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

Gujarat High Court

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

Equivalent citations: (1965) GLR 114, 1965 56 ITR 503 Guj

Author: Bhagwati

Bench: J Shelat, P Bhagwati

JUDGMENT Bhagwati, J.

1. Ordinarily we find cases where the assessee relies on section 4(3)(viii) and the revenue contests the claim of the assessee, but here in this reference the position is reversed and we find the revenue relying on section 4(3)(iii) and the assessee disputing that position. The reference relates to assessment year 1954-55, 1955-56 and 1956-57 the corresponding previous years being Samvat Years 2009, 2010 and 2011. The assessee is an individual and he holds certain agricultural lands. In or about 1952, a friend of the assessee suggested to him the idea of growing a vegetable product commonly called galka, the botanical name being luffa pentendra and the assessee accordingly obtained galka seeds from abroad and, after preparing the lands for cultivation, raised galka on the lands in 1952. Now the kind of galka prown by the assessee was not an indigenous kind but was a kind grown fairly widely in Formosa, Japan and other places. After the gulkas were fully grown, they were removed from the plants and the assessee then subjected them to a process for preparing what are called loofahs. The process consisted of various steps taken in the following order : (1) tapping dry galkas for taking out the seeds; (2) deskinning them; (3) giving them an acetic acid bath; (4) holding them in salicylic acid; (5) drying them in the sun ; (6) drying them in sun; (6) putting them in cold water for two days ; and (7) lastly, pressing them for the purpose of packing. The final product which emerges as a result of subjecting galkas to this process is known as loofah. It is a fibrous product in the nature of a pad and we area told that it is commonly used in the manufacture of shoes.

2. The foreign loofahs are about 16″ in length and 4″ in width. The loofahs prepared by the assessee were, however, only 5″ in length and 2-1/2″ in width. The assessee tried to market these loofahs abroad and sent them to England on consignment basis the sale, but it was found that it was not possible to sell them. The position was that even if they were sold at the lowest possible rate, the assessee would have been liable to pay purchase tax and that would have caused considerable loss to the assessee. The loofahs were, therefore, reshipped to India. The result was that loss was suffered by the assessee in this transaction. The assessee claimed a loss of Rs. 1,85,932-8-0 in the assessment for the assessment year 1954-55 and similar losses were also claimed in the assessment for the subsequent assessment years 1955-56 and 1956-57.

3. We may point out at this stage that the accounts in respect of the activities relating to the cultivation of galkas were entered by the assessee in the books of account of a business carried on by him in the name of Sakarlal Sons and Company. After the galkas were raised and removed from the plants, they were transferred by the assessee to the books of account of another business carried on by the assessee in the name of Minaxi Trading Company at a particular value determined by the assessee and it was Minaxi Trading Company which processed the galkas and exported loofahs prepared out of them. The losses set out above were, therefore, suffered by the business of Minaxi Trading Company and they were obviously arrived at on the basis of the cost of the galkas being taken at the value of which they were shown to have been taken over from Sakarlal Sons and Company. These losses were claimed by the assessee 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. That is a question which we shall presently consider, but it is clear that even if the contention of the assessee is accepted and it is held that the operations of Minaxi Trading Company were non-agricultural operations, a question might well arise as to the correct amount of losses suffered by the assessee attributable to these non-agricultural operations. Both the businesses, namely, Sakarlal Sons and Company and Minaxi Trading Company being the proprietary businesses of the assessee, the revenue may in that event have to apportion the losses suffered by the assessee in the entire transaction between the agricultural operations carried on in the name of Sakarlal Sons and Company and the non-agricultural operations carried on in the name of Minaxi Trading Company by resort to rule 7 of the Rules made under section 59 of the Act. We are, however, not concerned with that question and we do not wish to express any opinion upon it. These facts have been set out by us namely because an argument was founded upon them on behalf of the assessee for showing the conduct of the assessee as a cultivator.

