Full Judgment Text
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PETITIONER:
COMMISSIONER OF SALES TAX, LUCKNOW
Vs.
RESPONDENT:
D. S. BIST & ORS.
DATE OF JUDGMENT11/09/1979
BENCH:
UNTWALIA, N.L.
BENCH:
UNTWALIA, N.L.
PATHAK, R.S.
CITATION:
1980 AIR 169 1980 SCR (1) 593
1979 SCC (4) 741
CITATOR INFO :
D 1988 SC1435 (38)
ACT:
U. P. Sales Tax Act, 1948-S. 2(i) proviso-Tea leaves
after drying and processing-Whether remained agricultural
produce not exigible to sales tax under the proviso.
HEADNOTE:
The proviso to s. 2(i) of the U.P. Sales Tax Act, 1948
excludes from the term "turnover" proceeds of sale of
agricultural or horticultural produce grown by a person on
any land in which he has interest.
The assessee, who was an agriculturist, owned tea
gardens in the State. After being plucked from tea shrubs
tea leaves are withered in shade in rooms, crushed by hand
or foot, roasted for 15 minutes, then covered by wet sheets
for the purpose of generating fermentation, graded and
finally roasted again with charcoal for obtaining flavour
and colour. The final product is sold in the market.
Before the Sales Tax Authorities the assessee contended
that tea leaves sold by him were agricultural produce grown
by him on his own land and that, therefore, the sale of tea
effected by him was exempt from sales tax under the proviso
to s. 2(i) of the Act. The Sales Tax Authorities rejected
the assessee’s contention. The High Court answered the
reference in favour of the assessee and against the revenue.
Dismissing the appeal,
^
HELD: (per Untwalia J.): The High Court was right in
holding that sales of tea leaves were not exigible to sales
tax. The commodity which was sold was not different from the
commodity which was produced in agriculture and, therefore,
the proviso to s. 2(i) is attracted. [600 F, 602 E]
1. Almost every kind of agricultural produce has to
undergo some kind of processing or treatment by the
agriculturist himself either on the farm or elsewhere in
order to make it non-perishable, transportable and
marketable. Some minimal process is necessary to be applied
to many varieties of agricultural produce. The test in these
cases is to see whether in relation to that agricultural
produce the process applied was minimal or was so cumbersome
and long drawn out that either in common parlance or in the
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market or even otherwise no one would treat the produce as
an agricultural produce. The mere fact that in the case of a
particular product the process is a bit longer or even a bit
complicated would not rob the produce of its character of
being an agricultural produce. [597 B-C; F-G]
2. All the processes enumerated by the Revising
Authority were necessary for the purpose of saving the tea
leaves from perishing, making them fit for transporting and
marketing. The processes applied were all within the region
of minimal processes and at no point of time they crossed
that limit and robbed the leaves of their character of being
and continuing to be agricultural produce. [598 C-E]
594
Vol. 21 Encyclopaedia Britannica (1968 edition),
referred to.
The State of Madras v. Swasthik Tobacco Factory 17
S.T.C., 316, The State of Madras v. Bell Mark Tobacco Co. 19
S.T.C., 129 referred to.
The State of Madras v. R. Saravana Pillai 7 S.T.C.,
541, Deputy Commissioner of Agricultural Income Tax and
Sales Tax, Sough Zone v. Sherneilly Rubber & Cardamom
Estates Ltd. & others. 12 S.T.C. 519, Commissioner of Income
Tax v. Woodland Estates Ltd. 58 I.T.R., 612 Rayavarapu
Mrityanjaya Rao v. The State of Andhra Pradesh 20 S.T.C.,
417, Commissioner of Sales Tax, U.P., Lucknow v. Harbilas
Rai and Sons, 21 S.T.C., 17 approved.
Killing Valley Tea Company Ltd. v. Secretary to State
A.I.R. 1921 Calcutta, 40 distinguished.
(Pathak, J. concurring).
In Killing Valley Tea Co. Ltd. v. Secretary to State
A.I.R. 1921 Calcutta, 40 the Calcutta High Court was of
opinion that while process of selecting and plucking tea
leaves from the tea shrubs could be deemed to be
agriculture, the subsequent process which included drying
and rolling of the leaf was a manufacturing process. If the
Calcutta High Court could be said to have laid down that as
a result of those processes the tea leaf ceased to be
agricultural produce, it is not correct. The tea leaf
remained what it always was. It was tea leaf when selected
and plucked and it continued to be tea leaf when after the
process of withering, crushing and roasting, it was sold in
the market. The process applied was intended to bring out
its potential qualities of flavour and colour. The potential
inhered in the tea leaf from the outset when still a leaf on
the tea bush. The potential surfaced in the tea leaf when
the mechanical processes of withering, crushing and
roasting, fermenting by covering with wet sheets and
roasting again were applied. At no stag, did it change its
essential substance. It remained tea leaf throughout. In its
basic nature it continued to be agricultural produce. [603
B-C]
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 2361-
2364 of 1972.
