UGAR SUGAR WORKS LTD. v. STATE OF KARNATAKA — 1984 DIGILAW 212 (KAR)

( 1 ) THIS revision under Section 55 of the karnataka AGRICULTURAL INCOME-TAX ACT, 1957, 1957 (called shortly the 'act') is directed against the order of the Tribunal dated july 3r, 1978 passed in A. T. T. A. P. No. 24 of 1976. The petitioner is a public limiied company (shortly 'the Company' ). It has its sugar factory called "m/s. Ugar sugar Works Ltd. " at Ugarkhurd in belgaum District. The Company also owns some agricultural lands wherein it grows sugarcane and utilises the same in the manufacture of sugar in its factory, in addition to the sugarcane it buys from other growers. For the assessment year 1957-58, the company returned the agricultural income claiming several deductions. The deductions claimed are as follows : (I) The loss of Rs. 6,48. 333/- incurred during the year ended June 30, 1955; (II) Expenses representing the extra cost incurred for better yield of sugarcane grown in the lands belonging to the Company ; (III) The total expenditure incurred for raising the sugercane not only in the previous year to the assessment year, but also in the earlier two years ; (IV) The cess paid under the karnataka Sugarcane Cess Act, 1958 ; (V) Over head expenses ; and (VI) Depreciation. During the assessment year, the company sold some machineries and made a profit of Rs. 17,329/ -. The Company did not include that profit in the taxable income on the ground that it would not fall under the Second Proviso to Section 5 (f) of the Act. ( 2 ) THE Agricultural Income Tax officer, the Deputy Commissioner and the Appellate Tribunal all have disallowed all the claims and further added to the agricultural income Rs. 17,329/- as the profit on the sale of machinery. The correctness of the view taken by the Tribunal is questioned in this revision petition. ( 3 ) FROM the arguments addressed by counsel on both sides and on the material on record, the following questions arise for consideration : (I) Whether the Tribunal was justified in holding that the company was not entitled to the benefit of earry-forward and set off of the loss of Rs. 6,48,333/- incurred during the year ended June 30. 1955 ? (II) Whether the Tribunal was justified in law in holding that a sum of Rs. 7,50,601/- represented the company's agricultural income liable to tax? 6,48,333/- incurred during the year ended June 30. 1955 ? (II) Whether the Tribunal was justified in law in holding that a sum of Rs. 7,50,601/- represented the company's agricultural income liable to tax? (III) Whether the Tribunal was justified in law in disallowing a portion of the cultivation expenses relating to two years earlier to the relevant year of assessment ? (IV) Whether the Tribunal was justified in law in holding that the cess paid under the Karnataka Sugarcane Cess act, 1958 was not an expenditure incurred to derive agricultural income? (V) Whether the Tribunal was justified in law in holding that the profit on sale of machinery amounting to Rs. 17. 329/- was liable to tax ? (VI) Whether the Tribunal was justified in law in disallowing various overhead expenses ? (VII) Whether the Tribunal was justified in law in allowing depreciation on written down value and not on the original cost? ( 4 ) WE will take up these questions for consideration in turn. Re : Q. No. (i) : the Act came into force with effect from October 1, 1957, but Section 3 which is the charging section has been given retroactive operation with effect from april 1, 1957. The Company maintains its accounts from July to June. The relevant accounting year for the assessment year 1956-57 was the year ending June 30, 1955. For the assessment year 1957-58, the relevant accounting year was the year ending June 30, 1956. The Act was made applicable to the assessment year 1957-58 and onwards. The Company has claimed the benefit of carry forward and set off of the loss of Rs. 6,48,333/- incurred during the year ending June 30, 1955. The question herein is whether it could be allowed under Section 15 of the Act. The Act was made applicable to the assessment year 1957-58 and onwards. The Company has claimed the benefit of carry forward and set off of the loss of Rs. 6,48,333/- incurred during the year ending June 30, 1955. The question herein is whether it could be allowed under Section 15 of the Act. Section 15 provides:"where any person sustains a loss in agricultural income in any year, the loss shall be carried forward to the following year and set off against the agricultural income for that year and if it cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following year and so on, but no loss shall be carried forward for more than six years: provided that, in the case of loss sustained before the commencement of this Act, this section shall apply only to such loss as was sustained in the previous year immediately before such commencement. Provided further. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . " (underlining supplied) the previous year immediately before the commencement of the Act was the year ending June 30, 1955 and the assessment year was 1956-57. Since the Act is applicable for the assessment year 1957- 58, the Company is entitled to the benefit of carry forward of the said loss under the Proviso to Section 15. The Tribunal, in our opinion, was wholly in error in denying that benefit to the company. ( 5 ) RE: Q. No. (ii) : to understand th s question, we have got to narrate some facts. The Company raises sugarcane in its own agricultural lands and utilizes the same in the manufacture of sugar The Agricultural Income- tax Officer has levied tax only in respect of that income. It has claimed extra costs of Rs. 17. 