Tata Iron And Steel Co. Ltd vs The State Of Bihar (And Connected...)

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeals Nos. 587, 588, 590, 591, 600 and 601 of 1961

Decision Date: 24 September 1962

Coram: N. Rajagopala Ayyangar, J.C. Shah, Bhuvneshwar P. Sinha, Syed Jaffer Imam, K.N. Wanchoo

In the matter of Tata Iron and Steel Co. Ltd. versus the State of Bihar and connected appeals, the Supreme Court rendered its judgment on 24 September 1962. The judgment was delivered by a bench comprising Justice N. Rajagopala Ayyangar, Justice J. C. Shah, Justice Bhuvneshwar P. Sinha, Justice Syed Jaffer Imam, and Justice K. N. Wanchoo. The case is reported in the 1963 All India Reporter at page 577 and in the 1963 Supplement to the Supreme Court Reports at page 199. Subsequent citations of the decision appear in various later reports, including 1970 SC 1298, 1976 SC 2452, 1977 SC 1134, 1985 SC 840, and 1992 SC 959. The statutory provision involved was the Bengal Cess Act of 1880, as amended for the State of Bihar, specifically sections five, six, and seventy‑two, which imposed a local cess on all immovable property in Bihar, assessing the cess on mines according to the annual net profits derived from them.

The appellant company owned several iron‑ore mines in Bihar and extracted ore which it used in its Jamshedpur steel plant to manufacture finished iron and steel products. For the assessment year 1954‑55, the Cess Deputy Collector assessed the company on the basis that it earned a profit of Rs 4‑7‑0 per ton of ore extracted. The company contested the assessment, arguing that it should not be liable for the cess because it never sold the ore as a separate commodity and therefore, in the sense of section six, it had not made any profit from the mines. The central question before the Court was whether the company could be deemed to have derived “profit” from the mining activity when the extracted ore was directly incorporated into the manufacturing process and the profit was realized only upon the sale of the final products. The Court held that a proper construction of sections five, six and seventy‑two of the Bengal Cess Act, as amended, shows that when the assessee carries out activities beyond mere extraction—transforming ore into finished goods and selling those goods—the profit attributable to the mining operation is embedded in the final realization. The Court further explained that this profit can be separated, measured, and subjected to the cess. Consequently, the Court distinguished the present case from earlier decisions such as Kikabhai Premchand v. Commissioner of Income‑Tax, Bombay and Commissioner of Income‑Tax, Bombay v. Ahmedbhai Umerbhai & Co., emphasizing that the present facts warranted a different outcome.

The Court noted that the decisions in Anglo‑French Textile Co. Ltd. v. Commissioner of Income‑tax, Madras, reported in 1950 S.C.R. 523, Commissioner of Income‑tax, Madras v. Dewan Bahadur S. L. Mathias (1938) L.R. 66 I.A. 23, and Commissioner of Income‑tax, Bombay City I, Bombay v. Bai Shirinbai K. Kooka reported in 1962 Supp. 3 S.C.R. 391 were relied upon and considered in the present matter. The matter before the Court was a civil appellate jurisdiction comprising Civil Appeals Nos. 587, 588, 590, 591, 600 and 601 of 1961. These appeals were taken by special leave from a resolution dated 12 May 1959 issued by the Board of Revenue, Bihar, in Cases Nos. 49, 233 and 234 of 1958, and from the judgment and order dated 18 February 1960 of the Patna High Court in miscellaneous judicial cases Nos. 529, 530 and 531 of 1959. Counsel for the appellant, the Attorney‑General for India together with senior counsel, represented the appellant in Appeals 587 and 588, while another team of counsel for the appellant, also headed by the Attorney‑General for India and assisted by senior counsel, appeared for the appellant in Appeals 590 and 591. In Appeals 600 and 601, the appellant was represented by a different set of counsel. Counsel for the respondent, comprising a group of senior advocates, appeared on behalf of the respondent in each of the three groups of appeals. The judgment was delivered on 24 September 1962 by Justice Ayyangar.

The Court observed that the three groups of appeals raised a single substantive issue, namely the validity of the imposition of a local cess under sections 5 and 6 of the Bengal Cess Act, 1880 (Bengal Act IX of 1880, as amended in Bihar), hereinafter referred to as “the Act”. The Court emphasized that the interpretation of these two provisions was the sole question for determination in all of the appeals. The text of the relevant provisions was reproduced as follows: “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 lands 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 prescribed in this Act; 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 prescribed in this Act.” The Court therefore set the stage for its analysis of whether the assessment of the cess in the present cases conformed to the statutory language and legislative intent of sections 5 and 6.