4. The losses claimed by the assessee were disallowed by the Income-tax Officer on the ground that they were agricultural losses. The Income-tax Officer took the view that the raising of galkas was ultimately an agricultural operation and so far as the processing of galkas resulting in the preparation of loofahs was concerned, it was a process ordinarily employed by a cultivator to render galkas produced by him fit to be taken to market and the losses resulting from these operations were, therefore, agricultural losses within the meaning of section 2(1)(b)(ii). The assessee carried the matter in appeal, but the Appellate Assistant Commissioner upheld the disallowance of these losses. The matter was then taken to the Tribunal. The Tribunal also came to the conclusion that the process employed by the assessee was a process which came within section 2(1)(b)(ii) and the lossess suffered by the assessee were therefore, agricultural losses which were not liable to be deducted in computing the income of the assessee. Much argument turned upon the question as to what findings of fact were actually reached by the Tribunal and it would, therefore, be desirable to set out the relevant portion of paragraph 5 and the whole of paragraph 6 of the order of the Tribunal which were in the following terms :

“…. It was submitted that this was a case where the product galka has a market by itself and that subsequent operations are in the nature of manufacturing operations which do not come within the scope of the definition of agricultural income in section 2(1)(b)(ii). Reliance for this purpose is placed on evidence in the shape of letters written by an entity called Messrs. M. Kawanishi of Kobe, Japan. This is a letter, which was written to the assessee on September 21, 1959, in which it is stated that looking to the quality of the stuff, texture and size, they would have been in a position to purchase the stuff on assorted basis in the year 1952, round about the 12s per dozen on C.I.F. Japanese port basis. Another letter written on October 8, 1959, by another party of Japan was also relief upon for showing that the price in 1952 would have been round about 15-1/2s, a dozen. It is stated that on the basis of these letters, even dried fruits had a market by themselves and that, therefore, the rest of the activity was not one which would be an agricultural operations.

We are unable to agree with this submission. In order to find out whether there was a market for the produce as such or whether it had to be processed before it could be sold, what is necessary is to see whether there is a market at which it could be absorbed. The existence of a theoretical market in a place like Japan is not one that has to be taken into account for this purpose. The section postulates the performance of any process ordinarily employed by a cultivator so as to render the produce fit to be taken to market. The expression “ordinarily employed” would appear to postulate the existence of certain conditions at or about the locality in which the produce is grown. The item marketed by the assessee was a stranger to the Indian market. Therefore, there could have been no ready market in India. Indeed, this position was not disputed by the assessee. Therefore, merely because there was some possibility of a sale at its original stage, in a distant country, it does not follow that the fruit by itself had a market, which is relevant for our purpose. If a produce is grown, say in Kerala, and it does not have a ready market in its original stage there, then merely because there is some market, say in Punjab, for the produce in its original stage, it does not follow that the process ordinarily employed by cultivators in Kerala would cease to be agricultural process. In all these matters, what is liable to be looked into is the area in which the produce is grown and the customary process employed to render it fit for market, if it is not marketable in its original stage. That is why it is a question of fact in each case : see Brihan Maharashtra Sugar Syndicate Ltd., v. Commissioner of Income-tax. In our opinion, therefore, in this case, there was no market in which it could be sold in its original stage.”

5. The assessee thereupon made an application to the Tribunal for a reference and on the application the Tribunal made an order referring the following question for the opinion of this court :

“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 ?”

6. This was the form in which the question was framed, but an argument was addressed to us that this question did not bring out the real controversy between the parties inasmuch as it was based on a very limited postulate, namely, that the galkas did not have a market in India whereas the actual finding of the Tribunal was that there was that there was no market at all the galkas and that the question should, therefore, be reframed so as to bring out the real controversey between the parties. We shall consider this argument at the appropriate stage.

7. It is evident that the question depends for its determination on the true construction of section 2(1)(b)(ii) of the Income-tax Act, 1922. The question whether the process employed by the assessee for the purpose of preparing loofahs out of galkas with a view to exporting and selling loofahs abroad satisfies the requirements of section 2(1)(b)(ii) becomes material because if the process is covered by section 2(1)(b)(ii), the whole of the loss suffered by the assessee would be agricultural loss and would by reason of section 4(3)(viii) be liable to the excluded in computing the income of the assessee. Section 4(3)(viii) provides that agricultural income shall not be included in the total income of an assessee. “Agricultural income” is defined in section 2(1). Section 2(1)(a) deals with agricultural income consisting of rent or revenue derived from land which is used for agricultural purposes, and is either assessed to land revenue in the taxable territories or subject to a local rate assessed and collected by officers of the Government as such. We are not concerned with this part of the definition. Section 2(1)(b) which contains the material provision relevant for the purpose of the present reference reads as follows :

“2. In this Act, unless there is anything repugnant in the subject or context : –

(1) agricultural income means – ….

