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PETITIONER: STATE OF MADRAS

       Vs.

RESPONDENT: C. J. COELHO

DATE OF JUDGMENT: 30/04/1964

BENCH: SIKRI, S.M. BENCH: SIKRI, S.M. SUBBARAO, K. SHAH, J.C.

CITATION:  1965 AIR  321            1964 SCR  (6)  60  CITATOR INFO :  RF         1965 SC1201  (16)  R          1966 SC1053  (6)

ACT: Income Tax--lnterest paid on monies borrowed for purchase of plantation-If   deductible  from  the   assessable   Income- Expenditure  if laid out or expended wholly and  exclusively for    the   purpose   of   plantation-Madras    Plantations Agricultural  Income-tax Act (Mad. V of 1955). s.  5(e)  and (k).

HEADNOTE: The respondent, assessee purchased an estate, consisting  of tea.  coffee and rubber plantations.  Out of the sale  price of Rs. 3,10,000/- he ed Rs. 2,90,000/- at interest.  For the assessment year 1955-56. 61 be claimed deduction on interest amounting to Rs. 22,628-9-9 under s. 5(k) of the Madras Plantations Agricultural Income- tax  Act.  The Agricultural Income Tax Officer allowed  only Rs. 1,570-10-7 under the Act.  The assessee appealed to  the Assistant Commissioner and to the Tribunal, without success. On  his revision application, the High Court held  that  the deduction claimed by him fell within the scope of s. 5(e) of the  Act and that the whole of Rs. 22.628-9-8.  should  have been  deducted  from his assessable income.   On  appeal  by special  leave,  the appellant contended that  the  interest paid by the asscssee was not deductible under s. 5(e) of the Act on three grounds; first, it was in the nature of capital expenditure;  secondly,  it was a personal  expense  of  the assessce,  and  thirdly,  it was not laid  out  or  expended wholly and exclusively for the purpose of the plantation. HFLD:-(i)  There  is  no force in the  contention  that  the payment  of interest was capital expenditure within s.  5(e) of the Act.  In the instant case the payment of interest was revenue expenditure.  No new asset was acquired with.it;  no enduring benefit was obtained.  Expenditure incurred was par of  circulating  or floating capital of  the  assessee.   In ordinary commercial practice, payment of interest would  not be termed as capital expenditure. Assam Bengal Cement Co. Ltd. v. Commissioner of  Income-tax,

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[19551 1 S.C.R. 972, relied on. S.Kappuswami  v.  Commissioner  of  Income-tax,   Madras, I.L.R.  [1954]  Mad. 977; and  Commissioner  of  Income-tax, Madras  v. Siddareddy Venkatasuhba Reddy, [1949]  17  I.T.R. 157, held inapplicable. The  European Investment Trust Company Ltd. v.  Jackson,  18 T.C. I and Greshan Life Assurance Society v. Styles, 3  T.C. 185, distinguished. (ii)The second contention is equally without substance.  It is  impossible  to  hold that any  expense  to  discharge  a personal  obligation  becomes a personal expense  Within  s. 5(e)  of the Act.  Personal expenses would include  expenses on  the  person of the assessee or to satisfy  his  personal needs such as clothes. food etc., or purposes not related to the business for which the deduction is claimed. (iii)On the facts of the present case it is  impossible to dissociate the character of the assessee as the owner  of the plantation and as a person working the plantation.   The assessee  had  bought  the plantation for working  it  as  a plantation,  The payment of interest on the amount  borrowed for   the  purchase  of  the  plantation,  when  the   whole transaction of purchase and the working of the plantation is viewed as an integrated whole. is so closely related to  the plantation  that the expenditure can be *aid to be laid  out or  expended wholly and exclusively for the purpose  of  the plantation.   In principle there is no  distinction  between interest  paid on capital borrowed for the acquisition of  a plantation and between interest paid on capital borrowed for the purpose of running an existing plantation, both are  for the Purposes Of the plantation. 62 Commissioner  of Income-tax. Kerala v. Malavalem  Plantation Ltd. C.A. No. 389/63 dated 10th October, 1964, relied on. Eastern Investments Ltd. v. Commissioner of Income-tax, West Bengal, [1951] S.C.R. 594, Scottish North American Trust  v. Former,  5  T.C.  693, Dharamvir  Dhir  v.  Commissioner  of Income-tax, [1961] 3 S.C.R. 359 and Commissioner of  Income- tax,  Bombay  v. Jagannath Kissonlal, [1961] 2  S.C.R.  645, referred to. Metro Theatre Bombay Ltd. v. Commissioner of Income-tax,  14 I.T.R. 638, distinguished.

