Commissioner of Agricultural Income Tax vs Cochin Malabar Estates and Industries Ltd. Cochin Malabar Estates and Industries Ltd. Vs Commissioner of Agricultural Income Tax

K.S. Paripoornan, J.—These two references are made by the Kerala Agricultural Income Tax Appellate Tribunal, Additional Bench, Kozhikode, as per the statement of the case dated February 12, 1987. The assessing authority passed an assessment order against the assessee, Messrs. Cochin Malabar Estates and Industries Limited, for the assessment year 1973-74. The order of assessment for the said year was the subject-matter of two appeals before the Appellate Tribunal, both by the assessee and also by the Revenue. The Tribunal passed a consolidated order in the said two appeals dated August 1, 1986. While considering the appeals, the Appellate Tribunal allowed a sum of Rs. 1,132 as a permissible deduction in computing the agricultural income of the assessee. The said sum represented expenses incurred in connection with sales tax appeals. Aggrieved by the said portion of the common order, the Revenue moved the Tribunal for referring a question of law and the following question (question No. 1) has been referred to this court, at the instance of the Revenue :

"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the expenditure incurred in connection with the sales tax appeals was an allowable deduction in computing the agricultural income of the assessee ?"

The Appellate Tribunal further held that a sum of Rs. 2,020 incurred by the assessee for services in connection with the application for alteration of memorandum of association of the company is a capital expenditure and not an allowable deduction. Aggrieved by the said portion of the common order, the assessee moved the Appellate Tribunal to refer a question of law for the decision of this court and, in that context, question No. 2 has been referred by the Appellate Tribunal, at the instance of the assessee. Question No. 2 is as follows :

"2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the expenses incurred in connection with the alteration of the memorandum of association of the company was not an admissible deduction in computing the agricultural income of the assessee ?"

So, question No. 1 is referred at the instance of the Revenue and question No. 2 is referred at the instance of the assessee.

The Appellate Tribunal, in its common order dated August 1, 1986, has clearly stated that payment of sales tax is allowable u/s 5(n)(ii) of the Act and so any expenses incurred with a view to reduce such tax liability is also an admissible deduction. The expense incurred in connection with the sales tax appeals was found to be an admissible deduction. Counsel for the assessee brought to our notice a few Bench decisions of this court. They are : Commissioner of Agricultural Income Tax Vs. Kartikulam and Alathur Estates, ; Commissioner of Agricultural Income Tax Vs. Malabar Industries Company Limited, ; Commissioner of Agricultural Income Tax Vs. Emerald Valley Estates Limited, ; Commissioner of Agricultural Income Tax Vs. Kartikolam and Alathur Estates Limited and Plantation Corporation of Kerala, and Commissioner of Agricultural Income Tax Vs. S. Bhaskaran, . In the above cases, it has been broadly held that the expenses incurred in filing appeals, revisions, reference applications, etc., (claimed as legal charges) are allowable deduction''s in computing the agricultural income u/s 5(j) of the Kerala Agricultural Income Tax Act. It Was concluded in the said decisions that the legal expenses incurred and classified as professional fee for taxation work is an admissible expenditure in computing the agricultural income u/s 5(j) of the Act The question as to whether the expenses incurred in connection with the sales tax appeals is a permissible deduction was not specifically mooted in the said decisions. Section 5(n)(ii) of the Agricultural Income Tax Act is as follows:

"5. Computation of agricultural income.--The agricultural income of a person shall be computed after making the following deductions, namely :--....

(n) in the case of agricultural income referred to in Sub-clause (2) of Clause (a) of Section 2--(agricultural income from agriculture)--...

(ii) any tax, cess or rate paid on the cultivation or sale of the crop from which such agricultural income is derived ;"

It is common ground that for the sale of agricultural produce of the assessee, sales tax is levied and paid. If that be so, any expense incurred in connection with such sales tax payment by way of appeals or revisions, etc., and professional fee paid in connection therewith is a permissible deduction u/s 5(n)(ii) of the Act. The Appellate Tribunal was justified in holding so.

We, therefore, answer question No. 1 in the affirmative--against the Revenue and in favour of the assessee.

The only other question is whether a sum of Rs. 2,020 incurred in connection with the alteration of the memorandum of association of the assessee is an allowable deduction. The Appellate Tribunal negatived the plea for allowance holding that this is a capital expenditure. We are of the view that the Appellate Tribunal has not analysed the matter and made an in-depth study into what is revenue expenditure as distinguished from capital expenditure. The latest landmark decisions of the Supreme Court in Empire Jute Co. Ltd. Vs. Commissioner of Income Tax, ; Commissioner of Income Tax, Bombay City-I, Bombay Vs. Associated Cement Companies Ltd., Bombay, and Alembic Chemical Works Co. Ltd. v. CIT : [1989]177ITR377(SC) have laid down the law on the point. This Bench had occasion to consider the matter in a recent decision in Plantation Corporation of Kerala Ltd. Vs. Commissioner of Agricultural Income Tax, . At page 392 of the report (paragraph 6), we held thus (at page 368 of 177 ITR) :

"A broad understanding of the ratio of the three Supreme Court decisions would go to show that even in a case where expenditure is incurred for obtaining an advantage of enduring benefit, emphasis should be placed on the nature of the advantage in a commercial sense and if the advantage consists merely in facilitating the assessee''s trading operations or enabling the management and conduct of the assessee''s business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure should be held to be on revenue account, even though the advantage may endure for an indefinite future. The test of ''enduring benefit'' has been held to be not a decisive or conclusive test, it cannot be applied blindly and mechanically. The question must be viewed in the larger context of business necessity or expediency. If the expenditure is so related to the carrying on or the conduct of the business, it may be regarded as an integral part of the profit-earning process and not for acquisition of an asset or of a right of a permanent character. It has also been held that there is a dichotomy between profit-earning process and profit-earning machinery or apparatus. These aspects have been highlighted in the Bench decision of this court in Federal Bank Ltd. Vs. Commissioner of Income Tax, "

Applying the above test, we are inclined to hold that the expense incurred for services in connection with the application for alteration of the memorandum of association of the company is really an expenditure incurred for carrying on the business of the company and is an integral part of the profit-earning process, and not for acquisition of an asset or a right of a permanent character. In this view, the sum of Rs. 2,020 incurred for alteration of the memorandum of association of the company is a revenue expenditure. We hold so. The Appellate Tribunal was in error in taking the view that the expenses incurred in that behalf is a capital expenditure.

We answer question No. 2 referred to this court in the negative--against the Revenue and in favour of the assessee. Both the questions are answered in favour of the assessee and against the Revenue.

The references are disposed of as above.

A copy of this judgment, under the seal of this court and the signature of the Registrar, shall be forwarded to the Kerala Agricultural Income Tax Appellate Tribunal, Additional Bench, Kozhikode.