(b) any income derived from such land by –

(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, or

(iii) the sale by a cultivator or receiver of rent-in-kind of the produce raised or received by him, in respect of which no process has been performed other than a process of the nature described in sub-clause (ii).”

8. This section refers to income derived from land which means arising from land and denotes income, the immediate and effective cause of which is land. It is divided into three clauses. Clause (i) in terms takes in income derived from agricultural land by agriculture which would include agricultural produce as held by the Supreme Court in Dooars Tea Co. Ltd., v. Commissioner of Income-tax. Clause (ii) includes cases of income derived from the performance of any process ordinarily employed by a cultivator to render the produce fit to be taken to market. The reason behind this provision is not far to seek and it really provides a clue to its interpretation. A cultivator raises produce from the land with a view to selling it. If there is a market for the produce as grown, there is no difficulty; the cultivator can in such a case sell the produce without anything more and he need not perform any process on the produce. But if there is no market for the produce as grown and it can be sold only by performing some process on it., the cultivator would have to perform such process in order to be able to sell the produce; otherwise the produce would not be marketable and the raising of it would be futile. Where such is the case, the legislature says that, though strictly the agricultural operations ceases when the produce is raised and removed from the soil, the performance of the process should be regarded as a continuation of the agricultural operations since the process has to be performed by the cultivator for the purpose of enabling him to sell the produce which the otherwise cannot. It is because the performance of the process is essential in order to render the produce marketable, which it is otherwise not, that the law regards it as part of the agricultural operations carried on by the cultivator. This reason also explains the other requirement of the section, namely, that the process must be such as is ordinarily employed by cultivators to make the produce saleable. The performance of the process is assimilated to agricultural operations and must, therefore, like agricultural operations stricto sense, be an operation which is ordinarily done by cultivators. If some special or unusual process is employed by a cultivator, which is not ordinarily employed by cultivators to render the produce marketable, it cannot be regarded as part of the agricultural operations and the benefit of the income being treated as agricultural income would not be available to the cultivator. It will be clear from this discussion that there are two conditions which are required to be fulfilled before a process performed by the assessee can be said to be a process within the meaning of section 2(1)(b)(ii). The first condition is that the process must be necessary to render the produce fit to be taken to market and that involves the proposition that there must be no market for the produce in its raw state. If there is already a market for the produce in its raw state, then the process cannot be said to be a process employed to render the produce fit to be taken to market or, in other words, to make it marketable. That which is already marketable does not need any process to render it marketable. The second condition is that the process must be one which is ordinarily employed by a cultivator of the produce to render it marketable. But even if these two conditions are satisfied, it is not sufficient to attract the applicability of section 2(1)(b)(ii). There is an additional requirement which must be satisfied and that requirement springs directly from the language and the reason of the enactment. It follows as a necessary corollary from what is stated above that, even where the produce is subjected to a process ordinarily employed by cultivators to render it fit to be taken to market, the produce must not change its original character. The cultivator is permitted to subject the produce to a process in order to make it marketable and what is ultimately marketed must, therefore, be that produce. The character of the produce must not be altered as a result of the process. Of course when we say this we must make it clear that there may be changes brought about in the produce for the purpose of making the produce marketable but those changes must not amount to altering the original character of the produce : vide Dooars Tea Company’s case.

9. So much on principle. Turning now to the authorities, the first decision to which our attention was invited was the decision of the Patna High Court in In re Bhikanpur Sugar Concern. The question which arose in this case was whether income derived from sale of sugar manufactured from sugarcane grown by the assessee on its lands was agricultural income within the meaning of section 2(1)(b) of the Income-tax Act, 1918, which was in identical terms with section 2(1)(b) of the Income-tax Act, 1922. The assessee contended that the income was agricultural income, but a Full Bench of the Patna High Court consisting of three judges held that it was not, on the ground that the process employed by the assessee for manufacturing sugar was not a process ordinarily employed by cultivators of sugarcane for rendering it fit for marketing. Dawson-Miller C.J. said that the market of the was majority of cultivators of sugarcane was the sugar factory or the country mill and and they did not manufacture sugar out of it in order to make it marketable and that the process employed by the assessee was, therefore, not a process ordinarily employed by cultivators so as to bring the case within the section 2(1)(b)(ii). The other learned judges also expressed the same view. This decision clearly proceeded on the basis that the process employed by the assessee not being a process ordinarily employed by cultivators to render the sugarcane produced by them marketable, one of the two conditions specified in section 2(1)(b)(ii) was not fulfilled.