Appeals by special leave from the Judgment and Order
dated 17-5-72 of the Allahabad High Court in Sales Tax Ref.
Nos. 693 to 696/70.
S. C. Manchanda, Shiv Pujan Singh and M. V. Goswami for
the Appellant. (In all the appeals)
V. S. Desai and Rameshwar Nath for the Respondent.
The following Judgments were delivered:
UNTWALIA, J. The Commissioner of Sales Tax, Lucknow has
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filed these four appeals by special leave against the
judgment of the Allahabad High Court given in four sales-tax
references under the U.P. Sales Tax Act, 1948, hereinafter
referred to as the Act.
595
The assessee-respondent owns some tea gardens in the
State of U.P. The tea-leaves grown by the respondent in his
gardens are sold in the market after being processed and
packed. The stand taken on his behalf before the taxing
authorities was that the tea-leaves sold by the respondent
are agricultural produce grown by himself and, therefore,
the sales were not exigible to sales-tax. The contention of
the assessee was not accepted and the final Revising
Authority made four references in respect of the four
periods to the High Court on the following question of law:-
"Whether on the facts and circumstances of this case
the article ceased to be an agricultural produce and
whether the tea produced by the assessee would be
exigible to sales tax?"
The High Court has answered the reference in favour of the
assessee and against the revenue. Hence these appeals by the
department.
Under section 3, the charging section, of the Act it
was the turn-over for each assessment year determined in
accordance with the various provisions of the Act and the
Rules framed thereunder, which was chargeable to sales-tax.
The definition of ’turnover’ given in section 2(i) of the
Act at the relevant time stood as follows:-
" "Turnover" means the aggregate amount for which goods
are supplied or distributed by way of sale(or are
sold), or the aggregate amount for which goods are
bought, whichever is greater by a dealer, either
directly or through another, on his account or on
account of others, whether for cash or deferred payment
or other valuable consideration:
Provided that the proceeds of the sale by a person
of agricultural or horticultural produce, grown by
himself or grown on any land in which he has an
interest whether as owner, usufructuary mortgagee,
tenant or otherwise, or poultry or dairy products from
fowls or animals kept by him shall be excluded from his
turnover."
The above proviso was meant to exempt an agriculturist or a
horticulturist from the charge of sales-tax in respect of
his agricultural or horticultural produce grown by himself
in his land in which he has an interest of the kind
mentioned in the proviso. The short question which falls for
our determination, therefore, is whether the assessee’s
transactions of sale came within the ambit of the proviso.
Indisputably and undoubtedly the assessee was an
agriculturist, the
596
tea-leaves grown by him in his land were agricultural
produce, and he had sold them after processing and packing.
In other words the assessee made them marketable and fit for
consumption by the consumers and then sold them. If the tea-
leaves so sold substantially retained the character of being
an agricultural produce, it is plain that the assessee’s
sales will not be exigible to sales-tax. If, on the other
hand, the leaves had undergone such vital changes by
processing that they lost their character of being an
agricultural produce and became a different commodity then
the sales made by assessee were exigible to sales-tax.
The High Court has extracted the primary findings of
fact recorded by the Revising Authority in its revisional
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order. As is well-known tea-leaves are plucked from tea-
plants as green tea-leaves. The tea-leaves so plucked are
not fit for consumption and are not sold in the open market.
They are often purchased by big tea concerns from the owners
of the gardens and after processing and packing them they
(the concerns) sell them in the market. Since in their cases
the proviso will not apply the sales will be exigible to
sales tax. But when the producer himself does the same or
similar kind of job, then the question arises whether it can
be justifiably said that he also cannot take advantage of
the proviso?
The primary facts as extracted by the High Court from
the order of the Revising Authority are the following:-
(1) "The tea-leaves were first of all subjected
to withering in shadow in rooms on a wooden
floor for about 14 hours."
(2) "then they were crushed-by hand or foot and
were then roasted for about 15 minutes."
(3) "Later they were roasted on mats for about 15
minutes."
(4) And then they were "covered by wet sheets for
generating fermentation. During this process
the colour of leaves was changed from green
to yellowish."
(5) "the leaves were then subjected to grading
with sieves of various sizes. Fanning
machines are also used in completing the
grading process."