The provision required that the rate at which the local cess could be levied in any given year on the annual value of land should never be lower than one anna and six pies per rupee of such value, and never be higher than two annas per rupee of such value. The three companies that were appellants in these appeals owned various mines located in the state of Bihar. Tata Iron & Steel Co., Ltd., which was the appellant in Civil Appeals 587 and 588 of 1961, had taken on lease certain iron‑ore mines at Noamundi in the Singhbhum district. The ore extracted from those mines was fed directly to the company’s plant at Jamshedpur where it was processed into iron and steel. Indian Iron & Steel Co., Ltd., the appellant in Civil Appeals 590 and 591 of 1961, held mining concessions for iron and manganese ore at Gua and Monoharpur, also in the Singhbhum district, and used the extracted ore in its factories at Burnpur and Kulti in the Burdwan district to manufacture iron, steel and related products. Indian Copper Corporation Ltd., the appellant in Civil Appeals 600 and 601 of 1961, had taken on lease certain mines in Singhbhum as well, and converted the copper ore it mined into copper and copper goods at its plant in Moubhandar within the same district. The principal issue presented for determination was whether these three appellants could be said to have derived “annual net profits from the mines” when the ore they mined was not sold as a commodity but was instead incorporated into finished products that the appellants themselves sold.

Because the question centered on the nature of profit rather than the particular facts of each case, the Court did not feel it necessary to recount the entire factual matrix of every appeal. Instead, it chose to outline a few salient facts concerning the proceedings that gave rise to the appeals, focusing particularly on the matter involving Tata Iron & Steel Co., Ltd. in Civil Appeals 587 and 588 of 1961. The company had not been assessed for local cess on the ore it mined until the year 1926, when it sold a quantity of iron ore to Bengal Lion and Steel Co., Ltd., and an assessment for cess under the Act was made for that year. Although the company made no further sales of iron ore in subsequent years and instead used the ore it extracted in its own Jamshedpur plant, the authorities continued to assess and collect cess on an assumed profit basis. From the financial year 1926‑27 up to 1939‑40, the cess was calculated on an assumed profit of twelve annas per ton of iron ore mined. Beginning in the year 1940‑41, the assumed profit was raised to one rupee per ton. This basis of taxation was altered again in the financial year 1950‑51, when the assumed profit was increased to one rupee, four annas and one pie per ton. Subsequent variations in the rate at which the profit was computed occurred in later years, but those details were deemed unnecessary for the purpose of the present judgment.

By reason of an agreement that the company had entered into with the State Government, the assessment of profit was made per ton of ore extracted. Although the rate at which profit was computed changed in later years, the Court found it unnecessary to set out those variations in detail. The assessment that gave rise to the present appeals concerned the financial year 1954‑55. For that year the Cess Deputy Collector had assessed the company on the premise that it had earned a profit of Rs 4/7/- for each ton of iron ore that it extracted. The company challenged this assessment by filing an appeal before the Deputy Commissioner, contending that it was not liable to pay any cess under the Act because it never sold any ore as such and therefore could not be said to have derived “any profit from the mines” within the meaning of section 6 of the Act. The Deputy Commissioner rejected the company’s submission, but noted that the Cess Deputy Collector had not employed a proper basis for determining the profit. Consequently, the Deputy Commissioner sent the matter back for an inquiry into the cost of extracting the ore and for a calculation of other operating expenses. The company then lodged a revision application before the Commissioner of the Chota Nagpur Division, again raising the point of non‑liability to cess. When that revision was dismissed, the company pursued a further revision before the Board of Revenue, which likewise rejected the relief sought. After exhausting those administrative remedies, the company approached the Patna High Court by filing petitions under Articles 226 and 227 of the Constitution, seeking to set aside the Board of Revenue’s order confirming the Deputy Commissioner’s decision to remit the case to the Cess Deputy Collector for a fresh computation of the company’s net annual profit for the year in question. The High Court dismissed the writ applications, although it granted leave to appeal under Article 133 of the Constitution. The first civil appeal, numbered 587 of 1961, originated from the certificate of leave granted by the High Court. The second civil appeal, numbered 588 of 1961, was filed by special leave of this Court against the Board of Revenue’s order that had been the subject of the High Court writ petition. The factual background of the other appeals was similar, and the Court deemed it unnecessary to repeat those facts. It sufficed to note that the writ petitions of the other two appellants were also decided by the High Court together with the petition of Tata Iron & Steel Co. Ltd., and a common judgment disposed of all of them. In each of those cases, the appellants had filed two appeals: one challenging the High Court’s dismissal of the writ petition and another challenging the Board of Revenue’s order. From this narrative, the Court identified the core question for determination as whether, under the law, a person could be said to derive “profit” from a mine when the extracted ore is not sold as such but is instead used by the owner in the manufacture of a finished product that is later sold.

