JUDGMENT
M. Jagannadha Rao, C.J.
1. These six tax revision cases arise out of orders passed by the Agricultural Income-tax Appellate Tribunal and raise common questions. They relate to three assessment years 1975-76, 1976-77 and 1977-78. Tax Revision Cases Nos. 106 and 143 of 1991 relate to the assessment year 1975-76, T. R. Cs. Nos. 111 and 162 of 1991 relate to the assessment year 1976-77 and T. R. Cs. Nos. 129 and 133 of 1991 relate to the assessment year 1977-78. There was a remand order earlier by the Tribunal and, after remand, the matter had again come up before the Tribunal, and that is the reason why two T. R. Cs. have been filed for each year. While T. R. Cs. Nos. 111, 133 and 143 of 1991, the first of the cases in each of the three years, relate to the original orders passed by the Tribunal at the time of remand, T. R. Cs. Nos. 106, 162 and 129 of 1991 relate to the orders passed by the Tribunal in the appeals which came up before the Tribunal subsequent to the earlier remand orders. In the three years, the question arises in relation to Explanation 2 to Section 5 of the Kerala Agricultural Income-tax Act, 1950 (the “Kerala Act”). The assessee has claimed in all the three years that the rent paid by the assessee to its landlord in respect of the entire estate is to be
allowed as a deduction under Section 5(b) of the Kerala Act. But the Tribunal has not allowed deduction in so far as the portion of rent attributable to the extent of land covered by immature plants was concerned. This was on the basis that Explanation 2 introduced in 1961 below Section 5 is applicable to Section 5(b) also under which deduction is claimed. The other question relates to the deduction towards interest which is claimed as a deduction under Section 5(e) or (h) or (i) alternatively. The interest claimed as a deduction is on the loan obtained and utilised by the assessee for the purpose of cultivation, etc., in respect of the entire estate, that is to say, the mature and immature oil palm. The Tribunal has riot clearly stated whether the claim of the assessee would come under one or the other of the clauses, viz., Section 5(e) or (h) or (i). It has, however, held that Explanation 2 is also attracted to the above-said deduction, and the interest paid to the creditors by the assessee has to be disallowed in so far as the portion of the principal utilised for bringing up the immature oil palms. This method was adopted on the basis that Explanation 2 was attracted to the above-said claim. It may also be noted that non-deduction of the rent in part is the subject-matter of the appeals in all the three years, while the non-deduction of the interest charges in part, as stated above, relates to the two assessment years 1975-76 and 1976-77.
2. We have already stated that the claim for deduction of the entire interest is for all the three assessment years and the claim is under Section 5(b) of the Kerala Act. So far as the deduction of interest is concerned, the claim of the assessee was under Section 5(e) or, alternatively, under Section 5(h) or 5(i). But, the Tribunal has not given any clear-cut findings in so far as the claim for deduction of interest in respect of the assessment years 1975-76 and 1976-77 is concerned. We are, therefore, deciding the main legal question, namely, as to whether Explanation 2 to Section 5 governs all the clauses of Section 5 or whether it is to be restricted to Section 5(j) alone. A question also incidentally arises as to whether Explanation 2 covers only a part of the expenses under Section 5(j) or whether it covers the entire expenses covered by Section 5(j). We shall decide the legal questions and will leave it to the Tribunal to dispose of all the appeals once again on the basis of the principles of law laid down by us.
3. It is contended by learned counsel for the petitioners, Shri Markose Vellapally, that Explanation 2 to Section 5 of the Kerala Act 9 of 1961 was inserted with a view to get over the decision of the Supreme Court in Travancore Rubber and Tea Co. Ltd. v. Commr. of Agrl. I. T. [1961]
41 ITR 751 (SC), that the decision of the Supreme Court clearly related to Section 5(j) of the Kerala Act, and that Explanation 2 was intended to cover only Section 5(j) and not the various other clauses of Section 5. In this behalf, reference is made to the Statement of Objects and Reasons which preceded the Bill and Act 9 of 1961. Reference is also made to several other decisions of the Supreme Court as well as this court in relation to Sections 10(2)(xv) and 12(2) of the Indian Income-tax Act, 1922, and also to other rulings rendered under Sections 37(1) and 57(iii) of the Income-tax Act, 1961, to say that Section 5(j) is a residuary provision. It is also contended that Explanation 2 is intended to cover only a part of the area covered by Section 5(j) and not the entire extent covered by the said clause. Learned counsel further contended that the expression “the land from which agricultural income is derived” appearing in the various clauses of Section 5 does not mean that the agricultural income must necessarily be derived in the particular previous year, and that the latter part of the said expression governs the word “land”. It is also pointed out that the words in Section 5(j) “for the purpose of deriving agricultural income” do not also mean that, in the previous year, agricultural income must necessarily have been derived as a direct correlation of the expenditure referred to in Section 5(j). If there is a loss, it could be deducted from the profit of the year, or it could be carried forward under the other provisions of the Kerala Act. It is further argued that the words “for the cultivation, upkeep and maintenance of immature plants” in Explanation 2 refer only to direct expenses and not indirect expenses.
