Interest on agricultural borrowings stays deductible absent proof of use for immature plant cultivation or upkeep

Interest on borrowings under the Agricultural Income-tax Act, 1950 remains deductible where the funds are shown to have been used for agricultural purposes under section 5(h) or for reclaiming, improving or cultivating the property under section 5(i). The Explanation excluding expenditure on cultivation, upkeep or maintenance of immature plants applies only when there is a definite and real link between the borrowed amount and such immature plants. On the record, no specific material showed that any borrowed funds were so spent, so the disallowance could not be sustained and the interest was treated as allowable.

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Issues: Whether interest paid on borrowed funds was allowable as a deduction under section 5(h) or section 5(i) of the Agricultural Income-tax Act, 1950, when the borrowings were alleged to have been used for development of the estate including immature area.

Analysis: The allowance under section 5(h) depends on interest in respect of agricultural loans taken and expended on the land from which agricultural income is derived, while section 5(i) covers interest on amounts borrowed and actually spent for reclaiming, improving or cultivating the property from which agricultural income is derived. The Explanation excluding expenditure on cultivation, upkeep or maintenance of immature plants applies only when there is a definite and real connection between the borrowed amount and such immature plants. In the absence of material showing that any portion of the borrowed funds was specifically expended for cultivation, upkeep or maintenance of immature plants, the disallowance could not be sustained. The determination turned on the factual finding reached from the record.

Conclusion: The interest was allowable and the question was answered in the affirmative, in favour of the assessee and against the department.

Ratio Decidendi: Where no specific material shows that borrowed funds were expended for the cultivation, upkeep or maintenance of immature plants, interest on such borrowings remains deductible under section 5(h) or section 5(i) of the Agricultural Income-tax Act, 1950, and the issue is one of fact.

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