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Nizam Sugar Factory Vs. Commissioner of Agricultural Income-tax, Hyderabad. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAndhra Pradesh High Court
Decided On
Case NumberCase Referred No. 58 of 1960 in Writ Petitions Nos. 5/6, 6/6 and 7/6 of 1956 (Agricultural Income-ta
Reported in[1964]52ITR939(AP)
AppellantNizam Sugar Factory
RespondentCommissioner of Agricultural Income-tax, Hyderabad.
Excerpt:
- all india services act, 1951.sections 8 & 11 & a.p. buildings (lease, rent and eviction) control rules, 1961, rule 5: [v.v.s. rao, g. yethirajulu & g. bhavani prasad, jj] refusal by landlord to receive rent - deposit of rent in court - held, a tenant has the option to take recourse to section 8 in case of refusal or evasion by landlord to receive rent and if landlord were to not name a bank or refuse even the money order of rent, the tenant can deposit the rent in accordance with sub-rules (1) to (3) of rule 5. the notice to person entitled to rent and proper maintenance of accounts of such deposits under sub-rules (4) and (5) of rule 5 are solely dependent on compliance with sub-rule (3) by the tenant. the payment or deposit of rent under section 11 read with sub-rule (6) of rule 5.....basi reddy j. - in this matter arising under the hyderabad agricultural income-tax act, 1950 (hereinafter referred to as 'the act'), the nizam sugar factory limited is the assessee. at its instance, this court, acting under section 26(3) of the act, by an order dated february 25, 1959, directed the commissioner of agricultural income-tax, hyderabad, to state a case. in compliance with the requisition, the commissioner has drawn up a statement of the case and referred the following two questions for determination by this cour :'(1) whether, on the facts and circumstances of the case, the order of the appellate deputy commissioner, in adding the managing agency commission for computing the profits of the company, is justified in law(2) whether, on the facts and circumstances of the case,.....
Judgment:

BASI REDDY J. - In this matter arising under the Hyderabad Agricultural Income-tax Act, 1950 (hereinafter referred to as 'the Act'), the Nizam Sugar Factory Limited is the assessee. At its instance, this court, acting under section 26(3) of the Act, by an order dated February 25, 1959, directed the Commissioner of Agricultural Income-tax, Hyderabad, to state a case. In compliance with the requisition, the Commissioner has drawn up a statement of the case and referred the following two questions for determination by this cour :

'(1) Whether, on the facts and circumstances of the case, the order of the Appellate Deputy Commissioner, in adding the managing agency commission for computing the profits of the company, is justified in law

(2) Whether, on the facts and circumstances of the case, the income-tax authority was right in holding that the expenditure towards the construction of huts and camps was not a proper revenue deduction under section 7(2)(e) of the Hyderabad Agricultural Income-tax Act?'

For a proper appreciation of the issues involved in this reference, it is necessary to advert to the material provisions of the Act and the Rules framed thereunder, and also to the relevant facts of the case. The Act came into force on April 1, 1950, and provided for the levy by the erstwhile Hyderabad State, of a tax on agricultural income derived from land situated within that State. Section 2(a) defines what 'agricultural income' is, and under section 2(a)(2)(i) it means any income derived from land by agricultural. Rule 4 of the Hyderabad Agricultural Income-tax Rules, 1950 (which will be referred to as 'the rules') clarifies that if the agricultural produce of the land has been sold, the actual sale prices shall be deemed to be the gross agricultural income of such land; if, however, instead of such produce being sold it is utilised only as raw material for any manufacturing business, the market value of such produce shall be deemed to be the gross agricultural income. Section 3 is the charging section and it lays dow :

'For the financial year commencing on the 1st day of April, 1950, and for every subsequent financial year, agricultural income-tax shall be charged in accordance with, and subject to the provisions of, this Act on the total agricultural income of the previous year of every person.'

Section 2(q) of the Act defines 'total agricultural income' as the aggregate of the amounts of agricultural income of the different classes specified in sections 6 and 7 of the Act, as determined in the manner laid down in those sections.

