TMI Blog1992 (11) TMI 68X X X X Extracts X X X X X X X X Extracts X X X X ..... 62 and 129 of 1991 relate to the orders passed by the Tribunal in the appeals which came up before the Tribunal subsequent to the earlier remand orders In the three years, the question arises in relation to Explanation 2 to section 5 of the Kerala Agricultural Income-tax Act, 1950 (the " Kerala Act The assessee has claimed in all the three years that the rent paid by the assessee to its landlord in respect of the entire estate is to be allowed as a deduction under section 5(b) of the Kerala Act. But the Tribunal has not allowed deduction in so far as the portion of rent attributable to the extent of land covered by immature plants was concerned. This was on the basis that Explanation 2 introduced in 1961 below section 5 is applicable to section 5(b) also under which deduction is claimed. The other question relates to the deduction towards interest which is claimed as a deduction under section 5(e) or (h) or (i) alternatively. The interest claimed as a deduction is on the loan obtained and utilised by the assessee for the purpose of cultivation, etc., in respect of the entire estate, that is to say, the mature and immature oil palm. The Tribunal has not clearly stated whether the cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cisions of the Supreme Court as well as this court in relation to sections 10(2)(xv) and 12(2) of the Indian Income-tax Act, 1922, and also to other rulings rendered under sections 37(1) and 57(iii) of the Income-tax Act, 1961, to say that section 5(j) is a residuary provision. It is also contended that Explanation 2 is intended to cover only a part of the area covered by section 5(j) and not the entire extent covered by the said clause. Learned counsel further contended that the expression " the land from which agricultural income is derived " appearing in the various clauses of section 5 does not mean that the agricultural income must necessarily be derived in the particular previous year, and that the latter part of the said expression governs the word " land ". It is also pointed out that the words in section 5(j) " for the purpose of deriving agricultural income " do not also mean that, in the previous year, agricultural income must necessarily have been derived as a direct correlation of the expenditure referred to in section 5(j). If there is a loss, it could be deducted from the profit of the year, or it could be carried forward under the other provisions of the Kerala Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be an Explanation for the other clauses of section 5 also ? (3) If Explanation 2 is to be treated as referable to section 5(j) only, whether the said Explanation covers the entire field covered by section 5(j) or only a part of it? Point No. 1. -The point at issue is whether, in the scheme of section 5 of the Kerala Act, section 5(j) is a residuary provision similar to the corresponding residuary provisions in the Income-tax Acts of 1922 and 1961. This aspect has considerable bearing on the points involved inasmuch a s, if section 5(j) is a residuary provision, the corresponding principles applicable to the residuary clauses can, to a large extent, be used for the purposes of section 5(j). We shall briefly refer to a few provisions of the Kerala Act. It may be noticed that section 3 relates to the charge of agricultural income-tax in relation to the income of the previous years of every person. Section 4 defines the total-agricultural income of the previous year as comprising all agricultural income derived from land situated within the State and received by the assessee. Section 5 deals with computation of income and the section also provides for deductions. It will be con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al income is derived ; (i) interest paid on any amount borrowed and actually spent for the purpose of reclaiming, improving or cultivating the property from which agricultural income is derived. " (emphasis supplied). It is after these clauses that section 5(j) comes, and it reads as follows : "5. (j). Any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of deriving the agricultural income." (emphasis supplied). Section 5(k) deals with other expenditure that may be provided in the Rules, and is followed by certain other specific items of expenditure covered by clauses (1), (in) and (n). For deciding whether section 5(j) is a residuary provision, it will be useful to compare section 5(j) with the corresponding residuary provisions in the Madras (Plantations) Agricultural Income-tax Act and the residuary provisions in the Income-tax Acts of 1922 and 1961 : -------------------------------------------------------------------------------------------------------------------------------------------------- A. Section 5(j) of the Kerala Act Section 5(e) of the Madras A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Kerala Act was not a residuary provision relating to deductions, and, therefore, the relevant case law under the corresponding residuary provisions of the Income-tax Acts was not attracted. The aforesaid decision of this court was, however, reversed by the Supreme Court in Travancore Rubber and Tea Co. Ltd. v. Commr. of Agrl. I.T. [1961] 41 ITR 751. No doubt, in that case, the Supreme Court did not specifically say that