Pullangode Rubber and Produce Co. Ltd. vs Commissioner of Agricultural Income Tax Commissioner of Agricultural Income Tax Vs Pullangode Rubber and Produce Co. Ltd.

T. Kochu Thommen, Actg. C.J.

The following two questions have been referred to us by the Agricultural Income Tax Appellate Tribunal, Additional Bench, Kozhikode :

"1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is justified in disallowing the expenditure for levelling of the football ground and the tractor charges which is incidental to the purpose of deriving agricultural income ?

Whether, on the facts and in the circumstances of the case, the Tribunal is justified in allowing the expenses of Rs. 3,035.31 relating to cash in transit insurance and cash in safe insurance as items deductible u/s 5(j) of the Kerala Agricultural Income Tax Act, 1950 ?"

Question No. 2 which has been referred at the instance of the Revenue has, in the light of the decision in ITR No. 236 of 1979 dated July 24, 1984, (see p. 337 supra) to be answered in the affirmative, that is, in favour of the assessee and against the Revenue. We do so.

Question No. 1 has been referred at the instance of the assessee. The assessee''s claim for deduction of the sums of Rs. 9,116.66 and Rs. 1,838.66 as levelling expenses to make a football ground was disallowed by the Income Tax Officer whose decision was confirmed in appeal by both the authorities. Relying upon the decision of the Bombay High Court in Teksons Pvt. Ltd. Vs. Commissioner of Income Tax, Bombay City-II, , it is contended on behalf of the assessee that the expenditure incurred for levelling the football ground was an allowable expenditure in terms of Section 5(j) of the Kerala Agricultural Income Tax Act, 1950.

Referring to Section 37(1) of the Income Tax Act, 1961, the Bombay High Court held (at p. 747):

"If land has been levelled and could be used as a playground like any other open land, it is difficult to hold that this has resulted in any enduring benefit to the assessee company. By mere levelling of land for being used by the employees of the company, no capital asset comes into existence nor is there any evidence to show that this has resulted in appreciation of the value of that land. It is, therefore, difficult for us to hold that the expenditure was of a capital nature. It should have been allowed as revenue expenditure incurred by the assessee as being incidental to the activities of the assessee company."

Section 37(1) of the Income Tax Act, 1961, which was considered in the Bombay case is much wider in scope than Section 5(j) of the Kerala Agricultural Income Tax Act, 1950. Section 5(j) reads:

"5. (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."

In order to come within Section 5(j), the assessee has to show that the expenditure has been laid out or expended wholly and exclusively for the purpose of deriving the agricultural income, while u/s 37 all that the assessee has to show is that the expenditure was laid out or expended wholly and exclusively for the purposes of the business. Referring to the distinction between these two expressions, the Supreme Court stated in Commissioner of Income Tax, Kerala Vs. Malayalam Plantation Ltd., :

"The expression ''for the purpose of the business'' is wider in scope than the expression ''for the purpose of earning profits''. Its range is wide; it may take in not only the day to day running of a business but also the rationalization of its administration and modernization of its machinery ; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title ; it may also comprehend payment of statutory dues and taxes imposed as a pre-condition to commence or for carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business."

The question is not whether it is a capital expenditure, but whether it is an allowable expenditure u/s 5(j). The amount expended for levelling a ground to prepare a football field cannot be considered to be expended wholly and exclusively for "the purpose of deriving the agricultural income" in the limited sense in which that expression is understood by the Supreme Court. The expenditure may have been warranted by law and, therefore, expended for the purpose of the business, but to come within Section 5(j), the assessee has to show further that it was proximately connected with the earning of the profit. Expenditure on the construction of a football ground is not of such a character. The claim u/s 5(j) was, in our view, rightly disallowed by the Tribunal. Accordingly question No. 1 is answered in the affirmative, that is, in favour of the Revenue and against the assessee.

We direct the parties to bear their respective costs in these tax referred cases.

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