Teekoy Rubbers (India) Ltd., Palai vs State of Kerala

Govindan Nair, J.—The Agricultural income tax Appellate Tribunal has made this reference u/s 60(1) of the Agricultural income tax Act, 1950 (hereinafter referred to as the Act). The year of assessment is 1962-63 and the question referred reads thus:-

Whether on the fads and in the circumstances of the case, the managing agency commission on rubber replanting subsidy is allowable expenditure.

During the Levant accounting period pertaining to the year of assessment 1962-63, a sum of Rs. 50,388/- has been received as rubber replanting subsidy by the assessee company. The assessee company is engaged in the business of running a rubber estate. The company claimed 9 per cent of the amount of Rs. 50,388/- as an item of expenditure which they urged, should be deducted in computing its income for the purpose of taxation under the Act. This has been negatived. It is not contended before us that this amount can be claimed as a deduction under any provision other than Section 5 of the Agricultural income tax Act, 1960. The relevant sub-section is sub-section (J) which is in these terms:-

Computation of agricultural income -

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 deductions allowable u/s 5, we think, must relate to deductions from agricultural income earned by the person sought to be assessed. So the question arises as to whether the sum of Rs. 50,388/- received from the Rubber Board by the assessed company as rubber replanting subsidy can be said to be agricultural income. This is an amount paid to the assessee company by virtue of the provisions in the Rubber Act, 1947. A reference to sections 9A and 9B as well as Section 12 of that Art indicates that these must be payments either from the general fund or from the pool fund as envisaged by that statute. And it also seems to be clear that the bulk of it must have come out of the amounts that have been collected from persons like the assessee company by way of cess as envisaged by Section 12 (1) of the Rubber Act, 1947. Even so it is difficult to treat the amount received from the Rubber Board by the assessee company as agricultural income. Dealing with the question what is agricultural income the Privy Council observed in Commissioner of income tax v Raja Bahadur Kamakhaya Narayan Singh reported in (1948) 16 ITR 325 :-

The word ''derived'' is not a term of art. Its use in the definition indeed demands an enquiry into the genealogy of the product. But the enquiry should stop as soon as the effective source is discovered. In the genealogical trees of the interest land indeed appears in the second degree, but the immediate and effective source is rent which has suffered the accident of non-payment. And rent is not land within the meaning of the definition.

This passage has been quoted with approval by the Supreme Court in Commissioner of income tax U.P. v Kumar Trivikram Narain Singh reported in (1965) 57 I.T. R. 29 and we said following these decisions in Commissioner of Agricultural income tax v K.S. Narayanan Tratan Nambudiripad reported in 1965 K.L. T. 913 - 1965 K.L. J. 839.

If the immediate and effective source is not land the income cannot be considered to be agricultural income

We therefore are of the view that the sum of Rs. 50,388 received by the company as rubber replanting subsidy is not agricultural income of the Assessee Company. In fact it has not been suggested either by the Company or by the department that this is agricultural income. Admittedly the company had not included this amount in its return and the amount has not been taxed as such.

The deduction claimed is 9 per cent of the sum of Rs. 50,388/- which is admittedly not treated as agricultural income and such an amount we do not think, can be claimed as a deduction u/s 5 (j) of the Agricultural income tax Act, 1950. This should normally dispose of the case but we cannot leave it without referring to the further arguments advanced by counsel on behalf of the assessee company.

This entered round the contentions based on Sections 348 and 349 of the Companies Act, 1956. It was contended that the subsidy received by the assessee company is a subsidy that would fall within sub-section (2) of Section 349 of the Companies Act, 1956, which states:-

In making the computation aforesaid, credit shall be given for the following sums:-

bounties and subsidies received from any Government, or any public authority constituted or authorized in this behalf, by any Government unless and except in so far as the Central Government otherwise directs.

and therefore the Managing Agents will be entitled to claim commission on that account as well.

We will assume without deciding that the Rubber Board is a ''public authority'' as envisaged by the section. The question still arises as to whether the rubber replanting subsidy received by the assessee company is a ''subsidy'' within the meaning of that term in that part of Section 349 which we have extracted. We have very serious doubts whether this will be so. A reference to the report of the Company Law Committee seems to indicate that the subsidy in the section can refer only to such subsidies which augment the profits of the company. The relevant paragraph in the report runs thus:- (Page 98 of the report).

Item C which refers to bounties or subsidies effects a change in the present practice by including them as part of the profits on which the ''managing agents'' commission can be charged. We consider that receipts in the form of bounties or subsidies should not be ignored in calculating the ''managing agents'' commission. If a concern is helped to earn profits by protective duties, and if such profits are treated as part of the normal profits on which the ''managing agents are entitled to charge commission, we do not see why, when such profits are earned through the receipt of bounties or subsidies, these payments should not be treated as part of the normal profits for the purpose of calculating the managing agents'' commission especially when the bounties or subsidies, as we are given to understand, are treated as revenue receipts for purpose of taxation.

We do not wish to deal with this matter further as we are of the view that even if the payments by the Rubber Board with which we are concerned are ''subsidies'' within the meaning of that terms in Section 349 of the Companies Act 1956 the commission payable on that cannot be deducted as an item of expenditure u/s 5 (j) of the Act as the subsidy is not Agricultural Income. We answer the question referred to us in the negative, that is, against the assessee and in favor of the department. There will be no order regarding costs.