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 69670
section C Manchanda Shiv Pujan Singh and M V Goswami for the Appellant
In all the appeals V section Desai and Rameshwar Nath for the Respondent
The following Judgments were delivered UNTWALIA J The Commissioner of Sales Tax Lucknow has filed these four appeals by special leave against the judgment of the Allahabad High Court given in four sales tax references under the UP Sales Tax Act 1948 hereinafter referred to as the Act
595 The assessee respondent owns some tea gardens in the State of UP
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 2i 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 saleor 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 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 ie 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 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 2i 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 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 vs R Saravana Pillai1 and N Deviah Gowder vs Commercial Tax Officer Coimbatore2 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 2i 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 2i
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 section Borawake vs The State of Bombay1 and Commissioner of Income Tax Poona vs HG Date2 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 26
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 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 vs Sherneilly Rubber  Cardamom Estates Ltd  Others3
Deputy Commissioner of Agricultural Income Tax and Sales Tax Quilon vs Travancore Rubber and Tea Co Ltd4 Commissioner of Income Tax vs Woodland Estates Ltd5 Rayavarapu Mrityanjaya Rao vs 601 The State of Andhra Pradesh1 and Commissioner of Sales Tax UP Lucknow vs 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 vs Secretary to State3 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 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 vs Swasthik Tobacco Factory1 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 51i 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 vs Bell Mark Tobacco Co2 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 section Bist  Sons Nainital vs Commissioner of Sales Tax UP3 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 vs Secretary to State4 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 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
PBR Appeals dismissed


Summary:
The proviso to section 2i of the UP 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 section 2i 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 section 2i is attracted
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 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 vs Swasthik Tobacco Factory 17 STC 316 The State of Madras vs Bell Mark Tobacco Co 19 STC 129 referred to
The State of Madras vs R Saravana Pillai 7 STC 541 Deputy Commissioner of Agricultural Income Tax and Sales Tax Sough Zone vs Sherneilly Rubber  Cardamom Estates Ltd  others
12 STC 519 Commissioner of Income Tax vs Woodland Estates Ltd Rayavarapu Mrityanjaya Rao vs The State of Andhra Pradesh 20 STC 417 Commissioner of Sales Tax UP Lucknow vs Harbilas Rai and Sons 21 STC 17 approved
Killing Valley Tea Company Ltd vs Secretary to State AIR 1921 Calcutta 40 distinguished
Pathak J concurring
In Killing Valley Tea Co Ltd vs Secretary to State AIR 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