4. On the other hand, it is contended by the learned Government Pleader, Special Taxes, Shri T. Karunakaran Nambiar, that while it is true that Explanation 2 was inserted as a consequence of the decision of the Supreme Court under Section 5(j) in Travancore Rubber and Tea Co. Ltd. v. Commr. of Agrl. I.T. [1961] 41 ITR 751 (SC), but it has been put at the end of the section, and uses the words “in this section”, and, therefore, Explanation 2 is applicable to all the clauses of Section 5. He contends that it is not permissible to interpret the provisions in Explanation 2 with reference to the Statement of Objects and Reasons, and that the use of the words” the land from which agricultural income is derived “which occur in the various clauses of Section 5 mean that the agricultural income must necessarily be derived for the purpose of allowing particular expenditure by way of taxes, rent, or interest. In so far as any part of the land which did not yield income, taxes, rent, expenditure or interest could be restricted to that part of the land which produces income from mature
plants, while that part of the taxes, rent, expenditure or interest from lands referable to immature plants cannot be deducted from income. It is also contended that the words “for the purpose of deriving agricultural income” occurring in Section 5(j) also necessarily mean that the income must be derived in the previous year. As to the distinction between the words “for the purpose of” used in Section 5(j) and the words “for the cultivation, upkeep or maintenance of immature plants” used in Explanation 2, it is contended that, notwithstanding the slight difference in the words, Explanation 2 covers the entire field of Section 5(j).
5. The following points arise for consideration :
(1) Whether, in the scheme of Section 5, Section 5(j) is a residuary provision in regard to the claims of deduction from taxable agricultural income similar to Sections 10(2)(xv) and 12(2) of the Indian Income-tax Act, 1922, and Sections 37(1) and 57(iii) of the Income-tax Act, 1961?
(2) Whether Explanation 2 to Section 5 of the Kerala Act is an Explanation intended for explaining Section 5(j) only, or whether it is intended to be an Explanation for the other clauses of Section 5 also ?
(3) If Explanation 2 is to be treated as referable to Section 5(j) only, whether the said Explanation covers the entire field covered by Section 5(j) or only a part of it?
6. Point No. 1.–The point at issue is whether, in the scheme of Section 5 of the Kerala Act, Section 5(j) is a residuary provision similar to the corresponding residuary provisions in the Income-tax Acts of 1922 and 1961. This aspect has considerable bearing on the points involved inasmuch as, if Section 5(j) is a residuary provision, the corresponding principles applicable to the residuary clauses can, to a large extent, be used for the purposes of Section 5(j).
7. We shall briefly refer to a few provisions of the Kerala Act. It may be noticed that Section 3 relates to the charge of agricultural income-tax in gelation to the income of the previous years of every person. Section 4 defines the total agricultural income of the previous year as comprising all agricultural income derived from land situated within the State and received by the assessee. Section 5 deals with computation of income and the section also provides for deductions. It will be convenient to divide Section 5 into separate parts for a proper appreciation of this provision as follows :
I. Clauses (a) and (b) of Section 5 dealing with deduction of land revenue and rent go together.
II. Clauses (c) and (d) of Section 5 deal with deduction of expenses for maintenance and repairs of capital assets.
III. Clauses (e), (f), (g), (h) and (i) deal with deduction of interest. We shall refer to the clauses under the three headings :
“I. Land revenue, etc., and rent :
(a) any sums paid in the previous year on account of-
(i) land revenue or any tax in lieu thereof due to the Government, the Sreepandaravagai or the Sripadam ;
(ii) Jenmikaram ;
(iii) Thiruppuvaram ; and
(iv) local rates and cesses and municipal taxes, in respect of the land from which the agricultural income is derived.
(b) any rent paid in the previous year to the landlord or superior landlord, as the case may be, in respect of land from which the agricultural income is derived.
II. Expenses on maintenance and for capital asset :
(c) any expenses incurred in the previous year on the maintenance of any irrigation or protective work constructed for the benefit of the land from which the agricultural income is derived ;
Explanation.–‘Maintenance’ includes current repairs and includes also, in the case of protective dykes and embankments, all such work as may be necessary from year to year for repairing any damage or destruction caused by flood or other natural causes.
(d) any expenses incurred in the previous year on repairs in respect of any capital asset which was purchased or constructed for the benefit of the land from which the agricultural income is derived.
