28 April 1970
Supreme Court


Case number: Appeal (civil) 1192 of 1966






DATE OF JUDGMENT: 28/04/1970


CITATION:  1970 AIR 1578            1971 SCR  (1) 426  1970 SCC  (2) 152

ACT: U.P.  Agricultural  Income-tax  Art of 1948  s.  6(2)  (iv)- Expenses of cultivation-What are....

HEADNOTE: The  assessee-  a  sugar factory,  carried  on  agricultural ’farming on a large scale and had several farms.  It engaged on  each farm a Manager with necessary  technical,  clerical and menial staff to assist him.  These persons were  claimed to  have  been employed exclusively for the purpose  of  the farm   and   were  provided  with   accommodation,   medical facilities,  and  the allowances.  On the  question  whether the-expenses on the management charges of the  Establishment rent  inspection, repairs of bunglows and offices,  expenses on  car,  travelling, postage periodicals,  assessees’  con- tribution to Provident Fund, could be allowed as expenses of cultivation  under s. 6(2)(b)(iv) of the  U.P.  Agricultural Income-tax Act, 1948, this Court; HELD  :  The amount claimed by the assessee as  expenses  on management and miscellaneous expenses could be allowed under s.  6(2)  (b)  (iv)  if  and to  the  extent.  that  it  was determined  that  they  were incurred  for  the  management, supervision,.  organisation, technical knowledge and  assis- tance  and  other  allied matters for  the  purpose  of  the raising  of crops, their marketing and  transportation.   An apportionment may become necessary if it was determined that the  entire  expense  was not incurred  strictly  for  those purposes. [433 A-C] What  has  to be essentially determined under s. 6  (2)  (b) (iv)  is  whether the expenses were incurred on or  for  the purpose  of  the-entire work. and  ,operations  involved  in raising the crops, making the same fit for marketing and the transportation  of  the  produce to the  market.   The  word "raising  the  crop"  cannot  be  confined  simply  to   the ploughing  of  the  land, sowing the seed  and  cutting  the harvest.   Section 6(2)(b)(iv) is not to be construed  in  a narrow and pedantic sense and’ must be given its full effect in  the  background of modern large scale  farming  and  the organisation required for it. [432 F-H] It is well known that modern agricultural farming which  has



become mechanised involve-,, a high degree of  organisation, technical  skill  etc.,  in  the same  way  as  a  well  run industry.   If  agricultural production has to  be  obtained with optimum results it is necessary that there should be a propersupervisory   and,   other  staff  as   also   the employment of   such means    as   would  be  conducive   to maximum production and proper marketing of the produce.   It is  axiomatic  that  the  staff  would  require  residential accommodation  which will have to be kept in a proper  state of repair. The staff win also need medical attention and other amenities which    are normally afforded to  employees now  a  days.  The benefit of provident fund can  hardly  be denied  to them when it has become the accepted  and  normal feature  in all forms of employment . in modern  times.   If any  motor  vehicle  is being maintained  for  enabling  the supervisory  or  other  staff to took  after  the  farm  the expenses  incurred thereon cannot be regarded as foreign  to farming operations.  ’I-he expenditure incurred on  postage, telegrams, printing and stationery for the purpose 427 of and in connection with farming would also -be  allowable. If  certain periodicals are being subscribed  for  obtaining technical knowledge and up-to-date information in the matter of  agricultural  farming it is difficult to  see  how  that could be disallowed. [432 C-F] Agricultural  Income-tax  No.  366 of 1953  decided  by  the Allahabad High Court on May 11, 1956 approved. Mrs.   Bacha F. Guzder, Bombay v.   Commissioner of  Income- tax Bombay, Income Tax Reports (Vol 27)        1955 page  1, Commissioner  of Income-tax, West Bengal, Calcutta  V.  Raja Benoy Kumay Sahas Roy, 32 I.T.R. 466 distinguished,