When the ore that is extracted is not sold in its raw form but is instead used by the owner to manufacture a finished product that is subsequently sold, a different question of liability arises. Before examining the argument presented by the appellants, who contend that they should not be liable to pay the local cess, it was deemed useful to consider several provisions of the Act that are directly relevant to the dispute. The long title of the Act is stated as follows: “An Act to amend and consolidate the Law relating to rating for the Construction, Charges and Maintenance of District Communications and other Works of Public Utility, and of Provincial Public Works.” The pertinent part of the Preamble reads: “Whereas it is expedient to amend and consolidate the law relating to rating for the construction, charges and maintenance of district roads and other means of communication, and of provincial public works, within the territories administered by the Provincial Government of Bengal, and to the levy of a local cess on immovable property situate therein, and to the constitution of local committees for the management of the proceeds of the said local cess, and also to provide for the construction and maintenance of other works of public utility out of the proceeds of the said local cess. It is hereby enacted as follows.” The Act is divided into three Parts; Part 1 deals with the imposition and application of the cesses, and sections 5 and 6, which have already been cited, set out the charge that forms the subject of these appeals. Part 11 addresses the mode of assessment, and Chapter V of Part 11, entitled “Valuation, Assessment and levy of Cesses on Mines, Railways and other Immovable Property,” contains the provisions that are material to the point in issue. During the arguments, reference was made to sections 72, 72A, 73, 74, 75 and 76, which read as follows: “72. Notice to return profits.—(1) On the commencement of this Act in any district, and thereafter before the close of each year, the Collector of the district shall cause a notice to be served upon the owner, chief agent, manager or occupier of every mine or quarry other than a notified mine and of every tramway, railway and other immovable property not included within the provisions of Chapter II, and not being a tramway or railway on which local cess is not leviathan. Such notice shall be in the form contained in Schedule (2) and shall require such owner, chief agent, manager or occupier to lodge in the office of the Collector, within two months, a return of the net annual profits of such property, calculated on the average of the annual net profits for the last three years for which accounts have been prepared. (2)… (3) The Collector may, in his discretion, extend the time allowed for lodging any return referred to in this section. 72A. Penalty for omitting to make.”

The Court explained that under the provision dealing with failure to file a return, any owner, chief agent, manager or occupier who does not submit the required return to the Collector’s office within two months after receiving a notice issued under section 72, and who cannot show sufficient cause satisfactory to the Collector, becomes liable to a monetary penalty. The penalty may be imposed at a rate of up to fifty rupees for each day that elapses after the expiry of the prescribed period or any extension granted by the Collector, and it continues to accrue until the return is actually filed or until the Collector is able to determine the annual net profit or the annual dispatches of coal and coke from the property concerned by other means provided in the Act. The Collector is authorized to recover the fine that accrues from time to time in the manner laid down in section 98 or section 99, and the existence of an appeal against the fine does not automatically stay the collection of the fine pending the appeal, unless the Commissioner specifically orders a stay. Whenever the aggregate amount of a fine imposed under this provision exceeds five hundred rupees, the Collector must forward a special report of the case to the Commissioner, and thereafter no further levy for the same default may be made except by authority expressly granted by the Commissioner. The Court further noted that when property subject to assessment under this Chapter lies in more than one district, the notice requiring a return under section 72 shall be served on the owner, chief agent, manager or occupier either by the Collector of the district where that person resides or carries on his principal business, and a single consolidated return covering the entire property shall be sufficient. In cases where the assessable property straddles the boundary between Bengal and territories outside the administration of the Lieutenant‑Governor of Bengal, the return required by section 72 must indicate the total annual net profit and the total annual dispatches of coal and coke from the whole property, and it must also specify the portion of those profits and dispatches that can reasonably be allocated to the portion situated within Bengal. Finally, the Court held that if the required return is not filed within the two‑month period, or within any extension allowed by the Collector, or if the Collector believes that a filed return is false or inaccurate, the Collector is empowered to determine the annual net profit by any method he considers appropriate. The Collector may also, if he is unable to ascertain the profit or dispatches directly, assess the value of the property and then fix six per cent of that value as the deemed annual net profit, or, in the case of dispatches, determine a quantity that he deems just and proper after considering all relevant circumstances.

The Court explained that when a collector is unable to determine either the annual net profits or the annual dispatches of coal and coke from a property that falls within the scope of the chapter, the collector is empowered to adopt any method he considers appropriate to first ascertain the value of that property. Once the value has been fixed, the collector must then apply a rate of six per cent to that value to arrive at the deemed annual net profit, or, in respect of the annual dispatches, must determine a quantity that, after taking into account all the relevant circumstances of the case, he deems just and proper to represent the annual dispatches from the property. The notice prescribed under section 72, reproduced in Schedule E to the Act, requires the owner to submit a return in the annexed form. The essential wording of the notice directs the owner to lodge, at the office of the district collector, a return showing the net profits calculated on the average of the profits of the last three years for which accounts have been prepared. The form of return calls for details of yearly profits of mines, quarries, railways, tramways or any other immovable property that is in the possession or under the control of the person making the return, and includes fields for the district, name of the holder, and the annual net profit as computed on the average of the last three years’ accounts. The learned Attorney‑General for the appellants presented an argument that reiterated the position previously urged before the High Court and subsequently rejected. The submission contended that, read together, sections 6 and 72 impose a levy not on the mine as an immovable asset but on the “annual net profits” derived from the mine. According to this view, a profit can arise only when the mine is worked, the ore is extracted, and the extracted ore is sold at a price exceeding the cost of extraction; thus, the sale of ore is an indispensable condition for the existence of a profit on which the cess may be charged. The Attorney‑General further argued that where the extracted ore is not sold but is instead utilized by the owner in the manufacture of other finished products, the owner does not realise a profit from the mine. Consequently, for an assessee such as the appellants, the activities of ore extraction and of converting the ore into a finished product should be regarded as a single integrated undertaking rather than as two separate businesses, and no assessable profit can be said to arise from the mining operation alone.

