2006 (5) TMI 64 - HC - Income Tax

Assam Agricultural Income Tax Act 1939 - (I) Whether in view of the provisions of section 8(2)(f)(vii) of the Assam Agricultural Income-tax Act 1939 as amended by the Assam Act XXIII of 1989 with effect from December 28 1989 unpaid cess under the Assam Taxation (on Specified Lands) Act 1990 is to be allowed as a deduction from the net agricultural income under the Assam Act? - (II) If not whether in view of the decision of the Supreme Court in CIT v. Gemini Cashew Sales Corporation unpaid cess under the Land Act has still to be allowed as a deduction from the net agricultural income under the Assam Act in a situation where the assessee has maintained its/his accounts in the mercantile system?

Summary

Issues Involved:
1. Whether unpaid cess under the Assam Taxation (on Specified Lands) Act, 1990, is to be allowed as a deduction from the net agricultural income under the Assam Agricultural Income-tax Act, 1939.
2. Whether unpaid cess has to be allowed as a deduction from the net agricultural income under the Assam Act if the assessee maintains accounts in the mercantile system, in view of the Supreme Court decision in CIT v. Gemini Cashew Sales Corporation.

Issue-wise Detailed Analysis:

Issue I: Deduction of Unpaid Cess
The primary issue is whether unpaid cess under the Assam Taxation (on Specified Lands) Act, 1990 ("Land Act") can be deducted from the net agricultural income under the Assam Agricultural Income-tax Act, 1939 ("Assam Act"). The court examined section 8(2)(f)(vii) of the Assam Act, which was amended by the Assam Act XXIII of 1989. This provision allows deductions for expenditures laid out or expended wholly and exclusively for earning agricultural income, provided such expenditure would have been admissible for deduction under the Income-tax Act, 1961 ("Central Act").

The court noted that the amendment to section 8(2)(f)(vii) introduced a proviso that restricts deductions to those expenditures that would be admissible under the Central Act. Specifically, section 43B of the Central Act mandates that certain deductions, including taxes, duties, cess, or fees, are only allowable on actual payment. Since unpaid cess is not deductible under section 43B of the Central Act, it similarly cannot be deducted under the Assam Act.

Issue II: Mercantile System of Accounting
The second issue pertains to whether the unpaid cess should still be allowed as a deduction if the assessee maintains accounts in the mercantile system, referencing the Supreme Court's decision in CIT v. Gemini Cashew Sales Corporation. The court clarified that the ruling in Gemini Cashew Sales Corporation, which allowed deductions based on accrued liabilities in the mercantile system, does not apply here due to the specific legislative amendment to section 8(2)(f)(vii) of the Assam Act.

The court emphasized that the amendment to section 8(2)(f)(vii) introduced a mandatory condition for deductions, aligning with section 43B of the Central Act, which requires actual payment for certain deductions. Therefore, even if accounts are maintained on a mercantile basis, unpaid cess cannot be deducted under the Assam Act.

Legal Interpretation and Conclusion
The court engaged in a detailed interpretation of the proviso added to section 8(2)(f)(vii) of the Assam Act. It concluded that the proviso restricts the scope of allowable deductions to those permissible under the Central Act, specifically section 43B, which requires actual payment. The court rejected the argument that the amendment broadened the scope of deductions and instead held that it imposed a clear restriction.

The court also addressed the principle of strict interpretation of taxing statutes, emphasizing that exemptions should be construed strictly against the assessee. The court found no compelling reason to interpret the amended provision in a broader sense.

Final Judgment
The court concluded that unpaid cess under the Land Act is not deductible from the net agricultural income under the Assam Act due to the restriction imposed by the amended section 8(2)(f)(vii). The court held that the previous decision in Phukenbari Tea Co. P. Ltd. v. Commissioner of Taxes, which allowed such deductions, was rendered without considering the amendment and thus could not be correctly stated. Consequently, the court dismissed all six writ petitions, denying the relief sought by the petitioners.