JUDGMENT: CIVIL APPELLATE       JURISDICTION : Civil Appeals Nos, 1192 and 1276 of 1966. Appeals by special leave from the judgments and orders dated September  30, 1965 and November 23, 1965 of  the  Allahabad High Court in Agricultural Income-tax Reference Nos. 142  of 1954 and 232 of 1957. Gopinath Kunzru, V. K. S. Chaudhury and Ganpat Rai, for  the appellant (in both the appeals). C. B. Agarwala and 0. P. Rana,, for the respondent( in both the  appeals) The Judgment of the Court was delivered by Grover, J. These appeals special leave arise out of a common judgment of the Allahabad High Court in two references  made under the United Provinces Agricultural Income Tax Act, 1948 (hereinafter called the Act). As  the  points are common the facts in appeal No.  1276  of 1966 may be briefly stated The  appellant  is a sugar factory to which  is  attached  a sugar  cane  farm.  The appellant  carries  on  agricultural farming on a large scale in District Deoria and had  several farms.  According to the ease of the appellant it engages on each  farm a Manager with necessary technical, clerical  and menial staff to assist him.  These persons are also provided accommodation and facilities for   medical treatment and are given certain other necessary allowances. it is claimed that the  whole establishment is maintained exclusively  for  the purposes of the farm. The appellant opted to be assessed u/s 6 (2) (b) of the  Act for  the  assessment year 1357F, the  Assessing  Income  Tax Officer   (Collector) assessed the appellant to Agricultural



Income-Tax  after  disallowing expenses  on  the  management charges   of  European  Establishment  etc.,   miscellaneous expenses,  salary  of  European  staff,  rent,   inspection, repairs of bunglows and offices 428 as  not  being admissible under the rules.  This  Order  was upheld by the Agricultural Income Tax Commissioner mainly on the  ground  that the number of persons employed  and  their salary  was not given and it was therefore not possible  "to determine  whether those persons were at all necessary  when the assessee had too many other servants or laborers or  the like".   He  disallowed  the  expenses  on  management   and establishment  and  on the subscription on  periodicals,  on postage and telegram, printing and stationery, medicine etc. In  his  opinion  these could not be regarded  as  costs  of cultivation.   A revision was filed before the  Agricultural Income Tax Board which was dismissed on the ground that  the aforesaid expenses could not strictly be called expenses  of cultivation  and were not permissible u/s 6 (2) (b) (iv)  of the  Act.  The appellant filed an application under  Section 24(2)  for  reference to the High Court.   The  Agricultural Income Tax Board stated the following question of law :               "Whether the amount claimed by the assessee as               expenses    of    management,    miscellaneous               expenses,  detailed  above can be  allowed  as               expenses of cultivation u/s 6 (2) (b) (iv)  of               the Act".               The  items which had been disallowed and  with               ’regard  to which the reference was  made  are               given below               Senior Staff Establishment-Rs. 3,180/-               Indian Establishment-Rs. 4,021/15/3               Indian Menial Staff-Rs. 6,825/6/-               Travelling Expenses-Rs. 833/6/3               Staff Allowance Rs. 207/7/6               Garden Maintenance-Rs. 1,062/2/3               Motor Car Maintenance-Rs. 360/-               Lighting Plant Expenses-Rs. 1,844/1 1               Firm Contribution to Provident Fund-Rs. 574/1               Agency Allowance-Rs. 1,800/-/-               The assessee had showed certain other expenses               as  miscellaneous  expenses.   They  too  were               disallowed.  They were as follows.-               Subscription & Periodicals-Rs. 159/-               Postage & Telegrams--Rs. 189/5/-               Printing & Stationery-Rs, 79/14/-               Medicines & Medicals-Rs. 1,5;29/3/8               Sundries-Rs. 2,838/3/8. 429 The High Court relied largely on certain decisions of  this. Court   in   which  the  meaning   of   ’agricultural’   and ’agricultural purpose’ was considered with reference to  the provisions of the Income Tax Act, 1922.  It was held by  the High  Court  that  the expenses which  were  claimed  to  be deductible  could  not possibly be said to  be  directly  or approximately  connected with the raising of the crops,  nor for  making it fit for market or for transporting it to  the market.   These  expenses at best could only be said  to  be remotely  connected with the business side of marketing  the produce and had no connection with the raising of the crops. The  question  was therefore answered in  the  negative  and against the assessee. The Act was enacted to impose tax on agricultural income  in the  United Provinces.  Section 2 (1) defines  ’agricultural income’.   It is first stated that this expression  has  the



