VEERASWAMI J. - The petition relates to the assessment year 1959-60 under the Madras Agricultural Income-tax Act, 1955. The assessee, who is the petitioner, claimed to deduct Rs. 13,797.55 as a sum paid to financiers in lieu of interest, which was disallowed by the revenue as well as the Tribunal. The assessee accordingly has moved this court in revision and the following question arise for consideration :
'(1) Whether, on the facts and in the circumstances of the case, the disallowance of the sum of Rs. 13,797.55 being the sum paid to financiers in lieu of interest by the petitioner is valid in law and
(2) Whether, on the facts and in the circumstances of the case, the disallowance of Rs. 4,355 out of cultivation and management expenses claimed by the petitioner is justified in law ?'
So far as the second question is concerned, we may straightway answer it in the negative and against the assessee. The disallowance is based on the merits of the claim and scarcely any question of law arises.
On the first question, we are of opinion that the claim of the assessee is one of substance. The assessee succeeded to a leasehold interest relating to 70 acres of land in which cardamom was cultivated. In connection with the working of the lands, according to the assessee, he borrowed various sums of money from different persons from 1951 onwards. An agreement was entered into between the assessee and one Mr. M. V. John, who had advanced a total sum of Rs. 55,780 as on March 31, 1957, which provided for payment of a certain share of the net profits to be arrived at in the manner stipulated to Mr. John in lieu of interest and that the sums advanced by him were not returnable except in the event of the leasehold interest being sold in which contingency Mr. John would be entitled to payment of a proportionate sum out of the proceeds as repayment towards the advance he had made. There is no controversy that in point of fact that assessee in the financial year paid a sum of Rs. 13,797.55 out of the profits. The revenue with which the Tribunal agreed took the view that, inasmuch as the agreement did not provide for return of the so called advance, therefore, the payment of the sum could not be regarded as by way of interest. On that view the claim for deduction was disallowed.
Section 5 of the Madras Agricultural Income-tax Act, 1955, provides how the agricultural income of a person shall be computed. In doing so, the section allows certain deductions. Clause (e) reads :
'Any expenditure incurred in the previous year (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 the land.'
What this clause provides for is deduction of revenue incurred by the assessee in the previous year in order to earn his profits during that year. Whether the payment in question made by the assessee partakes of that character will depend upon the nature and effect of the transaction entered into between the assessee and Mr. John. If it amounts to an advance of money which is expended on the lands for the assessee to earn profits therefrom, such expenditure obviously will be of a revenue character. If, on the other hand, what was paid by Mr. John was in the nature of an investment, different consideration may arise.
On a careful consideration of the various terms of the agreement between the assessee and Mr. John, we have come to the conclusion that the Tribunals view as to its scope and effect cannot be supported. Factually, its conclusion is not correct that the agreement has not made any provision for return of the advance made by Mr. John to the assessee. As a matter of fact, clause 18 does provide for it, though in a particular form. What it provides is that in the event of the leasehold interest being sold, Mr. John will be entitled to a proportionate payment out of the proceeds. Clause 14 which throws a good deal of light on the nature of the transaction is as under.
'The party of the second part (Mr. John) and his/her heirs after him/her, are entitled only to a share of the profits in lieu of interest, as stipulated in section ten supra, and are not entitled at any time, to the return of any portion of the sums advanced by him/her, except as provided in section eighteen infra, and this shall always remain the sole concern of Sri M. V. Chacko, the party of the first part.'
There things are clear from this clause. One is that the parties themselves considered the payment by Mr. John as an advance. Secondly, there is a clear stipulation that profits should be paid but such payment is to be understood as in lieu of payment of interest. And thirdly, the leasehold interest shall be the sole concern of M. V. Chacko, the assessee. The last point seems to negative any theory of investment by Mr. John. Under the agreement right through the leasehold interest should be regarded as belonging to the assess notwithstanding the fact that moneys paid out by Mr. John to the assessee were expended on the leasehold lands. The main characteristics of debtor and creditor relationship are that one of the parties lends of the other a certain sum of money on the understanding that the receiver will repay it on demand or in accordance with other stipulations, which may be repayment only after a particular period, or in the happening of a particular contingency and that in view of the advance the debtor agrees to pay interest periodically or otherwise. Payment of interest need not necessarily be an essential element of a debt. But its presence will clearly indicate the character of the transaction as a case of advance of money creating the relationship of debtor and creditor. The essential element of the relationship appears to be the agreement for repayment of money received. The Tribunal was certainly right in looking forward to that element. But it seems to us that in doing so it failed to appreciate the true scope and effect of the agreement, though as we indicated above, the agreement clearly provides for return of the advance, but only in a particular contingency we have already noticed. Further, the agreement also explicity shows the intention of the parties to treat the advances as such and it provides in so many words for payment of a share out of the net profits in lieu of interest. All these facts taken together leave no doubt in our minds that the transaction between the assessee and Mr. John was essentially one of borrowing on interest. There is no question raised, as we mentioned, that the money so received from Mr. John was not completely laid in working the land and earning profit therefore. In our opinion, therefore, though the facts in Dharamvir Dhir v. Commissioner of Income-tax may be some what different from those in the instant case, the principle of that case is clearly applicable. In that case it was held :
'The payments were an expenditure wholly and exclusively laid out for the purpose of the assessees business and they were, therefore, deductible revenue expenditure.'
That is also the case here.
It is will be subject to the terms of section 5(k). But the revenue itself has treated the amount sought to be deducted as relating to payment of interest. Apart from that, what was paid under the agreement was a share of the net profits, which was in lieu of interest. We referred to the aspect of interest earlier in order to test the nature of the transaction as a borrowing. In the circumstances, therefore, there is no reason why the deduction sought for is not to be allowed under section 5(e).
The first question is answered in favour of the assessee, but with no costs.