1. During the assessment years 1972-73 and 1973-74, a sum of Rs. 24,000 is said to have been paid by the assessee-company to the landowner in order to enable the company to derive agricultural income. The Agricultural Income-tax Officer found that that was a sum with respect to which the assessee was entitled to deduction under Section 5(j) of the Agricultural Income-tax Act, 1950, which reads as follows ;
' 5. Computation of agricultural income.--The agricultural income of a person shall be computed after making the following deductions, namely :--... (j) any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of deriving the agricultural income. '
2. The Commissioner, later on, having detected that a deduction to which the assessee was not entitled was allowed by the Income-tax Officer, under Section 34 of the Act, took up the matter in suo motu revision and directed the Agricultural Income-tax Officer to complete the assessment without giving deduction to the payment of rent in 1972-73 and 1973-74. The questions referred to us read as follows :
' (i) Whether, on the facts and in the circumstances of the case, the lease rent paid by the applicant is an allowable deduction under Section 5(j) of the Agrl. Income-tax Act ?
(ii) Whether, on the facts and in the circumstances of the case, the Commissioner was justified in holding that no rent was payable by the assessee after April 1, 1970 ?
(iii) Whether, on a proper interpretation of the provisions of the Kerala Land Reforms Act, 1964, the Commissioner was justified in his finding that no rent was payable by the assessee after April 1, 1970 ?
(iv) Whether, the payment of lease rent is not allowable deduction on the basis that it constitutes a bona fide expenditure incurred on the grounds of commercial expediency, even assuming that after April 1, 1970, there was strictly no legal liability on the part of the assessee to pay such rent ?'
3. The counsel for the assessee submitted that inasmuch as there was no provision in the Kerala Land Reforms Act (Act 1 of 1964), as amended by Act 35 of 1969, that after the date of notification, under Section 72 of the Land Reforms Act, no rent need be paid, the payment was made bona fide and was justifiable for deriving agricultural income from the property owned by the company. The point for consideration in substance is whether, after the coming into force of Act 35 of 1969 and the notification pursuant thereto bringing into force Section 72 of the Act which provides that from the appointed day all lands in the possession of the cultivating tenants shall stand vested in the Government, the assessee had any legal obligation to pay rent to the landowner. Counsel for the assessee placed strong reliance on Sections 61 and 72-0 of the Land Reforms Act which read as follows :
'61. Cultivating tenant to Pay rent pending determination of Purchase price.--(1) Notwithstanding the filing of an application under Section 54, the cultivating tenant shall, pending the determination of the purchase price under Section 55 or, where there has been an appeal against the determination of the purchase price, pending orders on such appeal, deposit with the Land Tribunal an amount equal to the rent which would have been payable by him on the dates on which such rent would have become due if the lands were not purchased.
Provided that the Land Tribunal may-
(a) on application by the cultivating tenant, for sufficient reason, allow the applicant to make the deposit after the due date;
(b) allow any cultivating tenant to deposit the balance amount, if any, where the amount deposited is found to be less than the amount of rent.
(2) The Land Tribunal shall, after intimating the landlord, pay the amount deposited under Sub-section (1) to the landowner and intermediaries, if any, as part payment of the purchase price on taking proper security in case it is found that they are entitled to such amount.
(3) The amount deposited under Sub-section (1) shall be deducted from the purchase price payable by the cultivating tenant and he shall be liable to pay only the balance.
72-O. Rent paid by cultivating tenant to be adjusted towards purchase price and compensation in certain cases.--(1) Any amount paid by way of rent by the cultivating tenant in respect of his holding to the landowner or any intermediary or the Government for the period after the date of vesting of the right, title and interest of the landowner and the intermediaries in respect of the holding in the Government under Section 72 shall be adjusted towards the purchase price payable by the cultivating tenant, and such amount received by the landowner or any intermediary shall be adjusted towards the compensation payable to him under Section 72H.
(2) Where, consequent on the determination of the fair rent in respect of a holding, the rent payable by the cultivating tenant to the landowner or any intermediary has been reduced, the amount paid by the cultivating tenant in excess of the rent so determined to the landowner or the intermediary for the period commencing from the beginning of the agricultural year in which the cultivating tenant filed the application for such determination and ending with the date of such determination shall be adjusted towards the purchase price payable by the cultivating tenant and such amount received by the landowner or any intermediary shall be adjusted towards the compensation payable to him under Section 72A.'
4. On a careful reading of the relevant provisions of the Land Reforms Act with particular reference to sections 61 and 72, we are of the opinion that the tenant was under no obligation to pay any rent to the erstwhile landowner, and whatever payment he made in the name of rent could be treated as purchase money that was payable for purchasing the right, title and interest of the landowner which was in the nature of a capital expenditure and which was not an expenditure deductible under Section 5(j) of the Agricultural Income-tax Act.
5. Counsel for the Revenue drew our attention to the provisions contained in Section 5(b) of the Agricultural Income-tax Act, which reads as follows:
' 5. Computation of agricultural income.--The agricultural income of a person shall be computed after making the following deductions, namely :--... (b) any rent paid in the previous year to the landlord or superior landlord, as the case may be, in respect of land, from which the agricultural income is derived. '
6. According to him, the very fact that deduction was not claimed under Section 5(b) of the Agricultural Income-tax Act is indicative of the fact that the payment was not made by way of rent, but only as an item of expenditure and that is an expenditure with reference to which no deduction is allowable.
7. Counsel for the assessee contended for the position that assuming that the assessee was not bound to pay rent in law, if the payment was actually made and that was for the purpose of deriving agricultural income, he was entitled to get the benefit of deduction. Two decisions of the Supreme Court in Sassoon J. David & Co. (P.) Ltd. v. CIT : 118ITR261(SC) and CIT v. Nainital Bank Ltd. : 62ITR638(SC) were cited before us. So also a decision of the Madras High Court in CIT v. Sree Rajendra Mills Ltd. : 93ITR122(Mad) and a Full Bench decision of this court in CIT v. Standard Furniture Co. Ltd. : 116ITR751(Ker) , were cited before us.
8. The basic question is whether the amount paid amounted to an item of expenditure or, in the ultimate analysis, a capital investment. In case it is found to be a capital investment only, the assessee is not entitled to the deduction. As rightly pointed out by the counsel for the Revenue, deduction was not sought as arising out of payment of rent to which the assessee was entitled under Section 5(b) of the Agricultural Income-tax Act. The claim was based under Section 5(j) of the said Act in which, what is called expenditure, was not really and in effect a revenue expenditure for deriving the income and, therefore, the assessee was not entitled to deduction under that head.
9. The result, therefore, is that we answer question No. (i) in the negative, i.e., against the assessee and in favour of the Revenue and questions Nos. (ii), (iii) and (iv) in the affirmative, i.e., in favour of the Revenue and against the assessee.
10. A copy of this judgment under the signature of the Registrar and the seal of the court shall be forwarded to the Commissioner of Agricultural Income-tax, Board of Revenue (Taxes), Trivandrum.