We are not concerned with section 6, as it deals with the determination of assessable income derived by way of rent of revenue from agricultural land. Section 7, however, is the most important section for purpose of this case and may be extracted in full.

'7. (1) The agricultural income mentioned in sub-clauses (2) and (3) of clause (a) of section 2 shall be assessed on the net amount of such income determined in the prescribed manner.

(2) Rules prescribing the manner of determining the net amount of agricultural income for the purpose of sub-section (1) shall provide that the following deductions shall be made from the gross amounts of such income, namel :

(a) the sum actually paid in the previous year as revenue to the State or as rent to a landlord in respect of the land from which such agricultural income is derived;

(b) the sum actually paid in the previous year in respect of such land as any local cess or rate collected under and law of the Hyderabad State;

(c) any rate paid to a local fund or as a special rate in respect of any building used exclusively for the purpose of the cultivation of the land from which such agricultural income is derived;

(d) any sum paid in respect of the land from which such agricultural income is derived as water cess or tax in accordance with any law or rules for the time being in force;

(e) the expenses of cultivation the crop from which such agricultural income is derived, of transporting such crop to market, including the maintenance of agricultural implements and cattle required for the purpose of such cultivation and for transporting the crop to the market;

(f) any tax, cess or rate paid under any law of the Hyderabad State on the cultivation or sale of the crop from which such agricultural income is derived;

(g) (i) any expense incurred on the maintenance of any irrigation or protective work constructed exclusively for the benefit the land from which such agricultural income is derived;

(ii) any expense incurred exclusively on the maintenance of any capital asset purchased or constructed before the 1st day of April, 1950, if such maintenance is required for the purpose of deriving such agricultural income from such land;

Explanation. - Maintenance includes current repairs and includes also in the case of protective dykes and embankment all such work as may be necessary from year to year for repairing any damage or destruction caused by flood or other natural causes;

(iii) interest paid on any amount borrowed and actually spent in any capital expenditure incurred after the commencement of this Act exclusively for the benefit of the land from which such agricultural income is derived or for the purpose of deriving such agricultural income from such lan :

Provided that the interest allowable under this clause shall not exceed the interest which the assessee is liable to pay in respect of such amount as a borrower under sections 10 and 11 of the Hyderabad Money-Lenders Act 1349-F;

(iv) depreciation at the prescribed rate in respect of any capital asset purchased or constructed after the commencement of this Act exclusively for the benefit of the land from which such agricultural income is derived or for the purpose of deriving such agricultural income from such land; and

(v) any interest paid on any mortgage or other capital charge incurred exclusively for the purpose of a acquiring the property from which such agricultural income is derived or for the purpose of cultivation of the propert :

Provided that no deduction shall be made under this clause, if it has already been made under section :

Provided further that the interest allowable under this clause shall not exceed the interest which the assessee is liable to pay in respect of such mortgage or charge as borrower under section 10 and 11 of the Hyderabad Money-Lenders Act, 1349-F; and

(h) such other deductions as may be prescribed.'

It is to be noted that this section provides for the determination of net income derived from land by agriculture, after allowing certain deductions from the gross income. Under clause (e) of sub-section (2) - which is the crucial clause - the expenses of cultivating the crop have to be deducted from the gross agricultural income and the balance alone (together with other deductions, if any,) would be assessable to tax, as constituting the net agricultural income.

In this context rule 4(1)(b) of the Rules has also to be referred to. It says, inter alia, that for arriving at the net assessable amount of agricultural income, deductions in respect of items of expenses mentioned in clauses (a) to (g) of sub-sections (2) of section 7 of the Act shall be made from the gross agricultural income. The latter, in a case where the agricultural produce is not sold, but is used as raw material for any manufacturing business, is calculated at the market value of such produce. These are the relevant provisions of the Act and the Rules which have to be borne in mind in considering the questions referred to us.

We will now set out the facts of the case in so far as they are necessary for the decision of the two questions under reference. The Nizam Sugar Factory Limited was incorporated as a joint-stock company under the Hyderabad Companies Act in April, 1937. Its main objects, as they appear from the memorandum of association, ar :

'(1) To carry on the business of manufacturers of and dealers in all kinds of sugar, gur, and sugar, and gur preparations, and their by-products.