JUDGMENT: CIVIL APPELLATE JURISDICTION : Civil Appeal No. 701/1963. Appeal  by special leave from the judgment and  order  dated January  19, 1960 of the Madras High Court in T.R.C. No.  53 of 1957. A.Ranganadham   Chetty  and  A.   V.  Rangam,   for   the appellant. C. P. Lal, for the respondent. April 30, 1964.  The Judgment of the Court was delivered by SIKRI  J.-The  respondent, hereinafter referred  to  as  the assessee, purchased an estate in 1950, known as Silver Cloud Estate,  consisting of tea, coffee and rubber  plantations,. in  Gudalur, Nilgiris, Madras State.  Out of the sale  price of  Rs.  3,10,000,  he borrowed Rs.  2,90,000,  at  interest varying  from  seven to eight per cent per annum.   For  the assessment  year  1955-56, the assessee  claimed  to  deduct interest  on  this sum, amounting to  Rs.  22,628-9-8.   The Agricultural  Income  Tax Officer, Gudalur,  disallowed  Rs. 21,057-15-1,  allowing Rs. 1,570-10-7, under S. 5(k) of  the Madras Plantations Agricultural Income-Tax Act (Madras Act V of  1955)  (hereinafter  referred,  to  as  the  Act).   The

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relevant part of the assessment order is reproduced below: "Interest on borrowings Rs. _21,057-15-1.  The assessee  has claimed  Rs. 22,628-9-8 to wards interest.  It is seen  that about Rs. 80,000 has been borrowed from various parties, for 63 the  maintenance  of the estate.  Under section  5  (k)  the interest  has  to be limited to six per cent  on  an  amount equivalent to 25 per cent of the agricultural income in that year.   The  gross  income is Rs.  1,04,710-13-11.   So  the borrowing has to be limited to 25 per cent of Rs.  1,04,710- 13-11,  which is Rs. 26,177-11-6.  Interest at six per  cent on  this  amount  is  Rs.  1,570-10-7.   So  a  sum  of  Rs. 21,057-15-1 is disallowed (22,628-9-8 minus 1,570-10-7)." The  assessee  appealed  to the  Assistant  Commissioner  of Agricultural Income Tax, without success.  He then  appealed to the Madras Plantations Agricultural Income Tax  Appellate Tribunal,  hereinafter  refereed to as  the  Tribunal.   The tribunal observed as follows: "It  is  not  possible to agree with  the,  contention  that interest paid in the year of account towards a loan borrowed by  the  proprietor for the purpose of  acquisition  of  the estate will fall within the category of "expenditure  wholly and exclusively laid out for the purpose of the plantation". The  immediate object of the expenditure. i.e.,  payment  of interest,  is  to  liquidate a  personal  liability  of  the proprietor,  as  a debtor.  That after  such  borrowing  the debtor used it as sale price and acquired the estate, cannot make  the  payment of interest an  "expenditure  wholly  and exclusively laid out for the purpose of the plantation." The language of the various subdivisions of section 5 of the Act referring  to  the various items of  permissible  deductions towards  expenditure  shows  that the  expenditure  and  the plantation  must  have a direct  and  proximate  connection. Here,  the  proximate connection of the payment  is  with  a personal loan and not with the plantation." The assessee filed a revision application to the High  Court under s. 54(l) of the Act, and raised the following question before it: 64 "Question  of  law raised for decision by  the  High  Court- Whether interest paid on monies borrowed for the purchase of the  plantation is expenditure of the nature referred to  in section 5 (e) of the Act and should therefore be deducted in assessing the income of the Plantation during the year." The  High  Court  held that the  deduction  claimed  by  the assessee  fell within the scope of s. 5 (e) of the Act,  and that the whole of Rs. 22,628-9-8, and not merely Rs.  1,570- 10-7, should have been deducted from his assessable  income. It ordered that the assessment be revised accordingly.   The High  Court refused to certify the case as a fit one,  under article  133  (1) (c) of the Constitution.  But  this  Court gave  special leave to the appellant to appeal  against  the judgment and order of the High Court. The  relevant  statutory provisions are as under.   S.  2(a) defines  ’agricultural income’ and s. 2(r) defines  ’planta- tion’ "2(a) ’agricultural income’ means- (1)  any rent or revenue derived from a planta- (2)  any  income derived from such plantation in  the  State by- (i)  agriculture, or (ii)the performance by a cultivator or receiver of rent-in- kind  of any process ordinarily employed by a cultivator  or receiver  of  rent-in-kind to render the produce  raised  or received by him fit to be taken to market. or