In the case, the respondent argued that the appellant’s operations could not be treated as two separate businesses—one that extracted ore and another that converted the ore into steel—but rather as a single, integrated undertaking devoted to producing steel and steel products. He explained that, for a profit to be said to arise from the mine, it would first be necessary to assume that the ore‑winning activity was a distinct business from the ore‑conversion activity, and second, to imagine that the ore obtained by the first activity was sold to the second activity. The respondent contended that there was no factual basis for the first assumption because the appellant did not maintain two independent enterprises. Moreover, even if the two stages could be hypothetically separated, the respondent maintained that law permits profit only when a product is sold to a third party; consumption of one’s own goods does not generate profit since a person cannot sell or trade with himself. He further submitted that, although the statute provided for a cess or rate based on mere beneficial occupation without rent being received from a third‑party occupier in the case of land, it intentionally omitted a similar provision for mines such as those in dispute. This omission, he argued, indicated that merely occupying a mine on a beneficial basis, without actually receiving profit, could not justify imposing the charge. The respondent raised several additional minor points, which were to be addressed later, and suggested handling the two principal submissions separately. The Court observed that the core issue hinged on accepting the proposition that no profit accrues to a mine owner unless the extracted ore is sold to a third person, and on the related principle that when a person conducts multiple, yet integrated, activities that together generate a total profit, that profit cannot be dissected and allocated among the individual activities unless the governing statute expressly provides for such apportionment. Before examining this question, the Court noted an argument presented by the learned Government Advocate for the respondent. He submitted that section 5 of the Act created the charge and imposed liability, while section 6 and the related provision in section 72 merely supplied the measure for computing the charge, and that, because the mine constituted immovable property within the district, it fell within the ambit of the cess prescribed by the statute.

In this case the court held that the mined land was subject to the cess at the rates prescribed in sections 6 and 72 of the Act. The court found that the argument presented by counsel for the respondent did not answer the issue that had arisen for determination. The court noted that it was of little consequence whether the charging provision was described in technical terms as section 5 alone or as sections 5, 6 and 72 read together. Once it was accepted that, in the context of a mine, no liability to pay the tax could arise unless the mine was actually worked and such working produced a “profit”, the court still needed to consider whether the mine could be said to generate an “annual net profit” that alone would form the basis for levying the cess, especially when the ore extracted was not sold directly but was instead processed into a finished product and sold thereafter.

Counsel for the respondent focused on the meaning of the word “profit” as it appeared in section 6 and the related provisions of the Act. According to counsel, “profit” arose only when a commodity that was produced, obtained or acquired was the subject of a commercial sale, and it represented the difference between the cost of production or acquisition and the amount realized on the sale. The principal submission was that, because the mine‑owner did not sell the raw product of the mine as such, no “profit” could, in law, be deemed to have accrued to him from the mine. Counsel further emphasized that the taxable event was framed as the “annual net profit”, which the Act computed on the basis of the average of the “annual net profit for three years” as provided in sections 6 and 72.

The court observed, however, that this circumstance did not substantially advance the argument. The court reasoned that if it were possible in law to conceive of a profit or a net profit being derived when the mined ore was utilized by the mine‑owner in his own factory, there was no logical or principled difficulty in recognizing an “annual net profit”. The court noted that mining is a continuous activity that extends over many years, and therefore the concept of an annual net profit was not inherently inconsistent with the facts.

In support of his basic submission, counsel for the respondent invoked the principle laid down by the House of Lords in Styles v. The New York Lift, Insurance Company, which held that no‑one can make a profit out of himself. Counsel also referred to a passage from the judgment of Justice Rowlatt in Thomas v. Richard Evans and Co., Ltd., stating that a person cannot make a profit out of himself if the meaning is that he provides himself with something at a lower cost than he could purchase it or does work for himself instead of hiring another. In such situations the person saves money but does not make a profit. Counsel further invited the court to consider additional authorities on the same principle.

The Court directed attention to the case of Ostime v. Pontypridd (3) and quoted Viscount Simon’s speech in the House of Lords, which stated that “the identity of the source with the recipient prevents any question of profits arising.” The next argument presented was that this principle had already been adopted by this Court in Kikabhai Premchand v. Commissioner of Income Tax, Bombay (4). The Court noted that the reasoning in that earlier decision required a judgment in favour of the present appellant, and therefore it was unnecessary to examine the full scope of the maxim that a person cannot make a profit out of himself, nor to determine whether any exceptions to the principle might exist. The Court observed, however, that the House of Lords in Sharkey v. Wernher (1) had held that the general proposition that no one could trade with himself and generate taxable profit was not an absolute rule, and that there were situations where a person could make a profit from the consumption of his own goods. Yet, because the principle underlying the decision in Kikabhai Premchand’s case (2) conflicted with the House of Lords’ decision in Sharkey v. Wernher (1), as reflected in Commissioner of Income‑Tax, Bombay City 1 and Bombay v. Bai Shirinbai K. Kooka (3), the Court felt bound to follow the earlier Indian precedent wherever facts were similar to those in Kikabhai’s case, thereby negating the notion of a taxable profit. Consequently, the Court found it necessary to examine the precise scope of the decision in Kikabhai’s case (2). That case arose under the Indian Income‑Tax Act and concerned the computation of income and profits of a bullion merchant. During the relevant accounting year, the assessor had withdrawn some bullion from his stock‑in‑trade and transferred it to a trust he had created. The assessee valued the withdrawn bullion at the purchase price, resulting in no profit being shown from the transfer. The Revenue objected, contending that the bullion should be valued at the market price on the date of transfer. This Court, agreeing with the assessee’s contention, allowed the appeal. The ratio of the decision was set out by Justice Bose, speaking for the majority, who remarked: “We are of opinion that it is unreal and artificial to separate the business from its owner and treat them as if they were separate entities trading with each other and then by means of a fictional sale introduce”.

