AROORAN SUGARS LIMITED vs COMMISSIONER OF INCOME TAX

N. V. BALASUBRAMAMAN, J. The following two common questions of law have been referred to us for our consideration in respect of the asst. yrs. 1974-75, 1975-76 and 1978-79:

"(1) Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that in computing the income chargeable to Income Tax under the heads profits and gains of business the deduction to be made to exclude the agricultural portion of the appellant''s income should be worked out in accordance with r. 7(2)(a) and not 7(2)(b) of IT Rules, 1962?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the assessee was not entitled to deduct the depreciation in respect of farm assets used by the assessee in its business?"

The assessee is a manufacturer of sugar in its factory. The assessee also grows sugarcane in its own lands and the sugarcane so grown is utilised in the manufacture of sugar. The case of the assessee before the ITO was that the income taxable under the IT Act, 1961 (in short ''the Act'') should be computed by applying r. 7(2)(b) of the IT Rules, 1962 (in short ''the Rules''). Both the ITO and the CIT(A) rejected the claim of the assessee. The Tribunal, on an appeal preferred by the assessee also rejected the claim of the assessee on the basis of a judgment of this Court rendered in the assessee''s own case in CIT vs. Thiru Arooran Sugars Ltd. (1983) 36 CTR (Mad) 276 : (1983) 144 ITR 4 for an earlier assessment year. The finding of the Tribunal was that while computing the income chargeable to income tax under the heads profits and gains of business, the deduction has to be made in accordance with r. 7(2)(a) of the Rules. It is also not in dispute that the Supreme Court in Thiru Arooran Sugars Ltd., Madras etc. Vs. The Commissioner of Income Tax, Madras, affirming the judgment of this Court in CIT vs. Thiru Arooran Sugar Ltd. (supra) held that r. 70(a) of the Rules would squarely apply to the facts of the case and the market value of the sugarcane produced and consumed by the assessee had to be computed accordingly. Following the said decision of the apex Court, we answer the first question of law referred to us by holding that the Tribunal was correct in holding that while computing the income chargeable to Income Tax under the heads profits and gains of business, the deduction should be made in accordance with the provisions of r. 7(2)(a) of the Rules. Accordingly, we answer the first question of law referred to us in the affirmative and against the assessee.

In so far as the second question of law is concerned, the assessee claimed depreciation of the farm assets, after the income chargeable to Income Tax under the Act was determined in accordance with r. 7 of the Rules. Both the ITO as well as the CIT(A) rejected the claim of the assessee holding that the assessee was not entitled to depreciation on farm assets. The Tribunal on consideration of r. 7(2)(a) of the Rules came to the conclusion that the income assessable under the Act was determined in accordance with r. 7 of the Rules an d no further deduction shall be made from the income so computed and thereafter the assessee was not entitled to the depreciation as claimed.

Learned counsel for the assessee submitted that a close scrutiny of the Rules would show that the restriction made in r. 7 of the Rules is restricted to the deduction claimed in respect of the expenditure incurred by the assessee as the cultivator or receiver of rent in kind and the depreciation claimed cannot be classified as an expenditure incurred by the assessee either as cultivator or a receiver of rent in kind and since depreciation is claimed is a statutory allowance, r. 7 of the Rules does not bar the assessee from claiming the depreciation allowance on the farm assets.

On the other hand, learned counsel appearing for the Revenue submitted that the assessee is not entitled to depreciation, after the computation of income in accordance with r. 7 of the Rules.

We have carefully considered the submissions of learned counsel for the assessee and the learned counsel for the Revenue. We agree with the learned counsel for the assessee that r. 7 of the Rules restricts the claim of further deduction in respect of the expenditure incurred by the assessee either as a cultivator or as a receiver of rent in kind. It is also no doubt true that the depreciation cannot be regarded as an expenditure incurred by the assessee as a cultivator, but still the claim of the assessee has to fail. We hold that after applying the provisions of r. 7 of the Rules and after deducting the market value of the agricultural produce from the composite income, what remains would be the non-agricultural income. The assessee is claiming depreciation on the farm assets utilised for the purpose of growing sugarcane and the income relatable to the sugarcane would be agricultural income. The claim of the assessee for depreciation would be on the assets owned and used by the assessee for earning agricultural income and the attempt of the assessee to claim the depreciation allowance on farm assets used for producing agricultural income against the non-agricultural income portion is impermissible in law. In our view, under the scheme the assessee is entitled to claim depreciation on the assets owned and used for the purpose of assessee''s business and is not entitled to claim depreciation on assets used for earning agriculture income. The assets on which depreciation claimed are farm assets which were used for earning the agricultural income, and therefore, under the provisions of s. 32 of the Act, the assessee is dissentitled to claim depreciation on the farm assets used for earning agricultural income. Further, the principle behind r. 7 of the Rules prohibiting the deduction of expenditure incurred as a cultivator or rent-in-kind is also the same and the rule does not permit the expenses relating to the agricultural segment of income as an allowable expenditure against non-agricultural portion of the income. Hence, the claim of the assessee for depreciation should fail because of the provisions contained in s. 32 of the Act and it is not necessary even to invoke r. 7 of the Rules to deny the claim of the assessee for depreciation.

We are, therefore, of the opinion that the Tribunal was correct in holding that the assessee is not entitled to claim depreciation on the farm assets. Accordingly, we answer the second question of law referred to us also in the affirmative and against the assessee. The Revenue will be entitled to costs Rs. 1000 (Rupees one thousand only) in one set.

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