III. Interest :
(e) any interest paid in the previous year on any amount borrowed and actually spent on any capital expenditure incurred for the benefit of the land from which the agricultural income is derived ;
(f) where the land from which the agricultural income is derived is subject to a mortgage or other capital charge, any interest paid in the previous year in respect of such mortgage or charge ;
(g) any interest paid in the previous year on any debt, whether secured or not, incurred for the purpose of acquiring the land from which the agricultural income is derived ;
(h) any sum paid in the previous year as interest in respect of agricultural loans taken and expended on the land from which agricultural income is derived ;
(i) interest paid on any amount borrowed and actually spent for the purpose of reclaiming, improving or cultivating the property from which agricultural income is derived. “(emphasis supplied ).
8. It is after these clauses that Section 5(j) comes, and it reads as follows :
“5. (j). Any expenditure (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 deriving the agricultural income.” ( emphasis supplied ).
9. Section 5(k) deals with other expenditure that may be provided in the Rules, and is followed by certain other specific items of expenditure covered by Clauses (1), (m) and (n).
10. For deciding whether Section 5(j) is a residuary provision, it will be useful to compare Section 5(j) with the corresponding residuary provisions in the Madras (Plantations) Agricultural Income-tax Act and the residuary provisions in the Income-tax Acts of 1922 and 1961 :
A. Section 5(j) of the Kerala Act
Section 5(e) of the Madras Act
any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) (aid out or expended wholly and exclusively for the purpose of deriving the agricultural income.
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 plantation.
B. Indian Income-tax Act, 1922,
section 10(2)(xv)
Income-tax Act, 1961,
section 37(1)
any expenditure (not being an allowance of the nature described in any of the clauses (i) to (xiv) inclusive, and 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 such business, profession or vocation.
any expenditure (not being expenditure of the nature described in sections 30 to 36 and 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 business or profession shall be allowed in computing the income chargeable under the head ‘Profits and gains of business or profession’.”
C. Indian Income-tax Act, 1922,
section 12(2),
Income-tax Act, 1961,
section 57(iii).
. . . any expenditure (not being in the nature of capital expenditure) incurred for the purpose of making or earning such income, profits or gains . . .
any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income.” (emphasis * supplied).
11. It will be noticed that the words “expenditure (not being in the nature of capital expenditure or personal expenses)” occur in A and B alone. The words “laid out or expended wholly and exclusively” also occur. The word “purpose” also occurs. So far as the Income-tax Acts of 1922 and 1961 are concerned, Sections 10(2)(xv) and 12(2) of the Indian Income-tax Act, 1922, and Section 37(1) and Section 57(iii) of the Income-tax Act, 1961, are admittedly treated as residuary provisions.
12. At one time, a Division Bench of this court in Travancore Rubber and Tea Co. Ltd. v. Commr. of Agrl. I. T. [1959] 37 ITR 549, thought that Section 5(j) of the Kerala Act was not a residuary provision relating to deductions, and, therefore, the relevant case law under the corresponding residuary provisions of the Income-tax Acts was not attracted. The aforesaid decision of this court was, however, reversed by the Supreme Court in Travancore Rubber and Tea Co. Ltd. v. Commr. of Agrl. I. T. [1961] 41 ITR 751. No doubt, in that case, the Supreme Court did not specifically say that Section 5(j) of the Kerala Act was in the nature of a residuary provision. When, however, the corresponding provision, Section 5(e) of the Madras Act, came up for consideration before the Supreme Court in State of Madras v. G.J. Coelho [1964] 53 ITR 186, it was clearly observed that the Madras Act was a “word-for-word” reproduction of Section 10(2)(xv) of the Indian Income-tax Act, 1922.
13. In this court, the question again came up before a Division Bench in Commr. of Agrl. I T. v. Nilambur Rubber Co. Ltd. [1969] 71 ITR 686, and the learned judges clearly stated that Section 5(j) of the Kerala Act corresponds to the residuary provision in Section 10(2)(xv) of the Indian Income-tax Act, 1922. They further clarified that this was so in spite of the slight difference in the language, Section 5(j) of the Kerala Act using the words “for the purpose of deriving the (agricultural) income” and Section 10(2)(xv) using the words “for the purpose of such business,
profession or vocation”. In R. G. A. Baker v. State of Kerala [1979] 116 ITR 570 (Ker), another Division Bench reaffirmed the view that Section 5(j) corresponds to the residuary provision in Section 10(2)(xv) of the Indian Income-tax Act, 1922.