In this case the Court observed that creating a fictitious profit by treating a man as if he were selling to himself is both absurd and contrary to all principles of mercantile and income‑tax law. The Court illustrated the point by referring to a trader in rice who withdrew rice from his stock‑in‑trade for the consumption of his own family. The learned judge explained that what the trader does with the rice stored in a private godown is of no concern to the Income‑Tax Department provided that the rice is not sold or otherwise used to generate a profit. The trader may consume the rice, give it away, or even allow it to rot, and the Court emphasized that using ten bags from the godown for a feast at his daughter's marriage does not constitute personal income nor a profit for his business. From this illustration it follows that the stock withdrawn in the rice example was not the subject of any commercial transaction and was, in effect, lost to the business. However, the present situation differs because, although the mined ore itself was not directly sold, it was transformed into a commodity that was subsequently sold. The Court therefore posed the question of whether a profit may be said to arise from the acquisition of the basic commodity when a sale or commercial transaction results in profit on a product into which the original commodity has been transformed. The Court clarified that it cannot be assumed that profit is possible only when the ore is sold in the exact condition in which it emerged from the mine. Even if the ore is reduced to convenient sizes, broken into fragments, or pulverised, the cost of such dressing or pulverising would be treated as an expenditure to be taken into account in determining the profit from the sale of the dressed ore. If profit can indeed arise from the sale of ore that has been dressed for the market, there is no logical basis for denying the existence of profit when the ore undergoes further modification and a product of the dressed ore is sold. The Court recognized that where the mined ore is processed before marketing—whether by cleaning, dressing, or other means—the processed product may still be commercially described as ore, and the question of profit must be examined in that context.

The Court observed that even after processing, the product may still be described in the market as ore. It then raised the question whether it is necessary for a profit to arise from the mine’s operation that the commercial identity of the commodity sold must be the same as the commodity extracted from the mine. In other words, the Court asked if the loss of that commercial identity would cause the notion of “a profit” derived from producing the commodity to disappear. The Court found it difficult to accept the reasoning that if the mined ore is processed and the resulting product is sold under a different commercial name because the processing brings about extensive changes to the raw material, then the sale of the finished product could not, in law, generate any profit from the working of the mine.

At this point the Court noted that the situation did not involve a consumption of the ore in the sense of the ore being completely dissipated, such as the example of grain produced by a farmer and consumed by his own family, which had been discussed by Bose, J., in the case of Kikabhai Premchand (1). Instead, there was a sale of an end product, and the argument was that despite the sale and the realization of profit from that sale, no profit could be attributed to the mine’s product. The learned Attorney‑General referred the Court to the decision in Doors Tea Co. Ltd. v. The Commissioner of Agricultural Income‑tax West Bengal (2). In that case the issue was whether the value of bamboos, fuel timber, and similar items grown by a taxpayer but used by him in his tea business could be taken into account in computing “his income, profits and gains” under the Bengal Agricultural Income Tax Act. The Court held that such items could indeed be taken into account and, even if they did not fall within the phrase “profits or gains”, they were certainly part of “income” in its wider sense. The Court pointed out that the judges in that decision did not expressly exclude the items from the category of “profits”, and the authority was limited to the broader interpretation of “income” in that statute. The Court concluded that, as a matter of fact, the profit generated by the mining operation and the extraction of the mineral is embedded in the profit realized from the sale of the end product. To illustrate, it assumed that the cost of extracting the ore is Rs 50 per ton while the market price of comparable ore, which would have to be purchased if the mine’s ore were not available, is Rs 60 per ton. There could not be any doubt that

In the illustration given, the difference of ten rupees per ton of ore would appear in the profit or loss that resulted from the sale of the steel, as noted in the cited authorities (1) [1954] S.C.R. 219 and (2) (1962) 3 S.C.R. 157. The Court observed that it was unnecessary to add that, where the mined product cost more than the market price of the commodity, the mining operation would incur a loss even though the ultimate sale of the finished steel might generate a profit. Those calculations, however, were not relevant to the issue presently before the Court, because the Court’s task was to determine whether, under law, a profit could exist when the ore extracted from the mine was transformed into steel in the mills owned by the same mining company.

The Court then asked whether any legal principle barred the acceptance of the factual situation in which the profit earned from the mine, or from the mining activity, was embedded in the profit obtained from the sale of the steel. The learned Attorney‑General argued that, in such circumstances, the “Profit” was not a real or actual profit but merely a notional one, and that the statute’s reference to “profit” meant an actual, real and realised profit and not a notional profit. The Court stated that it could not accept that argument.

