Assam Frontier Tea Industries Ltd. vs Assistant Commissioner of Taxes (Appeals) and Others

D.N. Baruah, J.—This writ appeal is directed against the judgment and order dated August 19, 1996 (see Assam Frontier Tea Ltd. Vs. Assistant Commissioner of Taxes and Others, passed by a learned single judge in Civil Rule No. 2303 of 1992 dismissing the writ petition.

For the purpose of disposal of this writ appeal, the facts may briefly be stated as under :

The appellant is the writ petitioner in the civil rule. It is a public limited company incorporated under the Companies Act, 1956, with its registered office at Talap in the District of Tinsukia, Assam. The company is engaged in the business of cultivation, manufacture and sale of tea. It owns as many as 18 tea estates in Assam. About 14,500 workers are employed in those tea estates for growing tea and manufacture thereof. At the relevant time, the company used to spend about Rs. 70,00,000 yearly in welfare activities such as running schools and hospitals, etc., in the State. In the relevant year, namely, assessment year 1984-85, the appellant-company made contributions of Rs. 2 crores each to Apeejay Educational Association Ltd. and Apeejay Medical Research and Welfare Association Ltd. for the benefit of the workmen and for other welfare activities in the tea estates owned by the appellant-company. The Agricultural Income Tax Officer made the assessment. While making the assessment, the Agricultural Income Tax Officer ("AITO") disallowed the amount of Rs. 4 crores, i.e., Rs. 2 crores each contributed to Apeejay Educational Association Ltd. and Apeejay Medical Research and Welfare Association Ltd., on the ground that the assessee''s income was partly agricultural and partly business and, therefore, the entire expenditure incurred in the welfare activities as mentioned above could not be deducted. However, no effort was made by the Agricultural Income Tax Officer to find out what was the agricultural expenditure. Being aggrieved, the appellant preferred an appeal before the Assistant Commissioner of Taxes (Appeals). The Assistant Commissioner of Taxes (Appeals) also upheld the order of the Agricultural Income Tax Officer on the ground that the expenditure was not wholly agricultural. Hence, the Writ Petition (Civil Rule No. 2303 of 1992 (see Assam Frontier Tea Ltd. Vs. Assistant Commissioner of Taxes and Others, The civil rule was heard by the learned single judge and thereafter disposed of, rejecting the contention of the appellant-petitioner. While disposing of the writ petition, the learned single judge observed thus (page 162) :

"In view of the above discussions, I hold that -

(a) expenditure on account of welfare schemes such as hospitals or schools laid out or expended wholly or exclusively for the betterment of the workers within the parameters of the modern concept of welfare state and which is directly and transparently shown to have been expended or utilised for the said avowed purpose, such expenditure on proper verification by the assessing authority could be allowed under the provisions of the aforesaid Clause 2(f)(vii).

(b) Such expenditure has to have direct nexus with the betterment of the workers and not be indirectly or remotely connected with the welfare which is neither transparent nor the assessee is able to disclose to the assessing authority the utilisation of such expenditure or contribution.

(c) Thirdly, expenditure to be allowable under the said clause has to be incurred by the assessee himself directly and not through an agency who is not under the control and management of the assessee-company.

(d) Only that much amount is allowable which is shown to have been actually and reasonably spent for the betterment and welfare of the workers and not any fanciful or imaginary or presumed amount unconnected with the welfare of the tea garden workers and staff.

In the facts of this case, the petitioner has totally failed to substantiate its claim that the amount of contribution of Rs. 4 crores to the said two concerns was expended or laid out wholly and exclusively for the purpose of earning or deriving the agricultural income. The petition fails and is dismissed. There shall be no order as to costs. But before parting with the present application, I make it clear that I express no opinion on whether the said amount could be treated as a donation nor am I expressing any opinion on the other claims made in the petition."

Hence the present appeal.

The appeal was heard and judgment was reserved. However, for certain clarification the appeal is listed for further hearing.