section 5(j) of the Kerala Act was in the nature of a residuary provision. When, however, the corresponding provision, section 5(e) of the Madras Act, came up for consideration before the Supreme Court in State of Madras v. G. J. Coelho [1964] 53 ITR 186, it was clearly observed that the Madras Act was a " word-for-word " reproduction of section 10(2)(xv) of the Indian Income-tax Act, 1922. In this court, the question again came up before a Division Bench in Commr. of Agrl. I.T, v. Nilambur Rubber Co. Ltd. [1969] 71 ITR 686, and the learned judges clearly stated that section 5(j) of the Kerala Act corresponds to the residuary provision in section 10(2)(xv) of the Indian Income-tax Act, 1922. They further clarified that this was so in spite of the slight differ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d expenditure was not entitled to deduction in that year. Inasmuch as the expenditure on immature plants is not yielding income in the year in which the expenditure was incurred from the said immature plants, they thought that the expenditure is not allowable as a deduction in the year in which it was expended. For the said purpose, the Division Bench relied upon an earlier Division Bench decision of the Travancore-Cochin High Court in Malankara Rubber Produce Co. Ltd. v. Commr. of Agrl. I.T., AIR 1956 Trav.Cochin 17. The decision of the English Court in Vallambrosa Rubber Co. Ltd. v. Farmer (Surveyor of Taxes), [1910] 5 TC 529 (C. Sess.), which was cited before the Division Bench in the above said case, was treated as not relevant. In the result, in all the three assessment years the deduction of the expenditure incurred on immature plants was disallowed. The decision in the above said case in Travancore Rubber and Tea Co. v. Commr. of Agrl. I.T. [1959] 37 ITR 549 (Ker), was taken in appeal before the Supreme Court and was reversed in Travancore Rubber and Tea Co. Ltd. v. Commr. of Agrl. I.T. [1961] 41 ITR 751. The Supreme Court held that, in calculating the assessable agricultu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture passed Amendment Act 9 of 1961, with retrospective effect from April 1, 1951, introducing Explanation 2 and inserting it at the end of section 5 and the said Explanation reads as follows : "Explanation 2. -Nothing contained in this section shall be deemed to entitle a person deriving agricultural income to deduction of any expenditure laid out or expended for the cultivation, upkeep or maintenance of immature plants from which no agricultural income has been derived during the previous year. " (emphasis supplied ). If Explanation 2 is to be treated as applicable to all the clauses of section 5, the position would be that the assessee would not be entitled to deduct the proportionate land revenue under section 5(a) or rental under section 5(b) in relation to the area covered by the immature plants. The assessee will not also be able to deduct the proportionate expenses under sections 5(c) and 5(d) nor the interest on the principal applied for the purpose of the immature plants under sections. 5(e) to 5(i). The Revenue, therefore, contends that Explanation 2 is applicable to all the clauses of section 5, while the assessee contends that it is to be confined to section 5(j) a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ltivation, upkeep and maintenance of immature plants from which no agricultural income has been derived during the previous year We have already held that section 5(j) of the Kerala Act and section 5(e) of the Madras Act deal with expenditure laid out or expended for the purpose of deriving agricultural income and we have pointed out that they are residuary provisions akin to section 10(2)(xv) of the Indian Income tax Act, 1922, and section 37(1) of the Income-tax Act, 1961, etc. In all these sections, the Legislature has used similar words, viz., " any expenditure laid out or expended ". These words are not used in the other clauses of section 5(a) to (i) which list out enumerated categories of deductible expenses as contrasted with the residuary category in section 5(j). In our view, therefore, the primary indication is that, when Explanation 2 also deals with " expenditure laid out or expended ", the draftsman is mainly keeping section 5(j) in mind, which also uses the same words " expenditure laid out or expended". The next question is as to the meaning of the words " expenditure for the purpose of deriving the agricultural income " used in section (j) as contrasted with th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble deduction. In CIT v. Indian Bank Ltd. [1965] 56 ITR 77, the Supreme Court permitted deduction of interest on the monies borrowed for investment in securities, even though the income derived from the investment was not taxable because the investment was in exempted items. There the Supreme Court referred to the English case in Hughes v. Bank of New Zealand [1938] 6 ITR 636 ; [1938] 21 TC 472 (HL) and observed that we need not look behind the expenditure and see whether it has the quality of directly or indirectly producing taxable income. The Supreme Court observed (at page 80) : "The Legislature stops short at directing that it be ascertained what was the purpose of the expenditure. If the answer is that it is for the purpose of the business, Parliament is not concerned to find out whether the