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TMI Blog1978 (11) TMI 29X X X X Extracts X X X X X X X X Extracts X X X X ..... , 1962, on the basis of tonnage of sugarcane crushed during the said two half yearly periods, was not correct ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the correct method is to make apportionment of income on time basis on the basis of assumption that the agricultural activities have to commence right from the stage when the land is ploughed or made fit for the purpose of planting the sugarcane plant into it ? 3. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in coming to the conclusion that the expenditure is laid out wholly and exclusively for the purpose of deriving agricultural income in the absence of any finding by the lower authorities on the merits of each item of expenditure in the light of the Supreme Court decision in Purtabpore Company Ltd. v. State of Uttar Pradesh, AIR 1970 SC 1578 ? 4. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that whenever there was a common charge, the determination made by the Income-tax Officer must be accepted by the Agricultural Income-tax Officer for allowing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revious year in respect of the income on which tax is levied, it was, inter alia, provided in the Act that the previous year would be the financial year immediately preceding the year of assessment, or if the accounts of the assessee had been made up to a date within the said financial year, then at the option of the assessee the twelve months ending on such date. The assessees' accounting year was from October 1 to September 30, and it was for this accounting period that the assessees were being assessed to income-tax under the Indian I.T. Act, 1922, and the I.T. Act, 1961. In respect of their assessments under the Act the assessees could have exercised their option to select their accounting year as their previous year. The assessees, however, did not exercise such option and preferred to be taxed in respect of the previous year which was the financial year. The assessees filed their returns before the Agrl. ITO in respect of the previous year April 1, 1961, to March 31, 1962, for the assessment year April 1, 1962, to March 31, 1963. The returns so filed by them comprised halves of two accounting periods, namely, the second half of the accounting year October 1, 1960, to Septem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Agrl. ITO. There is thus no controversy between the parties with respect to the correctness of any of the amounts shown in the assessees' books or in their profit and loss accounts. According to the Agrl. ITO, however, the method canvassed for by the assessees for computing their agricultural income was an erroneous one. He held that as the crushing season of sugarcane commenced generally from October and ended by May, in respect of the period April 1, 1961, to September 30, 1961, there were only two months in which actual crushing took place, namely, in the months of April and May, 1961, and in respect of the period October 1, 1961, to March 31, 1962, there were five months during which crushing had taken place. He accordingly took into account the total quantity of sugarcane crushed during these months. Further, in order to arrive at the agricultural income taxable under the Act the Agrl. ITO took into account the profit and loss accounts and the statements filed by the assessees for the two accounting years, disallowed from them certain items claimed as allowances and deductions by the assessees and worked out for each accounting year the income in respect thereof on this ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l under s. 32 of the Act The Tribunal upheld all the contentions of the assessees. According to the Tribunal, agricultural operations were an integrated process and agricultural income accrued from day to day and not when sugarcane was crushed. So far as the deductions which were claimed by the assessees were concerned, the Tribunal held that, in view of the decision of the Supreme Court in Purtabpore Company Ltd. v. State of Uttar Pradesh, AIR 1970 SC 1578, the assessees were entitled to these deductions. It further upheld the assessees' contentions as to the manner in which depreciation was to be calculated. It is from this order of the Tribunal that the present reference has been made at the instance of the Commr. of Agrl. I. T. The five questions which have been referred to us in this reference resolve themselves into three heads ; questions Nos. 1 and 2 relate to the method to be adopted for arriving at the taxable agricultural income of the assessees, questions Nos. 3 and 4 relate to the deductions to be allowed to them under the Act, and question No. 5 relates to the mode of calculation of the depreciation to be allowed to the assessees. In order to appreciate the cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sset, as the case may be." Section 3 is yet another definition section and defines " previous year ". The relevant provisions of s. 3 are as follows : " 3. Definition of ' previous year ' : (1) For the purposes of this Act ' previous year ' means-- (a) the financial year immediately preceding the year of assessment ; or (b) if the accounts of the assessee have been made up to a date within the said financial year, then, at the option of the assessee the twelve months ending on such date ; or (c) in the case of any person or business or class or persons or business not falling within clause (a) or clause (b), such period as may be determined by the Commissioner in this behalf ; or..." Thus, the assessees had an option under cl. (b) of sub-s. (1) of s. 3 to take their accounting year as their previous year. They, however, did not exercise that option and preferred to be taxed on the basis of the financial year immediately preceding the first year of assessment. It would appear that under sub-s. (4) of s. 3, hereafter they cannot change their previous year, except with the consent of the Agrl. ITO and upon such conditions as he might deem fit to impose. Chapter II of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payable