(2) To carry on the business of planters and cultivators of sugar plants.'

Thus, the company has a manufacturing side and an agricultural side. Here in this case we are concerned with the agricultural operations of the company for the three assessments year 1950-51, 1951-52 and 1951-53. The company owns about 13,500 acres of land, which is used for raising sugarcane, and sugarcane is utilised as raw produce for manufacturing sugar in the factory owned by the company. About 15,000 labourers are employed for performing the various agricultural operations in growing sugarcane. During the agricultural season, large sums are expended by the company for providing accommodation to the workmen by erecting huts any running camps near the plantations, as it would be very difficult and costly to transport a large labour force to the work-spot day after day throughout the agricultural season.

Contemporaneously with the formation of the company, i.e., on April 18, 1937, a managing agency agreement was entered into between the company and one Dhanrajgir Raja Narsingirji, whereby the latter was appointed as the managing agent of the company for a term of 23 years from the date of incorporation of the company, his remuneration was fixed and his duties were specified. Clause 2 of the agreement fixes the remuneration to be paid to the managing agent. It read :

'(2) The remuneration of the said Dhanrajgir as such agent shall be as follows, viz :

(a) From and after the registration of the said company a commission on the annual net profits of the company at the rate of 10 per cent. or the minimum of Rs. 12,000 whichever may be higher per annum.

(b) net profits of the company for the purpose of the last preceding sub-clause means the profits of the company after allowing for all the usual working charges, interest on loans and advances, repairs and outgoings, depreciation on the fixed assets and other assets of the said company as would have been from time to time allowed in calculating profits had the British Indian Income-tax Act (in force at the date hereof) been in force in Hyderabad for the whole period of this agreement and such deductions shall be made irrespective of whether the amount such depreciations actually set aside or entered in the balance-sheet or accounts of the said company or not, bounties or subsidies received from Government or from a public body, profits by way of premium on shares sold, profits on sale proceeds of forfeited shares or profits from the sale of the whole or part of the undertaking of the company, but without any deduction in respect of income-tax or super-tax or any other tax or duty or income or revenue or expenditure by way of interest on debentures or otherwise on capital account of any sum which may be set aside in each year out of the profits for reserve or any other special fund,

(c) The said allowance and commission shall be exclusive of and shall not include any remuneration or wages which shall be payable to the banker, solicitors, engineers, experts, cashiers, accountants, managers, clerks, canvassers and other employees by the said Dhanrajgir for or an behalf of the said Dhanrajgir for or an behalf of the said company or for carrying on and conducting the business of the said company, all of which expenses as also rent of the office premises of the said company at Hyderabad used for the purpose of the business of the company shall be paid by the said company.

(d) The said commission shall be paid immediately after the annual accounts of the company have been passed by the shareholders.'

Clause 4 prescribes the duties of the managing agent as unde :

'The said Dhanrajgir shall, unless prevented by ill-health, throughout the said term devote the whole of his time, attention and abilities to the business of the said company, and shall obey the orders from time to time of the board of the said company and in all respects conform to and comply with the directions and regulations made by such board and shall well and faithfully serve the said company and use his utmost endeavours to promote the interest thereof, provided that the said Dhanrajgir shall be at liberty to appoint an agent on his behalf to perform all or any of the duties entrusted to him for the time being under these presents, such agent to be approved of in writing previous to his appointment by the board of directors of the said company. Such agent shall be paid by the said Dhanrajgir and the said Dhanrajgir shall be solely responsible for his acts and omissions.'

Clause 5 says that subject to the supervision and control of the directors, the said Raja Dhanrajgir shall have the general conduct and management of the business and affairs of the company.

Shortly after the managing agency agreement was entered into, it would appear that the managing agency was transferred by Raja Dhanrajgir in favour of H.E.H. the Nizams Industrial Trust Fund under a duly executed indenture dated October 17, 1937. This circumstance, however, does not affect the decision on the issues involved in this case.

