Commissioner of Income Tax vs Tractors and Farm Equipment Limited

R. Jayasimha Babu, J.—The question referred at the instance of the Revenue arising out of the assessment of the respondent''s income for

the assessment year 1976-77 is, as to whether, on the facts and in the circumstanced of the case, the Appellate Tribunal was right in deleting the

disallowance of Rs. 71,088 being the farm expenditure Incurred by the assessee.

The assessee is a manufacturer of tractors and farm equipment and has a demonstration farm on an extent of 200 acres which has been taken on

lease by it for that purpose. It is the case of the assessee that this demonstration farm is maintained by it to provide training to salesmen and

demonstrators employed by it and its dealers. The farm is also used as a school where farmers are familiarised with the use of the equipment

manufactured by the assessee. It is the case of the assessee that it conducts courses for the benefit of mechanics, service engineers and operators

employed by the dealers, as also for Government officials, University students and for farmers. The use''''0f the farm for these purposes is directly

connected with the business of the manufacture and sale of tractors and farm equipment.

While the Income Tax Officer rejected the assessee''s claim for deducting the expenditure incurred by it on the farm solely on the ground that it

was expenditure on agricultural land, the Commissioner as also the Tribunal have held that the expenditure incurred on the farm had a direct nexus

with the business carried on by the assessee and, therefore, qualifies as a deduction u/s 37 of the Act. The running of the farm was not a distinct

business of the assessee and the farm was maintained solely in aid of and for furthering the business of sale of the tractors and farm equipment

manufactured by it.

Learned counsel for the Revenue submitted that as agricultural income is not taxable under the Act by implication the expenditure on agriculture

is also not to be allowed as a deduction from the income under the Act. It is not possible for us to uphold that submission. The Supreme Court in

the case of Commissioner of Income Tax, Madras Vs. Indian Bank Ltd., , held that even when the income is exempt from tax, the expenditure

incurred by the assessee for earning that income is a permissible deduction. Of even greater relevance is the decision of the apex court in the case

of Commissioner of Income Tax, Bombay Vs. Maharashtra Sugar Mills Ltd., Bombay, , wherein the court expressly held that (head-note) :

There is no basis for the view that only expenditure incurred in respect of a business activity giving rise to income, profits or gains taxable under

the Act can be allowed as a deduction u/s 10(2)(xv) and not otherwise.

That was also a case where the expenditure claimed as a deduction had been incurred on agricultural land by the assessee which owned that

land as an adjunct to its sugar factory. The cultivation of sugarcane and the manufacture of sugar by the assessee constituted one single and

individual business. The apex court held that the expenditure incurred on the cultivation of sugarcane was an item of deductible expenditure from

out of the income of the composite business of cultivation of sugarcane and manufacture of sugar.

Once it is found that the expenditure incurred is one which was laid out wholly and exclusively for the purpose of the assessee''s business, the

deduction has to be allowed. The expenditure here, though incurred in relation to agricultural land, was for the purpose of the assessee''s business,

and is entitled to deduction u/s 37 of the Act;

We, therefore, answer the question referred to us in favour of the assessee and against the Revenue. The assessee-shall be entitled to costs in a

sum of Rs. 750.