(6) "The produce was then finally roasted with
charcoal for obtaining suitable flavour and
colour."
597
(7) "It is this final product which was
eventually sold by the assessees."
The question for consideration is whether on the
findings aforesaid it can be justifiably held in law that
the leaves lost their character of being an agricultural
produce and became something different. It should be
remembered that almost every kind of agricultural produce
has to undergo some kind of processing or treatment by the
agriculturist himself in his farm or elsewhere in order to
bring them to a condition of non-perishability and to make
them transportable and marketable. Some minimal process is
necessary to be applied to many varieties of agricultural
produce. As for example, when wheat stalks are cut from the
farm, threshing and winnowing have to be done. The product
so obtained has to be dried for a few days. The husk and
dust have to be separated. Thereafter packing the wheat in
bags or other containers it is taken to the markets for
sale. One can never suggest that such a wheat product
becomes a commodity different from the one which was
produced in the process of agriculture. To pursue that
example further, if the agriculturist who produces the wheat
has a flour mill and crushes the wheat produced by him in
that mill and then if the flour so produced is sold by him
one can never reasonably suggest that the flour sold by him
is an agricultural produce, because in that event, the
manufacturing process goes beyond the limit of making the
agricultural produce fit for marketing as such and turns it
into a different commodity altogether i.e. flour. But there
may be some other kinds of agricultural produce which
required some more processing to make it marketable. In the
case of such a commodity what one has to judge is to find
out whether in relation to that agricultural produce the
process applied was minimal or was it so cumbersome and long
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drawn that either in common parlance, or in the market, or
even otherwise, any body would not treat the produce as an
agricultural produce. The mere fact that in the case of a
particular product the process is a bit longer or even a bit
complicated will not rob the produce of its character of
being an agricultural produce. Largely the inference to be
drawn from the primary facts of processing, one may say,
will be an inference of fact. But it is not wholly so. In a
given case it will be a mixed question of fact and law. If
wrong tests are applied in drawing the inference that the
agricultural produce has lost its character of being so,
then it will be a question of law and the High Court will
have jurisdiction in an appropriate reference, as in the
present case it had, to decide whether the case came under
the proviso to section 2(i) of the Act.
598
Unlike many agricultural products tea-leaves are not
marketable in the market fresh from the tea gardens. No body
eats tea-leaves. It is meant to be boiled for extracting
juice out of it to make tea liquor. Tea-leaves are,
therefore, only fit for marketing when by a minimal process
they are made fit for human consumption. Of course, the
processing may stop at a particular point in order to
produce inferior quality of tea and a bit more may be
necessary to be done in order to make it a bit superior. But
that by itself will not substantially change the character
of the tea-leaves, still they will be known as tea-leaves
and sold as such in the market. In my opinion all the six
processes enumerated above from the primary findings of fact
recorded in the order of the Revising Authority were
necessary for the purpose of saving the tea-leaves from
perishing, making them fit for transporting and marketing
them. The process applied was minimal. Withering, crushing
and roasting the tea-leaves will be surely necessary for
preserving them. The process of fermentation or final
roasting with charcoal for obtaining suitable flavour or
colour and also the process of grading them with seives were
all within the region of minimal process and at no point of
time it crossed that limit and robbed the tea-leaves, the
agricultural produce, of their character of being and
continuing as such substantially. In my opinion, therefore,
the view expressed by the High Court is quite justified and
sustainable in law.
In Volume 21 of Encyclopaedia Britannica (1968 edition)
under the head ’Tea’ are dealt with at page 739 the
processes of cultivation and manufacture of tea. Under the
sub-head ’Cultivation’ it is found stated:-
"Tea leaves are plucked either by hand or with
special shears. In the tropical areas of southern
India, Ceylon, and Indonesia, harvest continues
throughout the year, but in the subtropical regions of
northern India and China and in Japan and Formosa, the
harvests are seasonal. The flavour and quality of the
tea-leaves vary with the climate, soil, age of the
leaf, time of harvest (even from season to season), and
method of preparation."
Then comes the sub-head ’Manufacture’ which enumerates the
categories of three classes of teas and then it is
mentioned:-
"Most stages of processing are generally common to
the three types, of tea. First, the fresh leaves, are
withered by exposure to the sun or by heating in trays
until pliable (usually 18-24 hours). Next the leaves
are rolled by hand
599
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or machine in order to break the leaf cells and
liberate the juices and enzymes. This rolling process
may last up to three hours. Finally, the leaves are
completely dried either by further exposure to the sun,
over fires, or in a current of hot air, usually for 30-
40 minutes."