Dr. Paul, learned senior counsel assisted by Dr. A.K. Saraf, learned counsel appearing on behalf of the appellant, submitted before us that the authorities as well as the learned single judge committed a manifest error in holding that the appellant-petitioner was not entitled to get the benefit of allowance of the amount spent in the welfare activities mentioned above solely on the ground that the expenditure was not wholly agricultural. In this connection, Dr. Paul drew our attention to Section 2(a)(2) of the Assam Agricultural Income Tax Act, 1939 (for short, "the Act"),, which provides that agricultural income derived from the land which is used for agricultural purposes by the cultivation of tea means that portion of the income derived from the cultivation, manufacture and sale of tea as is defined to be agricultural income for the purposes of the enactments relating to Indian Income Tax. Dr. Paul also drew our attention to Section 2(1) of the Income Tax Act, 1961, which defines "agricultural income" and Rule 8 of the Income Tax Rules, 1962, which provides that income derived from the sale of tea grown and manufactured by the seller in India shall be computed as if it were income derived from business and forty per cent. of such income shall be deemed to be income liable to tax under the Income Tax Act, 1961, and the balance 60 per cent. is to be regarded as agricultural income under the Act. Referring to Rule 5 of the Assam Agricultural Income Tax Rules, 1939 (for short, "the Rules"), Dr. Paul submitted that the said rule laid down that in respect of agricultural income from tea grown and manufactured by a seller in Assam, the portion of the net income worked out under the Income Tax Act and left unassessed being agricultural income should be assessed under the Act, According to him, the Act provided that while assessing such income under the Act, deduction should be allowed for the expenditure under the Act and the Rules in respect of which deduction had not been allowed under the Income Tax Act in computing the net income from the entire operation. Dr. Paul submitted that the assessee claimed deduction u/s 8(2)(f)(vii) of the Act in respect of the expenses incurred exclusively for earning agricultural income. Dr. Paul further submitted that u/s 37 of the Income Tax Act, 1961, any expenditure not being an expenditure of the nature described in Sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee expended wholly or exclusively for the purposes of the business or profession was to be allowed in computing the income chargeable under the head "Profits and gains of business or profession". As such, certain expenditure although might be allowable in computing the income chargeable under the head "Profits and gains of business or profession", but the same would not be deductible under certain circumstances. Any expenditure which was disallowed as deduction u/s 40A(9) must necessarily fall u/s 37 of the Income Tax Act, 1961. Section 40A(9) would come into operation only when expenditure was otherwise allowable u/s 37 of the Income Tax Act. Dr. Paul, relying on a Supreme Court decision in H.S. Shivakantappa Vs. Commissioner of Agricultural Income Tax, submitted that the principles that apply to the interpretation of Section 37 of the Income Tax Act will also apply to Section 8(2)(f)(vii) of the Act inasmuch as the words "for the purpose of deriving agricultural income" appearing in Section 8(2)(f)(vii) of the Act do not mean anything very different from the words "for the purpose of business" appearing in Section 37 of the Income Tax Act.

On facts, Dr. Paul submitted that the respondents did not challenge the bona fides or genuineness of the expenditure. According to him, the claim was rejected only on the ground that it was not only for the purpose of earning agricultural income. Dr. Paul assailed the reasoning of the learned single judge that the expenditure incurred indirectly for the welfare activities was not allowable expenditure. Elaborating his submission, Dr. Paul submitted that it was well-settled that an expenditure incurred indirectly even in the course of business and even indirectly to facilitate the carrying on of the business was also an expenditure incurred wholly and exclusively for the purpose of the business. In this connection, Dr. Paul had relied on a decision of the apex court in Empire Jute Co. Ltd. Vs. Commissioner of Income Tax, Relying on the said decision, Dr. Paul emphasised on his contention that the expenditure incurred indirectly for welfare activities to facilitate the carrying on of the business is also an expenditure incurred wholly and exclusively for the purpose of the business.

Dr. Todi, learned Government Advocate, appearing on behalf of the Revenue, refuted the submission made by Dr. Paul. According to him, the actual expenditure made towards the agricultural activities should be allowed. The amount spent for welfare activities was not expenditure for agricultural purposes. It is a mixed expenditure for both agricultural and business purposes. Therefore, according to Dr. Todi, the disallowances made by the authorities was justified and the learned single judge rightly rejected the claim. The next contention of Dr. Todi was that the amount was given to a sister concern and not spent by the company itself. Therefore, on this count also the claim of the company must fail. The amount of Rs. 4 crores spent through two different agencies was unreasonable and, therefore, no allowance should be given to them. In reply to that, Dr. Paul submitted that it was well-settled that if the expenditure was incurred for the purpose of business of the company, the Revenue authorities were not competent to sit in judgment over the company and determine the reasonableness of the expenditure from the subjective point of view of the Revenue authorities. If the amount was genuinely spent and there was no doubt about the genuineness of the amount, in that case the authorities had nothing to do.

Regarding the finding of the learned single judge to the effect that in order to get the deduction, the amount must be spent in the said year itself, Dr. Paul submitted that in the hands of the assessee, the amount should be spent in the same year. As the amount had already been given to two different agencies, it went out of the coffers of the company and the requirement of law was fulfilled.