10. We were then referred to a decision of the Calcutta High Court in Killing Valley Tea Company Ltd., v. Secretary of State (A.I.R. 1921 40). The assessee in this case grew green leaf tea in a tea garden owned by it and manufactured tea by performing a process on green leaves plucked from the tea garden. In its assessment to income-tax, the assessee contended that the entire income from the sale of manufactured tea was agricultural income within the meaning of section 2(1)(b)(ii) of the Income-tax Tax Act, 1918. The Calcutta High Court, however, held that though the green leaf from the tea plant was not a marketable commodity for immediate use as an article of food, it was certainly “a marketable commodity to be manufactured by people who possess the requisite machinery into tea fit for human consumption” and the manufacturing process could not, therefore, properly be said to be employed to render the tea leaves fit to be taken to market as required by the section. This decision, therefore, proceeded on the basis that if there is a market for the produce egfown by the assessee and despite that, some process is performed on it, such process cannot be said to be a process to render the produce fit to be taken to market so as to attract the applicability of section 2(1)(b)(ii).

11. The next decision which was cited before us was the decision of the Patna High Court in J. M. Casey v. Commissioner of Income-tax The facts in this case were that the assessee cultivated aloe plants and from them by means of machinery prepared sisal fibre which he sold in the market. The question arose whether the whole of the income derived by the assessee was exempt from tax as being agricultural income. The Patna High Court held that it was so exempt and the ground on which the Patna High Court based its decision was that aloe leaves had no market and that the process performed on aloe leaves for preparing sisal fibre was a process ordinarily employed to render aloe leaves fit to be taken to market. Courtney-Terrell C.J. who delivered the main judgment, observed that no cultivation of aloe plant appeared to have been practiced save in connection with the process of manufacture of sisal fibre and, moreover, there was no market for aloe leaves. Of course aloe leaves could be supplied to jails but the learned Chief Justice observed that that did not make any difference since the leaves so bought by the jail authorities were treated by the prisoners by means of the same laborious and uneconomic process which was employed by some villagers in treating the leaves of the wild and uncultivated plant and that the object of the manufacture in jails was not the conducting of an economic process which rendered profitable the cultivation of the aloe plant but merely to keep the prisoners employed on sufficiently laborious and punitive work. It was thus definitely found that the aloe leaves were not ordinarily marketable and they could normally be sold only by converting them into sisal fibre. The learned Chief Justice made it clear that the decision of the court was based on these conditions which existed at the time and observed :

“It may be that in the future the economic conditions may change. If the growth of the aloe leaf should become established as an agricultural industry by itself and if the manufacturers of sisal fibre should cease to cultivate the plant themselves and should purchase the leaves in an open market then and such circumstances may possibly require reconsideration in the light of the income-tax law…”

12. An argument was also advanced on behalf of the revenue that the assessee being the only cultivator, the process employed by him could not be said to be a process ordinarily employed by a cultivator to render aloe leaves marketable, but this argument was met by the learned Chief Justice by saying that since there was no cultivation of the aloe plant save in connection with the economic process involving the use of machinery such as was employed by the assessee, the process ordinarily employed would in fact be that used by the assessee. This decision thus laid down two propositions : (1) that in order to attract the applicability of section 2(1)(3)(ii) the produce in its raw state must not have a ready and available market where goods of that kind are bought and sold; and (2) that even if the assessee is the only cultivator, a generalization can be made from the single instance of the assessee and the process employed by the assessee can be regarded as a process ordinarily employed by a cultivator in render the produce marketable. The second proposition laid down in this decision would meet the difficulty pointed out on behalf of the assessee, namely, that the assessee being the only cultivator of galkas in the present case, the process employed by him could not be appropriately described as a process ordinarily employed by a cultivator to render galkas fit to be taken to market.

