable to that portion of their business connected with the sugar factory.

I hold, therefore, that the sugar factory as such is not a cultivator within the meaning of Section 2 (b) (ii) of the Income Tax Act; and consequently that the Bhikanpur Sugar Factory is not within the class of persons contemplated as entitled to exemption from liability to pay income tax under the Income Tax Act of 1918.

Assuming, however, that the Bhikanpur Sugar Factory is a cultivator within the provisions of the Income Tax Act, the next question that requires to be considered is, does the company in respect of the sugarcane which it raises or produces as part of its agricultural business submit the produce so raised by them to a process ordinarily employed by cultivators generally to render such produce fit to be taken to the market? In other words, the question is whether the operations of the sugar factory can reasonably be described as a process ordinarily employed by a cultivator to render his produce fit to be taken to market.

The Bhikanpur Company is an industrial trading concern enjoying a large and extensive business in the manufacture and refining of sugar; and it purports to buy raw material in its raw condition or in a crude state, and convert it into the refined and finished article for human consumption in the market of the consumer; and for the purpose of its business the sugar factory has erected costly machinery of the most improved and scientific character in order to produce the most finished article in the shape of sugar fit in its condition, as it leaves the factory, to be used for all domestic purposes.

Having considered the evidence in the case, I am satisfied that the process employed by the sugar factory in the manufacture of sugar is not that ordinarily employed by a cultivator in rendering the sugarcane produced by him fit to be taken to the market; and in my opinion the argument addressed to us by Mr. Kennedy begs the whole question when he contends that because the sugar factory has to treat the sugarcane in a certain way in its initial stages in order to render the raw material fit for more perfect manufacture as a finished article, that such process as is employed in the operations of the factory in the manufacture of sugar runs on parallel lines with the methods ordinarily adopted by a cultivator in rendering the produce of the sugarcane produced by him fit to be taken to the market.

Holding as I do that these two questions which I have mentioned should be answered in the negative qua the rights of the Bhikanpur Sugar Company, there is an end of this reference; and there is no necessity to apply one''s mind to a more minute consideration of the provisions of Section 2(b)(ii).

However, I would like to add two observations with regard to the construction of that section.

In my opinion the process ordinarily employed by a cultivator in rendering the produce produced by him, so far as sugarcane is concerned, for the purpose of rendering it fit to be taken to the market is the more crude and primitive method or process referred to in the deposition of Abilak Dbobi, Annexure G, which is the process ordinarily adopted by a cultivator in preparing the raw sugarcane for purchase by the manufacturer or the millowner, as the case may be; and, therefore, I am of opinion that the market contemplated in Section 2 (b) (ii) is the market available to the producer as such, and not the market for which the sugar factory cater, viz., the market of the retailer or consumer.

Section 4 read with Section 2 of the Income Tax Act of 1918 is, in my opinion, a Section designed to protect the producer, by giving to him exemption from liability from income tax, as a bona fide agriculturist carrying on the business of a farmer in the ordinary course of good husbandry.

For these reasons I respectfully concur in the judgment of the Chief Justice, and think that the answer to the reference should be that the decision arrived at by the Board of Revenue is right, and that, the Bhikanpur Sugar Company are not entitled to the exemption which they claim under the Income Tax Act of 1918.

Adami, J.

The circumstances leading up to this reference have been fully stated by the learned Chief Justice, the question referred to us is whether a company owning a sugar factory equipped with up to date machinery and manufacturing sugar for the consumption of the public, can claim exemption from the payment of tax on so much of its income as is derived from the sale of refined sugar manufactured from sugarcane grown on lands belonging to the company and cultivated by its own servant, whether in fact such income is "agricultural income" within the meaning of Section 2, sub-Section (1), Clause (b) (ii) of the Income Tax Act, 1918, and is, therefore, exempted from tax u/s 4 of the Act. u/s 2 (i) (b) (ii) of the Act, "agricultural income" includes income derived from the performance by a cultivator or receiver of rent-in kind of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render the produce raised or received by him fit to be taken to market."

We have, there, to determine what process is ordinarily employed by cultivators or receivers of rent-in-kind to render the sugarcane raised or received by them fit to be taken to market, and whether the Bhikanpur Sugar Factory, assuming it to be a cultivator so far as sugarcane grown by it is concerned, is in fact able by a like process to convert the raw material into a substance fit for the market on which the Concern depends for its profit and to which it ordinarily resorts.

