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Additional Commissioner of Income-tax Vs. Nizam Sugar Factory - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAndhra Pradesh High Court
Decided On
Case NumberCase Referred No. 229 of 1976
Judge
Reported in[1981]127ITR423(AP)
ActsIncome Tax Act, 1961 - Sections 10(1) and 37; Income Tax Rules, 1962 - Rule 7
AppellantAdditional Commissioner of Income-tax
RespondentNizam Sugar Factory
Appellant AdvocateP. Rama Rao, Adv.
Respondent AdvocateM.J. Swamy, Adv.
Excerpt:
direct taxation - exemption - sections 10 (1) and 37 of income tax act, 1961 and rule 7 of income tax rules, 1962 - whether expenses incurred by assessee company on its agricultural operations for raising sugarcane was allowable as deduction in computing income from business - assessee manufactured sugar from sugarcane grown on its own land - assessee also purchase sugarcane grown by other ryots in adjacent areas - cultivation of sugarcane and manufacturing of sugar by assessee constituted one single and individual business - held, expenses incurred by assessee permitted to be deducted in computing his total income. - .....of the i.t. act, 1961, and rule 7 of the i.t. rules, 1962, the portion of expenses incurred by the assessee-company on its agricultural operations for raising sugarcane was allowable in computing the income from business '2. at the outset we may point out that the aforesaid question does not arise out of the order of the tribunal. we shall state the admitted facts which are as follows : the assessee is a limited company manufacturing sugar from the sugarcane grown on its lands. the sugar-cane grown by the assessee and purchased from other ryots was being used as raw material for the purpose of manufacturing sugar. while computing the total income of the assessee for the assessment year 1962-63, the ito disallowed an amount of rs. 3,92,600 out of the total expenses claimed by the assessee.....
Judgment:

Kondaiah, C.J.

1. This is a reference made by the Income-tax Appellate Tribunal, Hyderabad Bench, under Section 256(2) of the I.T. Act, 1961, pursuant to the directions of this court for the opinion of this court on the following question of law :

' Whether, on the facts and in the circumstances of the case and on a correct interpretation of Section 2(1) of the I.T. Act, 1961, and Rule 7 of the I.T. Rules, 1962, the portion of expenses incurred by the assessee-company on its agricultural operations for raising sugarcane was allowable in computing the income from business '

2. At the outset we may point out that the aforesaid question does not arise out of the order of the Tribunal. We shall state the admitted facts which are as follows : The assessee is a limited company manufacturing sugar from the sugarcane grown on its lands. The sugar-cane grown by the assessee and purchased from other ryots was being used as raw material for the purpose of manufacturing sugar. While computing the total income of the assessee for the assessment year 1962-63, the ITO disallowed an amount of Rs. 3,92,600 out of the total expenses claimed by the assessee with regard to the amount attributable to agricultural operations. The assessee preferred an appeal to the AAC, who sustained an addition of Rs. 1,84,975 as proportionate overhead expenses attributable to the agricultural activity of the assessee-company, and granted relief in respect of Rs. 2,07,625. On further appeal, the Tribunal allowed the claim of the assessee in full, holding that the case is covered by the decision of the Supreme Court in CIT v. Maharashtra Sugar Mills Ltd. : [1971]82ITR452(SC) . Hence this reference.

3. Sri P. Rama Rao, learned counsel for the revenue, contends that the decision of the Supreme Court in CIT v. Maharashtra Sugar Mills Ltd. : [1971]82ITR452(SC) is distinguishable on facts and the question as framed must be answered in favour of the revenue holding that the expenses attributable to the agricultural activity of the assessee-company cannot be deducted by the assessee as a revenue expenditure. This claim of the department is resisted by Mr. M. J. Swamy, learned counsel for the assessee, contending, inter alia, that there is no question of expenses being incurred by the assessee towards agricultural operations and that the department is not entitled to add Rs. 3,92,600 or any portion thereof to the income returned by the assessee on the ground that it pertains to overhead expenses attributable to the agricultural activity of the assessee-company. As pointed out earlier, the proper question that really arises out of the order of the Tribunal has not been framed. We may re-frame the question thus :

' Whether, on the facts and in the circumstances of the case, the amount of Rs. 1,84,000 is liable to be added to the returned income of the assessee on the ground that it represents overhead expenses attributable to the agricultural activity of the assessee-company '

