1. Under Section 256(1) of the Income-tax Act, 1961, the following questions of law have been referred by the Appellate Tribunal, Madras Bench, for the opinion of this court : T.C. No. 406 of 1971 :
'(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the sum of Rs. 1,652 was not expenditure incurred for the purpose of the business ?
(2) Whether, on the facts and in the circumstances of the case, the Triburial was right in law in holding that the sum of Rs. 1,506 is not allowable as a revenue expenditure '
T.C. No. 10 of 1972 :
' Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the sum of Rs. 708 is not allowable as a revenue expenditure '
T.C. No. 226 of 1972 :
2. This reference has been made by the Cochin Bench under Section 256(1) of the Income-tax Act, 1961, raising the following question for the opinion of this court :
' Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the sum of Rs. 1,372 was not allowable as an expenditure in the computation of the assessee's profits from his business of manufacture and sale of bricks for the assessment year 1968-69 '.
3. Out of three references the first two relate to the same assessee, viz., the firm of Messrs. K. Sankaranarayana Iyer and Sons. The third reference relates to a partner in the said firm who- has his own individual brick field and who carries on the business of manufacture and sale of bricks. We shall first take the firm's references and set out the facts relating thereto. In the reference for the assessment year 1967-68 covered by T. C. No. 406 of 1971, the first question raises an independent point which is different from the other questions in all the three references which are common. With reference to this independent point the facts are as follows. The assessee is a registered firm carrying on business in the manufacture and sale of bricks and purchase and sale of timber. A sum of Rs. 1,652 was incurred as expenditure in a suit filed by one of the workers claiming higher rate of wages on higher quantum of work done during the period when the business was owned by a Hindu undivided family of which the partners were the coparceners. The expenditure was disallowed by the Income-tax Officer on the ground that the expenditure did not relate to the business of the assessee, viz., the firm. On appeal, the Appellate Assistant Commissioner held that the firm was an entity distinct from the Hindu undivided family which it succeeded and that the suit was against the previous proprietors of the business, viz., the Hindu undivided family and that in the circumstances the expenditure incurred on the compromise of the suit and other expenses incidental to the suit could not be described as an expenditure incurred for the purpose of the assessee's business. The assessee thereafter appealed to the Tribunal and it was contended on its behalf that as a result of the partition the assessee-firm succeeded to all the assets of the Hindu undivided family and that the expenditure claimed should be allowed. The Tribunal held that the expenditure was incurred by the Hindu undivided family and that the deduction was claimed by a partnership which was a different and distinct assessable unit and that since the expenditure had not been incurred as part of the a'ssessee's legitimate commercial requirements in order to facilitate the carrying on of its business the disallowance made was proper and justified. It is against this conclusion of the Tribunal that the assessee-firm has obtained reference of the first question in T. C. No. 406 of 1971.
4. The clear finding of the income-tax authorities as well as the Tribunal is that the expenditure was incurred with reference to the business of the Hindu undivided family and that it did not relate to the business carried on by the firm. In view of this finding, which is a finding on facts, the first question has to be and is answered in the affirmative and against the assessee.
5. Now, we consider the common question which relates to the assessee-firm for the assessment year 1967-68 and 1968-69. For the purpose of manufacture of bricks the mud required was taken out of the land belonging to the assessee-firm. The assessee claimed deduction of a sum of Rs. 1,506 towards the cost of mud taken from its own cultivated land which was worked out at 6 per cent. of the value of the cost of the land. This sum was debited in the trading account and corresponding credit was made in the land purchase account. Since the land belonged to the assessee-firm, the Income-tax Officer came to the conclusion that it was not correct to charge any value for the mud taken from the land. Accordingly, he disallowed the amount. This conclusion was confirmed on appeal. The assessee took the matter on further appeal to the Tribunal and before the Tribunal the assessee's contention was that since mud was an essential raw material for the manufacture of bricks which should be either purchased from outside or extracted from own lands and that since the value of the mud extracted from own lands was valued on a notional basis and adjusted in the profit and loss account, the same should be allowed as revenue expenditure. The Tribunal held that deduction for the purpose of income-tax could be claimed only if the liability was actually incurred and that the assessee was not entitled to deduct an expenditure not really made or incurred by it during the previous year. It, therefore, confirmed the disallowance. For the assessment year 1968-69 covered by T. C. No. 10 of 1972, this conclusion was followed as the facts relating to that year were identical except for the difference in the amount claimed by the assessee. As regards T. C. No. 226 of 1972, the assessee, as we mentioned already, is an individual carrying on business in the manufacture and sale of bricks. He debited a sum of Rs. 1,372 to the manufacturing account claiming to represent the value of the mud taken out by him from the land owned by him. The assessee claimed that amount as a deduction in the business of manufacture of bricks. The Income-tax Officer disallowed the claim holding that the sum of Rs. 1,372 was not allowable for the reasons set out in the assessment order for the earlier years in the case of the firm. Before the Appellate Assistant Commissioner the assessee contended that he was entitled to debit the said sum of Rs. 1,372 in computing his business profits, relying on the decisions in Gotan Lime Syndicate v. Commissioner of Income-tax : 59ITR718(SC) . The Appellate Assistant Commissioner rejected the claim observing that the decision relied on had no relevance to the assessee's case, since that case involved actual cash payment and not notional debit to the lessors of land from which the raw material was extracted. It was also pointed out that the payments were based on the quantity of materials extracted. The assessee thereafter appealed to the Tribunal and it was contended before it that the debit of Rs. 1,372 was in order and that what was to be ascertained was the true profits from the business of manufacture of bricks. It was argued that the assessee had used in his business raw materials worth Rs. 1,372 and that if he had not supplied it from his own land, he would have had to pay the same price in the market for the commodity and that such a payment would have been allowed. The Tribunal rejected the assessee's claim. It observed :
' The assessee's claim in effect is for depreciation of the land shown as his business asset and not for any expenditure actually incurred during the accounting year. In view of this position, we see no reason to interfere with the orders of the authorities below.'