For the assessment year 1950-51, the company returned an agricultural income of O.S. Rs. 15,59,411 and claimed deductions under two heads amongst others. First, it claimed that a sum of Rs. 1,89,020 representing the commission paid to the managing agent, forming 10% of the profits on the agricultural operations, should be deducted as an item of agricultural expenditure. Secondly, the company claimed that hutting and camp expenses for labour amounting to Rs. 2,26,523 spent for constructing huts and maintaining camps for the labourers during the cultivation season, was an admissible deduction from the gross agricultural income, in computing the net assessable amount of agricultural income. The companys contention with regard to the managing agency commission was accepted by the Agricultural Income-tax Officer, but he refused to allow the deduction in respect of the other item, viz., hutting and camp expenses for labour. In the result, the Income-tax Officer arrived at an assessable net agricultural income of O.S. Rs. 17,23,869. The company took the matter in appeal to the Deputy Commissioner of Agricultural Income-tax. It was contended before him that the Income-tax Officer had erred in disallowing the deduction of the sum of Rs. 2,26,523, representing the expenses for putting up temporary structures for the labourers and providing amenities for them during the cultivation season. In support of this contention, the company filed before the Deputy Commissioner a detailed statement showing the particulars of expenses as unde :

'(a) Amenities to camp :

Rs.

As.

Ps.

Water supply

28,519

10

7

Huts for camps, schools etc.

2,317

14

9

Medicines & medical aid

47,257

8

5

Night watchman and patrolling staff

2,617

8

8

Conveyance of foodgrains, oil stores

3,500

0

0

Drainage & sanitation (salaries)

16,888

6

10

Schools (salaries)

3,925

6

6

Road repairs

7,242

15

5

Miscellaneous expenses

1,551

12

11

Club expenses

1,058

13

0

Postal expenses

702

8

0

Gardening

975

11

3

1,16,558

1

7

Less : Cattle grazing fees

1,031

8

0

1,15,526

9

7

(b) Bamboos, mats, ropes, etc. for labour

85,346

11

8

(c) Bamboos, mats, ropes, etc. for staff

25,649

4

10

2,26,522

10

1

To this statement, the following certificate issued by the general manager of the company, was appende :

'THE NIZAM SUGAR FACTORY LTD.

P.O. Box No. 109,

Abid Road, Hyderabad-Deccan.

We hereby certify that the expenditure of Rs. 25,649-4-10 on staff huts, and Rs. 85,346-11-8 on labour huts, incurred during the year ended 30th June, 1950, wholly represents expenses of maintenance and replacements and that no part of it relates to expenses on the erection of new huts.

(Sd.) G.K. Tatake,

29- 2-1953

for GENERAL MANAGER.'

It will be observed that according to the above statement, about one-half of the amount claimed as deduction, represented the amounts spent towards providing amenities to the camps, such as water supply, medicines and medical aid, drainage and sanitation, road repairs etc., while the other half represented the cost of bamboos, mats, ropes etc., for constructing temporary structures to house the staff and the labourers during the agricultural season.

The Deputy Commissioner, however, was of the view that the company was entitled only to claim a deduction at the rate of 12 1/2% under rule 3(1) of the Rules inasmuch as the expenditure was a capital nature failing under section 7(2)(g)(ii) of the Act, that is to say, an outlay for acquiring a capital asset after commencement of the Act for the purpose of deriving agricultural income from the land. He accordingly allowed only a sum of Rs. 28,315-6-0 to be deducted under this head. It may be pointed out here that rule 3(1) prescribes that the depreciation in respect of any capital asset under sub-clause (iv) of clause (g) of sub-section (2) of section 7 of the Act, shall be calculated in the case of Kutcha building at the rate of 12 1/2% of the prime cost.

The Deputy Commissioner also held that the sum of Rs. 1,89,020 paid as managing agency commission, had been wrongly allowed by the Income-tax Officer and that it should be included in the assessable agricultural income of the company on the ground that the services of the managing agent were utilised only for the industrial concern of the company and not on its agricultural side. In that view, the Deputy Commissioner added back the sum of Rs. 1,89,020 representing the probable managing agency commission paid to the managing agent on the net profits earned by the company on agricultural operations, as per the terms of the managing agency agreement. Another ground relied on by the Deputy Commissioner for reaching this conclusion was that the commission paid to the managing agent was an item of expenditure out of the net profits of the company, which was ascertained after deducting all the expenses and, therefore, could not be treated as a revenue expenditure.

