State of Madras Vs. C. J. Coelho
 INSC 147 (30 April 1964)
30/04/1964 SIKRI, S.M.
CITATION: 1965 AIR 321 1964 SCR (6) 60
RF 1965 SC1201 (16) R 1966 SC1053 (6)
Income Tax--interest paid on monies borrowed
for purchase of plantation-If deductible from the assessable IncomeExpenditure
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).
The respondent, assessee purchased an estate,
consisting of tea. coffee and rubber plantations. Out of the sale price of Rs.
3,10,000/heed 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 Incometax
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,
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
Assam Bengal Cement Co. Ltd. v. Commissioner
of Income-tax, [19551 1 S.C.R. 972, relied on.
S.Kappuswami v. Commissioner of Income-tax,
Madras, I.L.R.  Mad. 977; and Commissioner of Income-tax, Madras v.
Siddareddy Venkatasuhba Reddy,  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.
(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,  S.C.R. 594, Scottish North American Trust v. Former,
5 T.C. 693, Dharamvir Dhir v. Commissioner of Income-tax,  3 S.C.R. 359
and Commissioner of Incometax, Bombay v. Jagannath Kissonlal,  2 S.C.R.
645, referred to.
Metro Theatre Bombay Ltd. v. Commissioner of
Income-tax, 14 I.T.R. 638, distinguished.
CIVIL APPELLATE JURISDICTION : Civil Appeal
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
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 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. 1,04,71013-11, 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 referred 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 CourtWhether 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. 1,57010-7, should have been deducted from his
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 'plantation'
"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-inkind
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
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
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
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, with which we will
In order to determine whether 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)  1
S.C.R. 972 67 a business, or for a substantial replacement of equipment:
vide Lord Sands in Commissioners of Inland
Granite City Steamship Company [(1927) 13
T.C. 1] and City of London Contract Corporation v. Styles [(1887) 2 T.C.
(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,
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
(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 circulating 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 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 prohibitions; 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
"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".
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
(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 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 expenditure (1) C.A. Nos. 384 and 385165 on April 10, 1964.
(2)  S.C.R 594.
71 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 distinguishable 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 character 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)  3 S.C.R.
72 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 said to be laid out or expended wholly
and exclusively for the purpose of the plantation.' In this connection, it is
pertinent to note that what the Act purports to tax is agricultural income and
not agricultural receipts. From the agricultural 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
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.