01 per tonne for better recovery of sugar. That claim was made in the assessment proceedings under the Central income-tax Act. But, the taxing authorities thereunder did not allow that tall claim. They have taken into consideration the market value of the sugarcane purchased by the Company from the other growers and reduced the said claim proportionately. 17. 01 per tonne for better recovery of sugar. That claim was made in the assessment proceedings under the Central income-tax Act. But, the taxing authorities thereunder did not allow that tall claim. They have taken into consideration the market value of the sugarcane purchased by the Company from the other growers and reduced the said claim proportionately. The Income Tax Appellate Tribunal also agreed with that view in I. T. A. Nos 9341 and 9342 of 1963 64 disposed of on May 14, 1965 and the mat er rested there. The Agricultural Income tax Officer, however, accepted the said claim of the assessee as to the extra cost per tonne for better recovery of sugar. Before the tribui. al it was contended for the company that since the said claim was not conceded by the Central Income-tax Department, it should not be the basis for computing ;he agricultural income under the Act. The tribunal rejected that contention and held:". . . . . . . . . . . . THE assessing authority is not bound by what the Ircome-tax authorities have decided. . . . . . . . . . . . The assessing authority is justified in adding Rs. 17. 01 per tonne to the declared income of the assessee. "mr. Srinivasan for the Company urged before us that there cannot be two standards for computing the same income. Mr. Rajendra Babu, learned High Court government Advocate for the respondent, contended that the Company cannot be allowed to resile from its own statement made before the Central Income Tax authorities and the authorities under the state Act are justified in accepting that statement by adding Rs. 17. 01 per tonne to the declared income of the Company. In our opinion, the view taken by the tribunal appears to be incorrect. The company might have made the claim before the Central Income Tax authorities with an eye to have more agricultural income. But that claim was not accepted by the said authorities. The Company has produced the same books of accounts before the Central Income-tax authorities and also before the agricultural Income- tax Officer. It is from that accounts the computation of the agricultural income and also the non-agricultural income has to be made by the two different authorities under two different enactments. The Company has produced the same books of accounts before the Central Income-tax authorities and also before the agricultural Income- tax Officer. It is from that accounts the computation of the agricultural income and also the non-agricultural income has to be made by the two different authorities under two different enactments. But the principles to be applied for allowing expenditure laid out or expended for the purpose of earning the agricultural income cannot be quite different from the principles applicable for computing the income under the Central Income-tax Act If the authorities under the Central Income-tax act have rejected the claim made by the company with regard to the extra costs or price per tonne, we fail to see why it should be accepted for determining the agricultural income under the Act in respect of the same venture of the company. The Company, in our opinion, is entitled to deduction of Rs. 17,50,601/- while computing the agricultural income for the year in question. 6 Re. : Q No. (iii) : this question relates to the cultivation expenses. The Company has claimed expenses incurred for the years 1953-54, 1954-55 and 1955-56 for raising two varieties of sugar-cane crop. For the years 1953-54, 1954-55 and 1955-56 the company has raised sugar cane Adsali no. 16 and for the years 1954-55 and 1955-56 it has raised sugar-cana-Ratoon no. 15. Adsali No. 16 is stated to be a crop of 18 mcnths and Ratoon No. 15 is of about 12 months. The assessing authority while examining the claim has observed as follows :"the expenditure incurred on adsali crop No. 16 is spread over 3 years and similarly the expenditure on Ratoon crop No. 15 is spread over 2 years. ""hence I allow those expenses by disallowing expenses at the rate of 25% thereof. Tn respect of Adsali Crop No. 16 expenses worth Rs. 97,119. 48 and rs. 12,23,071-34 were incurred in the year 5953-54 and 1954-55. These expenses are inclusive of the expenses apportioned under different heads like travelling, printing postage and stationery and directors fee and travelling, audit fee and travelling, legal fee, consultation fee, managing remuneration, sundry expenses, motor car expenses and depreciation etc. Which are not in the nature of cultivation expenses. The assessee Company is entitled to get depreciation from the crop year under reference and onwards and not to the previous years. Which are not in the nature of cultivation expenses. The assessee Company is entitled to get depreciation from the crop year under reference and onwards and not to the previous years. I estimate such expenses @ 25% disallow them similarly cultivation expenses worth Rs. 