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iii)the sale by a cultivator or receiver of rent in-kind of the  produce raised or received by him, in respect of  which no  process has been performed other than a process  of  the nature described in sub-clause (ii); Explanation I-Agricultural income derive from such plantation by the cultivation of 65 tea  means  that  portion of the  income  derived  from  the cultivation, manufacture and sale of tea as is defined to be agricultural  income  for  the purposes  of  the  enactments relating to Indian Income-tax; Explanation   II-Agricultural  income  derived   from   such plantation by the cultivation of coffee, rubber, cinchona or cardamom  means that portion of the income derived from  the cultivation,   manufacture  and  sale  of  coffee,   rubber, cinchona or cardamom, as the case may be, as may be  defined to be agricultural income for the purposes of the enactments relating to Indian Incometax; (2)  (r) ’Plantation’ means any land used for growing all or any of the following, namely, tea, coffee, rubber,  cinchona or cardamom;". Section  3  is  the charging section  and  it  directs  that "agricultural  income-tax at the rate or rates specified  in Part I of the Schedule to this Act shall be charged for each financial year commencing from 1st April, 1955 in accordance with and subject to the provisions of this Act, on the total agricultural  income of the previous year of every  person." Section  4  describes what is ’total  agricultural  income’. Section 5 is concerned with the computation of  agricultural income  and directs the deduction of various items.  We  are concerned with two sub-clauses and they are set out below "5(e)  any  expenditure incurred in the previous  year  (not being  in  the  nature of capital  expenditure  or  personal expenses  of  the assesse) laid out or expended  wholly  and exclusively for the purpose of plantation; (k)  any  interest paid in the previous year on  any  amount borrowed and actually spent on the 51 S. C.-5 66 plantation from which the agricultural income is derived. Provided that the need for borrowing was genuine having  due regard to the assets of the assessee at the time; Provided further that the interest allowed under this clause shall be limited to six per cent on an amount equivalent  to twenty-five  per  cent of the agricultural income  from  the plantation in that year." The learned counsel for the State contends that the interest paid by the assessee is not deductible under s. 5(e) of  the Act on three grounds: First, it is in the nature of  capital expenditure;  secondly,  it  is a personal  expense  of  the assessee; and thirdly, it is not laid out or expended wholly and exclusively for the purpose of the plantation. Before  adverting to the above grounds, it will  be  noticed that  s. 5 (e) is word for word a reproduction of s. 10  (2) (xv) of the Income Tax Act, 1928, and as this Court and  the High  Court  have on various occasions considered  the  said clause,  these decisions would be relevant for deciding  the present case, which arises under the Act. Is the payment of the said interest in the nature of capital expenditure or not? -Mr.  Chetty urges that the assessee  ad bought  the  plantation  with borrowed money  and  that  was undoubtedly  capital expenditure.  He says that  it  follows logically  from this that interest paid on the amount  spent on  the  purchase  of the plantation must  also  be  capital expenditure.  He invited our attention to a number of cases,

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with which we will shortly deal. In  order to determine whether an expenditure is revenue  or capital  expenditure,  certain broad principles have  to  be borne  in mind.  This Court formulated these  principles  in Assam  Bengal Cement Co. Ltd. v. The Commissioner of  Income Tax,(’) in the following words: "(1) Outlay is deemed to be capital when it is made for the initiation of a business, for extension of (1)  [1955] 1 S.C.R. 972 67 a  business, or for a substantial replacement of  equipment: vide  Lord  Sands  in Commissioners  of  Inland  Revenue  v. Granite  City Steamship Company [(1927) 13 T.C. 1] and  City of  London  Contract Corporation v. Styles  [(1887)  2  T.C. 239]. (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 an asset or an  advantage for the enduring benefit of a trade vide Viscount Cave, L.   C., in Atherton v. British Insulated and Helsby  Cables Ltd., [(1926) 10 T.C. 155].  If what is got rid of by a lump sum payment is an annual business expense chargeable against revenue, the lump sum payment should equally be regarded  as a business expense, but if the lump sum payment brings in  a capital  asset,  then  that puts  the  business  on  another footing  altogether.  Thus, if labour saving  machinery  was acquired,  the cost of such acquisition cannot  be  deducted out  of  profits  by claiming that it  relieves  the  annual labour bill, the business has acquired a new asset, that is, machinery. 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. (3)  Whether for the purpose of the expenditure, any capital was  withdrawn,  or, in other words, whether the  object  of incurring the expenditure was to employ what was taken in as capital  of the business.  Again. it is to be  seen  whether the  expenditure incurred was part of the fixed  capital  of the  business  or part of its  circulating  capital.   Fixed capital  is what the owner turns to profit by keeping it  in his own possession.  Circulating or floating capital is what he makes 68 profit  of by parting with it or letting it change  masters. Circulating  capital is capital which is turned over and  in the  process  of being turned over yields  profit  or  loss. Fixed  capital, on the other hand, is not involved  directly in that process and remains unaffected by it." This  Court  further held that ’one has got to  apply  these criteria,  one  after the other from the business  point  of view   and  come  to  the  conclusion  whether  on  a   fair appreciation of the whole situation the expenditure incurred in a particular case is of the nature of capital expenditure or  revenue expenditure in which latter event only it  would be  a deductable allowance under section 10(2) (xv)  of  the Indian Income Tax Act, 1922. If we apply these principles to the facts of this case,  the answer  seems clear that the payment of interest is  revenue expenditure.  No new asset is acquired with it; no  enduring benefit is obtained.  Expenditure incurred was part of  cir- culating  or floating capital of the assessee.  In  ordinary commercial practice, payment of interest would not be termed as capital expenditure. The cases relied on by Mr. Chetty do not bear on the precise

