S NAGAMANI Vs. STATE OF TAMIL NADU

JUDGEMENT

(1.) DESIRABLE it is, to pen down a common order in all these actions. The assessees are either holders of rubber or coffee estates in nagarcoil or Yercaud. No doubt, the assessees are different and distinct persons. So too, the Assessing Officers. The assessment order also is not the same, but different But, none the less, one common thread runs in all those actions and such a common thread is none else than the question relatable to the disallowance of interest on borrowed capital either under clause (e) or (k) of section 5 of the Tamil Nadu Agricultural Income-tax Act, 1955 (Tamil Nadu Act V of 1955-for short "the Act"), Disallowance under either of the clauses, as aforesaid was right through from the Assessing Officer till up to the Tamil Nadu Agricultural Income-tax Appellate Tribunal, Madras 104 (for short "the Tribunal") All the aggrieved assessees resorted to the present actions and now they are before us questioning the legality or otherwise of such disallowance of the claim made by the authorities below The pivotal question centres round the interpretation of clauses (e) and (k) of section 5 of the Act. Clauses (e) and (k) of section 5 relevant for the present purpose, as they stood then, read as under "5. Computation of agricultural income.---The agricultural income of a person shall be computed after making the following deductions, namely--- (e) any expenditure incurred in the previous year (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 the land (k) any interest paid in the previous year and any amount borrowed and actually spent on the land from which the agricultural income is derived Provided that the need for borrowing was genuine having due regard to the assets of the assessee at the timeprovided further that the interest allowed under this clause shall be limited to nine per cent on an amount equivalent to twenty-five per cent. of the agricultural income from the land in that year. " * From what has been extracted above, it is crystal clear that for the application of clause (e) the following are the primordial requisites (i) The expenditure must be incurred in the previous year ; (ii) It should not be in the nature of capital expenditure or personal expenses of the assessee ; (iii) Such expenditure need not be limited to an expenditure of a particular clause and it may be even expenditure relatable to interest paid on borrowed capital ; and (iv) Such expenditure must be laid out or expended wholly and exclusively for the purpose of the land. For the application of clause (k)of the said section, the following are the essential requisites (i) The interest must be paid in the previous year ; (ii) The interest so paid is relatable to the borrowed capital ; (iii) Such a borrowed capital must be actually spent on the land from which agricultural income is derived ; (iv) The interest paid on borrowed capital, even if actually spent on the land, from which no agricultural income is derived, is not liable as a deduction ; (v) But, there is a restriction or limit to the interest so paid and only nine per cent. on an amount equivalent to twenty-five per cent of the agricultural income derived from the land in that year alone is liable as a deduction ; and (vi) Even for such a deduction, the borrowing so made, must be genuine, having due regard to the assets of the assessee at the time. From a comparison of clauses (e) and (k) of section 5 of the Act, the following factors emerge For the applicability of clause (e), any expenditure, inclusive of interest incurred in the previous year, may figure as a deduction in the computation of the agricultural income of a person, provided such an expenditure, not being in the nature of capital expenditure or personal expenses of the assessee are laid out or expended wholly and exclusively for the purpose of the land, and even if from such a land, no income is derivedbut, for the applicability of clause (k), the interest payment in the previous year to the extent of nine per cent. on an amount equivalent to twenty-five per cent. of the agricultural income from the land in that year, from which the income is derived alone is liable as a deduction in the computation of the agricultural income of a person and that too, when the need for the borrowing is genuine, having regard to the assets of the assessee at the time From clause (e) of section 5 of the Act we are able to notice the phraseologies or expressions, namely, "laid out or expended wholly and exclusively for the purpose of the land" and from clause (k)thereof, we are able to discern the expression, "any amount borrowed and actually spent on the land from which the agricultural income is derived" * The question whether the agricultural income referred to in clause (k) means gross agricultural