by an assessee under the head 'Agricultural income from agriculture' in respect of all agricultural income derived from land referred to in sub-clause (b) of clause (1) of section 2 included in his total agricultural income and received by him in the previous year, subject to the following allowances, namely : (1) the expenditure incurred by the assessee in the previous year---- (a) in cultivating such land ; (b) in performing any process contemplated in item (ii) of sub-clause (b) of clause (1) of section 2 for rendering the produce of such land fit to be taken to market ; (c) in transporting such produce ; (d) in maintaining agricultural implements and machinery in good repair and in providing for the upkeep of cattle for the purpose of such cultivation, process or transport ;... (6) depreciation at such rate as may be prescribed, in respect of any irrigation or protective work or other capital asset (including machinery or plant) constructed or acquired 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; (7) in respect of any machinery or plant used exclusively fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t altering or amending such order of assessment under the provisions of that Act shall be conclusive evidence of the contents of such order. " While we are setting out the relevant provisions of the Act it will be convenient at the same time to refer to the relevant provisions of the Maharashtra Agrl. I.T. Rules, 1962, framed by the Government of Maharashtra in exercise of the powers conferred upon it by sub-ss. (1) and (2) of s. 72 of the Act. Sub-rule (1) of r. 3 prescribes the rates at which depreciation in respect of any irrigation or protective work or other capital assets is to be allowed to an assessee under cl. (6) of s. 8 of the Act. Sub- rule (3) of r. 3 deals with the rate of depreciation to be allowed for the purpose of ascertaining the written down value of plant or machinery for the purposes of cl. (7) of s. 8. Rule 4 prescribes the manner in which the market value of agricultural produce is to be determined except in the case referred to in cl. (a) of the proviso to sub-s. (1) of s. 9. Rule 5 prescribes how an allowance admissible under s. 7 or s. 8 or s. 9 in respect of mixed income is to be computed, and is as follows: " Rule 5. Computation of allowance on mixe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e about the tonnage crushed by the assessees each month, and it will be convenient at this stage to set out the quantity of sugarcane crushed during these two accounting years, divide it by half and then add the results obtained and see what the result would be according to the method contended for by the assessees and compare it with the quantity of sugarcane actually crushed during the previous year; --------------------------------------------------------------------------------------------------------------------------------------------------- Sl. No Accounting Total Break-up of tonnage crushed in year tonnage of each half of the two accounting sugarcane years crushed --------------------------------------------------------------------------------------------------------------------------------------------------- 1. 1-10-1960 97,926 1-10-1960 77,629 to to 30-9-1961 31-3-1961 1-4-1961 20,297 to 30-9-1961 ------------------ Total 97,926 ------------------ 2. 1-10-1961 93,112 1-10-1961 to to 91,726 30-9-1962 31-3-1962 1-4-1962 1,386 to 30-9-1962 Total tonnage ---------------- ------------ crushed 1,91,038 Total 93,112 ---------------- -- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es in British India of the oil manufactured at Raichur was attributable to the manufacturing operations at Raichur and that such profits should be excluded from assessment to excess profits tax under the said third proviso. The department's contention, on the other hand, was that the manufacturing operations carried on at Raichur did not constitute a part of the assessees' business within the meaning of the said third proviso and that even if such operations could be regarded as a part of their business, the profits derived from sales in Bombay could not be said to have accrued or arisen in Hyderabad State. The Supreme Court held that the activity which the assessees carried on at Raichur was a part of their business within the meaning of the said third proviso and that the profits of a part of the business, namely, the manufacture of oil in their mills at Raichur, accrued or arose at Raichur and that such profits were not assessable to excess profits tax under the said third proviso. In his judgment in that case Mahajan J. (as he then was), said : " It is true that no profits are realised until the oil is sold but the act of sale merely fixes the time and place of receipt of prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the other hand, if we were to take the actual tonnage crushed during the previous year, its market value on the rates determined by the ITO would come to Rs. 59,89,015.30. It would thus exceed the result obtained by the method contended for by the assessees by a sum of Rs. 8,19,030.40. Further, according to the method adopted by the assessees, half the total expenses or such of them as are allowable under the Act for each accounting year are to be deducted from the market value arrived at in order to compute the taxable agricultural income. The question is whether there is any warrant or basis in the provisions of the Act for adopting the method contended for by the assessees. We are unable to see any such warrant or basis. Under s. 4 of the Act, agricultural income-tax is to be charged in respect of the total agricultural income of the previous year. " Total agricultural income ", according to the definition given in cl. (15) of s. 2, is " the total amount of agricultural income referred to in section 5 and computed in the manner laid down in the Act ". Further, under s. 4, the agricultural income-tax is to be charged in accordance with and subject to the provisions of the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business ", it is the market value of the agricultural produce so utilized which is liable to agricultural