13. Reference was also made to a decision of the Court of the Judicial Commissioner, Nagpur, in Sheolal v. Commissioner of Income-tax, where the question was whether the process of ginning applied by the assesse could be said to be a process within the meaning of section 2(1)(b)(ii). The court held that the process of ginning was not a process ordinarily employed by cultivators to render cotton grown by them fit to be taken to market since unginned cotton was sold by the cultivators and ginning was not essential in order to render the cotton fit to be taken to market. The fact that there was a market for cotton grown on the land was thus taken into account for the purpose of holding that the process of ginning could not be said to be a process necessary to render the produce fit to be taken to market.

14. Then we were referred to a decision of the Bombay High Court in Brihan Maharashtra Sugar Syndicate Ltd., v. Commissioner of Income-tax. The question which arose in this case was whether income realised as a sale of galkas manufactured by the assessee out of sugarcane grown by it, was agricultural income within the meaning of section 2(1)(b)(ii). The Tribunal found that the requirements of the section were satisfied, but on a reference to the High Court a Division Bench of the High Court held that though there was evidence to support the finding of the Tribunal that the process employed by the assesse in the manufacture of gal was a process ordinarily employed by a cultivator, the finding that the process was one ordinarily employed by a cultivator to render the produce fit to be taken to market was erroneous inasmuch as there was a market for the sale of sugarcane before it was turned into gul. Kania J., as he then was, after referring to section 2(1)(b)(ii), said :

“Reading the words used in the definition section with their mutual meaning they must mean that the produce must retain its original character in spite of the process unless there is no market for selling it in that condition. If there is no market to sell the produce then any process which is ordinarily employed to render it fit to reach the market, where it can be sold, would be covered by the definition…”

15. The learned judge agreed with the Patna High Court in J. M. Casey’s case that market must mean a ready and available market where produce of the kind grown by the assessee is bought and sold and observed that since the statement of the case itself showed that there was a market for sugarcane, the process employed by the assessees in converting it into gul could not be said to be a process ordinarily employed to render it fit to be taken to market where it can be sold. Now it must be conceded straightway that, in view of the decision of the Supreme Court in Dooars Tea Company Ltd.’s case, the statement contained in the passage quoted above can no longer be regarded as good law in so far as it says that if there is no market for selling the produce in its original character, the character of the produce may be altered by performing a process necessary to render it fit to be taken to market and such a process too would be covered by section 2(1)(b)(ii). It is now clear that the produce must retain its original character and if the effect of the process is to alter the character of the produce, the process would not be a process within the intendment of section 2(1)(b)(ii). But this much is certainly established by this decision, namely, if there is a market for the produce, no process performed on it can be said to be a process necessary for rendering it fit to be taken to market.

16. We were also referred to a decision of the Mysore High Court in A. T. Parthasarathiah & Bros. v. Commissioner of Income-tax. That decision does not help us very much for it merely applies section 2(1)(b)(ii) as construed by us above to the facts of that case. The question there arose in regard to tamarind plucked by the assessee from trees owned by him and converted into “flower tamarind” by a process of cleaning which involved removal of fibre and seeds. The Mysore High Court held that inasmuch as the Tribunal had not addressed itself to the question as to what was the process ordinarily employed by cultivators in the locality where the assessee resides to render the tamarind grown by them fit to be taken to market, it was necessary to call for a further statement of the case and the Tribunal was accordingly required to submit a further statement of the case in order to enable the court to dispose of the question.

17. The last decision to which we must refer is the decision of the Andhra Pradesh High Court in Boggavarapu Peda Ammaiah v. Commissioner of Income-tax. The assessee in this case carried on the business of export of tobacco grown on his lands and he claimed exemption in respect of income arising on the sale of tobacco as agricultural income. The revenue authorities treated the income derived from operations up to the stage of “flue-curing” as agricultural income but regarded the subsequent activities which involved the performance of the process of re-drying, stripping and grading and sale of tobacco subjected to such process as non-agricultural operations and treated the income attributable to those operations as income from business subject to tax. The Andhra Pradesh High Court before whom the question came on a reference took the view that the tobacco after flue-curing had a large market in the country and the operations of re-drying, stripping and grading were, therefore, not quite essential to make the tobacco marketable. The High Court also took the view that these operations could not be regarded as a process ordinarily employed by cultivators in order to make the tobacco marketable. Since in the opinion of the High Court both the conditions of section 2(1)(b)(ii) were not satisfied, the High Court held that the income attributable to the operations of re-drying, stripping, and grading could not be described as agricultural income but should be treated as income liable to tax.

