Kil Kotagiri Tea & Coffee Estates … vs Commissioner Of Agricultural … on 21 March, 1986

Madras High Court
Kil Kotagiri Tea & Coffee Estates … vs Commissioner Of Agricultural … on 21 March, 1986
Equivalent citations: 1986 161 ITR 497 Mad
Author: Sathiadev
Bench: T Sathiadev


Sathiadev, J.

1. Petitioner seeks for quashing the proceedings of the first respondent dated July 3, 1979, which in turn had confirmed the other impugned orders of the second respondent dated November 24, 1977. Petitioner is an assessee under the Tamil Nadu Agricultural Income-tax Act, 1955. For the assessment year 1975-76, it was subjected to tax by a final assessment order dated November 24, 1977. Its net agricultural income was fixed at Rs. 3,79,086 and a tax liability of Rs. 2,08,497.30 was assessed. In doing so, the expenditure claimed under “Head Office expenses” towards provision made for retirement gratuity to employees under the Payment of Gratuity Act, 1972, was allowed to be deducted in the computation of coffee income. Petitioner’s estate has both tea and coffee and it apportions 20 per cent. of its income towards coffee and it is not in dispute. After the said order was passed, second respondent, by invoking section 36 of the Act, sent a notice dated March 20, 1978, stating that a sum of Rs. 41,070 was allowed by mistake under retirement gratuity and hence it is proposed to revise the earlier assessment order. Petitioner claims that under section 5(e) of the Act, provision for gratuity is allowable and there being no provision similar to section 40A(7) of the Income-tax Act, the second respondent cannot rely upon what was done by the Income-tax Department, in respect of the income derived from tea and furthermore, the power under section 36 cannot be invoked in contentious matters. Second respondent having proceeded to hold as proposed, petitioner preferred a revision to the first respondent which was also rejected and hence it had preferred the present writ petition.

2. On behalf of the respondents, it is submitted that the net income from coffee (estates) is determined by the Agricultural Income-tax Officer only and he is the only authority who can allow or disallow the expenditure relating to coffee (income). Provision of gratuity does not come within the fold of section 5(e), unless a trust had been formed for the gratuity fund. Petitioner had formed the trust only on and from December 1, 1975, and only from the following assessment years deduction is permissible. Therefore, it being a mistake apparent on the face of the records, section 36 was invokable.

3. Mr. K. J. Chandran, learned counsel for the petitioner, would submit that as far as the income from coffee is concerned, it has no relevance to what happens with regard to tea under the Indian Income-tax Act. This plea deserves acceptance. Hence, what is required to be considered is whether in respect of the coffee income, under section 5(e), expenditure incurrable towards gratuity payable under the Gratuity Act is allowable or not. Section 5(e) reads as follows :

“any expenditure incurred in the previous year (not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of the land;”.

Section 37(1) of the Income-tax Act reads as follows :

“Any expenditure (not being expenditure of the nature described in sections 30 to 36 and section 80VV and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head ‘ Profits and gains of business or profession’.”

4. Thus, it is clear that section 5(e) is almost a reproduction of section 37(1) of the Income-tax Act, except for the word “land” at the end of it. In interpreting the scope of section 37(1) of the Income-tax Act in CIT v. High land Produce Co. Ltd. [1976] 102 ITR 803, a Division Bench of the Kerala High Court held that the correct principle of valuation of this contingent liability is to ascertain the present value of the contingent liability which had arisen during the accounting period on actuarial valuation. It was also pointed out that “it is necessary to take into account in ascertaining the true profits and gains of business, the legitimate claims, if any, made in accordance with the principles of accountancy and well established commercial practice, and the liability towards gratuity relatable to the year of account, is a permissible deduction”. On an analogous provision existing in the Karnataka Agricultural Income-tax Act, a Division Bench of the Karnataka High Court in Balanoor Tea & Rubber Co. Ltd. v. State of Karnataka [1984] 148 ITR 736 by relying upon the decision of the Supreme Court in Metal Box Co. of India Ltd. v. Their Workmen [1969] 73 ITR 53, held that the provision for gratuity to employees, would be deductible. Therefore, under the Act, a similar provision having been engrafted on how it had been provided under the Income-tax Act, in the light of the said decisions above referred to under section 5(e), provision for gratuity is an allowable item of expenditure irrespective of the fact whether a trust has been formed or not. No provision akin to section 40A(7) of the Income-tax Act is found in the Act. Hence, the invocation of powers under section 36 of the Act was totally uncalled for.

5. As to whether this is a case in which section 36 would be attracted or not, it being a contentious matter, it does not call for any further consideration in view of what has been stated above.

6. Hence, this writ petition is allowed with costs. Counsel’s fee Rs. 250.

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