income or taxable agricultural income, which can be found out only after making all the allowances or deductions provided for in the various clauses of the said section was posing some agonising situations to the authorities and solution to such a question was also found or arrived at by this court in certain decisions. The interpretation of the expressions as above actually caused some difficulties in giving relief to assessees, by way of deduction in the computation of the agricultural income and the difficulties or obstacles posed in, giving interpretation to those expressions had been nicely solved with ease and grace, by this court, on occasions more than one, and profitable it is for us, to refer to those decisions In Cauvery Peak Estate v. Government of Madras 1973 (91)ITR 638 (Mad), the question as to whether the agricultural income referred to in clause (k) of section 5 of the Act is referable to "gross agricultural income" or "taxable agricultural income" came up for consideration and what the Division Bench of this court said on such a question gets reflected as below: "section 5 provides for computation of the agricultural income and it says that the agricultural income of a person shall be computed after making the deductions set out in various sub-sections set out thereunder. Subsection (k) provides for deduction towards interest paid on the amount borrowed and actually spent by the assessee on the land. At the stage of finding out the deduction towards interest paid by the assessee, it is not possible to ascertain as to what exactly is the net taxable income, for the taxable income has to be computed only after making the deductions contemplated under the various sub-sections including sub-section (k ). Therefore, when the second proviso limits the deduction to 25 per cent. of the agricultural income from the land, it can only mean the gross agricultural income and not the taxable agricultural income which can be found out only after making all the allowances or deductions provided for in the various sub-sections. " * It appears, the decision, as above, had not taken into account the amendment made to the second proviso to clause (k) of section 5 by the Madras Act XXIX of 1958. The said amending Act limited the measure of deduction of interest to nine per cent. on an amount equivalent to twenty-five per cent. to the agricultural income from the land in that year. Whatever it is, the decision lays down the dictum or ratio that the agricultural income referred to in clause (k) of the said section can only mean the It gross agricultural income "and not the "taxable agricultural income" which can be found out only after making all the allowances and deductions provided for in the various sub-sections In Kil Kotagiri Tea and Coffee Estates Co. Ltd. v. Government Madras 1974 (96) ITR 165 (Mad), the expression "for the purpose of the land" and "for the purpose of deriving the agricultural income from the land", as traceable to clauses (e) and (k) of section 5 of the act came up for interpretation and what the Division Bench of this court said is as below" * Section 5 (e) of the Madras Agricultural Income-tax Act, 1955, is in the nature of a residuary clause and would take in not only those expenditure incurred for the purpose of earning the agricultural income but also very many expenses involved in carrying on the agricultural activity as an occupation. The expression'for the purpose of the land'is much wider inscope than the expression'for the purpose of deriving the agricultural income from the land'. It covers a wide range of expenses taking in not only the expenses incurred actually for deriving agricultural income but also expenses which are not directly incurred for deriving agricultural income but have been expended in connection with the lands which do not have any relationship to the agricultural income derived in the previous year. If the expenses are reasonably connected with the holding of the land and using it for the purpose of agriculture, those expenses will come under the expression'for the purpose of the land'. "in expressing as above, this court took into consideration certain decisions of the Supreme Court, which happened to consider similar questions In Travancore Rubber and Tea Company Ltd. v. Commr. of agrl. I. T. 1961 AIR (SC) 604, 1961 (41) ITR 751, 1961 (1) SCJ 306, 1961 (3) SCR 279, 1961 Kerlt (SC) 31, 1961 Kerlj 402, 1961 (1) MLJ 55, 1961 (1) MLJ (SC) 55, 1961 Kerlt 31, 1961 (1) MLJ 55, 1961 Kerlt SC) 31 (SC), the Supreme Court was considering section 5 (j) of the Travancore-Cochin Agricultural Income-tax Act, 1950 (for short "the Travancore-Cochin Act"), which reads as follows: 5. The agricultural income of a person shall be computed after making the following deductions, namely (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. "the High Court of Kerala held that the expenses incurred for the upkeep and maintenance of immature rubber plants could not be considered as laid out or expended for the purposes of deriving agricultural income. The Supreme Court reversed the decision of the High Court and held that the expenses incurred on the upkeep and maintenance of the whole estate including the immature rubber plants would also come within the purview of the expression" * laid out and expended wholly and exclusively for the purpose of deriving the agricultural income "in Commr. of Agrl. I. T. v. Calvary Mount Estates (Pvt.) Ltd. 1961 AIR (SC) 1099, 1961 (41) ITR 755, 1961 (1) SCJ 308, 1961 (3)SCR 285, 1961 (1) MLJ 58, 1961 (1) Anwr (SC) 58, 1961 (1) MLJ (SC) 58, 1961 (1)MLJ 58, 1961 (1) An WR 58 (SC), the Supreme Court considered the scope of section 5 (e) of the Madras Act In that case also, the expenses that were the subject-matter of dispute were incurred in forking and manuring of the non-bearing and immature rubber plants grown in the estate. The Supreme Court followed their earlier decision in Travancore Rubber and Tea Company Ltd. v. Commr. of Agrl. I. T. 1961 AIR (SC) 604, 1961 (41) ITR 751, 1961 (1) SCJ 306, 1961 (3) SCR 279, 1961 Kerlt (SC) 31, 1961 Kerlj 402, 1961 (1) MLJ 55, 1961 (1)MLJ (SC) 55, 1961 Kerlt 31, 1961 (1) MLJ 55, 1961 Kerlt SC) 31 (SC) and held that those expenses are deductible under section 5 (e) of the Act. While so holding, the Supreme Court noted the difference in phraseology in section 5 (j)of the Travancore-Cochin Act and section 5 (e) of the Madras Act and held that the expression "for the purpose of land" occurring in the Madras Act was much more favourable to the assessee for his contention than the expression "for the purpose of deriving agricultural income" occurring in the travancore Cochin Act. The definition of "land" in section 2 (nnn) in the Madras Act includes "plantation" and that is why section 5 (e)reads as "for the purpose of the land" instead of the original expression for the purpose of plantation. It would be seen, therefore, that the expression "for the purpose of the land" is wider in its content than the expression "for the purpose of deriving agricultural income" In Puthutotam Estates (1943) Ltd. v. State of Tamil Nadu 1984 (148) ITR 341, 1984 (42) CTR 57, 1984 (2) TLR 1540 (Mad), the distinction between clauses (e) and (k) of section 5 of the Act had been brought about and what their Lordships of this court said on that aspect of the matter is as below" * Sections 5 (e) and 5 (k) of the Tamil Nadu Agricultural income-tax Act, 1955, operate in different areas. Section 5 (e) applies to any expenditure laid out or expended wholly and exclusively for the purpose of the land, not being in the nature of capital expenditure or personal expenses of the assessee. Section 5 (k) applies only to interest paid on the amounts borrowed and actually spent on the existing crop on the land, from which income is derived and will not apply to any interest payments on amounts borrowed for maintaining the other areas or plants from which agricultural income is not derived in the assessment year. The distinction made by the statute between lands in general and lands from which agricultural income is derived cannot be overlooked. Consequently, the interest payments made on the amounts borrowed and actually spent on the maintenance of the crop which yielded agricultural income will fall under section 5 (k) while the interest paid on the amounts borrowed for maintaining immature plants not yielding any income will fall under section 5 (e ). There is no question of a restriction in respect of a deduction to be made under section 5 (e) as contemplated under section 5 (k ). "in State of Madras v. G. J. Coelho 1965 AIR (SC)321, 1964 (53) ITR 186, 1964 (2) SCJ 400, 1964 (8) SCR 60, 1965 (52) AIR (SC)321, 1964 (2) ITJ 215 (SC), the question as to whether the entire interest paid by an assessee on monies borrowed for the purpose of purchasing the plantations should be deducted as expenditure laid out or expended wholly and exclusively for the purpose of the plantations under section 5 (e) of the Madras Plantations agricultural Income-tax Act, 1955, came up for consideration before the Supreme court and the apex court, in answering such a question held" * (i) that the interest was not capital expenditure as no new asset was acquired or enduring benefit obtained as a result of the payment of interest ; (ii) that the payment of interest was not a personal expense. Every expense to discharge a personal obligation did not become a personal expense within section 5 (e ).'personal expenses'included only expenses on the person of the assessee or to satisfy his personal needs such as clothes, food, etc. , or for purposes