14. It is, therefore, clear that the interpretation put upon Section 10(2)(xv) of the Indian Income-tax Act, 1922, as also upon Section 37(1) of the Income-tax Act, 1961, by the Supreme Court will be applicable, so far as may be, to Section 5(j) of the Kerala Act. Point No. 1 is decided accordingly.
15. Points Nos. 2 and 3.–The point is whether Explanation 2 to Section 5 of the Kerala Act is an Explanation intended for explaining Section 5(j) only or whether it is intended to be an Explanation for other clauses of Section 5 also and also whether Explanation 2 covers the entire field of Section 5(j).
16. We have first to mention how Explanation 2 came to be inserted in Section 5 by Kerala Act 9 of 1961.
17. In Travancore Rubber and Tea Co. Ltd. v. Commr. of Agrl. I. T. [1959] 37 ITR 549 (Ker), already referred to, the assessment years were 1951-52, 1952-53 and 1953-54 and the question referred to this court was whether, under the Kerala Act, in calculating the assessable agricultural income of a rubber estate already planted and containing both mature yielding rubber trees and also immature rubber plants which have not come into bearing, the annual expenses incurred for the upkeep and maintenance of such rubber plants could be permitted to be deducted from the income. The Division Bench observed that they found it impossible to say that the amounts spent for the upkeep and maintenance of immature rubber plants were laid out or expended “for the purpose of deriving agricultural income” much less that they were laid out or expended “wholly and exclusively” for that purpose. According to them, the words “the agricultural income”, in the context, could only mean the agricultural income obtained in the accounting year concerned and not the agricultural income of any other period. In other words, they thought that, unless the expenditure in respect of which deduction is claimed could be directly correlated to the income, the said expenditure was not entitled to deduction in that year. Inasmuch as the expenditure on immature plants is not yielding income in the year in which the expenditure was incurred from the said immature plants, they thought that the expenditure is not allowable as a deduction in the year in which it was expended. For the said purpose, the Division Bench relied upon an earlier Division Bench decision of the Travancore-Cochin High Court in
Malankara Rubber Produce Co. Ltd. v. Commr. of Agrl. I. T., AIR 1956 Trav.-Cochin 17. The decision of the English Court in Vallambrosa Rubber Co. Ltd. v. Farmer (Surveyor of Taxes), [1910] 5 TC 529 (C. Sess.), which was cited before the Division Bench in the above said case, was treated as not relevant. In the result, in all the three assessment years the deduction of the expenditure incurred on immature plants was disallowed.
18. The decision in the above said case in Travancore Rubber and Tea Co. v. Commr. of Agrl. I. T. [1959] 37 ITR 549 (Ker), was taken in appeal before the Supreme Court and was reversed in Travancore Rubber and Tea Co. Ltd. v. Commr. of Agrl. I. T. [1961] 41 ITR 751. The Supreme Court held that, in calculating the assessable agricultural income under Section 5(j) of the Kerala Act, the entire amount expended on the superintendence, weeding, etc., of the whole rubber estate, irrespective of whether the expenditure was incurred on immature trees or on mature plants was liable to be deducted, even though the immature rubber trees did not yield any income in the relevant year. The Supreme Court applied the principle laid down in the English case Vallambrosa Rubber Co. Ltd. v. Farmer (Surveyor of Taxes) [1910] 5 TC 529 (C. Sess.). The facts of the” English case were that a rubber company had an estate in which, in the year of assessment, only 1/7 produced rubber and the remaining 6/7 of the estate consisting of rubber plants were in the process of growing rubber trees and they do not yield any rubber normally until they are about six years old. The English court allowed the expenditure for the superintendence, weeding, etc., incurred by the company in respect of the whole estate including the non-bearing rubber estate on the ground that, in arriving at the assessable profits, the assessee was entitled to deduct the expenditure for superintendence, weeding, etc., not only in respect of 1/7th of the estate which yielded income, but also the expenditure incurred in respect of 6/7th of the estate, which did not yield any income. After thus following the English case, the Supreme Court observed (at page 755) :
” In our opinion, the amount expended on the superintendence, weeding, etc., of the whole estate should have been allowed against the profits earned and it is no answer to the claim for a deduction that part of those expenses produced no return in that year because all the trees were not yielding rubber in that year.”
19. On the same day, another appeal arising from Kerala in respect of the corresponding provision, Section 5(e) of the Madras Agricultural Income-tax, was disposed of in Commr. of Agrl. I T. v. Calvary Mount
Estates (P.) Ltd. [1961] 41 ITR 755 (SC). The case arose from the Malabar area of Kerala. The Kerala High Court’s decision in Commr. of Agrl. I. T. v. Pullangode Rubber and Produce Co. Ltd. [1960] 40 ITR 681 ; ILR 1958 Ker 660, which was followed in the judgment under appeal, was affirmed.