On the rival contentions of the parties it is to be seen whether the conclusions arrived at by the learned single judge approving disallowance can be sustained in law or not. The business of tea is of a composite nature. There is plantation and cultivation of tea and manufacture and sale of the same. The entire business can be divided into two parts, namely, agricultural activities and business activities. As the entire business is a mixed type of business it is difficult to ascertain which part of the income comes out of the agricultural activities and which part from business and the Legislature thought it fit to apportion the agricultural income and the business income in the manner prescribed under Rule 8 of the Rules. As per the said rule, the entire income of the tea garden business shall be first taken as a composite income derived from business and the allowances deductible under the provisions of the Income Tax Act shall be deducted. Thereafter net income shall be found out and after finding out the net income, forty per cent. of the said income shall be deemed to be income liable to tax under the Income Tax Act. The procedure of apportioning the income at the rate of 40 per cent. and 60 per cent. has been prescribed as it may not always be possible to determine the actual business income and the agricultural income. The Income Tax Act and the Rules do not, however, prescribe any apportionment so far as expenses are concerned unlike the manner prescribed for agricultural and business income. In fact, it is not possible. I quote Rule 8 of the Rules :

"(1) Income derived from the sale of tea grown and manufactured by the seller in India shall be computed as if it were income derived from business, and forty per cent. of such income shall be deemed to be income liable to tax.

(2) In computing such income an allowance shall be made in respect of the cost of planting bushes in replacement of bushes that have died or become permanently useless in an area already planted, if such area has not previously been abandoned, and for the purpose of determining such cost, no deduction shall be made in respect of the amount of any subsidy which, under the provisions of Clause (30) of Section 10, is not includible in the total income."

From a reading of the provisions of the Act and the Rules, it is clear that the genuine expenditure made by an owner of a tea garden of which no deduction was allowed under the Income Tax Act should be allowed. In this connection, a reference can be made to a decision of this court in Agricultural Income Tax Reference No. 2 of 1995 (George Williamson (Assam) Limited v. Asst. Commr. of Taxes (Appeals) [19971 223 ITR 468. In the said decision, this court after quoting Rule 8 of the Income Tax Rules, observed thus (page 474) :

"From a reading of these provisions of the Act and the Rules, in our opinion, expenses incurred for the purpose of earning agricultural income after giving allowable deductions by the Income Tax Officer while making the assessment, whatever amount is left out genuine expenses are to be deducted in accordance with law. In our opinion, the Act and the Rules do not prescribe any procedure for ascertaining what amount is actually spent by the assessee for the purpose of cultivation and manufacture of tea inasmuch as it will not be possible to ascertain actually what amount is spent towards agricultural activities. For instance, an employee may be engaged in cultivation of tea as well as for sale of tea. In such cases, it will not be possible to ascertain the actual expenditure in agricultural activities. We do not agree with the submission of Dr. Todi that actual expenditure made for the purpose of cultivation of tea should be found out and be taken as expenditure to derive income from agriculture. We also find it difficult to accept the submission of Mr. Gogoi that a notional percentage of expenses should be taken out for the purpose of giving allowance to the extent of 60 per cent. in the manner prescribed for the purpose of determining the income. The Legislature thought it fit to prescribe the percentage for determining the income both agricultural and business. It is the legislative wisdom not to prescribe any percentage for the purpose of ascertaining the expenses.

On going through all the provisions of the Act and the relevant Rules, in our opinion, whatever amount spent is disallowed by the Income Tax Officer can be allowed by the Agricultural Income Tax Officer. However, we make it clear that it must relate to plantation, manufacture and sale of tea."

We find no reason to come to a different conclusion in the present case.

Regarding the contention of Dr. Todi that the amount was spent through a sister concern of the company and, therefore, deduction was not allowable, we have given our considered thought. The question is whether the amount was spent for welfare activities. If the spending of the amount was not doubted, whether it was spent by the company or through agency or through the sister concern was immaterial. On this ground also the submission of Dr. Todi fails. As regards the submission of Dr. Todi that the amount was not spent in the relevant year, the amount was transferred to the agencies mentioned above. We find sufficient force in the submission of Dr. Paul in this regard and accordingly we hold that when the amount was given by the company in that year, the company will be entitled to get deduction. Regarding the reasonableness of the amount, we are of the opinion that if the amount was actually spent after taking the decision, the authorities concerned ought not to have questioned its propriety and deduction ought to have been allowed as submitted by Dr. Paul.

In view of the above we hold that the company is entitled to get the deduction of the amount contributed to both the agencies. We respectfully disagree with the conclusion arrived at by the learned single judge and, accordingly, we set aside the judgment and order passed by the learned single judge and also the orders passed by the Agricultural Income Tax Officer and the Assistant Commissioner of Taxes (Appeals).