2,88,020/- incurred in the year 1954-55 for Ratoon crop No. 15 are also inclusive of those expenses mentioned in respect of adsali crop no. 16. "similarly he disallowed 25% for the year 1955-56. In other words, heallowed 75% of the expenditure for all the three years. In the appeal preferred by the company the Tribunal observed as follows:"regarding the cultivation expenses, it is to seen that the assessing authority has taken into consideration the expenses incurred for the years 1953-54, 1954- 55 and 1955-56 and disallowed 25% of the total expenditure. In this regard the expenditure ought to have been allowed under Section 5 (k) of the Act provided it is incurred in the previous year only and the assessing authority ought to have disallowed the expenditure incurred earlier to the year 1955-56. However, the assessing authority has allowed the expenses for the years 1953- 54 and 1954-55 also. Since there is no cross appeal and the appellants cannot be placed in a disadvantageous position, we cannet disallow the expenditure in the earlier two years, namely 1953-54 and 1954-55 though the assessing authority was not correct in allowing such expenses Regarding the disallowance of 25% for the earlier two years of 1953- 54 and 1954-55, we fully accept the stand of the assessing authority because of the fact that when the full amount is to be disallowed, the disallowance of 25% will be fully justified. However, the disallowance of 25% in respect of the previous year, which is the crop year is not correct because the appellant-firm has shown the other expenses separately such as the over-head expenses, etc. Hence, the disallowance of 25% in respect of 1955-56 is not correct. The assessing authority should allow 25% of cultivation expenses in respect of both the crops relating to the year 1955-56. The contention of the appellant-firm in this respect is partly accepted. "it will be seen from the order of the tribunal that the company would be entitled to expenditure of the previous year, i. e. , 1955-56, and the expenditure incurred in respect of the said two crops for the years 1953-54 a -. The contention of the appellant-firm in this respect is partly accepted. "it will be seen from the order of the tribunal that the company would be entitled to expenditure of the previous year, i. e. , 1955-56, and the expenditure incurred in respect of the said two crops for the years 1953-54 a -. d 1954-55 was not to be allowed However, the Tribunal could not reverse the order of the assessing authority, since there was no cross-objection by the Department. The tribunal also found that 25% disallowance for the year 1955-56 made by the assessing authority on the ground that the expenses included the over-head charges was not correct. The Tribunal upon examination of that part of the account has found that the over-head charges were separately debited and, therefore, the allowance claimed should be allowed into to for the year 1955-56. The Tribunal, however, has no occasion to examine whether the overhead charges were included in the expenses for the year 1953 54 and 1954-55. The question for consideration is whether the Company is entitled to the entire expenditure incurred in respect of the said crops or only that part of the experditure incurred for the previous year relevant to the assessment year. Sri Babu, Government Advocate, urged that the Company cannot be allowed the expenditure incurred for several years earlier to the previous year while Sri sreenivasan for the company contended to the contrary. In support of the contention, sri Babu placed reliance on section 5 (k) of the Act. It reads : "any expenditure (not being in the nature of capital expenditure) laid out or expended in the previous year wholly and exclusively for the purpose of deriving the agricultural income ; 'previous year' is defined under section 2 (1) (s) of the Act to mean that the twelve months ending on the 31st day of march preceding the year for which the assessment is to be made, or, if the accounts of the assessee have been made up to a date within the said twelve months in respect of a year ending on any date other than the said 31st day of March, then at the option of the assessee the year ending on the day to which his accounts have been so made up. Mr. Mr. Babu, therefore, contended that the term 'previous year' should be limited to only one year and not to several years previous to the assessment year and the expenditure incurred in the previous year alone falls to be allowed. Literally, Mr. Babu may be right in his submission, but one should consider the substance of the claim. When the agricultural income is sought to be taxed, the assessee is entitled to a deduction of the expenditure laid out or expended wholly and exclusively for deriving that agricultural income. That is the purpose of Section 5 (k) of the Act. If a crop is of more than one year and the assessee has undisputedty expended expenditure for raising that crop for more than one year, should the assessee be denied of the deduction of expenditure incurred for more than the previous year relevant to the assessment year is the question herein. In A. K. T. K. M. Vishnudatta Antharajanam v Commissioner of Agricultural Income-Tax, trivandrum [ (1969) 71 1tr 733] Kerala high Court, while examining the scope of section 5 (j) of the Kerala Agricultural income-Tax Act, 1950, (shortly the 'kerala Act') which is somewhat similar to the provision of Section 5 (k) of the