The company then moved the Commissioner of Agricultural Income-tax under section 26(2) of the Act to refer the questions of law formulated by it is arising out of the order of the Appellate Deputy Commissioner, but the Commissioner declines to do so. Thereupon, the company moved the High Court and at the latters direction, the Commissioner has stated a case and referred the two questions set out supra.

The same questions arise in respect of the other two assessment years, viz., 1951-52 and 1952-53, although the actual figures vary. Since there is no dispute about the figures, it is not necessary to refer to them in detail. It may, however, be noted that for the year 1952-53 the Agricultural Income-tax Officer himself disallowed the managing agency commission. But the net result is that, as in the case of 1950-51, so also for the succeeding two years, the companys claim for deduction in respect of the managing agency commission and the claim in respect of hutting and camp expenses for labour were disallowed. It is apparently for this reason that the question referred to the High Court are general in nature and do not relate to any particular year.

We may now notice the arguments advanced on behalf of the assessee company on the one side and on behalf of the department on the other. Upon the first question referred to us, the learned advocate for the company contended that the departmental authorities were in error in refusing to allow the managing agency commission as a permissible deduction under section 7(2)(e) of the Act. It was urged that the commission paid to the agent is an allowable deduction as forming an item if cultivation expenses. It was further pointed out that one of the main objects of the company as per the memorandum of association is to carry on the business of planters and cultivators of sugarcane; that on a correct appreciation of terms of the agreement between the company and the managing agent, the commission paid to the managing agent is an item of expenditure which has necessarily to be incurred by the company in carrying on its business of raising sugarcane and earning the agricultural income in question; therefore, the company is entitled to deduct the entire commission paid to the managing agent as forming part of the cultivation expenses. It was also submitted that the view of the Deputy Commissioner that the services of the managing agent were utilized exlusively for advising the manufacturing concern and they were not utilized at all conducting the agricultural operations, is based on no evidence and is not factually correct. In this connection, reference was made to clause (4) of the agreement which stipulate :

'The said Dhanrajgir shall, unless prevented by ill-health, throughout the said term devote the whole of his time, attention and an abilities to the business of the said company,.... and shall we and faithfully serve the said company and use his utmost endeavours to promote the interest thereof.'

It was argued that the commissioner paid to the managing agent was for those services rendered by him for the purpose of earning profits.

In our opinion, the contentions on behalf of the company are well-founded. It is not disputed that the commission of 10% on the profits made on agricultural operation was in fact paid to the managing agent. The payment was in return for his supervision and management. The fact that the commission was paid as a percentage out of the net profits, has no relevancy in determining whether it is permissible cultivation expense falling under section 7(2)(e) of the Act.

The learned Government Pleader, appearing for the department, did not seriously dispute that the commissioner paid to the managing agent, would be a legitimate deduction under section 7(2)(e) of the Act; but what he sought to make out was that there was no sufficient date for ascertaining how much time and effort the managing agent had really devoted for supervising and managing the agricultural operations of the company. That, however, is beside the point, because it is not disputed that the managing agency commission was actually paid to the managing agent. From the duties prescribed by the terms of the agreement, it is reasonable to suppose that the commission had been paid in return for services rendered by the managing agent.

We are also of the opinion that the view taken by the departmental authorities in respect of the assessment year 1950-51 and 1951-52 that because under the agency agreement, commission has to paid to the agent from out of the net profits of the company, it should not be regarded as an item of revenue expenditure, is the result of confusion of thought. The calculation of the remuneration to be paid to the managing agent is one thing; the computation of the net assessable agricultural income for the purpose of levying agricultural income-tax under the Act, is quite another. The former depends on the terms of the agency agreement; the latter, on statutory provisions which provide for certain deductions. So the real question i : Was the 10% commission paid to the agent, a payment made for earning the gross agricultural income? To narrow down the issue still furthe : Was the commissioner paid for the services rendered by the managing agent in supervising the agricultural operations which yielded the income? Can the amount be properly brought under the head - 'the expenses of cultivating the crop from which such agricultural income is derived?' In our judgment, the answer to the above questions should be in the affirmative.

