TMI Blog1964 (4) TMI 14X X X X Extracts X X X X X X X X Extracts X X X X ..... , S. M. SIKRI JUDGMENT The judgment of the court was delivered by SIKRI J.--The respondent, hereinafter referred to as the assessee, purchased an estate in 1950, known as Silver Cloud Estate, consisting of tea, coffee and rubber plantations, in Gudalur, Nilgiris, Madras State. Out of the sale price of Rs. 3,10,000, he borrowed Rs. 2,90,000, at interest varying from seven to eight per cent. per annum. For the assessment year 1955-56, the assessee claimed to deduct interest on this sum, amounting to Rs. 22,628-9-8. The Agricultural Income-tax Officer, Gudalur, disallowed Rs. 21,057-15-1, allowing Rs. 1,570-10-7, under section 5(k) of the Madras Plantations Agricultural Income-tax Act (Madras Act V of 1955) (hereinafter referred to as the Act.) The relevant part of the assessment order is reproduced below : " Interest on borrowing Rs. 21,057-15-1. The assessee has claimed Rs. 22,628-9-8 towards interest. It is seen that about Rs. 80,000 has been borrowed from various parties, for the maintenance of the estate. Under section 5(k) the interest has to be limited to six per cent. on an amount equivalent to 25 per cent. of the agricultural income in that year. The gross in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st the judgment and order of the High Court. The relevant statutory provisions are as under. Section 2(a) defines " agricultural income " and section 2(r) defines " plantation " : " 2. (a) 'agricultural income' means-- (1) any rent or revenue derived from a plantation ; (2) any income derived from such plantation in the State by-- (i) agriculture, or (ii) the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render the produce raised or received by him fit to be taken to market, or (iii) the sale by a cultivator or receiver of rent-in-kind of the produce raised or received by him, in respect of which no process has been performed other than a process of the nature described in sub-clause (ii) ; Explanation I.--Agricultural income derived from such plantation by the cultivation of tea means that portion of the income derived from the cultivation, manufacture and sale of tea as is defined to be agricultural income for the purposes of the enactments relating to Indian income-tax ; Explanation II.--Agricultural income derived from such plantation by the cultivation of coff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , which arises under the Act. Is the payment of the said interest in the nature of capital expenditure or not ? Mr. Chetty urges that the assessee had bought the plantation with borrowed money and that was undoubtedly capital expenditure. He says that it follows logically from this that interest paid on the amount spent on the purchase of the plantation must also be capital expenditure. He invited our attention to a number of cases, with which we will shortly deal. In order to determine whether an expenditure is revenue or capital expenditure, certain broad principles have to be borne in mind. This court formulated these principles in Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax in the following words : " (1) Outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for a substantial replacement of equipment : vide Lord Sands in Commissioners of Inland Revenue v. Granite City Sleamship Company and City of London Contract Corporation v. Styles. (2) Expenditure may be treated as properly attributable to capital when it is made not only once and for all, but with a view to bringing into existence an asset ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot be termed as capital expenditure. The cases relied on by Mr. Chetty do not bear on the precise problem. We may, however, notice them in brief. In S. Kuppuswami v. Commissioner of Income-tax the assessee was held to have acquired the goodwill by paying a certain share of profits. This was held to be capital expenditure. In Commissioner of Income-tax v. Siddareddy Venkatasubba Reddy, the assessees had under certain agreements obtained mining rights in different. plots of land for periods varying from five to nine years, and claimed deduction of the amounts paid by them under the said agreements. The High Court held the money expended for the acquisition of mining rights to be capital expenditure. In European Investment Trust Co. Ltd. v. Jackson, the Court of Appeal was concerned with the interpretation of rule 3 of the Rules applicable to Cases I and II of Schedule D of the Income Tax Act, 1918 (8 and 9 Geo. V, c. 40). In the English Act there are a series of prohibitions ; among other things prohibited to be deducted are any capital withdrawn from or any sum employed or intended to be employed as capital in such trade, profession or employment or vocation, and any annual in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny other acts incidental to the carrying on of a business. However wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business. It cannot include sums spent by the assessee as agent of a third party, whether the origin of the agency is voluntary or statutory ; in that event, he pays the amount on behalf of another and for a purpose unconnected with the business. " Before deciding the question, it is necessary to mention three other decisions of this court. In Eastern Investment Co. Ltd. v. Commissioner of Income-tax this court held that interest on debentures issued by an investment company was to be allowed as business expenditure under section 12(2) of the Indian Income-tax Act. It observed that this being an investment company, if it borrowed and utilised the same for its investments on which it earned income, the interest paid by it on the loans will clearly be a permissible deduction under section 12(2) of the Act. Earlier, it had observed ..... X X X X Extracts X X X X X X X X Extracts X X X X
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