act, has held that the expenses incurred during the years previous to the accounting year could be allowed in computing the agricultural income. In support of this conclusion, the Kerala High Court relied upon the decision of the Supreme Court in Badridas Daga v Commissioner of income-Tax [ (1958) 34 ITR 10] and also the decision of Bombay High Court in gustad Dinshaw Irani v Commissioner of income-Tax [ (1958) ITR 92]. We respectfully agree with the view taken by the Kerala High Court. As otherwise, it would lead to incorrect computation of (he agricultural income of the assessee. When a claim is made for deduction as expenditure, which was incurred for earning the agricultural income sought to be taxed, that claim should be allowed if there is no prohibition under the Act mr. As otherwise, it would lead to incorrect computation of (he agricultural income of the assessee. When a claim is made for deduction as expenditure, which was incurred for earning the agricultural income sought to be taxed, that claim should be allowed if there is no prohibition under the Act mr. Babu, however, urged that section 5 (j) of the Kerala Act is not similar to Section 5 (k) of the Karnataka act and in the former there is no reference to the expenditure incurred in the previous year and it only refers to the expenditure expended for the purpose of deriving the agricultural income and, therefore, the decision of the Kerala high Court cannot be pressed into service by the assessee in this c?se. We do not think that we could accept this submission. Section 5 (j) of the kerala Act is similar to Section 10 (2) (xv) of the Income Tax Act, 1922, and also section 37 (1) of the Income Tax Act, 1961. In both these provisions, the term 'previous year' has not been used. The supreme Court in Badridas Dagga's case, while examining the scope of Section 10 (2) (xv) of the Income Tax Act, 1922, observed thus :"when a claim is made for a deduction for which there is no specific provision in section 10 (2), whether it is admissible or not will depend on whether, Having regard to accepted commercial practice and trading principles, it can be said to arise out of the carrying on of the business and to be incidental to it. If that is established, then the deduction must be allowed, provided of course there is no prohibition against it, express or implied, in the Act. "this principle is equally applicable to the present case. The term 'previous year' used in Section 5 (k) of the Act cannot, in the context in which it is used, be construed as a prohibition for allowing expenditure incurred in more than one year. Secondly such deduction has to be allowed by the method of accounting regularly employed by the assessee. This would be clear from Section 7 of the Act. It reads :''7. Secondly such deduction has to be allowed by the method of accounting regularly employed by the assessee. This would be clear from Section 7 of the Act. It reads :''7. Method of accounting.-Agricultural income shall be computed for the purpose of sections 5 and 6 in accordance with the method of accounting regularly employed by the assessee: provided that, no method of accounting has been regularly employed by the assessee, or if the method employed is such that, in the opinion of the Agricultural income-tax Officer, the agricultural income cannot properly be deduced therefrom, then the computation shall be made upon such basis and in such manner as he may determine : it will be clear from the above provision that the assessing authority has to compute the agricultural income regard being had to the method of accounting regularly employed by the assessee. If the company in this case has incurred expenditure in the years 1953-54 and 1954-55 for crops of sugar-cane Adsali No. 16 and ratoon No. 15 and that expenditure was carried forward and claimed for deduction in the year of harvest, it would be proper for the assessing authority to allow such expenditure while computing the income of the company. Secondly, Section 7 read with Section 5 clearly indicates that there is no prohibition under the Act to allow expenditure for more than one year, if necessarily the assessee has to incur that expenditure for raising the crop in question. But, none of the authorities have examined the accounts in the light of these principles and the Tribunal also has not examined the accounts for the years 1953-54 and 1954-55 to find out whether the over-head charges were also included in the cultivation expenses. The assessing authority may, therefore, consider the claim of the Company in the light of the observations made. 7. Re : Q. No. (iv) : this question relates to the disallowance of the cess paid under the karnataka Sugarcane Cess Act, 1958. It is not in dispute that the Company has paid the cess under the said Act The company claims deduction of the cess paid in respect of its own sugar-cane brought for crushing in its factory. It has not made any claim for deduction of the cess paid in respect of the sugarcane purchased from growers. Section 4 of the Karnataka Sugarcane cess Act, 1958, reads:"4. It has not made any claim for deduction of the cess paid in respect of the sugarcane purchased from growers. Section 4 of the Karnataka Sugarcane cess Act, 1958, reads:"4. Imposition of cess :-A cess at such rate not exceeding six rupees per tone, as may be specified by notification by the Government shall be levied on the entry of Sugarcane into a local area for