18. It would thus be seen that in all these decisions the various High Courts applied section 2(1)(b)(ii) to the facts of the case before them and examined the question whether the two conditions of the section were satisfied so as to make the income agricultural income. We will, therefore, now proceed to consider how far these two conditions could be said to be fulfilled in the present case in regard to the process employed by the assessee for the purpose of preparing loofahs out of galkas.

19. Before, however, we do so, it would be convenient to dispose of one short argument advanced by Mr. Kaji on behalf of the assessee and that argument was that galkas when subjected to the process for converting them into loofahs did not retain their original character but underwent a change in character, since loofahs were goods of a different character from galkas and section 2(1)(b)(ii) was, therefore, not attracted. Now it is undoubtedly true that if galkas did not retain their original character on being subjected to the process for converting them into loofahs, the process would not be a process within the meaning of section 2(1)(b)(ii). But unfortunately for the assessee it is not open to Mr. Kaji to urge this contention before us since the contention raises a question of fact and not having been advanced before the Tribunal and there being no finding of the Tribunal on the question and the question not being the subject-matter of reference before us, the assessee cannot be permitted to raise the contention before us.

20. Going back to the main question, Mr. Kaji contended that the Tribunal had misdirected itself in law in proceeding on the basis that for the purpose of determining whether there was no market for galkas in raw state which would make the performance of the process for converting them into loofahs necessary to render them marketable, the only market which the Tribunal was required to take into account was the market in India. He urged that even if there was no market for galkas in India, but there was a market abroad, say for example, in Japan, as the contention of the assessee was, the performance of the process for converting them into loofahs could not be said to be necessary in order to render them fit to be taken to market and the Tribunal should have therefore considered whether there was no market for galkas outside India. This contention is, in our opinion, well-founded. We do not think it can be seriously disputed that if there was a market for galkas – and by galkas we mean the commodity of galkas in raw state – even outside India, the performance of the process for converting them into loofahs could not be said to be necessary in order to make them marketable. It is in this connection important to bear in mind that even loofahs had no market in India and the process of converting into loofahs was performed on the galkas with a view to exporting and selling them abroad. Both in the case of galkas and in the case of loofahs, therefore, there was no market in India and the market had to be found outside India. It is possible that if loofahs had a market in India, an argument could with some plausibility have been advanced that even if galkas had a market outside, a cultivator of galkas in India would ordinarily convert them into loofahs which would be saleable in India rather than sell galkas in their raw state outside India. But where, as in the present case, the markets, if any, could only be outside India, both for galkas and loofahs, it must be concluded that if galkas had a market outside India, the process employed for converting galkas into loofahs for a market which was also outside India could not be said to be employed in order to make galkas fit for being taken to market. In such a case both the markets being out of India and galkas being marketable, no process performed on them could be said to be a process essential to make them marketable. It was, therefore, not enough for the Tribunal to find that there was no market for galkas in India. The Tribunal should have also considered whether there was no market for galkas outside India and it was only if the Tribunal found that there was no market for galkas outside India, that the Tribunal could come to the conclusion that the process employed for the purpose of converting gullas into loofahs was a process covered by section 2(1)(b)(ii).

