Vaish Pharmacy v. State of Tamil Nadu — 1992 DIGILAW 303 (MAD)

Judgment : RAJU, J. The assessee is the petitioner before this court. For the assessment year 1981-82, as against the income returned by the petitioner from its agricultural holdings to the tune of Rs. 44, 31, 613, the Agricultural Income-tax Officer determined the net income of the assessee under the Tamil Nadu Agricultural Income-tax Act, 1955, at Rs. 48, 38, 919. On appeal, the Appellate Assistant Commissioner gave partial relief to the petitioner. Not satisfied with the extent of the relief granted, the petitioner pursued the matter on further appeal before the Tribunal. The Appellate Tribunal in its turn also granted partial relief in the appeal to the petitioner. As against the claims disallowed by the authorities below including the Appellate Tribunal, the above revision has been filed before this court The revision petition before us concerns the disallowance by the authorities of seven items of claims which may be set out hereunder, 1. Entertainment expenditure disallowance 50 per cent 2. Marriage present of Rs. 500 3. Motor car expenditure-25 per cent. disallowance 4. Advertisement expenditure of Rs. 770 5. Donation of Rs. 3, 001 to INTUC 6. Rubber subsidy of Rs. 13, 566 7. Doubtful debts of Rs. 17, 830 So far as item No. 1 relating to entertainment expenditure on which the authorities granted deduction of 50 per cent. and disallowed in respect of the other 50 per cent., learned counsel for the petitioner relied on decision of this court in CIT v. Karuppuswamy Nadar and Sons. While construing the scope of section 37(1) of the Income-tax Act, 1961, the learned judges expressed the view that expenses incurred by the assessee for supplying coffee, tea, etc., to the clients or customers could not really be said to be entertainment expenditure, but must be considered to be expenditure incurred really for purposes of the business and, therefore, the same was allowable as a deduction under the provisions of the Income-tax Act. In our view, we cannot import the ratio of the said decision rendered in the context of arriving at "business income" under the Central Act while considering a claim in respect of allowing a deduction when computing the agricultural income of an assessee by applying the provisions contained in section 5 of the Tamil Nadu Agricultural Income-tax Act, 1955. In our view, we cannot import the ratio of the said decision rendered in the context of arriving at "business income" under the Central Act while considering a claim in respect of allowing a deduction when computing the agricultural income of an assessee by applying the provisions contained in section 5 of the Tamil Nadu Agricultural Income-tax Act, 1955. De hors the question whether it is entertainment expenditure or not, in our view, the deduction claimed of this item of expenditure cannot be brought under any of the sub-clauses of section 5 including clause (e) an, consequently, we are unable to agree with learned counsel for the petitioner that the disallowed portion also ought to have been deducted while computing the agricultural income. The disallowance by the authorities below could not be said to be erroneous in lawSo far as the claim in respect of marriage present (Rs. 500), motor car expenditure ( 25 per cent. disallowance ) and advertisement expenditure (disallowed to the tune of Rs. 770), submissions have been made reiterating them on the same lines as before the authorities below but, in our view, we cannot come to a conclusion that the disallowance in respect of those items suffers from any legal error. So far as the item relating to marriage present is concerned, we do not feel that there is any relevance of the same for calculating the agricultural income, vis-a-vis, any provisions contained in section 5 of the Tamil Nadu Agricultural Income-tax Act. So far as the partial disallowance of motor car expenditure, the authorities below only disallowed the claim partially apparently with the idea and object of apportioning or confining the relief to be granted only to the sphere of agriculture activities relating to or connected with the land and the earning of the agricultural income. As a matter of fact, in respect of the very assessee in T. C. No. 487 of 1981, dated January 2, 1991 ( Vaikundam Rubber Co. Ltd. v. State of Tamil Nadu (No. 1), disallowance of such a claim has been sustained by a Division Bench of this court. As a matter of fact, in respect of the very assessee in T. C. No. 487 of 1981, dated January 2, 1991 ( Vaikundam Rubber Co. Ltd. v. State of Tamil Nadu (No. 1), disallowance of such a claim has been sustained by a Division Bench of this court. The denial of deduction in respect of the advertisement expenditure appears to be reasonable having regard to the combined nature of the activity and the denial is related to the non-agricultural area of activity and, consequently, the conclusion rendered to disallow partially the expenditure claimed on this account cannot be said to be illegal or vitiated by perversity of approach warranting our interference. So far as the claim in respect of the donation of Rs. 3, 001 granted to INTUC is concerned, we are not able to countenance the claim that the said donation has any direct or indirect relevance to the land or the activities connected with the land or the earning of the agricultural income. In our view, inasmuch as the claim could not be brought under any of the clauses enumerated under section 5 of the Act, in spite of our earnest endeavour to reasonably and liberally construe those clauses, the disallowance in this regard by the authorities below, therefore, cannot be said to be bad in law. So far as the item relating to rubber subsidy is concerned, there is no serious controversy as the issue is since covered by decisions of this court in favour of the assessee. In Velimalai Rubber Co. Ltd. v. Agrl. ITO, the claim in respect of the entire amount for deduction has been sustained and in Vaikundam Rubber Co. Ltd. v. CIT 1991 TLR 379 (Mad), T. C. No. 877 of 1981, dated February 13, 1991, in respect of the assessment year 1977-78, the assessee before us in the present case itself was