Nazarbad Planation vs State of Karnataka

Jagannatha Shetty, J.-This revision petition arises out of the order dated February 13, 1980 made by the Commissioner of Agricultural Income Tax under S. 35 of the Karnataka Agricultural Income Tax Act, 1957 (called shortly ''the Act'').

The assessee-firm purchased a coffee estate on October 29, 1971. In addition to the consideration paid under the sale deed, the assessee separately paid Rs. 50,000 to the vendor towards what was described as the expenditure incurred by the vendor for cultivation of the estate for the period from April 1, 1971 to August 31, 1971.

For the assessment year 1972-73 the assessee filed an application in Form No. 7 for registration of the firm enclosing a copy of the partnership deed. That application was not signed by all the partners personally. Two of the partners, namely, Mohamed Imam Nissar and Mohamed Maqbool Hussain did not sign, but their authorised agents have signed the application on their behalf. The assessing Officer, however, accepted the application and by an order dated October 28, 1975 granted registration of the firm under S. 29 of the Act for the year ending March 31, 1972.

Before the Assessing Officer, the firm claimed deduction of the total expenditure of Rs. 1,65,765.61 inclusive of Rs. 50,000 said to have been paid to the previous owner of the estate. The assessing Officer allowed the claim in part, but inclusive of that Rs. 50,000 and computed the income which ultimately resulted in the loss. That loss was allocated among the 9 partners in accordance with their respective shares.

The said assessment was revised by the Commissioner in exercise of his suo motu revisional power conferred under S. 35 of the Act primarily on two grounds:

(i) that the deduction of Rs. 50,000 allowed by way of revenue expenditure said to have been paid to previous owner of the estate was illegal; and (ii) that the grant of registration on an application signed not personally by all the partners was invalid.

The Commissioner cancelled the registration of the firm and directed the Assessing Officer to redo the assessment on the basis that the firm was unregistered. He also directed not to deduct Rs. 50,000 said to have been paid by the assessee to the previous owner towards the alleged cost of cultivation.

The validity of the order of the Commissioner has been assailed in this revision.

In view of the earlier decision of this Court in Attithope Estate v. State of Karnataka (C.R.P. No. 1328 of 1980 DD. 19-3-1984) laying down that the personal signatures of all the partners are necessary on the application for registration of the firm, Mr. Prasad could not urge against the finding recorded by the Commissioner that the grant of registration to the assessee-firm was illegal. He, however, urged that in this case that the invalidity of registration per se cannot be said to be prejudicial to the interests of Revenue since the firm had no taxable income but only the loss to be carried forward.

We do not think it is necessary to examine this contention. It is no doubt true that an order which is not prejudicial to the interests of Revenue cannot be revised by the Commissioner under S. 35 of the Act. There may be cases where grant of registration may result in securing more tax to the State if individual partners have got other independent income. The instances of that nature are contemplated under S. 19(5)(b) of the Act. But in this case, the order of the Commissioner does not depend solely on the grant of registration to the assessee firm. The Commissioner has given one more reason. He has found fault with the assessing officer for deducting Rs. 50,000 by way of expenditure said to have been paid to the previous owner of the estate. Mr. Prasad, however, contended that even allowing such a claim towards revenue expenditure cannot be considered as prejudicial to the interests of Revenue, if the computation of income of the assessee ultimately results in the loss.

We do not think that we could accept this contention. It is not correct to state that if the computation results in a demand then only it would be prejudicial to the interests of Revenue. This submission is opposed to the very concept of assessment. Assessment may result in a demand or a computation of loss. If there is a loss such as in this case, there would be allocation of the loss among the partners in proportion to their shares and they will be entitled to claim set off against their independent income and carry forward the loss for the succeeding year upto six years as provided by S. 15 of the Act. Since the deduction of Rs. 50,000 has also entered into computation of loss in the assessment order that deduction itself must be considered as prejudicial to the interests of Revenue if the assessee is not entitled to such deduction. The order of the Commissioner, therefore, cannot be found fault with on the ground that it was not prejudicial to the interests of Revenue.

As to the next contention about the Revenue expenditure of Rs. 50,000 allowed by the assessing officer, the Commissioner has stated that prior to the sale of the estate, there was no connection whatsoever between the vendor and the purchaser and that payment only had the effect of enhancing the capital value of the estate. This reasoning may not be wholly justified. The estate was purchased by the assessee on October 29, 1971. The assessee was entitled to the crop of that year and the vendor had incurred some expenditure if not Rs. 50,000 for raising the crop before the sale of the estate. While computing the income from the crop for that year in the hands of the purchaser, it is necessary for the assessing officer to find out the relevant and reasonable expenditure incurred to raise that crop. No matter whether that expenditure was incurred by the vendor or by the purchaser of the estate. The expenditure which was laid out or expended wholly and exclusively for the purpose of deriving the agricultural income sought to be taxed has to be allowed under S. 5(k) of the Act. The Commissioner, therefore, was not justified in disallowing the entire sum off Rs. 50,000. A reasonable expenditure for raising the coffee crop of that relevant year should be deducted while computing the agricultural income. The assessing officer may consider that claim of the assessee.

In the result, we allow the revision petition in part, modify the order of the Commissioner with a direction to the assessing officer to re-do the assessment in the light of the observations made and in accordance with law.

The parties shall appear before the assessing officer on April 16, 1984 to receive further notice.