In this connection, reference may usefully be made to two cases cited at the Bar. The first of these case is British Sugar . v. Harris. In that case, a company carrying on manufacturing business, agreed with two other companies to pay them a stated percentage of its 'net profits' in consideration of their giving to the company the full benefit of their technical and financial knowledge and experience, and giving to the company and its directors advice to the best of their ability on all questions of or relating to manufactur and finance and disposal of the companys products.'Net profits' were to be ascertained after payment of all expenses of the company, and after providing for interest on debentures. On these facts, it was held by the Court of Appeal that in computing its profits for the purposes of income-tax, the company was entitled to deduct the sums so paid as being 'money wholly and exclusively laid out or expanded for the purpose of the trade'. Greene M.R. pointed out that it was not a contract for payment of a share of the profits simpliciter but it was a payment of remuneration by way of a commission representing a percentage of 'profits' for services to be rendered to the company, which is deductible in truth before the profits divisible are ascertained. There were two funds of so-called profits which came into the picture; the first one was the fund which had to be ascertained for the purpose of calculating the percentage to be paid as remuneration to the companies for their services. In that fund, as such, the person entitled to profits of the company had no concern. It was used for the purpose, and for the purpose only, of ascertaining what is to be paid as remuneration to the two companies. When that amount had been ascertained, it then became necessary to ascertain what were the divisible profits, and for that purpose, to take another account which not only would bring in depreciation, but would also take into account the sum that had been paid out to the companies as remuneration. The Master of the Rolls observe :

'It seems to me that the circumstances that those two accounts have to be made out throws a very clear light upon the real nature of this transaction, and, looking at the clause in question as a whole, it seems to me clear beyond any reasonable doubt that the agreement is merely an agreement under which, before ascertaining the divisible profits of this company at all, the Skoda Works and Corporation are to receive upon a particular conventional basis a commission sum as remuneration for their services.'

He added, 'Once you realise that as a matter of construction the word profits may be used in one sense for one purpose and in another sense for another purpose, I think you have the real solution of the difficulties that have arisen in this case.'

In a concurring judgment, Romer L.J. elucidated the position thu :

'It appears to me that in all cases similar to the one with which we are dealing today the real question is thi : Is the payment that has to be made by the trader under the contract in question a mere division of profits with another party or is it a payment to the other party, the amount of which is ascertained by reference to the profits? The question whether the particular case fall on one side of the line or other is very often one of extreme difficulty...... For myself in this case I can feel no doubt. The payment that has to be made in this case, is in my opinion, a payment that is made, the amount of which has to be ascertained by reference to certain profits of the company ascertained in a particular way. The payment is a payment necessary for the purpose of enabling the company or the trader to earn the profits of its trade, and therefore it is a legitimate deduction from its profits when ascertained for the purpose of assessment...'