not related to the business for which the deduction was claimed; (iii) that it was impossible to dissociate the character of the respondent as the owner of the plantations and as a person working them. He had bought the plantations for working them as plantations. The payment of interest on the amount borrowed for the purchase of the plantations when the whole transaction of purchase and the working of the plantations was viewed as an integrated whole was so closely related to the plantations that the expenditure could be said to be laid out or expended wholly and exclusively for the purpose of the plantations ; (iv) that, therefore, the interest paid by the respondent was allowable as a deduction under section 5 (e) of the Madras Plantations agricultural Income-tax Act, 1955 In principle, there is no distinction between interest paid on capital borrowed for the acquisition of a plantation and interest paid on capital borrowed for the purpose of an existing plantation. Both are for the purposes of the plantation. "in State of Madras v. Thiru Arooran Sugars Ltd. 1965 (55) ITR 307 (Mad), the distinction between clauses (e) and (k) of section 5 of the Act came up for consideration and what the Division Bench of this court said thus is relevant" * Interest paid by the assessee on the unpaid part of the consideration for the purchase of agricultural land due to the vendor is deductible from the income derived from such land under section 5 (e) of the madras Agricultural Income-tax Act, 1955 ; There is a clear difference between'moneys borrowed for expenses wholly and exclusively for purposes of the land'referred to in section 5 (e) and'moneys borrowed and actually spent on the land'referred to in section 5 (k ). For section 5 (k) to apply the money borrowed should have been actually'spent on the land'and it is not enough that the money was spent for the purpose of the land in connection with the business activities of the assessee which resulted in the earning of the agricultural income and it is for the State to establish that particular items represent moneys actually spent on the land so as to take out any portion of those items from the scope of section 5 (e) Section 5 (e) is the general provision and section 5 (k) is a special provision, and if section 5 (k) applies to certain interest charges the application of section 5 (e) would be excluded even if all the statutory requirements of section 5 (e) are satisfied. "the decision in Thiru Arooran Sugars Ltd.'s case 1965 (55) ITR 307 (Mad), we rather feel, had been very often misinterpreted and misquoted by the assessing authorities. The said authorities expressed as if this decision laid down the ratio that once interest deduction on borrowed capital by the assessee is not admissible as a deduction under clause (k) of section 5 of the Act, the same cannot at all be construed as an item eligible for deduction under clause (e) of the said section, even if the parameters prescribed under the said clause (e) of that section are satisfied. That is the wrong approach adopted by the assessing authorities. The said decision did not say so at all and what the decision lays down is that once the interest on borrowed capital is allowed as a deduction, on satisfaction of the parameters prescribed therein, the same cannot at all figure again by way of deduction under clause (e) of the said section and nothing furtherwe may say, at this juncture, that this decision is not expressing any opinion, contra to the decision in Puthutotam Estate's case 1984 (148) ITR 341, 1984 (42) CTR 57, 1984 (2) TLR 1540 (Mad), wherein it is laid down that clauses (e) and (k) of section 5 of the Act operate in different areas Our attention had been drawn to two unreported decisions of this court in Bonaventure Estate v. State of Tamil Nadu (since reported in 1999 (239) ITR 215 (Appex.)) and M. S. P. Rajes v. State of Tamil Nadu in T. C. No. 378 of 1986 dated September 26, 1995 In Bonaventure Estate v. State of Tamil Nadu (Supra) a sum of Rs. 2, 91, 664 was claimed as a deduction towards interest on borrowed capital under clause (k) of section 5 of the Act. It appears, that the assessee sustained a net loss for the assessment year in question. In such a situation, the question that arose for consideration was whether the deduction claimed under clause (k) of section 5 of the Act is permissible and allowed to be deducted for computing the agricultural income under section 5 of the Act Learned counsel appearing for the Revenue appeared to have submitted that the deduction under clause (k) of section 5 of the Act is not permissible, although the same could be allowed as a permissible deduction under clause (e) of section 5 of the Act. The rationale or reasoning adopted by learned counsel for the Revenue is twofold. One is, as found