consumption or use therein : sugar-cane cess is liable to be paid by the Company as occupier of the factory as provided under Section 7 of the Act. The Tribunal has disallowed the claim on the ground that the cess paid was not an item of expenditure borne by the agriculturists who grow the sugar-cane. It is true that under the Act, the growers are not required to pay the cess But, in the instant case, the Company has dual capacity. It owns the factory and also the sugar cane crop raised in the lands owned by it. It is not in dispute that the Company has used the sugar-cane grown from its own lands in the Factory for manufacturing sugar. For this purpose, the company has necessarily to bring the sugar-cane within the local area. The entry of sugar cane for consumption or use into the local area where the company's factory is located, attracts the levy of cess. This levy is more or less similar to octroi. The Company has paid the cess and claimed its deduction as an item of expenditure which it has necessarily to incur to derive the agricultural income. We do not think that that claim is untenable. The cess paid, in our opinion, would be an item of expenditure for the purpose of deriving agricultural income. It must fall to be excluded while evaluating the value of sugar. 8. Re : Q No. (v) : the assessing authority has added to the Company's taxable income a sum of rs. 17,329/- as the profit by the sale of old machinery. The claim of the Company for excluding that sum has been rejected by the Tribunal by observing thus : ". . . . . . . . . . . . . . . . the appellant has not shown when this machinery was purchased and for what amount it was purchased. The claim of the Company for excluding that sum has been rejected by the Tribunal by observing thus : ". . . . . . . . . . . . . . . . the appellant has not shown when this machinery was purchased and for what amount it was purchased. This apart, it was also not brought to our notice what was the value of the machinery at the commencement of the year. In the absence of all these materials, it is impossible for us to say that the assessing authority has erred in taking the profit derived from the sale of machinery. As per the material available on record, the appellant has realised the profit of Rs. 17. 329/- on the sale of the old machinery, and as such the assessing authority is justified in doing so. We would have accepted the contention of the appellant-firm if it has furnished the information regarding the date of purchase, the value at which it was purchased and also the value for which it was sold and such other material. In the absence of any such material evidence which is required from the appellant, we are unable to accept the stand of the appellant. "it seems to us that there has been no proper consideration of the second proviso of Section 5 (f) of the Act which governs the question in dispute. The said proviso reads:"provided further that where the amount for which any such building, machinery or plant is sold, whether during the continuance of the agricultural operations or after the cessation thereof, exceeds the written down value, so much of the excess as does not exceed the difference between the original cost and the written down value shall be deemed to be profits of the previous year in which the sale took place?"the sale of the machinery was effected in the year 1955-56. There was no depreciation allowed on the machinery since the Act cams into force on April 1, 1957. Since there was no depreciation allowed and indeed could not be allowed, the above proviso evidently has no application. The profit derived from the sale of the machinery, therefore, could not be added as an agricultural income. There is no other provision in the Act to treat the profit derived on the sale of capital assets as agricultural income. Since there was no depreciation allowed and indeed could not be allowed, the above proviso evidently has no application. The profit derived from the sale of the machinery, therefore, could not be added as an agricultural income. There is no other provision in the Act to treat the profit derived on the sale of capital assets as agricultural income. The view taken by the Tribunal cannot therefore, be sustained. 9. Re: Q. No. (vi) : this question relates to the claim of the Company regarding over-head expenses. The Tribunal has disallowed the claim of the Company on the ground that the expenses incurred were not for the purpose of deriving the agricultural income. The expenses on this head were proved to have been incurred in order to carry on the business activity of the company. The Tribunal, in our opinion, was justified in rejecting this part of the claim of the Company. 10. Re: Q. No. (vii): the question is whether the Tribunal was justified in law in allowing depreciation on written down value and not on the original cost. The Company has claimed depreciation without producing any evidence regarding the original costs of the assets. The Tribunal has summarily rejected the claim of the Company and. in our opinion, very rightly, in the absence of any evidence regarding the original costs. 11. In the result and for the reasons suited above, we allow this revision petition in part and in modification of the orders of the authorities below, we issue a direction to the assessing authority to re-do the assessment in the light of the observations made. In the circumstances, we make no order as to costs. --- *** --- .