Beginning from the premise that the sale of the final product produced a real profit, the Court explained that, when examined, profit is the aggregate result of the profits derived from the various lines of activity pursued by the company. If, by arithmetic, the total profit represents the sum of the different activities, the Court saw no reason to describe the profit attributable to each individual activity as merely notional and therefore not a real profit.

For the sake of clarity, the Court added that the same principle would apply when the sale of the final product did not yield a profit but instead produced a loss. In that situation, the component attributable to the mining operation would either reduce the overall loss if it were a profit, or increase the overall loss if it were also a loss. The Court noted that another contention had been raised, namely that the final profit could not be dissected to determine its components; however, the Court regarded that issue as distinct from the matter presently before it and indicated that it would be addressed elsewhere.

What the Court now emphasized was that, if the overall profit could be broken down into its constituent parts, it would be inaccurate to describe the profit apportioned to each line of activity as any less real than the aggregate profit realised from the combined ventures. The Court further observed that its approach did not depart from the principle that a person cannot trade with himself; in fact, the analysis fully respected that principle.

The Attorney‑General introduced the principle of dichotomy by first separating the appellant’s undertaking into two distinct parts. He described the first part as the activity of a mine‑owner who extracts ore, and the second part as the activity of a steel‑manufacturing company that purchases and processes the extracted ore. He then asked whether the legal transfer of ore from the mining division to the manufacturing division could be characterised as a sale of the product that would generate a “profit”. The Attorney‑General further suggested that the entire operation could be viewed as a single, integrated enterprise, a view the Court was invited to adopt. If the mining and manufacturing activities are treated as one continuous chain, commencing with the extraction of ore and ending with the sale of finished steel or steel products by the same company, the question of a person trading with himself would not arise. Instead, the issue would shift to whether the profits of such an integrated business could be broken down into the contributions of each component that together constitute the whole operation.

Undoubtedly, to determine the profit attributable to the mining activity, it would be necessary to separate the total gross profit that ultimately arises from the sale of the finished steel or steel products. The Court emphasized that this analytical separation does not amount to a dismemberment of the business that would invoke the principle that a person cannot deal with himself. Rather, the inquiry is whether, when a profit results from the combined effect of different but integrated operations, that profit may be divided so that specific amounts can be assigned to each individual operation or activity. The underlying question, therefore, is whether any rule of law forbids the partition of profits in order to identify the profit or loss attributable to each line of activity, given that the sale of the final product yields a profit or loss for the whole venture. The Attorney‑General submitted that there is no general legal principle that allows the profits generated by a series of integrated activities to be dissected for the purpose of ascertaining the profit or loss of each individual activity that contributes to the overall result. He argued that, in the absence of a specific statutory provision, there can be no “artificial” division of the businesses for the purpose of calculating the profit of each activity. In support of the view that such a disaggregation of profit may be permissible, the respondent’s counsel relied chiefly on two Supreme Court decisions: Commissioner of Income Tax, Bombay v. Ahmedbhai Umarbhai & Co., Bombay, and Anglo‑French Textile Co. Ltd. v. Commissioner of Income Tax, Madras.

The Court referred to the decisions in Commissioner of Income Tax, Madras and Anglo‑French Textile Co. Ltd. v. Commissioner of Income Tax, Madras, in which the Court had apportioned income for the purpose of levy under the Excess Profits Act, 1940, and the Indian Income‑Tax Act, 1922. The Court observed that it was unnecessary to recount the detailed reasoning of those cases because, as correctly noted by the learned Attorney‑General, those decisions did not address a general principle concerning the apportionability of incomes, profits, or gains arising from interconnected activities; rather, they dealt with the construction of specific statutory provisions. In support of his contention that, absent a statutory provision, profits could not be dissected, the Attorney‑General cited a passage from the judgment of Patanjali Sastri J. in the first of the cited cases, where the judge observed that it might be a “fallacy” to, under a taxing statute that focuses on the source of income as the test of chargeability, ignore the initial stages of production and concentrate solely on the final stage when income is realized in money. The judge questioned whether, without any statutory requirement, it was consistent with business principles to arbitrarily divide a continuous business operation into separate portions and allocate the resulting profits between them. The Attorney‑General also relied on a similar passage from Commissioner of Income Tax, Madras v. Diwan Bahadur S. L. Mathias, in which Sir George Rankin stated that green coffee could not be regarded as income, profit or gain within the meaning of the Act because it is cultivated for the purpose of sale, and that business operations could not be arbitrarily split but must be considered as a whole. The Court expressed its inability to accept that these two excerpts supported the Attorney‑General’s argument. It was sufficient to consider the second quotation, which typified the principle that where profits arise from the sale of an end product or from the result of a final activity and are brought within the tax net, there is no legal principle that permits dissecting those profits so as to limit the taxable amount to that derived solely from the ultimate activity. The Court illustrated this by referring to the Mathias case, in which the assessee cultivated coffee on his own land in the State of Mysore, transported the raw beans to Mangalore in the State of Madras for curing and processing, and then sold the cured coffee, receiving the sale proceeds within the taxable territory. The assessee had contended that, because he had already received the raw coffee in Mysore, the value of that product should be excluded when computing profit from the sale of the cured coffee. The Court rejected this contention, noting that the passage quoted earlier was intended to explain why such a division of profit is impermissible in cases where the profit from the sale of an end product is subject to tax.