20. Subsequent to the decision of the Supreme Court referred to above, in Travancore Rubber and Tea Co. Ltd.’s case [1961] 41 ITR 751 (SC), reversing the Kerala decision, the Kerala Legislature passed Amendment Act 9 of 1961 with retrospective effect from April 1, 1951, introducing Explanation 2 and inserting it at the end of Section 5 and the said Explanation reads as follows :
“Explanation 2.–Nothing contained in this section shall be deemed to entitle a person deriving agricultural income to deduction of any expenditure laid out or expended for the cultivation, upkeep or maintenance of immature plants from which no agricultural income has been derived during the previous year. “(emphasis supplied ).
21. If Explanation 2 is to be treated as applicable to all the clauses of Section 5, the position would be that the assessee would not be entitled to deduct the proportionate land revenue under Section 5(a) or rental under Section 5(b) in relation to the area covered by the immature plants. The assessee will not also be able to deduct the proportionate expenses under Sections 5(c) and 5(d) nor the interest on the principal applied for the purpose of the immature plants under Sections 5(e) to 5(i). The Revenue, therefore, contends that Explanation 2 is applicable to all the clauses of Section 5, while the assessee contends that it is to be confined to Section 5(j) alone. Both sides relied upon several principles of interpretation as also the meaning of the various expressions used in Sections 5(a) to 5(j). It is argued on behalf of the assessee that the internal aids, namely, the words used in Section 5(j) and in Explanation 2 and the fact that the Explanation is given retrospective effect from April 1, 1951, lead to the conclusion that Explanation 2 is intended to explain Section 5(j) only. Reference is also made to external aids such as the Statement of Objects and Reasons and the proceedings of the Legislature.
22. If we read Explanation 2 in isolation, it is possible to contend that, having regard to the words “in this section” used therein, the Explanation covers all the sub-clauses of Section 5. But, at the same time, one has to see what is the mischief sought to be remedied.
23. We are satisfied that the internal aids afford sufficient clue to the problem. We shall first examine the matter from the point of view of
internal aids in Section 5(j) and Explanation 2, including the fact that Explanation 2 was given retrospective effect from April 1, 1951, obviously to avoid refunds. If w.e are not able to get a definite clue from internal aids, then we could go to the external aids such as the Statement of Objects and Reasons or the proceedings of the Legislature.
24. We shall initially compare the language used in Section 5(j) and in Explanation 2 :
Section 5(j) :
“any expenditure (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 deriving the agricultural income.
Explanation 2.–Nothing contained in this section shall be deemed to entitle a person deriving agricultural income to deduction of any expenditure laid out or expended for the cultivation, upkeep and maintenance of immature plants from which no agricultural income has been derived during the previous years. ” (emphasis supplied ).
25. It will be noticed that Section 5(j) uses the words “any expenditure …. laid out or expended ” while Explanation 2 too uses the words” any expenditure laid out or expended “. The difference, however, is that, while Section 5(j) describes the expenditure “wholly and exclusively for the purpose of deriving the agricultural income” to be deductible, Explanation 2 says that no deduction will be given for the “expenditure on the cultivation, upkeep and maintenance of immature plants from which no agricultural income has been derived during the previous year”.
26. We have already held that Section 5(j) of the Kerala Act and Section 5(e) of the Madras Act deal with expenditure laid out or expended for the purpose of deriving agricultural income and we have pointed out that they are residuary provisions akin to Section 10(2)(xv) of the Indian Income-tax Act, 1922, and Section 37(1) of the Income-tax Act, 1961, etc. In all these sections, the Legislature has used similar words, viz., “any expenditure laid out or expended”. These words are not used in the other clauses of Section 5(a) to (i) which list out enumerated categories of deductible expenses as contrasted with the residuary category in Section 5(j). In our view, therefore, the primary indication is that, when Explanation 2 also deals with “expenditure laid out or expended”, the draftsman is mainly keeping Section 5(j) in mind, which also uses the same words “expenditure laid out or expended”.
27. The next question is as to the meaning of the words “expenditure for the purpose of deriving the agricultural income” used in Section 5(j) as contrasted with the words “expenditure for the cultivation, upkeep and maintenance” in Explanation 2. The words “for the purpose” have come up for consideration under the corresponding residuary provision in the Income-tax Acts of 1922 and 1961 in several cases and the said rulings have to be applied for purposes of Section 5(j) also. In all these cases, it was argued for the Revenue that the expenditure claimed under the residuary provisions, Section 10(2)(xv) or Section 12(2) of the Indian Income-tax Act, 1922 (or Section 37(1) or Section 57(iii) of the Income-tax Act, 1961), is allowable as a deduction only if it resulted in producing income or taxable income. The Supreme Court has rejected such a contention and has held that because of the use of the word “purpose” in these residuary clauses, it was sufficient if the expenditure was utilised in the year “for the purposes” mentioned in the sections and it was immaterial whether the said expenditure produced income or taxable income. If the income was less than the expenditure, the expenses incurred in the year could be assessed as “loss” and carried forward. Section 12 of the Kerala Act also contains provisions for carrying forward losses.