income-tax. Section 9 further provides that the market value so determined would be subject to any allowances which may be permissible under the provisions of the Act. We are unable to see in what manner the decision of the Supreme Court relied upon by Mr. Trivedi on behalf of the assessees supports their case. The question in that case was the construction to be placed upon the third proviso to s. 5 of the E.P.T. Act, 1940, and the question was where the profits of a business accrued or arose. Concept of income or profits accruing or arising which found place in that Act and finds place in the I.T. Act is not germane for the purpose of the Act. The Act does not speak of agricultural income arising or accruing but speaks of its derivation and receipt. Mr. Trivedi, learned counsel for the assessees, however, submitted that s. 9 dealt only with the determination or quantification of agricultural income when the total income of an assessee was partly agricultural and partly non-agricultural and it did not lay down when income arose in point of time. He further submitted that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equent to the previous year. This again they are not entitled to do under the provisions of the Act. The only allowance to which an assessee is entitled under the Act are the allowances set out in s.8. We have set out the relevant provisions above, but when we look at the whole section we find that, apart from the case of depreciation which is covered by sub-ss. (6) and (7) of that section and apart from sub-s. (9), every other sub-section speaks of the expenditure incurred in the previous year. The very wording of sub-s. (9) would show that it too refers to the expenditure incurred in the previous year. That sub-section uses the expression " any other expenditure ". Further, it refers to expenditure which is not in the nature of capital or personal expenditure, that is, it is revenue expenditure of a nature different from that specified in the earlier sub-sections which deal with revenue expenditure. It is obvious that revenue expenditure for a period prior to the previous year cannot be brought into the previous year in order to reduce the taxable income of the previous year. According to the method adopted by the assessees if in their first accounting period the largest part of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the statement of the case as follows: 1. Repairs to buildings. (actual). 2. Gratuity paid (actual). 3. Provident Fund Account (actual). 4. Insurance-workers. 5. Sanitation and dispensary. 6. Travelling and motor car expenses. 7. Postage, telegram, stationery and printing. 8. Miscellaneous expenses. 9. Directors' fees. 10. Audit fees. 11. School expenses. 12. Dairy and vegetable expenses. 13. Managing agent's commission. 14. Manager's salary. Admittedly, items Nos. 1, 2, 3 and 12 pertain purely to the plantation department of the assessees, while the expenses in respect of the other items were expenses incurred by them for carrying out the agricultural and sugar manufacturing activities of the assessees. The Tribunal allowed all these expenses on the basis of the decision of the Supreme Court in Purtabpore Company Ltd. v. State of Uttar Pradesh, AIR 1970 SC 1578. In view of this decision, Mr. Jetly, learned counsel for the applicant, conceded that items 1 to 7 were covered by the Supreme Court decision and the assessees would be entitled to claim deduction in respect of these expenses. With respect to the rest of the items, he contended that they we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowed. It is not necessary to refer to all other items the details of which have been given before. What has to be essentially determined under s. 6(2)(b)(iv) is whether the expenses were incurred on or for the purpose of the entire work and operations involved in raising the crops, making the same fit for marketing and the transportation of the produce to the market. The words ' raising the crop' cannot be confined simply to the ploughing of the land, sowing the seed and cutting the harvest. It must be emphasised that section 6(2)(b)(iv) is not to be construed in a narrow and pedantic sense and must be given its full effect in the background of modern large scale farming and the organization required for it. We are generally in agreement with the views expressed in the previous unreported decision of the Allahabad High Court referred to before." The unreported decision of the Allahabad High Court is the one given by the court in Agrl. I.T.Reference No. 366 of 1953 decided on May 11, 1956. In that case the High Court allowed as deductions a number of items which were of an identical nature with those which fell to be considered by the Supreme Court. It also allowed the assessees ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Agrl. ITO as also by the Assistant Commissioner and have been so held by the Tribunal. The Agrl. ITO, however, did not allow any of the 14 items of expenditure listed above on the ground that they did not bear any direct or proximate connection with the agricultural activities of the assessees. The Assistant Commissioner did not allow them on the ground that none of them appeared to be wholly and exclusively incurred by the assessees for the purpose of earning agricultural income. It may be said in fairness to the assessing authority and the Assistant Commissioner that their orders were passed before the Supreme Court delivered its judgment in Purtabpore Company's case, AIR 1970 SC 1578. The application to remand the case was also made before the Tribunal and it was rejected. To our mind, the Tribunal rightly refused to remand the case for the purpose of the Agrl. ITO determining Whether any of the items constituted a common charge or not. Under cl. (b) of the proviso to s. 9(1) of the Act where there is a common charge, that is, the charge for expenditure Which has been incurred partly for agricultural business and partly for business chargeable to income-tax under the head " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess and has allowed a portion of it as a deduction permissible under the I.T. Act, it will not