by the Tribunal, that when there is net loss, there cannot be any deduction under clause (k) of section 5 of the Act. The other reasoning is that a portion of the borrowal was not utilised on the land from which the agricultural income was derived On the basis of the rationale or reasoning of the said learned counsel for the Revenue, a Division Bench of this court expressed in paragraphs 5, 6 and 7" * Anyway, since learned counsel for the Revenue herself submits that the abovesaid entire amount of Rs. 2, 91, 664 would fall under section 5 (e) of the Act and, hence, deductible, the assessee will in no way be aggrieved. No doubt, learned counsel for the assessee sought to initially argue that the term'agricultural income'used in the abovesaid proviso to section 5 (k) of the Act would also include a loss. But, he could not press that point very much. In our view also, that term would mean only a plus figure and not a minus figure. It must be noted that the term used in the said proviso is only 'agricultural income'as defined under section 2 (a) of the Act, Ind from which all the deductions under section 5 of the Act are allowed. The term used in the abovesaid proviso is not'total agricultural income'as defined in section 2 (x)of the Act, which alone is charged to tax under the charging provision viz. , section 3 of the Act. Though total agricultural income may also include a minus figure (loss) the term'agricultural income'would not include a minus figure or loss At any rate, as already stated, since learned counsel for the Revenue herself fairly submits that the abovesaid entire sum of Rs. 2, 91, 664 would be deductible under section 5 (e) of the Act, the assessee must be fully satisfied and there could be no grievance on the part of the assessee. Even before giving the abovesaid deduction of Rs. 2, 91, 664 there is a loss which, it is said, could be carried forward in accordance with the provisions of the Act. Then, the abovesaid figure of Rs. 2, 91, 664 also could be carried forward in accordance with the provisions of the Act Accordingly, the tax case revision is allowed. The order of the authorities below are set aside. No costs. "in M. S. P. Rajes, the order is a short and crisp one and it reads as below" * In the tax case revision filed under section 54 (1) of the tamil Nadu Agricultural Income-tax Act, 1955, relating to the assessment year 1983-84 only a short question is involved. The claim by the assessee is for deduction under section 5 (k) of the Tamil Nadu Agricultural Income-tax Act (hereinafter referred to as'the Act') There is no dispute that the claim made is with reference to the interest spoken to therein, namely, interest paid in the previous year on any amount borrowed and actually spent on the land from which agricultural income is derived. But in the abovereferred to assessment year in question there was only a minus figure under the caption'agricultural income'. In such a situation, we have already held in our judgment dated August 1, 1995 in T. C. (R) No. 83 of 1986 that the term'agricultural income'that is used in the second proviso to section 5 (k) of the Act could not mean a loss or minus figure. In other words, when'agricultural income'is a minus figure, as per our abovesaid earlier judgment the second proviso became inoperative. Therefore, in the present case the main part of section 5 (k) of the Act alone will operate, that is, the deduction has to be given in entirety and without any limit as provided in the abovesaid second proviso. In the present case, the allowance has been given only partly and by all the authorities including the tribunal, which is not correct. We hold that in view of the abovesaid reasoning, the assessee is entitled to full allowance without any monetary limit under section 5 (k) of the Act. Accordingly, we set aside the orders of the authorities below including the Tribunal with reference to the abovesaid deduction claimed by the assessee under section 5 (k) of the Act. The assessing authority has to work out the deduction in accordance with this judgment. The tax case is allowed accordingly. No costswe may also add that while dealing with this question, in our abovereferred judgment dated August 1, 1995, in Tax case No. 83 of 1986 at the end of the paragraph 5 thereof we had stated thus 'though total agricultural income may also include a minus figure (loss) the term "agricultural income" would not include a minus figure or loss' and that evidently, this observation would apply only with reference to the term'agricultural income'used in the abovesaid second proviso to section 5 (k) of the Act. " The decision in Bonaventure Estate's case (supra)proceeded on the concession made by learned counsel for the Revenue. Such being the case, the said decision, as such, cannot at all be relied upon, as