28. These principles were first laid down in the income-tax laws in Eastern Investments Ltd. v. CIT [1951] 20 ITR 1 (SC), which arose under Section 12(2) of the Indian Income-tax Act, 1922, That decision was followed in CIT v. Royal Calcutta Turf Club [1961] 41 ITR 414 (SC), which again arose under Section 10(2)(xv). There, it was held, following Morgan v. Tate and Lyle Ltd. [1954] 26 ITR 195 ; [1955] AC 21 (ML), that even expenditure incurred for preserving or protecting the estate of its assets was a deductible expenditure if such expenditure was intended to enable the company to carry on its business or to earn profits. Strong and Co. of Romsey Ltd. v. Woodifield [1906] AC 448 (HL) was followed. In fact, in the Turf Club case [1961] 41 ITR 414 (SC), the expenditure allowed as deduction was incurred for the starting of a school for training boys as jockeys for the purposes of the race club. In India Cements Ltd. v. CIT [1966] 60 ITR 52 (SC), a question arose under Section 10(2)(xv) of the Indian Income-tax Act, 1922, and it was held that the expenditure incurred on stamps and registration, etc., incurred in connection with the raising of a loan for the business was a permissible deduction. In CIT v. Indian Bank Ltd. [1965] 56 ITR 77, the Supreme Court permitted deduction of interest on the monies borrowed for investment in securities, even though the income derived from the investment was not taxable because the investment was in exempted items. There the Supreme Court referred to
the English case in Hughes v. Bank of New Zealand [1938] 6 ITR 636 ; [1938] 21 TC 472 (HL) and observed that we need not look behind the expenditure and see whether it has the quality of directly or indirectly producing taxable income. The Supreme Court observed (at page 80) :
“The Legislature stops short at directing that it be ascertained what was the purpose of the expenditure. If the answer is that it is for the purpose of the business, Parliament is not concerned to find out whether the expenditure has produced or will produce income.” (emphasis supplied ).
29. In CIT v. Rajendra Prasad Moody [1978] 115 ITR 519 (SC), Bhagwati J. (as he then was) held, in a case under Section 57(iii) of the Income-tax Act, 1961, that the crucial word was the word “purpose”. It was sufficient if the expenditure was related to the purpose of making or earning income whether, in fact, the income was derived or not.
30. We have, in fact, three cases of the Supreme Court arising under the agricultural income-tax law itself. We have already made reference to two of these cases in detail. They are Travancore Rubber and Tea Co. Ltd.’s case [1961] 41 ITR 751 (SC) and Commr. of Agrl. I. T. v. Calvary Mount Estates [1961] 41 ITR 755 (SC). There it was held that the deduction was allowable even though the expenditure did not produce any income. The third case is the one in State of Madras v. G.J. Coelho [1964] 53 ITR 186 (SC), wherein, apart from explaining the difference between capital expenditure and revenue expenditure, the Supreme Court dealt with Section 5(e) of the Madras Plantations Agricultural Income-tax Act, and said that interest on capital borrowed for purchase of plantations (Note : there is no provision in the Madras Act corresponding to Section 5(g) of the Kerala Act) was deductible under the residuary provision in Section 5(e) even though the expense did not directly generate income in that year.
31. The Kerala High Court has also explained the word “purpose” in Section 5(j) in Commr. of Agrl. I. T. v. Nilambur Rubber Co. Ltd. [1969] 71 ITR 686 (Ker). In that case, while comparing Section 5(j) with Section 10(2)(xv) of the Indian Income-tax Act, 1922, the Division Bench observed (at page 689) :
“It is not necessary that there must be income for claiming the allowance under Clause (j) of Section 5 of the Agricultural Income-tax Act. All that is required is that it should have been expended for the purpose of deriving the income, whether the adventure results in profits or gains.
The same is the position under the Indian Income-tax Act. The purpose of a business is deriving profits and gains ; and, in our opinion, an expenditure for the purpose of business is one for the purpose of deriving income therefrom. ”
32. In Plantation Corporation of Kerala v. Commr. of Agrl. I. T. [1969] 73 ITR 23 (Ker), the same view was expressed while dealing with Section 5(j).
