Case: State Of Madras Vs. C. J. Coelho

1. The respondent, hereinafter referred to as the assessee, purchased an estate in 1950, known as Silver Cloud Estate, consisting of tea, coffee and rubber plantations, in Gudalur Nilgiris, Madras State. Out of the sale price of Rs. 3,10,000/-, he borrowed Rs. 2,90,000/-, at interest varying from seven to eight per cent, per annurn. For the assessment year 1955-56, the assessee claimed to deduct interest on this sum, amounting to Rs. 22,628/9/8. The Agricultural Income-tax Officer, Gudalur, disallowed Rs. 21;057/15/1, allowing Rs. 1,570/10/l, under S. 5 (k) of the Madras Plantations, Agricultural Income-tax Act (Madras Act. V of 1955), (hereinafter referred to as the Act). The relevant part of the assessment order is reproduced belowon borrowing Rs. 21,057-1. The assessee has claimed Rs. 22,628-9-8 towards interest. It is seen that about Rs. 80,000 has been borrowed from various parties, for the maintenance of the estate. Under S. 5 (k) the interest has to be limited to six per cent. on an amount equivalent to 25 per cent of the agricultural income in that year. The gross income is Rs. 1,04,710-13-11. So the borrowing has to be limited to 25 per cent of Rs. 1,04,710-13- 11 which is Rs. 26,177-ll-6. Interest at six per cent on this amount is Rs. 1,570-10-7. So a sum of Rs. 21,057-15-1 is disallowed (22,628-9-8 minus 1,570-10-7).The assessee appealed to the Assistant Commissioner of Agricultural Income-tax, without success. He then appealed to the Madras Plantations Agricultural Income-tax Appellate Tribunal hereinafter referred to as the Tribunal. The Tribunal observed as followsis not possible to agree with the contention that interest paid in the year of account towards a loan borrowed by the proprietor for the purpose of acquisition of the estate will fall within the category of "expenditure wholly and exclusively laid out for the purpose of the plantation". The immediate objet of the expenditure, i.e. payment of interest, is to liquidate a personal liability of the proprietor, as a debtor. That after such borrowing the debtor used it as sale price-and acquired the estate, cannot make the payment of interest an expenditure wholly and exclusively laid out for the purpose of the plantation." The language of the various subdivisions of S. 5 of the Act referring to the various items of permissible deductions towards expenditure shows that the expenditure and the plantation must have a direct and proximate connection. Here, the proximate connection of the payment is with a personal loan and not with the plantation.The assessee filed a revision application to the High Court under S. 54(1) of the Act, and raised the following question below itof law raised for decision by the High Court-Whether interest paid on monies borrowed for the purchase of the plantation is expenditure of the nature referred to in S. 5 (e) of the Act and should therefore be deducted in assessing the income of the plantation during the year.The High Court held that the deduction claimed by the assessee fell within the scope of S. 5 (e) of the Act and that the whole of Rs. 22,628/9/8, and not merely Rs. 1,570/10/7, should have been deducted from his assessable income. It ordered that the assessment be revised accordingly. The High Court refused to certify the case as a fit one, under Art, 133 (1) (c) of the Constitution. But this Court gave special leave to the appellant to appeal against the judgment and order of the High Court.

Reasoning: 10. If we apply these principles to the facts of this case, the answer seems clear that the payment of interest is revenue expenditure.No new asset is acquired with it; no enduring benefit is obtained. Expenditure incurred was part of circulating or floating capital of the assessee. In ordinary commercial practice payment of interest would not be termed as capital expenditure.Accordingly, we hold that there is no force in the contention that the payment of interest was capital expenditure within S. 5 (e) of the Act14. The next point, namely, that the payment of interest was a personal expense is equally without substance. We are unable to appreciate that any expense to discharge a personal obligation becomes a personal expense within S. 5(e). Personal expenses would include expenses on the person of the assessee to satisfy his personal needs such as clothes. food, etc., or purposes not related to the business for which the deduction is claimed.Applying the above principles to the facts of this case, it seems to us 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. The payment of interest on the amount borrowed for the purchase of the plantation when the whole transaction of purchase and the working of the plantation is viewed as an integrated whole, is so closely related to the plantation that the expenditure can be said to be laid out or expended wholly and exclusively for the, purpose of the plantation. In this connection, it is pertinent to note that what the Act purports to tax is agricultural income and not agricultural receipts. From the agricultural receipts must be deducted all expenses which in ordinary commercial amounting must be debited against the receipts. There is nothing in the Act which prohibits such expenses from being deducted. No farmer would treat interest paid on capital borrowed for the purchase of the plantation as anything but expenses, and as long as the deductions he claims, apart from any statutory prohibition, can be fairly said to lead to the determination of the true net agricultural income, these must be allowed under the Act. In principle, we do not see any distinction between interest paid on capital borrowed for the acquisition, of a plantation and that between interest paid on capital borrowed for the purpose of existing plantations, both are for the purposes of the plantation.