granted relief on that account. Consequently, the expenditure sought to be deducted to the tune of Rs. 13, 566 is entitled to be deducted from the computation of the agricultural income and the disallowance in this regard cannot be sustained. The claim on behalf of the petitioner in this regard is sustained and allowedSo far as the claim made under the heading "doubtful debts" to the tune of Rs. 13, 566 is entitled to be deducted from the computation of the agricultural income and the disallowance in this regard cannot be sustained. The claim on behalf of the petitioner in this regard is sustained and allowedSo far as the claim made under the heading "doubtful debts" to the tune of Rs. 17, 830 is concerned, learned counsel for the petitioner contends that the petitioner has not received agricultural income at all inasmuch as when he has sold the produce, the sale consideration was not received in full by the assessee and, therefore, to that extent, a deduction should be allowed. Learned counsel sought to place reliance in support of the said submission on the decision in Badridas Daga v. CIT. That was a case where the apex court while considering the claim for deduction under the Indian Income-tax Act, 1922, was of the view that the loss sustained in a business by reason of embezzlement by an employee or agent is not an admissible deduction under section 10(2)(xi) of the Act, but is eligible for deduction under section 10(1) of the 1922 Act. While taking such a view, their Lordships also observed that, when there is no provision against a claim, express or implied in the Act, the claim for deduction may also be considered under the ordinary commercial principles. In CIT v. Sitalakshmi Mills Ltd., also relied on for the petitioner , a Division Bench of this court, while considering claim under the Income-tax Act, 1961, expressed the view that (at p. 418)where there is no specific statutory provision for deduction of a certain item in the computation of the taxable business profits, it does not mean that the item goes without any deduction at all, but the question will have to be resolved on the basis of commercial accounting principles provided they do not go against the grain of the income-tax statute, or the fiscal concept of business income, "We are not able to see how this decision has any relevance or of any help to sustain the claim now made before us for the petitioner, particularly in the light of certain decisions to which a reference will be made hereinafter. In Dooars Tea Co. Ltd. v. Commr. of Agrl. In Dooars Tea Co. Ltd. v. Commr. of Agrl. I T., the apex court had an occasion to consider the claim of an assessee in respect of agricultural produce realised but not sold and used in the assessees business under the Bengal Agricultural Income-tax Act, 1944. Their Lordships categorically expressed the view that agricultural produce used by the appellant in its business also constituted agricultural income under the Bengal Agricultural Income-tax Act, 1944, inasmuch as there was no necessity that the agricultural produce should be sold or profits realised from such sale before it could be included within the meaning of the agricultural income, for the purpose of the Act under consideration. At the same time, their Lordships also made it clear that there could be no analogy or comparison of the concept of income as used in, the Indian Income-tax Act, 1922, on the one hand with the "agricultural income" used in the Bengal Agricultural Income-tax Act. In R. Vaidyanatha Mudaliar v. State of Madras, a Division Bench of this court had an occasion to consider as to when an agricultural income could be held to arise for the purpose of the very Act under our consideration. The learned judges of the Division Bench have considered extensively the earlier decisions on the point and declared the position to be thus (at page 450):" It is now well-settled that for income to be agricultural income, the produce which is the subject-matter need not have been the subject-matter of a sale resulting in a profit or gains. The word income, in the context in which it appears in the Madras Agricultural Income-tax Act, does not derive colour from any antecedent transaction such as sale in relation to the agricultural produce received or derived. If the produce is subject to a sale or a manufacturing process with intent to sell, then the money equivalent of the ultimate result of such an activity becomes chargeable. But in the absence of a clear postulate in the language of the definition of agricultural income, envisaging a sale of the produce as a condition precedent for charging agricultural income to tax, it would be straining its language to superimpose such a condition. It, therefore, follows that once it is established that agricultural produce has been received or raised during the accounting year, then such produce becomes chargeable to tax. It, therefore, follows that once it is established that agricultural produce has been received or raised during the accounting year, then such produce becomes chargeable to tax. The Supreme Court, after fully explaining the implications of similar section under the Bengal Agricultural Income-tax Act (IV of 1944 ), concluded in Dooars Tea Co. Ltd. v. Commr. of Agrl. I T. thusTherefore, it is clear that income derived from sale of agricultural produce has been provided for by clauses (ii) and (iii) and prima facie that would show that clause (i) which does not refer to sale even indirectly cannot be intended to cover cases of income derived from the sale of agricultural produce. Considered in the light of clauses (ii) and (iii) of section 2(1)(b) what is the true scope and effect of the income contemplated by clause (i) ? In terms the clause takes in income derived from agricultural land by agriculture ; and as we have already pointed out, giving the material words their plain grammatical meaning, there is no doubt that agricultural produce constitutes income under this clause. Is there anything in the context which requires the introduction of the concept of sale in interpreting this clause as suggested by the appellant ? In our opinion this question must be answered in the