1964 (4) TMI 14 - SC - Income Tax

Interest on Plantation Purchase Deductible under Tax Act Section

State Of Madras Versus GJ. Coelho

The High Court held that the interest paid for purchasing the plantation was deductible under section 5(e) of the Madras Plantations Agricultural ... Whether interest paid on monies borrowed for the purchase of the plantation is expenditure of the nature referred to in section 5(e) of the Act and should therefore be deducted in assessing the income of the plantation during the year ? Held that:- it is impossible to dissociate the character of the assessee as the owner of the plantation and as a person working the plantation. The assessee had bought the plantation for working it as a plantation, i.e., for growing tea, coffee and rubber. In principle, no distinction between interest paid on capital borrowed for the acquisition of a plantation and interest paid on capital borrowed for the purpose of existing plantations : both are for the purposes of the plantation. In the result, we agree with the High Court that the deduction claimed by the assessee fell within the scope of section 5(e) of the Act, and that the whole of ₹ 22,628-9-8 and not merely ₹ 1,570-10-7 should have been deducted from his assessable income. Appeal dismissed. Issues Involved:1. Whether the interest paid on monies borrowed for the purchase of the plantation is deductible under section 5(e) of the Madras Plantations Agricultural Income-tax Act.2. Whether the interest paid constitutes capital expenditure.3. Whether the interest paid constitutes personal expenses.4. Whether the interest paid is laid out or expended wholly and exclusively for the purpose of the plantation.Issue-wise Detailed Analysis:1. Deductibility of Interest under Section 5(e) of the Act:The assessee claimed a deduction of Rs. 22,628-9-8 towards interest on borrowed money for purchasing the Silver Cloud Estate. The Agricultural Income-tax Officer allowed only Rs. 1,570-10-7, disallowing Rs. 21,057-15-1 based on section 5(k) of the Madras Plantations Agricultural Income-tax Act, which limits interest deduction to six per cent on an amount equivalent to 25 per cent of the agricultural income. The High Court held that the entire amount should be deductible under section 5(e), as it fell within the scope of 'expenditure incurred... laid out or expended wholly and exclusively for the purpose of plantation.'2. Nature of Interest as Capital Expenditure:The State contended that the interest paid was capital expenditure. The court referred to principles from Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax, which distinguish between capital and revenue expenditure. Capital expenditure is for initiating, extending, or substantially replacing business equipment, while revenue expenditure is part of circulating capital. The court concluded that the interest payment did not acquire a new asset or enduring benefit and was part of circulating capital, thus qualifying as revenue expenditure.3. Nature of Interest as Personal Expenses:The State argued that the interest payment was a personal expense of the assessee. The court rejected this, clarifying that personal expenses are those related to personal needs, such as clothes and food, and not related to the business. The interest payment was connected to the business of the plantation and thus could not be classified as personal expenses.4. Interest Laid Out Wholly and Exclusively for the Purpose of the Plantation:The State argued that the interest was not wholly and exclusively for the plantation. The court, referencing Commissioner of Income-tax v. Malayalam Plantations Ltd., emphasized that expenses for the purpose of business include those for running, protecting, and preserving the business. The court found that the interest payment was closely related to the plantation's operation. The purchase and operation of the plantation were viewed as an integrated whole, making the interest payment an expense wholly and exclusively for the plantation.Conclusion:The court agreed with the High Court that the deduction claimed by the assessee fell within the scope of section 5(e) of the Act. Therefore, the entire interest amount of Rs. 22,628-9-8 should be deducted from the assessable income, not just Rs. 1,570-10-7. The appeal was dismissed with costs.Appeal dismissed.