4. The ITO has added Rs. 3,92,600 on the ground that it represents the proportion of the common expenses, disallowed as attributable to agricultural operations. But according to him, the cost of farm cane was Rs. 89,99,176 ; the cost of ryots' cane was Rs. 2,06,00,794 and the manufacturing expenses were Rs. 2,83,69,794. The total cost of production of sugar by the assessee-company was Rs. 5,79,69,764. The ITO, as seen from page 17 of the paper book, arrived at the sum of Rs. 3,92,600 by multiplying the management expenses of Rs. 24,53,955 with the cost of farm cane representing Rs. 89,99,176 and dividing it by the total management expenses of the assessee-company, viz., Rs. 5,79,69,764. Alternatively, he has also multiplied the allocable expenses of the management, viz. Rs. 24,53,955, with 0.16 and arrived at this figure approximately.

5. We have carefully perused the schedule at page 17 of the paper book showing the allocation of management expenses of the assessee-company for the assessment year 1962-63. The allocable management expenses of Rs. 24,53,955 arrived at in the schedule does not include any expenses pertaining to agricultural operations, viz., tilling, sowing, harvesting or other agricultural operations. The expenses pertain to the management of the company. There is absolutely no basis for the ITO to arrive at this figure of Rs. 3,92,600 as the proportionate expenses attributable to agricultural operations. This assumption is erroneous and without basis. There is no question of a proportion of the common expenses being disallowed as attributable to agricultural operations in the instant case. The cost of farm cane and the expenses for the production of the farm cane are separately shown. The AAC also erred in sustaining the addition of Rs. 1,84,975 as proportionate overhead expenses attributable to the agricultural activity of the assessee-company. True, as contended by the learned standing counsel for the revenue, the expenses incurred by the assessee-company towards agricultural operations such as tilling of the land, sowing of the seeds, planting and similar operations on the lands are not allowable deductions. But, as held by the Supreme Court in CIT v. Raja Benoy Kumar Sahas Roy : [1957]32ITR466(SC) ' agriculture ', in its primary sense, denotes the cultivation of the field and is restricted to cultivation of the land in the strict sense of the term, meaning thereby ' tilling of the land, sowing of the seeds, planting and similar operations on the land '. Hence, the money actually spent for agricultural operations referred to above can be said to be expenditure incurred by the assessee as a cultivator within the meaning of Rule 7 and that expenditure is permitted to be deducted by the assessee in computing his total income.

6. In the present case, the Income-tax Appellate Tribunal relied upon the decision of the Supreme Court in CIT v. Maharashtra Sugar Mills Ltd. : [1971]82ITR452(SC) and allowed the claim of the assessee in toto. In that case, the assessee-company was found to have one composite business of growing sugarcane and manufacturing sugar as it owned extensive lands on which it grew sugarcane and used the same for the manufacturing of sugar in its factory. It was found, as a fact, that the cultivation of sugarcane and the manufacture of sugar by the assessee constituted one single and indivisible business. In these circumstances, the court had to consider the question as to whether a part of the managing agency commission could be disallowed on the ground that it related to management of sugarcane cultivation, income from which was exempt from tax as agricultural income. Section 10(1) of the I.T. Act exempts the income from sugarcane, being agricultural income. In the present case, the Tribunal took it for granted that the case on hand is governed by the decision of the Supreme Court in Maharashtra Sugar Mills Ltd, : [1971]82ITR452(SC) . In other words, the cultivation of sugarcane and the manufacture of sugar by the present assessee-company constituted one single and indivisible business. Admittedly, the assessee-company owned extensive agricultural lands on which sugarcane is grown by it. The sugarcane grown on the lands owned by the assessee-company is taken as raw material by the company to produce sugar in its own factory. In addition to the sugarcane grown by the assessee-company on its own lands, it was purchasing sugnrcane grown by other ryots in the adjacent area as the sugarcane grown from its own lands was not sufficient to run the assessee-sugar factory. In the circumstances, it cannot be said that the cultivation of sugarcane and the manufacture of sugar by the assessee do not constitute one single and indivisible business. We have, therefore, no hesitation to hold that the assessee is entitled to succeed in the present reference as the department has no legal basis to disallow either Rs. 3,92,600 or any portion of it on the assumption that it represents management overhead expenses towards the agricultural activity. The expenses incurred by the assessee towards agricultural operations have not been claimed in the present reference as a revenue expenditure.

7. For all these reasons, we answer the question re-framed by us, in favour of the assessee and against the revenue. The assessee will have its costs of the reference. Advocate's fee Rs. 300.


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