TMI Blog1963 (6) TMI 35X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Whether, on the facts and circumstances of the case, the income-tax authority was right in holding that the expenditure towards the construction of huts and camps was not a proper revenue deduction under section 7(2)(e) of the Hyderabad Agricultural Income-tax Act? For a proper appreciation of the issues involved in this reference, it is necessary to advert to the material provisions of the Act and the Rules framed thereunder, and also to the relevant facts of the case. The Act came into force on April 1, 1950, and provided for the levy by the erstwhile Hyderabad State, of a tax on agricultural income derived from land situated within that State. Section 2(a) defines what agricultural income is, and under section 2(a)(2)(i) it means any income derived from land by agriculture. Rule 4 of the Hyderabad Agricultural Income-tax Rules, 1950 (which will be referred to as the rules ) clarifies that if the agricultural produce of the land has been sold, the actual sale prices shall be deemed to be the gross agricultural income of such land; if, however, instead of such produce being sold it is utilised only as raw material for any manufacturing business, the market value of such p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which such agricultural income is derived; (g) (i) any expense incurred on the maintenance of any irrigation or protective work constructed exclusively for the benefit of the land from which such agricultural income is derived; (ii) any expense incurred exclusively on the maintenance of any capital asset purchased or constructed before the 1st day of April, 1950, if such maintenance is required for the purpose of deriving such agricultural income from such land; Explanation.--Maintenance includes current repairs and includes also in the case of protective dykes and embankment all such work as may be necessary from year to year for repairing any damage or destruction caused by flood or other natural causes; (iii) interest paid on any amount borrowed and actually spent on any capital expenditure incurred after the commencement of this Act exclusively for the benefit of the land from which such agricultural income is derived or for the purpose of deriving such agricultural income from such land: Provided that the interest allowable under this clause shall not exceed the interest which the assessee is liable to pay in respect of such amount as a borrower under sections ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar from the memorandum of association, are: (1) To carry on the business of manufacturers of and dealers in all kinds of sugar, gur, and sugar and gur preparations, and their by-products. (2) To carry on the business of planters and cultivators of sugar plants. Thus, the company has a manufacturing side and an agricultural side. Here in this case we are concerned with the agricultural operations of the company for the three assessment years 1950-51, 1951-52 and 1952-53. The company owns about 13,500 acres of land, which is used for raising sugarcane, and the sugarcane is utilised as raw produce for manufacturing sugar in the factory owned by the company. About 15,000 labourers are employed for performing the various agricultural operations in growing sugarcane. During the agricultural season, large sums are expended by the company for providing accommodation to the workmen by erecting huts and running camps near the plantations, as it would be very difficult and costly to transport a large labour force to the work-spot day after day throughout the agricultural season. Contemporaneously with the formation of the company, i.e., on April 18, 1937, a managing agency agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d company at Hyderabad used for the purpose of the business of the company shall be paid by the said company. (d) The said commission shall be paid immediately after the annual accounts of the company have been passed by the shareholders. Clause 4 prescribes the duties of the managing agent as under: The said Dhanrajgir shall, unless prevented by ill-health, throughout the said terms devote the whole of his time, attention and abilities to the business of the said company, and shall obey the orders from time to time of the board of the said company and in all respects conform to and comply with the directions and regulations made by such board and shall well and faithfully serve the said company and use his utmost endeavours to promote the interest thereof, provided that the said Dhanrajgir shall be at liberty to appoint an agent on his behalf to perform all or any of the duties entrusted to him for the time being under these presents, such agent to be approved of in writing previous to his appointment by the board of directors of the said company. Such agent shall be paid by the said Dhanrajgir and the said Dhanrajgir shall be solely responsible for his acts and omissio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Huts for camps, schools etc. 2,317 14 9 Medicines amp; medical aid 47,257 8 5 Night watchman and patrolling staff 2,617 8 8 Conveyance of foodgrains, oil stores 3,500 0 0 Drainage amp; sanitation (salaries) 16,888 6 0 Schools (salaries) 3,925 6 6 Road repairs 7,242 15 5 Miscellaneous expenses 1,551 12 11 Club expenses 1,058 13 0 Postal expenses 702 8 0 Gardening 975 11 3 1,16,558 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... managing agency commission, had been wrongly allowed by the Income- tax Officer and that it should be included in the assessable agricultural income of the company on the ground that the services of the managing agent were utilised only for the industrial concern of the company and not on its agricultural side. In that view, the Deputy Commissioner added back the sum of ₹ 1,89,020 representing