Sakarlal Naranlal v. C.I.T. AIR 1965 Guj. 165

Sakarlal Naranlal v. C.I.T. AIR 1965 Guj. 165

FACTS

• The assessee, an individual, cultivated a vegetable product called galka (botanical name: luffa pentendra) on agricultural lands.
• The galka seeds were obtained from abroad, and after cultivation, the assessee processed them to produce loofahs, a fibrous product used in various applications, including shoe manufacturing.
• The process involved several steps such as tapping dry galkas, deskinning, acid baths, drying, and pressing.
• Attempts to sell the loofahs abroad were unsuccessful due to size variation in abroad, resulting in their return to India and causing a considerable loss to the assessee.
• The accounts related to galka cultivation were recorded in the books of a business named Sakarlal Sons and Company, which later transferred the galkas to another business, Minaxi Trading Company, for processing and export.
• The losses incurred in these operations were claimed by the assessee as non-agricultural business losses.
• However, the revenue authority disallowed these losses, considering them as agricultural losses under section 2(1)(b)(ii) of the Income Tax Act.
• The Income-tax Officer, Appellate Assistant Commissioner, and Tribunal upheld this disallowance, considering the processing of galkas into loofahs as an agricultural operation.
• The Tribunal rejected the argument that there was a separate market for galkas and concluded that the processing was a customary agricultural process, as the produce did not have a ready market in its original stage.
• The Tribunal referred the question of whether the process employed on galkas for exporting and selling abroad satisfied the requirements of section 2(1)(b)(ii) of the Act to the court for opinion.

ISSUE

• Whether on the facts here, where the galka produced does not have a market in India, the process employed on it for purposes of exporting and selling it abroad satisfies the requirements of section 2(1)(b)(ii) of the Act?

RULES 

• Section 2(1)(b)(ii) Income Tax Act, 1922 defines income derived from land, including income from the performance of any process ordinarily employed by a cultivator to render the produce fit for market. The process must fulfill two conditions: it must be necessary to render the produce marketable, and it must be a process ordinarily employed by cultivators. Additionally, the original character of the produce should not change after the process.

HELD-

• Brihan Maharashtra Sugar Syndicate Ltd. v Commissioner of Income-tax (Bombay High Court): Process of manufacturing gul from sugarcane wasn't considered a process to render it fit for market as there was already a market for sugarcane.
• Boggavarapu Peda Ammaiah v Commissioner of Income-tax (Andhra Pradesh High Court): Operations of re-drying, stripping, and grading tobacco weren't considered essential to make it marketable, hence not qualifying as agricultural income.
• These cases established that if there is a ready market for the produce in its original state, any process performed on it would not qualify as necessary for marketability. The process must also be commonly employed by cultivators and not alter the original character of the produce.
• In the present case, it was argued that if galkas had a market outside India, the process of converting them into loofahs for export could not be deemed necessary for marketability. Thus, the Tribunal should have considered both domestic and international markets before determining whether the process falls under section 2(1)(b)(ii).
• The Tribunal initially found no market for galkas in India, but it's unclear if they considered the market abroad.
• The Tribunal's decision is being re-evaluated, focusing on whether there was a market for galkas both in India and abroad.
• The Tribunal is directed to provide a clear finding on the market for galkas both domestically and internationally.

COMMENTARIES NOTES-

• INCOME DERIVED FROM MARKETING PROCESS Sometimes it becomes difficult to find ready market of the crop as harvested. In order to make the produce a commodity which is saleable, it becomes necessary to perform some kind of process on the produce. The income, arising by way of enhancement of value of such produce, by performing such process to make the raw produce fit for market, is also agricultural income. However, the following conditions must be satisfied: 

the process must be one which is ordinarily employed by a cultivator or receiver of rent-in-kind;and

the process must be applied to render the produce fit to be taken to market.