21. But the learned Advocate-General contended that even if that be the view which we are inclined to take, there was a finding of the Tribunal that there was no market for gulkas and that in view of that finding the process employed by the assessee must be regarded as a process necessary to render gulkas fit to be taken to market. This contention involves a consideration of the order of the Tribunal. But before we examine this contention, we may dispose of another argument advanced by Mr. Kaji, namely, that the process employed by the assessee could not be said to be a process ordinarily employed by a cultivator to render galkas fit to be taken to market. There were two circumstances relied on by Mr. Kaji in this connection. The first was that the assessee was the only cultivator of galkas and there could not, therefore, be any standard with reference to which it could be said whether the process was a process ordinarily employed by a cultivator. But this argument is sufficiently met by the reasoning of the Patna High Court in J. M. Casey’s case to which we have already referred. As a matter of fact if galkas in their raw state had no market at all, a cultivator of galkas in India could not do otherwise that make loofahs out of them and the process of making loofahs would, therefore, be a process ordinarily employed by a cultivator of galkas. The second circumstance on which reliance was placed was the fact that the accounts in respect of the cultivation of galkas were maintained by the assessee in one set of books while the accounts in respect of the processing of galkas and sale of loofahs made out of them were maintained in another set of books. This, argued Mr. Kaji, showed that the intention of the assessee as a cultivator was not to make loofahs out of galkas but to sell galkas in their raw state and if the conduct of the assessee be taken as a test, the process of making loofahs out of galkas could not be said to be a process which would be ordinarily employed by a cultivator. This argument is, in our opinion, totally devoid of force. It cannot be overlooked that both the concerns belonged to the assessee and it is not possible to infer from a mere bifurcation of the two activities of the assessee that an ordinary cultivator of galkas would sell galkas in their raw state and would not prepare loofahs out of them. The determining factor must be whether there was a market for galkas as a commodity. If there was a market for galkas as a commodity, it would be possible to take the view that a cultivator would ordinarily sell galkas in raw state for he would be interested merely in selling his produce and not in performing processes which are not necessary in order to render the produce marketable. But if there was no such market, then obviously the cultivator would have no choice but to make loofahs out of them for the purpose of sale. We must, therefore, come back to the question whether there was no market for galkas in the sense that there was no place in India or abroad where galkas as a commodity were bought or sold.

22. Now turning to the order of the Tribunal, the portion of paragraph 5 of the order which we have reproduced above shows that before the Tribunal it was the contention of the assessee that galkas had a market by themselves and that the subsequent operations were in the nature of manufacturing operations. The assessee for the purpose of establishing this plea produced evidence in the shape of letters addressed by parties in Japan to the assessee and contended on the basis of these letters that there was a market for gulkas. The Tribunal after setting out this contention of the assessee in paragraph 5 proceeded to deal with it in paragraph 6. The Tribunal started by saying that they were unable to agree with this contention of the assessee, namely, that galkas had a market. The Tribunal then proceeded to give its reasons for coming to this conclusion. The Tribunal first stated that in order to find out whether there was a market for the produce, what was necessary to be seen was whether there was a market at which it could be absorbed. This is no doubt a correct proposition, but in the way in which it is put, it is likely to be misunderstood and we would, therefore, like to clarify it by saying that what is required to be considered is not whether the particular produce grown by the assessee is saleable but whether there is a market where the produce ordinarily grown by a cultivator is bought or sold as a commodity so that a cultivator of the produce would ordinarily sell the produce as such and not perform any process on it. The Tribunal after setting out this proposition observed that the existence of “a theoretical market in a place like Japan is not one that has to be taken into account for this purpose”. The learned Advocate-General relied strongly on this observation and contended that this observation showed that the Tribunal found as a fact that there was no real market in Japan. Mr. Kaji, on the other hand, contended that all that the Tribunal meant to say in making this observation was that the existence of a theoretical market in a place like Japan was not relevant but what was relevant was the existence of a market in India. He urged that the word “theoretical” was used by the Tribunal to describe the market in Japan because the Tribunal considered that the real market to be considered was the market in India and all markets outside India were theoretical markets for the purpose of determination of the present question. We think Mr. Kaji is right in his reading of this observation of the Tribunal. The observations of the Tribunal which immediately follow upon this observation clearly support the interpretation sought to be placed by Mr. Kaji. The Tribunal, after making this observations, proceeded to examine what is the market in reference to which the question whether it exists or does not exist is required to be considered. The Tribunal observed that the expression “ordinarily employed” would appear to postulate the existence of certain conditions at or about the locality in which the produce is grown, meaning thereby that whether there is a market for the produce must be judged in relation to the area in which the produce is grown. The Tribunal then stated that the item marketed by the assessee, namely galkas, was a stranger to the Indian market and, therefore, held that there could not be ready market for galkas in India. This position was as a matter of fact not disputed by the assessee. The Tribunal emphasised the necessity of the market in India by observing that merely because there was some possibility of a sale at its original stage in a distant country, it did not follow that galkas by themselves had a market. The Tribunal then gave an illustration to reinforce its point of view. The Tribunal observed that if a produce is grown, say in Kerala, and it does not have a ready market in its original stage there, then merely because there was some market, say in Punjab, for the produce in its original stage, it does not follow that the process ordinarily employed by cultivators in Kerala would cease to be agricultural process. The Tribunal then stated that what was required to be looked at was the area in which the produce is grown and the customary process employed to render it fit for market, if it is not marketable in its original stage. This process of reasoning of the Tribunal which we have set out above clearly shows that what the Tribunal considered to be the correct position in law was that the market to be taken into account must be the market in the area in which the produce is grown, that is, the Indian market, and since there was no ready market for galkas in India, it must be concluded that galkas had no market so as to attract the applicability of section 2(1)(b)(ii). And that conclusion was set out by the Tribunal in the last sentence of the paragraph. Reading the paragraph as a whole we think that though there are one or two observations in the paragraph which read in isolation appear to lend some support to the argument that the Tribunal found as a fact that there was no market for gulkas in Japan and, therefore, no market at all in India or abroad since the market in Japan was the only market put forward on behalf of the assessee, if those observations are read in the context of the rest of the paragraph, it is clear that those observations were made not for recording a finding that there was no market for galkas as a commodity in Japan but merely for the purpose of emphasizing that what must be looked at is the market in India and not the market in a distant place like Japan. The word “theoretical” also appears to have been used in order to emphasize that the real market to be considered is the Indian market and that the rest of the markets would be mere theoretical markets. The word “theoretical” was not used in order to record a finding that there was no real market in Japan. It appears that in the view of the law which it took, the Tribunal did not concern itself to examine and find whether there was a market for galkas as a commodity in Japan and this becomes clear if we refer to the statement of the case and the question referred to us for our opinion. The statement of the case clearly shows that according to the Tribunal what it held was, to quote its own words :