the probable managing agency commission paid to the managing agent on the net profits earned by the company on agricultural operations, as per the terms of the managing agency agreement. Another ground relied on by the Deputy Commissioner for reaching this conclusion was that the commission paid to the managing agent was an item of expenditure out of the net profits of the company, which was ascertained after deducting all the expenses and, therefore, could not be treated as a revenue expenditure. The company then moved the Commissioner of Agricultural Income- tax under section 26(2) of the Act to refer the questions of law formulated by it as arising out of the order of the Appellate Deputy Commissioner, but the Commissioner declined to do so. Thereupon, the company moved the High C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt which stipulated: The said Dhanrajgir shall, unless prevented by ill-health, throughout the said term devote the whole of his time, attention and abilities to the business of the said company,........and shall well and faithfully serve the said company and use his utmost endeavours to promote the interest thereof. It was argued that the commission paid to the managing agent was for those services rendered by him for the purpose of earning profits. In our opinion, the contentions on behalf of the company are wellfounded. It is not disputed that the commission of 10% on the profits made on agricultural operations was in fact paid to the managing agent. The payment was in return for his supervision and management. The fact that the commission was paid as a percentage out of the net profits, has no relevancy in determining whether it is a permissible cultivation expense falling under section on 7(2)(e) of the Act. The learned Government Pleader, appearing for the department, did not seriously dispute that the commission paid to the managing agent, would be a legitimate deduction under section 7(2)(e) of the Act; but what he sought to make out was that there was no suff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... after payment of all expenses of the company, and after providing for interest on debentures. On these facts, it was held by the Court of Appeal that in computing its profits for the purposes of income-tax, the company was entitled to deduct the sums so paid as being money wholly and exclusively laid out or expended for the purposes of the trade . Greene M.R. pointed out that it was not a contract for payment of a share of the profits simpliciter but it was a payment of remuneration by way of a commission representing a percentage of profits for services to be rendered to the company, which is deductible in truth before the profits divisible are ascertained. There were two funds of so-called profits which came into the picture; the first one was the fund which had to be ascertained for the purpose of calculating the percentage to be paid as remuneration to the companies for their services. In that fund, as such, the person entitled to the profits of the company had no concern. It was used for the purpose, and for the purpose only, of ascertaining what is to be paid as remuneration to the two companies. When that amount had been ascertained, it then became necessary to ascertain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the basis of a percentage of the net profits, was allowable as business expenditure. There the assessee, a company, was formed to carry on and develop the business in Burma of one W. The agreement between W and the assessee provided that W. Co. of Bombay should be the secretaries, treasurers and managers of the assessee company. The remuneration of W. Co., under the original articles of association of the assessee, was a commission of 5 per cent. on the gross proceeds of the business. This article, as subsequently amended, provided that certain deductions should first be made from the gross proceeds of the business and a figure thereby arrived at (which figure was called for the purpose of the article the net profits of the company ) and the remuneration of W. Co. should be half of such net profits , but that this remuneration should be subject to a maximum of 5 per cent. of the gross proceeds of the business. In the account year ended 31st May, 1937, after making the necessary deductions, there remained a profit of ₹ 32,21,762. Since half of this amount exceeded 5 per cent. of the gross proceeds, W. Co. were paid a sum of ₹ 11,43,766 based on 5 per cent. of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iture under this head would, in our opinion, constitute expenses of cultivating the crop from which such agricultural income is derived within the meaning of clause (e) of sub-section (2) of section 7 of the Act. This expression, namely, expenses of cultivating the crop , should not be understood in a narrow and restricted sense as applicable only to the actual expenses incurred for tilling the soil, sowing, weeding, harvesting etc.; but whilst dealing with large scale mechanised agricultural operations of the kind undertaken by the Nizam Sugar Factory, such expenses should properly include all expenses reasonably connected with and involved in the process of raising sugarcane. On the material placed by the company before the departmental authorities, the conclusion is inescapable that this item falls fairly and squarely within the ambit of clause (e) as cultivation expenses. We are, therefore, unable to countenance the contention of the learned Government Pleader that this expenditure is in the nature of a capital expenditure falling under section 7(2)(g)(iv) and as such only depreciation at the prescribed rate is allowable. This distinction between capital expenditure and revenu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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