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Issues: Whether the Appellate Tribunal was right in deleting the disallowance of farm expenditure incurred by the assessee for the assessment year 1976-77.
Analysis: The assessee, a manufacturer of tractors and farm equipment, maintained a demonstration farm on a leased 200-acre land for training salesmen, demonstrators, farmers, mechanics, service engineers, operators, government officials, university students, and farmers. The farm was directly connected with the business of manufacturing and selling tractors and farm equipment. The Income-tax Officer initially disallowed the expenditure on the farm, considering it as expenditure on agricultural land. However, both the Commissioner and the Tribunal held that the expenditure on the farm had a direct nexus with the business activities of the assessee and qualified for deduction under section 37 of the Act. They concluded that the farm was maintained solely to aid and further the business of selling tractors and farm equipment. The Revenue argued that since agricultural income is not taxable under the Act, the expenditure on agriculture should not be allowed as a deduction. However, the court rejected this argument by referring to relevant case laws. Citing the Supreme Court's decisions in the cases of CIT v. Indian Bank Ltd. and CIT v. Maharashtra Sugar Mills Ltd., the court emphasized that even when income is exempt from tax, the expenditure incurred for earning that income is a permissible deduction. The court highlighted that if the expenditure is laid out wholly and exclusively for the purpose of the assessee's business, it must be allowed as a deduction. In the case of Maharashtra Sugar Mills Ltd., the apex court explicitly stated that expenditure incurred on agricultural land can be deductible if it is for the purpose of the assessee's business. Consequently, the court ruled in favor of the assessee, holding that the expenditure incurred on the farm, though related to agricultural land, was for the purpose of the assessee's business and thus entitled to deduction under section 37 of the Act. The question was answered in favor of the assessee, and the Revenue was directed to bear the costs of Rs. 750.
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