“…. that what was liable to be looked into for the purpose of finding out whether there was a market is the area in which the produce is grown and the customary process employed to render it fit for market if it is not marketable in its original stage. The Tribunal found also that there was no market in India in which it could be sold in its original stage. Under these circumstances, it was held…”

23. The question which has been referred to us also shows that according to the Tribunal the basis on which its decision was founded was that galkas did not have a market in India. Even if, therefore, there were any doubt as to what the Tribunal found in its order, such doubt is clearly laid at rest by the statement of the case and the question referred by the Tribunal. We, therefore, think that reading the order of the Tribunal as a whole along with the statement of the case and the question referred for our opinion, it must be held that the only finding reached by the Tribunal was that there was no market for galkas in raw stage in India and that there was no finding of the Tribunal that galkas as a commodity had no market even outside India.

24. Now the real controversy between the parties was whether the process employed by the assessee was a process within the meaning of section 2(1)(b)(ii) and in order to the proper determination of that controversy it was necessary for the Tribunal to give a finding on the question whether there was no market for galkas in India or outside India, for it is only if there was no market for galkas in India or abroad, that the process employed by the assessee could be said to be a process covered by section 2(1)(b)(ii) as contended by the revenue. The question as framed is however based on the postulate that it would be sufficient to attract the applicability of section 2(1)(b)(ii) if there was no market for galkas in India. It is, therefore, necessary to reframe the question in order to bring out the real controversy between the parties and the question as reframed will be as follows :

“Whether, on the facts and circumstances of the case, the process employed on galkas for purposes of exporting and selling them abroad satisfies the requirements of section 2(1)(b)(ii) of the Act ?”

25. In order to properly and effectively answer this question it is necessary to have the finding of the Tribunal on the question whether there was no market for galkas as a commodity in India or abroad. We, therefore, direct the Tribunal to give its finding on this question after hearing the parties and to submit a further statement of the case in relation to that finding. The Tribunal will of course confine itself to the record of the case in giving the finding. We, however, do not express any opinion on the question as to on whom would lie the burden of proof in regard to the question on which the Tribunal is directed to give the finding. That would be a matter for the Tribunal to consider. The reference will be placed on board for hearing after the supplementary statement of the case is received from the Tribunal.