Sakarlal Naranlal vs Commissioner Of Income-Tax, … on 1 September, 1964 – Case Summary

In the case of Sakarlal Naranlal vs Commissioner Of Income-Tax, decided on 1 September 1964 by the Gujarat High Court, a unique situation arose where the roles of the assessee and the revenue were reversed. The case revolved around the interpretation of section 4(3)(iii) and section 4(3)(viii) of the Income Tax Act, 1922, and the classification of losses incurred by the assessee.

Facts of the Case

The assessee, Sakarlal Naranlal, was an individual who owned agricultural lands. In 1952, he was suggested by a friend to cultivate a vegetable product called galka (botanical name: luffa pentendra). He imported seeds from abroad and started growing galka on his lands. The galka grown was not indigenous but was a type widely grown in Formosa, Japan, and other places. After the galkas were fully grown, they were processed into a product known as loofahs, which are fibrous pads commonly used in the manufacture of shoes.

The loofahs produced by the assessee were smaller than the foreign ones and were sent to England on a consignment basis for sale. However, due to the high purchase tax, the loofahs were not sold and were reshipped back to India, causing a loss to the assessee. The assessee claimed a loss of Rs. 1,85,932-8-0 in the assessment year 1954-55 and similar losses in the subsequent years 1955-56 and 1956-57.

Issues

The main issue was whether the losses claimed by the assessee were agricultural losses or business losses. The assessee claimed these as business losses arising out of non-agricultural operations, but the revenue contended that they were agricultural losses and were, therefore, not liable to be taken into account in computing the income of the assessee from business.

Court’s Observations and Judgment

The court observed that the question depended on the true construction of section 2(1)(b)(ii) of the Income-tax Act, 1922. If the process of converting galkas into loofahs was covered by section 2(1)(b)(ii), the whole of the loss suffered by the assessee would be an agricultural loss and would be excluded from the total income of the assessee as per section 4(3)(viii).

The court noted that there were two conditions to be fulfilled for a process to be considered within the meaning of section 2(1)(b)(ii). First, the process must be necessary to render the produce fit to be taken to market, implying that there must be no market for the produce in its raw state. Second, the process must be one which is ordinarily employed by a cultivator of the produce to render it marketable. However, even if these conditions are met, the produce must not change its original character as a result of the process.

In the present case, the court found that the galkas did not have a market in India in their raw state, and the process employed by the assessee was necessary to make them marketable. The court also noted that the process did not change the original character of the galkas. Therefore, the court concluded that the losses suffered by the assessee were agricultural losses and were not liable to be deducted in computing the income of the assessee.

This case is significant as it provides a detailed interpretation of section 2(1)(b)(ii) and section 4(3)(viii) of the Income Tax Act, 1922, and sets a precedent for cases where the nature

of the losses incurred by an assessee is in question.

Further Observations

The court also made some important observations regarding the nature of the businesses involved in the case. The assessee had two businesses – Sakarlal Sons and Company, which was involved in the cultivation of galkas, and Minaxi Trading Company, which processed the galkas into loofahs and exported them. The losses claimed by the assessee were suffered by Minaxi Trading Company, and were calculated based on the cost of the galkas being taken at the value at which they were shown to have been taken over from Sakarlal Sons and Company.

The court noted that even if the operations of Minaxi Trading Company were considered non-agricultural operations, a question might arise as to the correct amount of losses suffered by the assessee attributable to these non-agricultural operations. The court, however, did not express any opinion on this matter.

Precedents Cited

The court referred to several precedents while arriving at its judgment. These included the decisions of the Patna High Court in In re Bhikanpur Sugar Concern, the Calcutta High Court in Killing Valley Tea Company Ltd., v. Secretary of State, the Patna High Court in J. M. Casey v. Commissioner of Income-tax, the Court of the Judicial Commissioner, Nagpur, in Sheolal v. Commissioner of Income-tax, and the Bombay High Court in Brihan Maharashtra Sugar Syndicate Ltd., v. Commissioner of Income-tax. These cases helped the court in interpreting the provisions of the Income Tax Act, 1922, and in understanding the nature of the processes employed by the assessee.

Conclusion

The case of Sakarlal Naranlal vs Commissioner Of Income-Tax is a landmark judgment that provides a detailed interpretation of the provisions of the Income Tax Act, 1922, related to agricultural income and losses. It sets a precedent for cases where the nature of the losses incurred by an assessee is in question, and provides guidance on the conditions that need to be fulfilled for a process to be considered within the meaning of section 2(1)(b)(ii) of the Act. The case also highlights the importance of the marketability of a product in its raw state and the changes brought about in the product as a result of the process in determining the nature of the losses.