1963 (6) TMI 35 - HC - Income Tax

High Court rules in favor of assessee company on deductions under Hyderabad Agricultural Income-tax Act.

NIZAM SUGAR FACTORY Versus COMMISSIONER OF AGRICULTURAL INCOME-TAX, HYDERABAD.

NIZAM SUGAR FACTORY Versus COMMISSIONER OF AGRICULTURAL INCOME-TAX, HYDERABAD. - [1964] 52 ITR 939 (AP) Issues Involved:1. Whether the managing agency commission should be included for computing the profits of the company.2. Whether the expenditure towards the construction of huts and camps is a proper revenue deduction under section 7(2)(e) of the Hyderabad Agricultural Income-tax Act.Issue-Wise Detailed Analysis:1. Inclusion of Managing Agency Commission for Computing Profits:The first issue was whether the commission paid to the managing agent should be included in the computation of the company's profits. The Nizam Sugar Factory Limited claimed that the commission paid to the managing agent, which was 10% of the profits from agricultural operations, should be deducted as an item of agricultural expenditure. The Deputy Commissioner of Agricultural Income-tax disagreed, arguing that the services of the managing agent were utilized only for the industrial side of the company and not for its agricultural operations. Additionally, the Deputy Commissioner contended that the commission was an item of expenditure out of the net profits of the company, and thus could not be treated as a revenue expenditure.The High Court found that the commission paid to the managing agent was indeed a legitimate deduction under section 7(2)(e) of the Act. The court noted that the commission was paid for the supervision and management of agricultural operations, which directly contributed to earning the agricultural income. The court held that the manner of calculating the remuneration to be paid to the managing agent and the computation of the net assessable agricultural income for tax purposes are distinct processes. The commission paid to the agent was a payment made for earning the gross agricultural income and, therefore, should be considered an expense of cultivating the crop.The court referenced two cases to support its decision: British Sugar Manufacturers Ltd. v. Harris and Commissioner of Income-tax v. Bombay Burma Trading Corporation. Both cases established that payments made as remuneration for services rendered, calculated as a percentage of profits, are legitimate deductions for tax purposes. Consequently, the court concluded that the managing agency commission should be deducted as an expense of cultivating the crop.2. Deduction of Expenditure for Construction of Huts and Camps:The second issue was whether the expenditure towards the construction of huts and camps for laborers should be considered a proper revenue deduction under section 7(2)(e) of the Act. The Nizam Sugar Factory Limited argued that these expenses were necessary for providing accommodation to laborers during the agricultural season and should be deducted from the gross agricultural income.The Deputy Commissioner allowed only a partial deduction, treating the expenditure as a capital expense and allowing depreciation at the rate of 12.5% under rule 3(1) of the Rules. The company contended that the entire expenditure should be considered a revenue expense, as the materials used for constructing the huts did not last more than a year and nothing would be left over for the next year.The High Court agreed with the company's contention. The court noted that the expenditure was of a recurring nature and was necessary for providing amenities to the laborers, such as water supply, medical aid, and sanitation. The court held that these expenses should be considered as expenses of cultivating the crop within the meaning of clause (e) of sub-section (2) of section 7 of the Act. The court emphasized that the term 'expenses of cultivating the crop' should not be narrowly interpreted but should include all expenses reasonably connected with and involved in the process of raising the crop.The court also referenced the Supreme Court's decision in Assam Bengal Cement Co. v. Commissioner of Income-tax, which provided criteria for distinguishing capital expenditure from revenue expenditure. Applying these criteria, the court concluded that the expenditure on huts and camps was not a capital expense but a revenue expense, as it did not bring into existence an asset or advantage of enduring benefit.Conclusion:Both questions referred to the High Court were answered in the negative and in favor of the assessee company. The managing agency commission was considered a legitimate deduction as an expense of cultivating the crop, and the expenditure on huts and camps for laborers was deemed a proper revenue deduction. The court made no order as to costs.