expenditure has produced or will produce income. (emphasis supplied). In CIT v. Rajendra Prasad Moody [1978] 115 ITR 519 (SC), Bhagwati J. (as he then was) held, in a case under section 57(iii) of the Income-tax Act, 1961, that the crucial word was the word "purpose". It was sufficient if the expenditure was related to the purpose of making or earning income whether, in fact, the inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diture? The above question in relation to section 5(j) arose in Commr. of Agrl. I.T. v. Malayalam Plantations Ltd. [1978] 115 ITR 624 (Ker), before a Division Bench of this court. The question was whether " police expenses, litigation expenses incurred for conducting encroachment cases, assault and theft cases, industrial disputes, expense for cumblies supplied to workers, and expenditure towards batta, travelling allowance and wages to witnesses " were allowable deductions under section 5(j) ? It was argued that direct expenses, (i.e.), " agricultural expenses " alone were deductible as against " agricultural income ". While holding that the expenses above referred to were not in the nature of direct " agricultural expenses ", the Division Bench held that both direct and indirect expenses were allowable under section 5(j) as the said section was comparable to section 10(2 )(Xv) of the Indian Income-tax Act, 1922. After referring to Commr of Agrl. I.T. v. Nilambur Rubber Co. Ltd. [1969] 71 ITR 686, which was also a case under section 5(j) decided by this court and to Travancore Rubber and Tea Co. Ltd. v. Commr. of Agrl. I.T. [1961] 41 ITR 751 (SC), the Division Bench in Malayalam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... either directly or indirectly laid out or expended "for the purpose " of deriving agricultural income, Explanation 2 does not permit deduction, in so far as immature plants from which no agricultural income has been derived during the previous year are concerned of the expenses relating to cultivation, upkeep and maintenance which are of a direct nature. Therefore, going by the internal aids in section 5(j) and Explanation 2, namely, the actual words used, it is, in our opinion, clear that section 5(j) permits deduction of the expenditure of a direct as well as indirect nature laid out or expended for the purpose of deriving agricultural income, but Explanation 2 does not permit deduction of the direct expenditure laid out or expended towards "cultivation, upkeep and maintenance" of immature plants. Explanation 2 is thus an Explanation only to section 5(j). There is yet another indication from another internal aid, namely, in the Legislature giving retrospective effect to Explanation 2 with effect from April 1, 1951. Obviously, this was to avoid refund of the tax levied and collected on the basis of the judgment of the High Court in Travancore Rubber and Tea Co. Ltd.'s case [1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o go to external aids such as the Statement of Objects and Reasons. However, with a view to complete the discussion and reinforce our aforesaid conclusion, we shall also refer to the external aids, the Statement of Objects and Reasons. It reads as follows : Statement of Objects and Reasons: Under section 5 of the Agricultural Income-tax Act, 1950, the agricultural income of a person is to be computed after making certain deductions specified in that section. One of the deductions specified in the section is 'any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of deriving the agricultural income'. Amounts expended by assessees for the upkeep and maintenance of immature rubber plants, etc., from which no income was derived, were not being deducted in computing the agricultural income, since such amount could not be considered to be spent for the purpose of deriving the agricultural income. But the Supreme Court has recently reversed an earlier decision of the Kerala High Court and held that the amount expended on the superintendence, weeding, etc., of the whole estate sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jects and Reasons stated in the Bill could be used. It is the mischief to be remedied that gave an indication of the intention. As already stated, the mischief sought to be remedied is referred to in the Statement of Objects and Reasons as well as in the proceedings of the Legislature. In the Statement of Objects and Reasons, it is stated, after referring to the reversal of the High Court judgment by the Supreme Court, in connection with section 5(j) : " Since agricultural income-tax has been collected without allowing such deductions, the question of paying large amounts by way Of refunds also arose. " (emphasis supplied). The proceedings of the State Legislature dated March 21, 1961, have also been placed before us. They too show that the purpose of the amendment was to get over the decision of the Supreme Court in relation to section 5(j). Thus, our earlier conclusion arrived at on the basis of internal aids is clearly confirmed by the external aids also. In the result, we hold on point No. 2 that Explanation 2 to section 5 is intended to explain what expenditure is not deductible under section 5(j) and the said Explaination is not intended to explain the deductions in t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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