a precedent laying down any ratio or dictum in respect of a question raised and considered by giving a rationale or reasoning, in answering such a question From the question in M. S. P. Rajes, we are able to discern that the said decision purports to follow the earlier decision rendered by the same Division Bench in Bonaventure Estate's case (supra) While doing so, the Bench explained its earlier decision as to the meaning of the term "agricultural income" as traceable to the second proviso to clause (k) of section 5 of the Act. Having stated so, the Bench further expressed that the second proviso to clause (k) of section 5 will become inoperative and the main part of clause (k) of section 5 alone would operate, that is to say, the deduction has to be given in its entirely and without any limit, as provided for in the second proviso. While so holding, the Bench gave the assessee, full allowance without any monetary limit prescribed under clause (k) of section 5 of the Act. While doing so, we rather feel, the said Bench did not at all take into consideration, the earlier view expressed by a Division Bench of this court in Cauvery Peak Estate's case 1973 (91) ITR 638 and that apart, the ratio of the said decision of the Division Bench is contrary to the scheme of the act. For saying so, we should not be misunderstood and the said decision can be brushed aside also on the salutary principle of per incuriam. Therefore, the decisions of the said Division Bench of this court in Bonaventure Estate's case (supra) and M. S. P. Rajes are not binding on us, in the face of the decision of Cauvery Peak Estate's case (supra) and in the face of the salutary and sanguine provisions adumbrated under the second proviso to clause (k) of section 5 of the Actbearing in mind the principles as laid down in the decisions, as referred to above, if we analyse the factual matrix of all these actions now before us, we rather feel the authorities below did not at all apply their mind to the applicability of the sanguine provisions adumbrated under clauses (e) and (k) of section 5 of the Act. For the sake of emphasis, we may state that none of the authorities below recorded any finding that the need for the borrowing was genuine, having due regard to the assets of the assessee at that time. There is also no finding recorded by any of them as to the gross income of the assessee relating to the previous year in question. Further, there is no semblance of materials traceable to the orders of the authorities below as to the quantifying of the allowable interest under the second proviso to clause (k) of section 5, in the sense of finding out initially an amount equivalent to 25 per cent. of the gross income and then again arriving at nine per cent thereof that is to say, on an amount equivalent to twenty-five per cent. of the gross income in giving relief to the respective assessees. What all the authorities recorded was the interest claimed, interest allowed or disallowed, either under clause (e) or clause (k) of section 5 of the Act and nothing further. In such state of affairs, it is not at all possible for this court to determine the question as to whether the interest claimed is capable of being allowed or not either under clause (e) or (k) of section 5 of the Act. We having been placed in such a predicament position there is no other go for us, except to remit all those matters back to the Tribunal for consideration afresh of the question relatable to the claim of interest made by the respective assessee under clause (e) or (k) of section 5 of the Act. The tribunal, within six weeks from the date of receipt of the records from this court, shall dispose of all these actions, by analysing the factual matrix of the cases of the individual assessees, as relatable to the claim of interest on borrowed capital either under clause (e) or (k) of section 5 of the Act and give a proper legal fitment, in the manner indicated by us, by referring to a catena of decisions emerging from this court and the apex court as wellin Tax case (Revision) Nos. 519 to 522 of 1985, apart from the claim of disallowance of interest, what is agitated further is the addition of yield of rubber in the assessment years in question. While making the addition, the Agricultural income-tax Officer took into consideration the increase in the yield year by year relatable to the previous assessment years and that being so, he would say, the consequent fall in the yield relatable to the assessment year in question cannot at all be accepted, when especially the rubber trees yield more on growing older and, therefore, an addition so made, on the facts and circumstances of those cases, we rather feel, is quite reasonable not calling for interference All these tax (revision) cases are thus disposed of. No costs. .