6. The only question that has to be considered in all the three references is as to whether the assessee would be entitled to deduction of a notional value for the mud taken out from his own lands for use in the business of manufacturing bricks. This question is covered' by a decision of the Allahabad High Court in Commissioner of Income-tax v. Tika Ram and Sons Ltd. : 5ITR544(All) . The assessee in that case was also manufacturing bricks. It owned as proprietor a part of the land from which earth was taken for the manufacture of bricks. It held also a lease of the other portion of the land. It claimed that a sum of Rs. 2,500 representing the value of the earth used up in the manufacture of bricks during the year of account should be deducted in computing its income for purposes of income-tax as depreciation of property or business expenditure. The High Court confirmed the disallowance made by the income-tax authorities and observed at page 548 as follows :
' It, therefore, seems that the case of a brick field is very similar to that of a quarry or a mine and the proprietor of the land or the lessee is not a mere purchaser of raw materials but a person who has acquired certain rights in the land and the amount invested by him must, therefore, be treated as capital expenditure within the meaning of Section 10(2)(ix) of the Indian Income-tax, Act, 1922, as it then stood. The present assessee has agreed presumably to pay some premium and an annual rent for all his rights under the lease, and he or his predecessor might have paid the price of the land purchased. He has really not purchased any raw materials for cash and he cannot be allowed to claim a deduction of the supposed value of the earth taken out of the land as part of the property.'
7. In the present case also there is finding that there was no outgoing in cash. Therefore, the principle of this decision would squarely apply to the facts here.
8. The learned counsel for the assessee, however, brought to our notice a decision of the Supreme Court in Commissioner of Income-tax v. Hantapara Tea Co. Ltd. : 89ITR258(SC) . The assessee in that case was carrying on business in manufacture and sale of tea. It used in its business thatch, bamboo and fuel, etc., grown on its own lands. The agricultural income-tax authorities assessed to agricultural income-tax the market value of the thatch, bamboo and fuel, etc., so grown in the tea estate and used in the tea business as 100 per cent. agricultural income after deducting the cost of cultivation. The assessee claimed that the market value of the produce, from the estate utilised by the assessee in the tea business, which had been assessed at 100 per cent. by the agricultural income-tax authorities must be taken into consideration for the computation of the allowable expenditure. The Supreme Court held that :
' In computing the profits from its business under the Indian Income-tax Act, 1922, the assessee was entitled to deduct by way of expenditure the market value of the thatch, bamboo and fuel, etc., grown by it and utilised for the purpose of the tea business. '
9. In the course of the judgment it was pointed out :
' If the assessee has to pay agricultural income-tax on the market value of the agricultural produce raised in his estate and used in his tea business it stands to reason that while determining the deductible expenditure incurred for the purpose of his business, the market value of the produce used for the tea business should be taken into consideration, because in terms of money what he expended was the market value of the produce used in connection with his business. The fact that he used his own goods is immaterial. '
10. The learned counsel for the assessee submitted that the Supreme Court had permitted deduction of the amount representing the value of the materials used in that case even though the said goods were his own. On the same analogy, the contention was that the notional value put on the mud in the present case should be allowed as deduction.
11. The decision of the Supreme Court has no application to the facts here. That was a case where the Supreme Court was considering the question as to what was assessable under the Central Income-tax Act in relation to the assessment of income from tea business. The bamboo, thatch, fuel, etc., had been treated as having been sold to the tea business in the agricultural income-tax assessment made on the assessee and agricultural income-tax was consequently levied on the entire value of the thatch, bamboo and fuel, etc. It is in the context of agricultural income-tax assessment that the Supreme Court came to consider the question as to whether the assessee was eligible for the deduction of the value of thatch, bamboo, etc., used in the business of manufacture of tea. The Supreme Court was not considering a claim like the present one where the notional value for the mud taken out from a capital asset was claimed as a deduction for arriving at the business income of the assessee. Therefore, for all these reasons, we answer the second question in T.C. No. 406 of 1971, and the sole question in the other two references in the affirmative and against the assessee. The Commissioner will be entitled to his costs. Counsel's fee Rs. 150 in each.