In making black tea, the leaves, after being rolled, are
fermented in baskets or on glass shelves or cement floors
under damp cloths. "The process of fermentation, or
oxidation, reduces the astringency of the leaf and changes
its colour and flavour." About green-leaves it is mentioned-
"Green tea is made by steaming without fermentation in a
perforated cylinder or boiler, thus retaining some of the
green colour. The leaves are lightly rolled before drying."
It would thus be seen that the tea-leaves as plucked have
got to pass through stages of processing of one kind or the
other in order to make them fit for human consumption, as in
the case of paddy and many other commodities dehusking in
the case of former and some other kind of process in regard
to the latter has got to be done in order to make them
marketable and fit for consumption.
There are two decisions of the Madras High Court in The
State of Madras v. R. Saravana Pillai(1) and N. Deviah
Gowder v. Commercial Tax Officer, Coimbatore(2) where a
similar question arose with respect to arecanuts. At page
544 of the first case which was followed in the second
occurs a passage which may be usefully quoted here:-
"As we have pointed out, it was common ground that
there is no market in Coimbatore or elsewhere for
arecanuts as they are when plucked from the trees, and
it should be remembered they are gathered when they are
still unripe. The proviso to section 2(i) of the Act is
obviously conceived in the interests of agriculturists.
It excludes from any tax liability under the Act sale
of agricultural and horticultural produce, the primary
condition to be satisfied being that it must be produce
of the land which either belongs to the seller or of
the land in which he has an interest as specified by
section 2(i). To restrict that concession to sale of
arecanuts, for instance, only if those arecanuts are
sold in the state in which they are immediately on
being gathered from the trees, would render the
statutory exclusion meaningless."
I approve of this decision.
600
There are two decisions of the Bombay High Court given
in relation to the question of sugarcane being converted
into jaggery. They are:-R. B. N. S. Borawake v. The State of
Bombay(1) and Commissioner of Income-Tax, Poona v. H.G.
Date.(2) In the former case it was observed at page 11:-
"It is true that gur cannot be regarded as an
agricultural produce grown on land. But if gur is
prepared out of the agricultural produce which is grown
on land, in the absence of any indication to the
contrary suggesting that the agricultural produce must
be sold in the form in which it is grown, we will be
justified in holding that an agriculturist who is
exclusively selling agricultural produce grown on the
land either in the form in which it is grown or in the
form in which it is converted for the purpose of
transportation or preventing deterioration is within
the exception provided by section 2(6). In the present
case, with a view to prevent deterioration and for the
purpose of facilitating transportation the assessee
converted the sugar-cane grown by him into gur and sold
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it."
It appears to me that this case has gone a bit too far and
on an appropriate occasion it may require further
consideration. Nonetheless, in the instant case one can
safely conclude, as I have done, that with a view to prevent
deterioration and for the purpose of facilitating transport
and making it marketable the assessee himself did some
processing to the plucked tea-leaves and hence the High
Court was right in holding that such sales were not exigible
to sales-tax. Similar or identical principles have been
applied by other High Courts also in respect of different
commodities such as rubber, sole crepe, casuarina, pig
bristles etc. The cases are-Deputy Commissioner of
Agricultural Income-Tax and Sales-Tax, South Zone v.
Sherneilly Rubber & Cardamom Estates Ltd. & Others(3).
Deputy Commissioner of Agricultural Income-Tax and Sales-
Tax, Quilon v. Travancore Rubber and Tea Co., Ltd.;(4)
Commissioner of Income-Tax v. Woodland Estates Ltd.;(5)
Rayavarapu Mrityanjaya Rao v.
601
The State of Andhra Pradesh(1) and Commissioner of Sales
Tax, U.P., Lucknow v. Harbilas Rai and Sons. (2) Broadly
speaking these cases have been decided on application of the
correct principles of law.
Reliance on behalf of the Revenue was placed upon a few
cases. None of them supports the department’s contention. I
may notice only two or three of them. In Killing Valley Tea
Company, Ltd. v. Secretary to State(3) the question for
consideration related to the tax liability of the Killing
Valley Tea Company under the Income Tax Act, 1918. If the
whole of its income was derived from agriculture, the
assessee was not liable to pay income-tax. If, however, the
activities of the Company, which produced income were
attributable partly to agriculture and partly to its
manufacturing activities, then the whole of the amount could
not have been taxed under the Income-Tax Act. The stand of
the Company was-"the actual leaf of the tea plant, without
the addition thereto of the processes above described, is of
no value as a market commodity." On behalf of the Revenue it
was contended "that the manufacturing processes carried out
in a modern tea factory, with scientific appliances and up-
to-date machinery, are different from those ordinarily
employed by a cultivator to render the produce raised by him
fit to be taken to market." The High Court held-"that the
process in its entirety cannot be appropriately described as
agriculture. The earlier part of the operation when the tea
bush is planted and the young green leaf is selected and
plucked may well be deemed to be agriculture. But the latter
part of the process is really manufacture of tea, and
cannot, without violence to language, be described as
agriculture.