same meaning as has been assigned to it in the Indian Income Tax Act, 1922.  In its, adapted form, it is reproduced below :               (a)   any  rent or revenue derived  from  land               which is used for agricultural purposes and is               either  assessed  to land  revenue  in  (Uttar               Pradesh) or is subject to a local rate or cess               assessed  and collected by an officer  of  the               (State Government)               (b)   Any income derived from such land by-               (i) ............               (ii) .............               (iii) ..............               (c)   any income derived from any building Section  3 provides for the charge of  agricultural  income- tax,  section 4 (A) for computation of agricultural  income, section  5  for determination of such income and  section  6 gives  an option to the assessee to have the computation  of income done in accordance with its provisions.   Sub-section 2(b)  says  that the income shall be the gross  proceeds  of sale of all the produce of the land subject to the following deductions:-               (i)..........               (ii)..........               (iii).........               (iv)  the  expenses incurred in  the  previous               year  in  raising  the  crop  from  which  the               agricultural               43 0               income is derived, in making it fit for market               and  in transporting it to  market,  including               the   maintenance  or  hire  of   agricultural               implements  and  cattle  required  for   these               purposes;               (v)..........               (vi)..........               (vii) any  expenses incurred in  the  previous               year  on the maintenance of any capital  asset               if  such  maintenance  is  required  for   the               purpose of deriving the agricultural income;". The  provisions  of  Section  6(2) (b)  (iv)  came  LIP  for consideration   before   the   Allahabad   High   Court   in Agricultural Income Tax Reference No. 366 of 1953 decided on 11th  May, 1956.  In that case also the income  was  derived from   large  scale  farming  It  had  been  found  by   the Agricultural  Income  Tax Board that the farm had  been  run under  the  supervision  of a Manager and  all  the  figures relating  to  receipts  and expenditure  had  been  properly checked  and scrutinized.  A number of items  were  involved which were of an identical nature as are to be found in  the present  case and with regard to which deductions  had  been claimed u/s 6(2) (b).  The provident fund which  represented the Company’s contribution was allowed by the High Court  on the  ground that the employees were engaged at the firm  and the  contribution  to  their provident fund  was  in  a  way remuneration  or salary paid to them.  The expenses  on  the maintenance and repairs to the Assistant Manager’s  bungalow were  allowed u/s 6(2)(b))(vii).  Similarly the  expenditure incurred  on  repairs to quarters allowed  o  blacks-smiths, watchman,   carpenters   and  clerks-,ill   connected   with cultivation was allowed under the aforesaid provision.   The expenses  incurred  on the maintenance of a lorry  used  for transporting,, the harvest and the car which was provided to the  managerial  staff to ensure proper supervision  of  the farm were also allowed by the High Court.  It was considered



that  this  expenditure  was necessary for  the  purpose  of deriving  the agricultural income.  As regards the  payments made  to Directors, Managing Agents and expenses I  incurred on  a general Office and the General  Manager’s  commission, the position taken up on behalf of the assessee was that all this expenditure had been incurred on controlling operations in  the  Organization for the cultivation  of  land,  raisin transporting and marketing of the crops etc.  The High Court was of the view that Ill this expenditure which  represented only  1/5th  of  the total expenditure of  the  Company  was deductible  as it had been incurred for the purposes of  the farm.  As regards Manager’s salary, his travelling expenses, leave and passage allowance and clerical salaries, the  High Court felt that unless there be reasons for holding that the expense was so unreasonable a, to justify 43 1 a  finding  that  it  did not  relate  to  the  agricultural activities of the company, the assessing authority could not substitute  its  own  views of prudent  management  for  the actual management by the Board of Directors of the  Company. The following observations may be referred to :               "The  actual raising of the crop is  certainly               done  by the coolies who work on the farm  but               the   brains   that  direct  and   guide   the               operations, protect the crops and arrange  for               its  collection and disposal, are by no  means               to  be ignored and if payment is made  by  the               company  to secure such assistance we  do  not               find  any justification for holding  that  the               expense is not incurred in raising the crops". The  above  case was not followed by the High Court  in  the present case. In  Mrs. Macha F. Guzder, Bombay v. Commissioner  of  lncome Tax,  Bombay(1), the questions which fell for  determination were  of a different nature altogether.  The assessee  there was  a shareholder in certain tea companies 60%  of  whose’, income  was  exempt from tax as  agricultural  income  under section  4  (3) (viii) of the Indian  Income-tax-Act,  1922. The,  assessee  claimed  that ’00% of  the  dividend  income received  on those shares would also be exempt from  tax  as agricultural  income.  It was held that the dividend  income was not agricultural income but was income assessable  under section 2 of the aforesaid act.  According to that decision, the object underlying section 2(1) of the Income-tax Act was not  to subject to tax either the actual tiller of the  soil or  any other person getting land cultivated by  others  for deriving  benefit  therefrom, but to say  that  the  benefit intended to be conferred upon such persons should extend  to those into whose hand that revenue fall, however, remote the receiver of such revenue might be, was hardly warranted. In the other case, Commissioner of Income tax West  Bengal,’ Calcutta  v. Raja Benoy Kumar Sahas Roy(2) the question  was whether  income  derived from the sale of  Sal  and  plyasal trees  ’in  the  forest  owned by  the  assessee  which  was originally a forest of spontaneous growth "not grown by  the aid  of  human  skill  and labour"  but  on  which  forestry operations  described  in  the statement of  case  had  been carried on by the assessee involving considerable amount  of expenditure  of  human  skill and  labour  was  agricultural income  within the meaning of S. 2(1) of the  Indian  Income tax Act. 1922.  It was in this connection that  observations were made with regard to the primary sense in which the (1)  Income Tax Reports (Vol 27) 1955, page (1). (2)  32 I.T.R, 466.. 43 2