33. If the expenditure referred to in Section 5(j) is, therefore, expenditure incurred for the “purpose” of deriving income from the land,–whether income is derived or not in that year,–the further question is whether the said expenditure referred to in Section 5(j) refers to direct expenditure spent actually for the cultivation, upkeep and maintenance as also indirect expenditure ?
34. The above question in relation to Section 5(j) arose in Commr of Agrl. I. T. v. Malayalam Plantations Ltd. [1978] 115 ITR 624 (Ker), before a Division Bench of this court. The question was whether “police expenses, litigation expenses incurred for conducting encroachment cases, assault and theft cases, industrial disputes, expense for cumblies supplied to workers, and expenditure towards batta, travelling allowance and wages to witnesses” were allowable deductions under Section 5(j) ? It was argued that direct expenses, (i.e.), “agricultural expenses” alone were deductible as against “agricultural income”. While holding that the expenses above referred to were not in the nature of direct “agricultural expenses”, the Division Bench held that both direct and indirect expenses were allowable under Section 5(j) as the said section was comparable to Section 10(2)(xv) of the Indian Income-tax Act, 1922. After referring to Commr. of Agrl. I. T. v. Nilambur Rubber Co. Ltd. [1969] 71 ITR 686, which was also a case under Section 5(j) decided by this court and to Travancore Rubber and Tea Co. Ltd. v. Commr. of Agrl. I. T. [1961] 41 ITR 751 (SC), the Division Bench in Malayalam Plantations’ case [1978] 115 ITR 624, 628 (Ker) observed :
“To confine this provision to cover only those expenses which are directly and immediately relatable to the derivation of income will be to import limitations which are not there, either in the language or in the context, and to hold that what is contemplated is only ‘agricultural expenses’ considered as an antithesis of ‘agricultural income’. It appears that Section 5(j) of the Agricultural Income-tax Act and Section 10(2)(xv) of the Indian Income-tax Act, 1922, represent conceptions which are kindred though distinct.” (emphasis supplied ).
35. The Bench further observed (at page 628) :
“No doubt, there should be connection between the items of expenditure and the earning or ensuring of income ; and the connection should not be remote, indefinite or fanciful. Whether there is such connection in a given case will be a question of fact, once the proper approach is seen to have been made.”
36. Thus, Section 5(j) has been held to cover “direct” as well as “indirect expenses” and not to be confined to “agricultural expenses” stricto sensu, but to expenses laid out, wholly or exclusively for the purpose of deriving income. However, there should be connection between the item of expenditure and the income earned or intended to be earned. It is sufficient if the purpose was to derive income.
37. In fact, in Commr. of Agrl. I. T. v. Kerala Estate Plantations [1973] 89 ITR 167 ; [1972] KLT 398 (Ker), another Division Bench described the expenses covered by Explanation 2 as “direct” expenditure.
38. If, thus, Section 5(j) is intended to cover “direct and indirect expenses” having a nexus with the purpose of deriving agricultural income and it is also not actually necessary that the said expenditure should help to derive income in that year, what is the scope and content of Explanation 2 is the next question.
39. It must be noticed at the outset that while Section 5(j) refers to amounts laid out or expended “for the purpose” of deriving agricultural income, Explanation 2 refers to a particular type of expenditure laid out or expended and which is not deductible, namely, amounts laid out or expended for the cultivation, upkeep and maintenance of immature plants from which no agricultural income has been derived during the previous year. In other words, while Section 5(j) permits the deduction of expenditure either directly or indirectly laid out or expended “for the purpdse” of deriving agricultural income, Explanation 2 docs not permit deduction,–in so far as immature plants from which no agricultural income has been derived during the previous year are concerned–of the expenses relating to cultivation, upkeep and maintenance which are of a direct nature.
40. Therefore, going by the internal aids in Section 5(j) and Explanation 2, namely, the actual words used, it is, in our opinion, clear that Section 5(j) permits deduction of the expenditure of a direct as well as indirect nature laid out or expended for the purpose of deriving agricultural income, but Explanation 2 does not permit deduction of the direct
expenditure laid out or expended towards “cultivation, upkeep and maintenance” of immature plants. Explanation 2 is thus an Explanation only to Section 5(j).
41. There is yet another indication from another internal aid, namely, in the Legislature giving retrospective effect to Explanation 2 with effect from April 1, 1951. Obviously, this was to avoid refund of the tax levied and collected on the basis of the judgment of the High Court in Travancore Rubber and Tea Co. Ltd.’s case [1959] 37 ITR 549 (Ker), which, as already stated, related to the assessment years 1951-52, 1952-53 and 1953-54. We have already stated that the High Court judgment was reversed by the Supreme Court in Travancore Rubber and Tea Co. Ltd.’s case [1961] 41 ITR 751 (SC). Obviously, the Legislature intend to restore the position before the Supreme Court judgment by making Explanation 2 retrospective in so far as Section 5(j) was concerned.