negative. Not only is there no indication in the context which would justify the importing of the concept of sale in the relevant clause, but as we have just indicated the indication provided by clauses (ii) and (iii) is all to the contrary. What this clause seems clearly to have in view is agricultural produce itself which has been used by the assessee. A Division Bench of this court in Beverley Estates Ltd. v. Commr. of Agrl. I T., while considering the point as to when agricultural income can be said to have been actually received, and after noticing the above decision of the Supreme Court, observed. Looked at broadly, it seems clear that income derived from land by a process of agriculture is itself receipt of agricultural income. It may be in the shape of produce or it may be in the shape of rent received by a person owning land from a lessee or other person cultivating the land. Looked at broadly, it seems clear that income derived from land by a process of agriculture is itself receipt of agricultural income. It may be in the shape of produce or it may be in the shape of rent received by a person owning land from a lessee or other person cultivating the land. It may in certain circumstances be taken to be the actual sale price of the produce respectively, raised or received by such a person. But where person raises a crop and realises the produce, such realisation itself amounts to the receipt of agricultural income.... The definition of "agricultural income", however, indicates that a sale of the produce is not always necessary before one can expect the receipt of agricultural incomeAgain at page 380, it was observed, What the Legislature has endeavoured is to specify the receipt of income by two different classes of persons, one by a person who derives income by agriculture, the income being represented by the crop itself and which presumably is not subsequently sold by him but utilised by him for his own needs. In such a case, the income is received when the crop is harvested. In the other case, where the cultivator raises principally for the purpose of marketing it, it is the sale of the produce that results in the realisation of income. If any process necessary to render the produce fit for the market such as ordinarily employed by such persons, is performed, that presumably results in an increased value of the crop obtained by the sale. The money realised by the sale is treated as the income derived from the land in cases where the cultivation is undertaken principally for the purposes of marketing the produce. The Revenue, however, brought to our attention the ratio in S. S. .Rajalinga Raja, v. State of Madras. We do not think that the explanation of "agricultural income" as propounded by the Supreme Court earlier in Dooars Tea Co. Ltd. v. Commr. of Agrl. I T., has been departed from, as suggested in the later case. The Revenue, however, brought to our attention the ratio in S. S. .Rajalinga Raja, v. State of Madras. We do not think that the explanation of "agricultural income" as propounded by the Supreme Court earlier in Dooars Tea Co. Ltd. v. Commr. of Agrl. I T., has been departed from, as suggested in the later case. Though the court would say that the normal connotation of "income" as arising from a disposal, consumption or use in the manufacture or other process carried on by the assessee would apply to "income" as defined in the Madras Plantations Agricultural Income-tax Act, 1955 (an Act similar to the Madras Agricultural Income-tax Act, 1955 it would add: "It is not necessary, however, for income to accrue that there must be a sale of a commodity : consumption or use of a commodity in the business of the assessee from which the assessee obtains benefit of the commodity may be deemed to give rise to income". Quoting Dooars Tea Co. Ltd. v. Commr. of Agrl. I.T. [1962] 44 ITR (SC), the learned judges concluded. The decision is authority for the proposition that for agricultural income to arise, it is not predicated that the agricultural produce must be sold ; user of agricultural produce for the purpose of the business of the assessee may give rise to agricultural income. It is, therefore, clear that agricultural income arises not necessarily by any supervening trading or commercial activity or mechanical process, but by the factum of production, receipt and derivation of the produce from the land." In the light of the said pronouncement of this court construing the scope of "agricultural income" under the Tamil Nadu Agricultural Income-tax Act itself, we are not able to countenance the plea raised on behalf of the petitioner since, in our view, the agricultural income arises not necessarily by any supervening trading or commercial activity or mechanical process but by the factum of production, receipt and derivation of the produce from the land. In the light of the resultant position, we hold that the provisions of the Act under our consideration do not envisage a sale of the produce as a condition precedent for charging the income received or derived in the shape of produce to agricultural income-tax. In the light of the resultant position, we hold that the provisions of the Act under our consideration do not envisage a sale of the produce as a condition precedent for charging the income received or derived in the shape of produce to agricultural income-tax. The question whether subsequently the produce has really been sold or whether the sale consideration has been actually realised from such a sale becomes wholly irrelevant for attracting liability to tax under the Act. Consequently, we are of the view that the disallowance made by the authorities below on this item of doubtful debts claimed for the petitioner appears to be quite in accordance with the law and no exception could be taken to the conclusions of the authorities below on this aspectThe tax cases shall stand allowed only in respect of the claim for the assessee made in respect of rubber subsidy to the tune of Rs. 13, 566, which shall stand deducted from the computation of agricultural income of the assessee for the assessment in question and, in all other respects, the tax revision will stand dismissed. No costs.