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TMI Blog1996 (8) TMI 87X X X X Extracts X X X X X X X X Extracts X X X X ..... has several tea gardens in the State of Assam and engaged in the business of cultivation, manufacture and sale of tea. For the assessment year 1984-85, while computing the income of the assessee, the assessing authority under the Income-tax Act, 1961 (hereinafter referred to as "the Central Act"), did not allow any deductions on account of Rs. 4 crores contributed by the assessee to two sister concerns, namely, Apeejay Educational Association Ltd. and Apeejay Medical Research and Welfare Association Ltd. and computed the total income as being Rs. 7,25,52,094. The income-tax authority passed the said assessment order under section 251 read with section 143(3) on March 30, 1990, and taxed 40 per cent. of such income in terms of rule 8 of the Income-tax Rules framed under the Income-tax Act, 1961, The balance 60 per cent. of the income was left out for assessing under the Assam Agricultural Income-tax Act, 1939. Before the Agricultural Income-tax Officer, the assessee claimed deduction of Rs. 4 crores contributed by the company to the Apeejay Educational Association Ltd. and Apeejay Medical Research and Welfare Association Ltd. The Assam Agricultural Income-tax Officer, however, di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Income-tax Act, 1961, is assessable income under the Assam Agricultural Income-tax Act, 1939. Rule 8 of the Income-tax Rules, 1962, specifically provides that income derived from the sale of tea grown or manufactured or sold in India shall be computed as if it were income derived from business and 40 per cent. of such income shall be liable to tax under the Income-tax Act, 1961, and balance 60 per cent. of such income is to be regarded as agricultural income liable to be taxed under the Assam Agricultural Income-tax Act, 1939. Rule 5 of the Assam Agricultural Income-tax Rules, 1939, according to Dr. Saraf lays down that in respect of the agricultural income from tea grown and manufactured by the seller in the State of Assam, the portion of net income worked out under the Income-tax Act and left unassessed being agricultural income shall be assessed under the Assam Agricultural Income-tax Act, 1939. It also provides that while assessing such income under the Agricultural Income-tax Act, 1939, deduction should be allowed for the expenditure allowable under the State Act and the Rules made thereunder so far they have not been allowed under the Income-tax Act in computing the net ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head 'Profits and gains of business or profession'. 40A. (9) No deduction shall be allowed in respect of any sum paid by the assessee as an employer towards the setting up or formation of, or as contribution to, any fund, trust, company, association of persons, body of individuals, society registered under the Societies Registration Act, 1860 (21 of 1860), or other institution, for any purpose, except where such sum is so paid, for the purposes and to the extent provided by or under clause (iv) or clause (v) of sub-section (1) of section 36, or as required by or under any other law for the time being in force. Rule 8. Income from the manufacture of tea. --- (1) Income derived from the sale of tea grown and manufactured by the seller in India shall be computed as if it were income derived from business, and forty per cent. of such income shall be deemed to be income liable to tax. (2) In computing such income an allowance shall be made in respect of the cost of planting bushes in replacement of bushes that have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be ascertained by computing the income from the cultivation, manufacture and sale of tea as computed for Indian income-tax from which shall be deducted any allowance by this Act authorised in so far as the same shall not have been allowed in the computation for the Indian Income-tax Act. Rule 5. In respect of agricultural income from tea grown and manufactured by the seller in the Province of Assam, the portion of net income worked out under the Indian Income-tax Act and left unassessed as being agricultural shall be assessed under this Act after allowing such deductions under the Act and the rules made thereunder so far as they have not been allowed under the Indian Income-tax Act in computing the net income from the entire operation : Provided that the computation made by the Indian Income-tax Officer shall ordinarily be accepted by the Assam Agricultural Income-tax Officer who may, for his satisfaction under section 20 of the Assam Agricultural Income-tax Act, obtain further details from the assessee or from the Indian Income-tax Officer, but shall not without the previous sanction of the Deputy Commissioner of Taxes or when there is no Deputy Commissioner of Taxes (the As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibutable wholly and exclusively for the said purpose. Dr. Todi further submits that the contribution made by the petitioner-company to the two sister concerns for the welfare of the workers and staff could at best be treated as donation under section 8(2)(f)(g) of the Agricultural Income-tax Act, 1939, and the maximum limit provided for deduction is Rs. 1,00,000 or ten per cent. of the total agricultural income, whichever is less. Dr. Todi further makes a distinction between the expenditure and allowance. He submits that section 8(2)(f)(vii), second proviso, speaks of deduction of any allowance permissible under the