The next case is due one decided by the Rangoon High Court in Commissioner of Income-tax v. Bombay Burma Trading Corporation. The facts in that very similar to the facts in the present case. The question was whether remuneration paid to the secretaries of the company on the basis of a percentage of the net profit, was allowable as business expenditure. There the assessee, a company, was formed to carry to carry on and develop the business in Burma of one W. The agreement between W. and the assessee provided that W. & Co. of Bombay should be the secretaries, treasures and managers of the assessee company. The remuneration of W. & Co., under the original articles of association of the assessee, was a commission of 5 per cent. on the gross proceeds of the business. This article, as subsequently amended, provided that certain deductions should first be made from the gross proceeds of the business and a figure thereby arrived at (which figure was called for the purpose of the article 'the net profits of the company') and the remuneration of W. & Co. should be half of such 'net profits', but that this remuneration should be subject to a maximum of 5 per cent. of the gross proceeds of the business. In the account year ended 31st May, 1937, after making the necessary deductions, there remained a profit of Rs. 32,21,762. Since half of this amount exceeded 5 per cent. of the gross proceeds, W. & Co. were paid a sum of Rs. 11,43,766 based on 5 per cent. of the gross proceeds. That proportion of this payment, namely, Rs. 8,48,235 which related to the undertakings in Burma, was not allowed as business expenditure by the Income-tax authorities in calculating the profits and gains of the assessee on the ground that it was payment of a share of the profits of the assessee. The court, however, held that the payment of this sum of Rs. 8,48,235 was an expenditure incurred by the assessee 'solely for the purpose of earning such profits or gains' within the meaning of section 10(2)(ix) of the Indian Income-tax Act, 1922, and the assessee company was entitled to claim that this sum should be deducted in computing its profits and gains. Roberts C.J. pointed out that '... the taxable profits, or really net profits, can only be discovered when every outlay has been provided for, including expenditure out of income which has been incurred solely for the purpose of earning the profits or gains'. Dunkley J. observed that 'the net profits calculated under the articles of the company are not the same as the taxable profits for the purpose of the Income-tax Act... In order that it can be held in any case that there is an agreement for division of profits, there must be some sort of joint venture, and there must be one single profit fund for all purpose, not two profit funds to be ascertained for different purposes.'

Applying the ratio of the above decisions, we are clearly of the opinion that in the instant case the assessee company is entitled to deduct the amount paid as managing agency commission as an item of expenses of cultivating the crop within the meaning of clause (e) of sub-section (2) of section 7 of the Act.

Turning to the second question propounded in this reference regarding the hutting and camp expenses for labour, it will be seem that this is in the nature of a recurring annual expenditure - about one half of which went towards supplying amenities to camps, such as, water supply, medical aid and sanitation, and the other half to the cost of the material, such as, bamboos, mats, ropes etc. for erecting huts or the labourers and the staff. From the certificate issued by the general manager, it is clear that the materials used for constructing the huts to do not last more than a year and nothing would be left over for the next year. This being so, the entire expenditure under this head would, in out opinion, constitute expenses of cultivating the crop from which such agricultural income is derived within the meaning of clause (e) of sub-section (2) of section 7 of the Act. This expression, namely, 'expenses of cultivating the crop', should not be understood in a narrow and restricted sense as applicable only to the actual expenses incurred for tilling the soil, sowing, weeding, harvesting etc.,; but whilst dealing with large scale mechanised agricultural operations of the kind undertaken by the Nizam Sugar Factory, such expenses should properly include all expenses reasonably connected with and involved in the process of raising sugarcane. On the material placed by the company before the departmental authorities, the conclusion is inescapable that this item fairly and squarely within the ambit of clause (e) as cultivation expenses. We are, therefore, unable to countenance the contention of the learned Government Pleader that this expenditure is in the nature of a capital expenditure falling under section 7(2)(g)(iv) and as such only depreciation at the prescribed rate is allowable. This distinction between capital expenditure and revenue expenditure was indicated by the Supreme Court in Assam Bengal Cement Co. v. Commissioner of Income-tax. While noticing that the line of demarcation between capital expenditure and revenue expenditure is thin and that it is very difficult to lay down any general rule which is both sufficiently accurate and sufficiently exhaustive to cover all cases, their Lordships after referring to a catena of English and Indian cases, laid down the following broad tests for distinguishing capital expenditure from revenue expenditur :

1. Outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for a substantial replacement of equipment.

2. Expenditure may be treated as properly attributable to capital when it is made not only once and for all, but with a view to bringing into existence as asset or an advantage for the enduring benefit of a trade.

The expressions 'enduring benefit' or 'of a permanent character' were introduced to make it clear that the asset or the right acquired must have enough durability to justify its being treated as a capital asset.

Applying the above criteria, we have no hesitation in holding that the departmental authorities were in error in regarding the expenditure incurred year after year by the company under head - hutting and camp expenses for labour, as a capital expenditure.

It follows from the foregoing discussion that both the questions referred to us should be answered in the negative and in favour of the assessee company, and we answer them accordingly. In all the circumstances of the case, however, we make no order as to costs.

Questions answered in the negative.


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