1999 (4) TMI 2 - SC - Income Tax

Assessee manufactures an animal feed known as AUROFAC wherein rice husk is mainly used as raw material. The deductions claimed by the assessee were in respect of the expenditure incurred by it in disseminating literature, pamphlets, etc., containing information on modern techniques and methods of agriculture designed for increasing the yield of rice amongst the cultivators and farmers who grow rice - held that assessee-company was entitled to weighted deduction under section 35-C.

Summary

Issues:
1. Interpretation of section 35C of the Income-tax Act, 1961 for deduction of expenses.
2. Definition of "agricultural product" in the context of manufacturing operations.
3. Eligibility for weighted deduction under section 35C for agricultural development expenses.

Analysis:
1. The judgment dealt with a reference under section 256 of the Income-tax Act, 1961, where the High Court answered questions regarding deductions for assessment years 1974-75 and 1975-76. The Tribunal disallowed deductions claimed by the assessee under section 35C. The High Court considered the purpose of section 35C, designed to encourage agricultural development, and interpreted it liberally to include expenses for disseminating agricultural information. The court held in favor of the assessee, emphasizing the agricultural nature of the operations involved.

2. The key issue revolved around the definition of "agricultural product" in the context of manufacturing operations. The Tribunal had disallowed deductions by arguing that rice husk, used as raw material, was not a "product of agriculture." However, the High Court disagreed, stating that the process of de-husking paddy is an agricultural operation. The court interpreted "agricultural product" broadly, including products that undergo simple operations to enhance their marketability. Both rice and husk were considered agricultural products, leading to a favorable judgment for the assessee.

3. Regarding the eligibility for weighted deduction under section 35C for agricultural development expenses, the High Court emphasized the importance of encouraging agriculture through such deductions. The court's interpretation favored the assessee, highlighting that the expenses incurred in providing services and facilities to agriculturists should be eligible for deductions. The judgment dismissed the Revenue's appeals, affirming the liberal construction of "agricultural product" and the allowance of deductions under section 35C for agricultural development expenses.