word  ’agriculture’  was  used  and  what  the  meaning   of ’agricultural  operation’  was.  It was said that  the  term ’agriculture’ could not be extended to all activities  which had some relation to the land and were in any way  connected with  the  land.  For instance the application of  the  term ’agriculture’  to denote such activities in relation to  the land  including horticulture forestry, breeding and  rearing of  live-stock,  dairying,  butter  and  cheese-making   and poultry farming was unwarranted distortion of the term. The above two decisions relied upon by the High Court,  with respect, have no bearing on the question which arose in  the present  case.   It is well known that  modern  agricultural farming  which has become mechanised involves a high  degree of  Organisation, technical skill etc. in the same way as  a well  run  industry.  If agricultural production has  to  be obtained  with  optimum results it is necessary  that  there should  be a proper supervisory and other staff as also  the employment  of such means as would be conducive  to  maximum production  and  proper  marketing of the  produce.   It  is axiomatic   that   the  staff  would   require   residential accommodation  which will have to be kept in a proper  state of repairs.  The staff will also need medical attention  and other amenities which are normally afforded to employees now a days.  The benefit of provident fund can hardly be  denied to  them when it has become the accepted and normal  feature in  all forms of employment in modern times.  If  any  motor vehicle is being maintained for enabling the supervisory  or other.  staff to look after the farm the  expenses  incurred thereon cannot be regarded as foreign to farming operations. The expenditure incurred on postage, telegrams, printing and stationery for the purpose of and in connection with farming would  also be allowable.  If certain periodicals are  being subscribed  to for obtaining technical knowledge and  up-to- date information in the matter of agricultural farming it is difficult  to see how that could be disallowed.  It  is  not necessary  to refer to all other items the details of  which have  been  given  before.   What  has  to  be   essentially determined  under S. 6 (2) (b)(iv) is whether  the  expenses were  incurred on or for the purpose of the entire work  and operations involved in raising the crop, making the same fit for  marketing and the transportation of the produce to  the market.   The  words "raising the crop" cannot  be  confined simply  to the ploughing of the land, sowing the  seed  ’and cutting  the harvest.  It must be emphasised that section  6 (2) (b) (iv) is not to be construed in a narrow and pedantic sense and must be given its full effect in the background of modem large scale farming and the organization required  for it.  We are generally in agreement with the views  expressed in  the previous unreported decision of the  Allahabad  High Court referred to before. 43 3 It would appear that the authorities concerned have not con- sidered  the items in dispute from the correct angle and  it would have to be decided with regard to each item whether it was  partly  or wholly expended for the  purposes  mentioned before.   An  apportionment  may become necesary  if  it  is determined that the entire expense was not incurred strictly for those purposes. The  correct answer to the question referred would be :  The amount claimed by the assessee as expenses on management and miscellaneous  expenses detailed before can be  allowed  u/s 6(2)(b) (iv) if and to the extent it is determined that they were incurred for the management, supervision, Organisation, technical knowledge and assistance and other allied  matters for the purpose of the raising of crops, their marketing and



transportation, in the light of the observations made by  us in this judgment. The  appeals  are allowed with costs in this Court  and  the judgment of the High Court is set aside.  One hearing fee. Y.P.                                                 appeals allowed. 434