said Act in so far as the same has not been allowed in the computation of the Indian Income-tax Act. In support of his contention, Dr. Todi argues that allowances which have been specifically provided for by sections 7 and 8 of the Act of 1939 are allowable and nothing else. In this connection, Dr. Todi refers to a decision reported in M. C. V. S. Arunachala Nadar v. State of Madras, AIR 1959 SC 300, where the Supreme Court has observed : "allowance means something given as compensation, rebate or deduction." Referring to the provisions of sections 7 and 8, Dr. Todi s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee-company and not to the profits earned by the assessee-company in any of the concerned years was eloquent enough to suggest that the payment could not have been by way of gift or donation to the hospital trust, for even if there was loss incurred by the assessee-company in a particular year out of three years for which arrangement had been made, the company was required to make the payment to the hospital trust for the medical facility which the hospital authorities had rendered to its clerical staff in those years. He further contended that normally speaking the assessee-company would have been required to incur expenditure for providing medical facilities to its own staff but instead of the assessee-company incurring that expenditure it made this arrangement with the Bombay Hospital Trust and, therefore, the Tribunal was in error in coming to the conclusion that the payments made to the hospital trust were not wholly and exclusively laid out for the purpose of business of the assessee-company. There is considerable force in this contention of Mr. Kolah and we are also in agreement with him that the finding of the Tribunal is really based on no evidence at all. In the fir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... where while constructing a residential colony for sale, the petitioner also constructed a school and claimed deduction on account of the school on the ground that is wholly and exclusively a business expenditure as it is a part of the construction of the residential colony being an incentive to the purchasers of plots and flats in the said colony. In another decision reported in Purtabpore Co. Ltd. v. State of U. P., AIR 1970 SC 1578, while interpreting the provisions of section 6(2)(b)(iv) of the Uttar Pradesh Agricultural Income-tax Act, 1948, the Supreme Court was pleased to hold that expenses for raising crops include expenses incurred for management, supervision, organisation, etc. Such expenditure is allowable. The Supreme Court said as follows : "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 pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... money must be 'laid out or expended wholly and exclusively for the purpose of business'. The word 'wholly' refers to the quantum of expenditure and the word 'exclusively' refers to the motive, object or purpose of the expenditure.... Again, the words 'for the purpose of business' used in section 37(1) should not be limited to the meaning of 'earning profit alone'. Business expediency or commercial expediency may require providing facilities like schools, hospitals, etc., for the employees or their children or for the children of the ex-employees. The employees of today may become the ex-employees tomorrow. Any expenditure laid out or expended for their benefit, if it satisfies the other requirements, must be allowed as deduction under section 37(1) of the Act. It may also be stated, as observed by the Supreme Court in the aforesaid case, that the fact that somebody other than the assessee is also benefited or incidentally takes advantage of the provision made, should not come in the way of the expenditure being allowed as a deduction under section 37(1) of the Act. But, nevertheless, it must be an 'expenditure' allowable as deduction under the Act. The question that, however, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nableness of the payment with reference to these factors has to be judged not on any subjective standard of the assessing authority but from the point of view of commercial expediency. . . . What is the requirement of commercial expediency must be judged not in the light of the 19th century laissez faire doctrine which regarded man as an economic being concerned only to protect and advance his self-interest but in the context of current socioeconomic thinking which places the general interest of the community above the personal interest of the individual and believes that a business or undertaking is the product of the combined efforts of the employer and the employees and where there is sufficiently large profit, after providing for the salary or remuneration of the employer and the employees and other prior charges such as interest on capital, depreciation, reserves, etc., a part of it should in all fairness go to the employees." Dr. Saraf in continuation of his argument further urges that the language of section 8(2)(f)(vii) of the Assam Agricultural Income-tax Act is verbatim the same and refers to the decision of the Supreme Court in H. S. Shivakantappa v. Commr. of Agrl. I. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the Supreme Court in H. S. Shivakantappa v. Commr. of Agrl. I. T [1993] 204 ITR 349 where the Supreme Court observed : "We see no reason whatsoever why the principle that applies to the interpretation of section 37 of the Income-tax Act, 1961, should not apply to the said section 5(j). The fact that section 5(j) uses the words 'for the purposes of deriving the agricultural income', pressed by learned counsel for the Revenue, do not, in our view, mean anything very different from the words used in section 37 of the Income-tax Act, 1961. Expenditure of this kind falls under section 37 of the Income-tax Act, 1961, and must, therefore, fall within the said section 5(j)." I have considered the submissions of Dr. Saraf, on behalf of the petitioner, and Dr. Todi, on behalf of the respondents. To appreciate the respective submissions of the parties the most important aspect of the matter is the interpretation of the provisions of section 8(2)(f)(vii) of the Assam Agricultural Income-tax Act, 1939. The language used by the Agricultural Income-tax Act, 1939, is any expenditure (not being in the nature of capital expenditure) laid out and expended wholly and exclusively for the purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al income, the direct nexus between the two has to be established. Dr. Saraf, in support of his argument, submits that section 8(2)(f)(vii) of the Act of 1939 and the Rules framed thereunder particularly rule 5 make it abundantly clear that any expenditure laid out or expended wholly and exclusively for the purpose of earning or deriving the agricultural income is to be excluded in the computation of income under the Agricultural Income-tax Act, 1939. According to Dr. Saraf, section 8(2)(f)(vii) has a very wide spectrum and is no longer to be judged in the light of the 19th century laissez faire doctrine. It should be looked into from the modern concept of welfare State where workers and their progeny should also share equally the socio-economic advancement and where large profits are made, such profits should look after the interests of the workers of the company. Dr. Saraf submits that but for the limitations of section 40A(9) of the Act of 1961, the petitioner would have been entitled to claim deduction under section 37 of the Income-tax Act, 1961. The introduction of the said section which bars the authorities to allow deductions as provided under the said section while compu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of four days. If an expenditure is to be made for the welfare scheme of the workers, the said expenditure has to have some connection with the object sought to be achieved. How could an expenditure of such huge amount be termed as laid out or expended wholly and exclusively for the purpose of earning and deriving the agricultural income during the said assessment year since the said amount was paid on March 28, 1984. The Supreme Court in Purtabpore Co. Ltd. v. State of U. P., AIR 1970 SC 1578, at page 1582 observed as follows : "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 under section 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." Further, to allow any expenditure being laid out and wholly and exclusively for earning and deriving the agricultural income, the assessing authority m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of the working class. Such book entry transactions between the assessee and sister concerns can only be a camouflage to avoid paying taxes under the State Act and not any attempt for the welfare of the workers. Even assuming that the petitioner-company was most generous and had the workers' interest at heart when they made the said contribution, it could not possibly have any connection with the welfare scheme of tea garden workers within the tea estates unless actually shown to be so. Opening of flood gates only destroys, damages and uproots the crop and does not help any proper cultivation of product in the field, the same is possible only with a stream or canal, deep tubewell which would release sufficient water as and when required to cultivate the land and produce bumper crops. Floods do not produce bumper crops but they destroy the same. Likewise, reasonable expenditure made on consideration of welfare schemes would bring stability and happiness to the workers and staff and benefit the said scheme and not by inundating with funds not required nor utilised for any specific schemes. Accordingly, in an appropriate case where proper expenditure is made towards welfare of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rding that it is not for the Income-tax Officer to judge the reasonableness of the expenditure made on account of a welfare scheme though appears attractive. The same is, however, without any substance. The question of reasonableness arises only if there is dispute as to the quantum of expenditure. In the facts of this case no such dispute has arisen. The assessee has failed to produce any materials or items of expenditure that connects the same to the welfare of the workers. As such, it is not possible to hold that the aforesaid amount was spent for the object of the clause (2)(f)(vii) of the Act of 1939. There is no rational nexus existing between the expenditure and the welfare of the workers in the tea gardens. Such expenditure, in my view of the matter, could under no circumstances be treated as an expenditure laid out or expended wholly or exclusively for the purpose of earning and deriving the agricultural income. In the absence of these factual basis it is impossible for the assessing authority to allow any deduction of the said Rs. 4 crores or any portion thereof under the said clause (vii) of section 8(2)(f) of the Act. No attempt has been made by the assessee to show the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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