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problem.   We  may, however, notice them in  brief.   In  S. Kuppuswami v. The Commissioner of Income Tax, Madras(’), the assessee was held to have acquired the goodwill by paying  a certain  share  of  profits.  This was held  to  be  capital expenditure.   In  Commissioner of  Income-Tax,  Madras,  v. Siddareddy  Venkatasubba Reddy(’), the assessees  had  under certain agreements obtained mining rights in different plots of  land  for periods varying from five to nine  years,  and claimed deduction of the amounts paid by them under the said agreements.  The High Court held the money expended for  the acquisition of mining rights to be capital expenditure. In The European Investment Trust Company Limited v. Jackson(’) the Court of Appeal was concerned with the inter- (1)  I.L.R. (1954) Mad. 977 (2)  (1949) 17 I.T.R. I 5 (3) 18 T.C. I 69 pretation of Rules 3 of the Rules applicable to Cases I  and 11 of Schedule D of the Income Tax Act, 1918 (8 & 9 Geo.  V. c.  40).   In the English Act there are a series  of  prohi- bitions;  among other things prohibited to be  deducted  are any  capital withdrawn from or any sum employed or  intended to  be  employed  as capital in such  trade,  profession  or employment or vocation, and any annual interest or any annuity or annual payment payable out of profits. the English  cases  like The European Investment  Trust  Company case(’) are distinguishable because in England there existed the  prohibition  enumerated  above.   There  are  no   such prohibitions  in the Act with which we are  concerned.   But apart  from these prohibitions, Lord Herschall  observed  in Gresham Life Assurance Society v. Styles(2) as follows: "I think the fourth rule was primarily designed to meet such a  case as that in which a trader had contracted to make  an annual  payment out of his profits, as for example, when  he had agreed to make such a payment to a former partner or  to a person who had made a loan on the terms of receiving  such a  payment.  But for the rule it might plausibly  have  been contended that in such a case a trader was only to return as his profits what remained after such payment". (emphasis supplied). Accordingly we hold that there is no force in the contention that the payment of interest was capital expenditure  within s. 5 (e) of the Act. The  next point, namely, that the payment of interest was  a personal  expense  is  equally without  substance.   We  are unable  to  appreciate  that  any  expense  to  discharge  a personal  obligation becomes a personal expense within s.  5 (e).  Personal expenses would include expenses on the person of  the  assessee or to satisfy his personal needs  such  as clothes, food, etc., or purposes not related to the business for which the deduction is claimed. (1)  18 T.C. 1. (2)  3 T.C. 185. 70 The  third  fround  raised,  by  Mr.  Chetty  needs  careful scrutiny.   This Court, after reviewing English  and  Indian cases, summarised the position in Commissioner of IncomeTax, Kerala v. Malayalam Plantation Ltd.(’) as follows: "The  aforesaid discussion leads to the following  result  : The expression "for the purpose of the business" is wider in scope  than  the  expression  "for  the  purpose  of  coming profits".   Its range is wide. it may take in not  only  the day   to   day   running  of  a  business   but   also   the rationalization  of its administration and modernization  of its machinery; it may include measures for the  preservation