In that earlier case the assessee argued that because he had already taken receipt of the raw coffee in the State of Mysore, the value of the raw coffee should be left out when calculating the profit arising from the sale of the cured coffee. The Court rejected this argument and explained that the reasoning quoted earlier was intended to address precisely that contention. The Court then observed that situations in which profit from the sale of a final product is subject to tax can be placed into two broad categories. The first category includes cases in which the whole profit, without any deduction for income or profit earned at earlier intermediate stages, is liable to tax; the decision in the Mathias Case (1) reported by the Privy Council serves as an illustration of this category. The second category comprises cases in which either no tax liability or a specific exemption applies to the “income, profits and gains” that accrue up to a certain defined stage. The Court noted that this second category is essentially the converse of the situation presently before it and that it required a more detailed examination. The converse character arises because, in the present matter, the statute subjects only the profit from the earlier mining operation to tax and excludes the profit from the later manufacturing activity, whereas in the opposite class the profit from the later activity is taxed while the profit from the earlier activity either escapes liability or enjoys a statutory exemption. In that opposite class the statute therefore creates an implicit dichotomy by charging tax only on the profit attributable to the later activity. The Court pointed out that this principle corresponds to the commercial accounting rule applied in Commissioner of Income Tax v. Kooka (1) and also underlies Rule 23 of the Income‑Tax Rules, which will be referred to later. Since the taxing provision under consideration taxes only the profit derived from a single activity, the Court held that it is necessary to apportion that profit between the portion attributable to that activity and the portion attributable to subsequent processes that convert the ore into steel and related products. Moreover, even where profit from an ultimate activity is taxable, an apportionment may still be required if an exemption exists for profits arising from distinct earlier activities, as demonstrated by the provisions of the Indian Income‑Tax Act itself. For example, if a sugar mill cultivates its own cane, and there is no exemption for agricultural income as defined in Section 2, then the entire profit of the mill from selling the sugar must be taken into account as taxable profit under Section 10.

Section 4(3)(viii) of the Income‑Tax Act excludes from tax the agricultural income that is defined in section 2(1). Because of this exemption, the total “incomes, profits or gains” of a taxpayer become divided into two separate categories: the income that arises from business activities and the income that is agricultural in nature. Consequently, the tax authorities must separate, or apportion, these two streams in order to calculate the portion of total income that is subject to tax. To give effect to this requirement, section 59(2) of the Income‑Tax Act empowers the Government to issue rules that prescribe the method and procedure for determining the taxable share when income is derived partly from agriculture and partly from business. In the exercise of this rule‑making power, the Government framed Rule 23, which was published in the 1962 Supplement to the Supreme Court Reports (page 391). Rule 23 lays down the principles that must be applied to achieve the necessary apportionment and its terms are set out below for the purpose of illustrating the principle.

Rule 23(1) states that where a taxpayer’s income consists of both agricultural income (as defined in section 2) and income chargeable to tax under the head “Business”, the taxable portion must be computed after deducting the market value of any agricultural produce that the taxpayer has either grown himself or received as rent‑in‑kind and subsequently used as raw material in the business, or whose sale receipts have been recorded in the business accounts. No further deduction is permitted for any expense incurred by the taxpayer in the capacity of a cultivator or rent‑in‑kind receiver. Rule 23(2) then defines “market value”. It declares that market value shall be presumed to be (a) the average price realized during the preceding year for agricultural produce that is normally sold in the market either in its raw state or after undergoing the usual processing applied by a cultivator or rent‑in‑kind receiver to make it marketable; or (b) where the produce is not ordinarily sold in the market in its raw condition, the sum of (i) the cultivation expenses, (ii) the land revenue or rent payable for the land on which it was grown, and (iii) an amount that the Income‑Tax Officer, after considering all relevant circumstances, determines to represent a reasonable profit rate on the sale of that agricultural produce. In the Court’s opinion, this principle of apportionment, which is based on dissecting the ultimate profits earned by a taxpayer, is inherently contained in section 6 of the Act. Section 6 brings to tax the profit that arises from an initial activity when the taxpayer subsequently engages in further processing of the ore obtained, resulting in a profit from the sale of the final product. The Court noted that this reasoning formed the second principal submission in the matter.