be open to an Agrl. ITO to re-determine the question whether it is a common charge or. not or to re-determine what proportion of such common charge should be allowed to the assessee, because it would otherwise in substance permit him to reopen an assessment made by the ITO. He must accept what the ITO has found and allow the remaining portion as a deduction under the Act subject to this qualification that such deduction is an allowance permissible under s. 8. As we have already mentioned above, all the 14 items, including items 8 to 14, in respect of which alone a controversy now survives, would be deductions permissible under s. 8 on the authority of the Supreme Court' s decision in Purtabpore Company's case, AIR 1970 SC 1578. In the case, however, of managing agent's commission an additional argument was advanced by Mr. Jetly, learned counsel for the department, that a deduction for such commission could not be allowed under the Agrl. I.T. Act, but ought to have been claimed and fully allowed by the ITO in the income-tax assessment of the assessees. In support of this submission Mr. Je ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment under the Act. The figures furnished by the assessees and the quantum of deductions worked out by them and accepted by the Agrl. ITO as also the Assistant Commissioner were in respect of their accounting years. They merely give the total at the end of each accounting year in respect of each head of expenditure. The deductions, however, to which the assessees would be entitled would be only that part of the figures given by them as appertaining to the previous year and not to any period of time either prior or subsequent thereto. Thus, the actual figures would have to be computed again but without any determination of the question whether these items or any of them is a common charge or whether these items or any of them is a deduction permissible under s. 8 read with s. 9 of the Act. This then brings us to the question of depreciation. Under sub-s. (6) of s. 8 an assessee is entitled to an allowance by way of " depreciation at such rate as may be prescribed, in respect of any irrigation or protective work or other capital asset (including machinery or plant) constructed or acquired for the benefit of the land from which such agricultural income is derived or for the purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntroversy turns upon the true interpretation to be placed upon the phrase " allowable to him under this Act " in sub-cl. (b) of cl. (16) of s. 2. In Mr. Jetly's submission these words must be read as if they meant " allowable to him under the Act as if the Act had been in force ". According to him, this was the clear intention of the legislature, as otherwise the result would be unjust and inequitable to the department and would lead to loss of revenue. Mr. Jetly further referred us to the definition of " written down value " given in cl. (6) of s. 43 of the I.T. Act, 1961. Mr. Jetly also referred us to sub-s. (7) of s. 8 of the Act under which when any machinery or plant used exclusively for agricultural purposes which has been sold or discarded, the amount by which the written down value of the machinery or plant exceeds the amount for which the machinery or plant is actually sold or its scrap value is allowed to be deducted, provided that such amount is actually written off in the books of the assessee. According to Mr. Jetly, unless and until a notional written down value as contended for by the department were taken, considerable benefit and advantage would accrue to the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowable to him under this Act as if the Act had been in force " or some other words to that effect. It is unnecessary to refer to a number of instances. Suffice it to refer to only one such instance. Sub-clause (5) of cl. 13 of the Saurashtra I.T. Ordinance, 1949 (Ordinance No. IX of 1949), defines " written down value " as meaning " (a) in the case of assets acquired in the previous year, the actual cost to the assessee ; (b) in the case of assets acquired before the previous year the actual cost to the assessee less all depreciation actually allowed to him under this Ordinance or allowed under any Act repealed hereby or which would have been allowed to him if the Indian Income-tax Act, 1922, was in force in the past ". (The emphasis has been supplied by us). The words which we have emphasised make the point clear. We fail to see how the definition of " written down value " contained in cl. (6) of s. 43 of the I.T. Act, 1961, in any way supports Mr. Jetly's case. In that clause " written down value " has been defined as " (a) in the case of assets acquired in the previous year, the actual cost to the assessee ; (b) in the case of assets acquired before the previons year, the actua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ural income for the first time, had it intended that the written down value in the case of an asset acquired prior to the previous year, being a period before the Act came into operation, should be the cost thereof reduced by adjusting against it for each year that the Act was not in force, depreciation at the rate prescribed by r. 3, the legislature would have used words appropriate to bring about this effect, as had been done in the Saurashtra I.T. Ordinance, 1949. We would part with this argument of Mr. Jetly by finally rejecting it in these words of Wright J. in In re Athlumney : Ex parte Wilson [1898] 2 QB 547, 551-2 (QB) : " Perhaps no rule of construction is more firmly established than this- that a retrospective operation is not to be given to a statute so as to impair an existing right or obligation, otherwise than as regards matter of procedure, unless that effect cannot be avoided without doing violence to the language of the enactment. If the enactment is expressed in language which is fairly capable of either interpretation, it ought to be construed as prospective only." (The emphasis has been supplied by us). This would be more so in the case of a taxing statute. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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