The green leaf is not marketable commodity for immediate use
as an article of food, but it is a marketable commodity to
be manufactured by people who possess the requisite
machinery into tea fit for human consumption." After
referring to some authoritative books on Tea, the view
expressed by the High Court was "that the entire process is
a combination of agriculture and manufacture." Hence only a
part of the income was held to be taxable. In the instant
case the problem is quite distinct and different. Here we
are concerned with the question whether the commodity which
the assessee sold as tea was his agricultural produce or
not. He had not sold his tea-leaves from his gardens to any
manufacturing tea
602
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company. He had himself applied some indigenous and crude
manufacturing process in order to enable him to sell his tea
in the market. In such a situation I have no difficulty in
holding that the sale was of his agricultural produce.
In The State of Madras v. Swasthik Tobacco Factory(1)
the question before this Court was whether the respondent-
firm which purchased raw tobacco and converted it by a
manufacturing process into chewing tobacco and sold it in
small paper packets was entitled to deduction of excise duty
paid by it on the raw tobacco from the gross turnover of
sales of chewing tobacco under rule 5(1)(i) of the Madras
General Sales Tax (Turnover and Assessment) Rules, 1939. It
would be found mentioned at page 318:-"Both the advocates
argued, on the basis of the factual position, that the
packets of chewing tobacco were goods different from tobacco
from which the said goods were manufactured." On that
footing, by interpretation of the rule it was held that only
excise duty paid on the goods sold by the assessee is
deductible from the gross turnover, and not the excise duty
paid on raw tobacco. This case was followed by the Supreme
Court in The State of Madras v. Bell Mark Tobacco Co.(2) In
the instant case I have held that the commodity which was
sold was not different from the commodity which was produced
in agriculture.
The view expressed by the Allahabad High Court in the
judgment under appeal which is reported in D. S. Bist &
Sons, Nainital v. Commissioner of Sales Tax, U.P.(3) is on
the lines of the preponderance of views expressed by
different High Courts in relation to different commodities.
I approve of the case and dismiss these appeals with costs-
hearing fee-one set only.
PATHAK, J. I agree that the appeals should be
dismissed.
But I should like to say a few words in regard to
Killing Valley Tea Company, Ltd. v. Secretary to State.(4)
That was a case where the Killing Valley Tea Company, Ltd.
had a tea plantation and after selecting and plucking the
young green leaf from the tea bush by hand it was put
through a process of drying and rolling. The Income Tax
Department alleged that the process actually applied to the
dry leaf was a manufacturing process carried out in a modern
tea factory with scientific appliances and the latest
machinery. The
603
Calcutta High Court, on a consideration of the respective
cases of the parties, observed that the entire process could
not be described as agriculture, and that the process
applied to the tea leaf after it had been plucked was a
manufacturing process. It observed that the green tea leaf
was a marketable commodity to be manufactured by people who
possessed the requisite machinery into tea fit for human
consumption. It was of the opinion that while the process of
selecting and plucking the tea leaf from the tea shrubs
could be deemed to be agriculture, the subsequent process
which included drying and rolling of the leaf was a
manufacturing process. The High Court drew a distinction
between the two processes for the purpose of apportioning
the income between agricultural income and non agricultural
income. The question before us is whether after the tea leaf
had been put through the process of withering, crushing,
roasting and fermentation it continued to be agricultural
produce. If the Calcutta High Court can be said to have laid
down that as a result of those processes the tea leaf ceased
to be agricultural produce, I am unable to agree with it. To
my mind, the tea leaf remained what it always was. It was
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tea leaf when selected and plucked. and it continued to be
tea leaf when after the process of withering, crushing and
roasting it was sold in the market. The process applied was
intended to bring out its potential qualities of flavour and
colour. The potential inhered in the tea leaf from the
outset when still a leaf on the tea bush. The potential
surfaced in the tea leaf when the mechanical processes of
withering, crushing and roasting, fermenting by covering
with wet sheets and roasting again were applied. The tea
leaf was made fit for human consumption by subjecting it to
those processes. At no stage. did it change its essential
substance. It remained a tea leaf throughout. In its basic
nature, it continued to be agricultural produce.
The appeals fail and are dismissed with costs. Costs
are awarded as one set only.
P.B.R. Appeals dismissed.
604