The learned Attorney‑General contended that the statute, by its own provisions, gave unmistakable indication that the term “Profit” occurring in sections 6, 72 and other relevant provisions was to be interpreted in a narrow sense, restricting it solely to profit derived from the sale of the extracted ore. To support this contention, he pointed to the parallel provisions of the Act that dealt with the determination of “the annual value of lands,” an item that, together with the annual net profit from mines and quarries, was subject to the cess imposed under section 6. He observed that the phrase “Annual value” would ordinarily encompass only the profit generated from land and would not include the benefit that accrues to an owner from his own occupation of the land. To bring the latter category within the statutory net, the Act incorporated a definition of “annual value,” which read: “4. Interpretation clause.—In this Act, unless there be something repugnant in the subject or context, ‘Annual value of land, etc.’—‘Annual value of any land, estate or tenure’ means the total rent which is payable, or if no rent is actually payable, would on a reasonable assessment be payable during the year by all the cultivating raiyats of such land, estate, or tenure, or by other persons in the actual use and occupation thereof.. Explanation. For the purposes of the foregoing definition, whatever is lawfully payable or deliverable, or would on a reasonable assessment be lawfully payable or deliverable.. in money or in kind, directly to the Government,— (a) by raiyats cultivating land in a Government estate—on account of the use or occupation of the land, or (b) by other persons in the actual use and occupation of land in such an estate, shall be deemed to be ‘rent’.” He then analogized the position of a mine owner who consumes the ore he has extracted in his own factory to the situation of a land‑owner who occupies his own land beneficially. In that analogy, although the owner unquestionably obtains a benefit, he does not derive a “profit” from the land itself. Accordingly, the argument advanced was that, in the absence of a specific statutory provision addressing mine‑owners who do not sell the ore they extract, there could be no liability to levy the charge under the Act. The Court, however, was unable to accept this argument. It observed that, in the context of other immovable property, beneficial occupation by the owner is treated on a par with the receipt of rents and profits, which suggests that such occupation was not excluded from the framers’ contemplation. Although it was possible that, at the time of enactment, the framers had not envisioned cases like those of the appellants, that possibility alone was insufficient to infer that those cases lay outside the scope of the charging provision. The Court emphasized that the decisive factor is the language, breadth and scope of the charging provision% and

The Court observed that even if the appellants fall within the charging provision, it is of little relevance that the framers of the enactment may not have specifically pictured cases like the present one. The learned Attorney‑General relied upon a rule of construction which holds that there is no equity in a taxing statute and that a tax cannot be imposed unless the taxpayer is clearly brought within the charging provision. According to that rule, when a taxing statute is ambiguous and one construction would allow the tax while another would not, the taxpayer is entitled to the benefit of the doubt. The Court, however, declared that the construction it has adopted for the relevant sections of the Act leaves no room for the application of that rule.

The appellants further contended that the Act was defective because it did not contain a specific mechanism for dealing with the type of cases now before the Court, and that, because of this lack of machinery, the charge could not be imposed. In support of this contention they relied upon the well‑known House of Lords decision in Colquhoun v. Brooks (1889) 14 App. Cas. 493. The Court rejected this argument, noting that it had already interpreted sections 5, 6 and 72 of the Act to mean that where an assessee carries on activities beyond the mere extraction of ore, and where there is a sale of the ultimate product, any profit that is embedded in the final realisation may be identified and taxed.

The Court clarified that it was not concerned at this stage with the method by which such profit must be disaggregated, nor with the specific components or items that must be taken into account to arrive at the “annual profit” required under sections 6 and 72. Those determinations are to be made by the competent authorities pursuant to the order of remand issued by the Board of Revenue in the present cases. The only issue before the Court in these appeals, the Court explained, was whether the law permits an annual profit to arise from a mine when the ore produced is not sold as ore but is instead used as a raw material for manufacturing other products that are subsequently sold.

The Court affirmed that, once it is accepted that profit may result from mining activity, it is unnecessary for the ore to be sold in the same condition in which it emerged from the mine. Even if the extracted ore undergoes further processing and is transformed into a different commodity before sale, a profit can still be attributed to the mining operation. Consequently, the Court rejected the submissions that the charging provisions could not be applied to the appellants’ situation.

In this case the Court observed that if ore is processed so as to become more useful or attractive to a buyer and is then sold, a profit will arise and the costs incurred in processing may be treated as legitimate expenditures for the purpose of computing that profit. The Court further held that turning the ore into a different commodity and selling it does not defeat the concept of “a profit” from the mine; the remaining issue is the removal of the additional expenses incurred and the principles by which those expenses are to be measured. It is the duty of the appropriate assessing authorities to determine the annual profit when a dispute arises, and the Court noted that Section 76 of the Act contains a residuary provision allowing the Collector, if he is unable to ascertain the annual net profit, to fix the profit at six per cent of the value of the mine. Consequently, the Court could not agree with the submission that the charging provisions should be dismissed as meaningless merely because the statute does not provide a specific mechanism for apportioning profit where the ore is not sold as ore but is converted into other saleable products. The learned Attorney‑General criticised the reasoning of the High Court judges and the decisions on which they relied, but the Court found it unnecessary to address those criticisms because it was already satisfied, for the reasons already set out, that the High Court was correct in holding that the appellants fell within the charging sections of the Act. Counsel for the appellants in Civil Appeals Nos. 600‑601 of 1961, while largely adopting the Attorney‑General’s arguments, contended that there was no market for copper ore, the product obtained by the appellants, and therefore no market price could be fixed and no profit could be ascertained from the mining operation. The Court considered that argument irrelevant to these appeals, which were concerned not with the method of calculating profit but solely with the legal question of whether a mine‑owner who does not sell ore as such but instead manufactures a finished product for sale can, in law, derive profit from the mining activity. Accordingly, the Court held that the submission was not pertinent at this stage and refrained from examining its merits. The appeals were therefore dismissed, with costs awarded, including one set of hearing fees, and the appeals were formally closed.