Purtabpore Company Ltd. Vs. State of
Uttar Pradesh [1970] INSC 113 (28 April 1970)
28/04/1970 GROVER, A.N.
GROVER, A.N.
SHAH, J.C.
HEGDE, K.S.
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 assesseea 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' contribution
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 assistance 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 Incometax 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,
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 incometax, 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 considered 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 necessary
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.
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