As agriculture gets industrialised and information technology changes the way of buying and selling things, the legal question that arises is as to what is a market.

Market value is a standard legal phrase in the laws of a developing economy ranging from the Land Acquisition Act to the Income Tax Act. But how does one come to that value if there is no market in the traditional sense of a concourse of buyers and sellers meeting and coming to a price of the goods in question, especially where prices are already fixed by a control order under the Essential Commodities Act?

Now the Supreme Court in Thiru Arooran Sugars Vs Commissioner of Income Tax has held that there does not have to be a concourse of buyers and sellers for a market to exist. Hence even if there is only one factory in an area which is buying sugarcane at its gate from farmers, the market value of the sugarcane will be the price at which it makes the purchase. If the price is determined by a control order then the controlled price will be the market price since buyers and sellers are expected to transact business at that price only.

The issue of what is a market became important when Thiru Arooran Sugars claimed deduction from their manufacturing income the price of sugarcane bought to produce the sugar. Rule 7 of the Income Tax Rules gave two methods of arriving at the value of the sugarcane: One was where the agricultural produce is "ordinary sold in the market" in its raw state. In that case, the deduction from income of such produce was to be on the basis of the value calculated according to the average price at which the produce was sold during the relevant previous year.

The other method was where the agricultural produce was not "ordinarily sold in the market" in its raw state. Then the price of such produce for deduction from the income had to be arrived at by adding the following: expenses of cultivation, land revenue or rent paid for the area in which it was grown and such amount as the assessing officer finds in a case to be a reasonable profit.

Since the price of sugarcane was controlled under the sugarcane control order the question arose as to the meaning of the words "ordinarily sold in the market" in Rule 7. The company contended that it had grown sugarcane in its own land as well as lands taken on lease. In addition it had bought sugarcane both from registered as well as unregistered farmers.

This had to be done because the sugarcane grown by it was not sufficient for its factory having a capacity of 1200 tons per day. On the basis of these facts the Tribunal concluded that the sugarcane consumed could not be treated as a product that could be `ordinarily sold in the market' Hence the market value of the consumed sugarcane had to be calculated according to the second method of adding up the cost of cultivation, land revenue paid and the reasonable profit. By this method the company's average cost of cultivation worked out to be higher than the average cost of purchase of the sugarcane by the company itself.

The high court, however, came to a contrary conclusion. It held that sugarcane did not cease to be a raw produce ordinarily sold in the market because of the sugarcane control order. Merely because the price, the distribution, the production the relationship between grower and buyer were all subjected to elaborate government regulations, it could not be said that the product itself lost either its identity or its nature or its character of an agricultural produce sold in the market.

Hence the market value of the sugarcane consumed by the company's factory had to be calculated according to the first method.

It held that the assessee-company was simply trying to get deduction of a higher amount than the market value of the sugarcane produced by it.

The company appealed to the Supreme Court Justices S C Sen and S P Kurdukar reversed the high court. They rejected the argument that because of the Control Order and this being the only factory in the whole area, there was no market where buyers and sellers would congregate to determine the price at which it would be `ordinarily sold' The judges held that the existence of an open market subject to the pressures of demand and supply among several buyers and sellers is not an essential prerequisite to the words `ordinarily sold' and adopting the first method.

The 1930, Patna high court judgement in J M Casey stating that the market implied a real centre of economic exchange was distinguished on the ground that that had been said in the case of non-commercial purchases made by the Motihari jail to keep the prisoners occupied" on laborious jobs. Hence all sugar factories will have to arrange their costing structure now on this basis the court however took no note of the fact that the appeal was pending before it since 1983. It did not inquire as to whether the company enjoyed a stay for all these years and as to why the appeal remained unheard for so long.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.