The affidavit, Annexure G, to the reference shows that the ordinary cultivator of sugarcane outs and strips his cane, crushes it in a kolhu with the help of two bullocks and extracts the juice, which is run into an earthen vessel. The juice is strained through a piece of cloth and then removed to an iron pan wherein it is boiled slowly until it becomes rab. The rab is then sold by the cultivator to sugar refiners for the manufacture of sugar. Instead of converting the juice into rab, cultivators will often boil and re-boil the juice until it becomes a thick jelly, which is then converted into gur or molasses and is used in the cultivator''s own house or is sold for domestic use as gur in the local market.

The next class are the Indian manufacturers of sugar on a small scale as described in Appendix F to the reference. They chiefly buy cane from cultivators in the locality and by stripping and crushing, boiling, and straining, mate gur cakes which are soaked in water. This substance is boiled and strained and then stored in tanks covered with simar (tank weed) which causes the molasses to drain away and leave coarse white sugar which is then, after being broken up, fit to be taken to the market to be sold.

The next superior class described in Annexure H are the Indian sugar refiners, who bay rab from the cultivators and grow no cane themselves. They plane the rab in pans and boil and strain and re-boil it allowing it to thicken. It is then covered with simar which makes the molasses trickle off and sugar remains. These men are not cultivators, but they form the market to which the cultivators take the rab they have made from the cane grown by them.

In the processes followed by these three classes no machinery is used other than the kolhu (wooden crusher) or the Behea Mill, both of which are worked by bullocks.

Lastly we come to the sugar factory such as the Bhikanpur Concern. There the process up to the stage of the extraction of the juice is similar to that followed by the; ordinary cultivator and small Indian manufacturer, only, instead of bullocks, machinery is used for crushing and the arrangements are more elaborate. A much more scientific process, however, is followed in treating the juice, various retorts, defecators, eliminators, settling pans, triple effect boilers, and centrifugals are used for converting the juice into rab and the rab into sugar. The crushing, heating and evaporating are done by machinery and steam. The process followed by the factory, as far as the stage of conversion into rab, is in its essentials the same as that fallowed by the cultivator though far more elaborate, but for the cultivator the conversion of the juice into rab is the end of the process He has then performed the process which has made the sugarcane fit to be taken to his market, and his market is to be found in the smaller sugar refineries or larger sugar factories, otherwise, if be does not trouble to perform any process at all, he sells the cane he has grown to a factory or to an Indian refiner who extracts sugar from the cane On a small scale as shown in Annexure F. The cultivator, then, randers the produce of his sugarcane crop fit for the market in which he is to sell it either by merely cutting it or by converting it crudely into rab, and the market he sells it in is the market in which the manufacturers and refiners of sugar are purehasers.

On the other hand, the object and sole business of the sugar factory is to produce refined sugar. It has no sale for rab but instead may purchase it. It finds its market among the general consumers of sugar and the grocers who sail it to the public.

Assuming that the concern, by reason of its growing its own sugarcane on its own lands, is a cultivator for the purposes of Section 2 of the Act, it cannot be held that the process performed, by it in order to render that sugarcane fit to be taken to the market, which it is the object of its business to command, namely, the sugar-market, is a process ordinarily employed by a cultivator who merely converts sugar, cane into rab to be sold to manufacturers or refiners. Were we to decide otherwise, and follow the contention of the Bhikanpur Concern to the logical conclusion, we would have to admit that a firm carrying on the business of the manufacture of confectionery, which, for the purpose of that business, ''grew its own cane and refined its own sugar, could claim to be exempted from tax on the income it derived from the sale of the confectionery.

It is not necessary to dispute the assertion in the affidavit that the process performed in the Bhikanpur Factory is the same as that performed in all sugar factories in India and the world. The point is that the processes performed by the factory to render the sugarcane fit to be taken to its market are not the same as those ordinarily employed by a cultivator to render the sugarcane be has grown fit to be taken to the market in which he can find a sale. The factory cannot claim that, because up to the preliminary stage of conversion of sugarcane into rab the process performed by it is essentially the same as that ordinarily employed by a cultivator who sells his rab to the refiners and manufacturers, therefore, the whole process, which produces the refined sugar ready for the consumer by the treatment of the rab by elaborate machinery, is the process ordinarily employed by the cultivator. The produce of the factory''s cultivation may be the same and the preliminary stage of manufacture may be the fame as in the case of a cultivator, but the final produce of the process is not the same and the market is altogether different. I agree with the learned Chief Justice that Section 2 (1) (b) (m), read with Section 4, of the Income Tax Act does not apply to the case of a sugar factory of the nature of the Bhikanpur firm, even though a moiety or more of the sugar manufactured is the product of sugarcane grown on its own lands by its own servants.