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of  the  business and for the protection of its  assets  and property  from expropriation, coercive process or  assertion of  hostile  title;  it  may  also  comprehend  payment   of statutory  dues  and  taxes imposed as  a  pre-condition  to commence or for carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business. However  wide  the  meaning of the expression  may  be,  its limits  are  implicit in it. The purpose shall  be  for  the purpose  of  the business, that is to say,  the  expenditure incurred  shall be for carrying on of the business  and  the assessee shall incur it in his capacity as a person carrying on  the  business.   It cannot include  sums  spent  by  the assessee  as agent of a third party, whether the  origin  of the agency is voluntary or statutory; in that event, he pays the   amount  on  behalf  of  another  and  for  a   purpose unconnected with the business." Before  deciding  the question, it is necessary  to  mention three other decisions of this Court.  In Eastern Investments Ltd.  v.  Commissioner of Income Tax,  West  Bengal(’)  this Court  held  that  interest  on  debentures  issued  by   an investment Company was to be allowed as business expen- (1)  C.A. Nos. 384 and 385165 decided on April 10, 1964. (2)  [1961] S.C.R 594. 71 diture  under  s. 12 (2) of the Indian Income Tax  Act.   It observed  that  ’this  being an investment  company,  if  it borrowed  and used the same for its investments on which  it earned  income,  the-interest paid by it on the  loans  will clearly  be  a permissible deduction under s. 12(2)  of  the Act’.  Earlier, it had observed that Scottish North American Trust v. Farmer(’) was a somewhat similar case. In  Dharamvir  Dhir v. The Commissioner of Income  Tax  (2), this  Court held that a payment of 11/16 of the net  profits of  the  assessee’s business was an expenditure  wholly  and exclusively laid out for the purposes of the business as the assessee had arranged financing ’of the business on the best terms that he could manage. In  the  Commissioner  of Income Tax,  Bombay  v.  Jagannath Kissonlal(3) this Court upheld the claim of the assessee  to deduct  the  amount  it  had to pay  the  bank  on  a  joint promissory note. The   only  case  cited  by  Mr.  Chetty,  which  has   some resemblance  to  the  present case is the  decision  of  the Bombay   High  Court  in  Metro  Theatre  Bombay   Ltd.   v. Commissioner  of Income Tax (4) . But this case  is  distin- guishable for the interest claimed to be deducted, and which was  disallowed, was in respect of the amount  borrowed  for acquiring  land  on 999 years lease, on which a  cinema  was subsequently  built.   There  was  no  immediate  connection between the interest paid and the cinema business.  As Kania J.,  as he then was, put it, ’if the interest was not  paid, the result would be not necessarily the stoppage of  showing films,  but the assessee will not acquire the lease of  this property. Applying the above principles to the facts of this case,  it seems to us that it is impossible to dissociate the  charac- ter of the assessee as the owner of the plantation and as  a person working the plantation.  Ile assessee had bought  the plantation for working it as a plantation, i.e., for growing tea, coffee and rubber.  The payment of interest on the (1) S.T.C. 693.                         (2) [1961] 3  S.C.R. 359. 72 amount borrowed for the purchase of the plantation when  the whole  transaction  of  purchase  and  the  working  of  the

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plantation  is viewed as an integrated whole, is so  closely related  to the plantation that the expenditure can be  said to  be laid out or expended wholly and exclusively  for  the purpose of the plantation.’ In this connection, it is perti- nent  to note that what the Act purports to tax is  agricul- tural income and not agricultural receipts.  From the  agri- cultural  receipts  must be deducted all expenses  which  in ordinary commercial accounting must. be debited against  the receipts.  There is nothing in the Act which prohibits  such expenses  from  being  deducted.   No  farmer  would   treat interest  paid on capital borrowed for the purchase  of  the plantation  as  anything but expenses, and as  long  as  the deductions he claims, apart from any statutory  prohibition, can be fairly said to lead to the determination of the  true net  agricultural  income, these must be allowed  under  the Act.   In principle, we do not. see any distinction  between interest paid on_ capital borrowed for the acquisition of  a plantation  and  that  between  interest  paid  on   capital borrowed for the purpose of running an existing  plantation; both are for the purposes of the plantation. In  the  result,  we  agree with the  High  Court  that  the deduction  claimed by the assessee fell within the scope  of s. 5(e) of the Act, and that the whole of Rs. 22,628-9-8 and not merely Rs 1,570-10-7 should have been deducted from  his assessable  income.  The appeal fails and is dismissed  with costs. Appeal dismissed.