42. In this context, we may also refer to two rulings of the Supreme Court and to a ruling of this court which stated that the object of Explanation 2 was to restore the status quo ante prevailing before the Supreme Court judgment in Travancore Rubber and Tea Co. Ltd.’s case [1961] 41 ITR 751 (SC). In Karimtharuvi Tea Estates Ltd. v. State of Kerala [1963] 48 ITR (SC) 83, wherein the constitutional validity of Explanation 2 to Section 5(j) fell for consideration, the Constitution Bench of the Supreme Court observed (at page 90) :
“Now, Explanation 2 added to Section 5 by the Amendment Act takes away the advantage of the provisions of Clause (j) of Section 5 with respect to the expenses incurred in the upkeep and maintenance of immature plants from which no agricultural income has been derived during the accounting year.” (emphasis supplied ).
43. Again in Travancore Rubber and Tea Co. Ltd. v. State of Kerala [1963] 48 ITR (SC) 102, decided on the same day by the same Bench, the Supreme Court observed, while dealing with the validity of Explanation 2, that Explantion 2 was the result of the earlier judgment of the Supreme Court in Travancore Rubber and Tea Co. Ltd.’s case [1961] 41 ITR 751 (SC). In Commr. of Agrl. I. T. v. Johnsons Estates and Agencies (P.) Ltd. [1964] 52 ITR 629 (Ker), a Division Bench of this court held that Explanation 2 was intended to “restore” the position as it existed before the Supreme Court decision in Travancore Rubber and Tea Co. Ltd.’s case [1961] 41 ITR 751 (SC).
44. From the aforesaid internal aids in Section 5(j) and in Explanation 2, we are clearly of the opinion that the Legislature intended that Explanation 2 is to be an Explanation only to Section 5(j) of the Kerala Act and was not intended to be an Explanation to the other sub-clauses of Section 5. This is so in spite of the use of the words “nothing in this section” used in the Explanation 2.
45. In that view of the matter, it is not necessary to go to external aids such as the Statement of Objects and Reasons. However, with a view to complete the discussion and reinforce our aforesaid conclusion, we shall also refer to the external aids, the Statement of Objects and Reasons. It reads as follows :
“Statement of Objects and Reasons :
Under Section 5 of the Agricultural Income-tax Act, 1950, the agricultural income of a person is to be computed after making certain deductions specified in that section. One of the deductions specified in the section is ‘any expenditure (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 deriving the agricultural income’. Amounts expended by assessees for the upkeep and maintenance of immature rubber plants, etc., from which no income was derived, were not being deducted in computing the agricultural income, since such amount could not be considered to be spent for the purpose of deriving the agricultural income. But the Supreme Court has recently reversed an earlier decision of the Kerala High Court and held that the amount expended on the superintendence, weeding, etc., of the whole estate should have been allowed against the profits earned and it is no answer to the claim for a deduction that part of those expenses produced no return in that year, because all the trees were not yielding rubber in that year.
46. As a result of this judgment, it has become necessary to allow, in computing agricultural income, deductions not originally contemplated. Since agricultural income-tax has been collected without allowing such deductions, the question of paying large amounts by way of refunds also arose. As these matters would affect the revenue of the State, it was decided that the Agricultural Income-tax Act should be amended retrospectively to provide that nothing in Section 5 of the Act shall require the deductions of any expenditure laid out or expended for the cultivation, upkeep or maintenance of immature plants from which no agricultural income was derived during the previous year. Since the Assembly was not in session and the amendment had to be made urgently, an Ordinance, namely, the
Agricultural Income-tax (Amendment) Ordinance, 1961, was promulgated by the Governor on January 17, 1961, for the above purpose.
47. The Bill is intended to replace the Ordinance by an Act of the Legislature.” ( emphasis supplied ).
48. The principles regarding use of the Statement of Objects and Reasons are well-settled. In Rib Tapes (India) Pvt. Ltd. v. Union of India, AIR 1986 SC 2014, the issue was whether penalty could be imposed on the importer for violation of Section 111(m) of the Customs Act before amendment was made in 1973 so as to include the specific word “value”. Before the amendment, the expression “material particulars” was supposed to cover “value” also, as claimed by the Revenue. But the Supreme Court had held in Union of India v. Rai Bahadur Shreeram Durga Prasad P. Ltd., AIR 1970 SC 1597, that the penal provision had to be strictly construed and, therefore, no penalty could be levied for violation of Section 111(m) since the word “value” was not specifically mentioned in the section.
49. The Supreme Court then went into every clause of the amendment of Section 111(m) by looking into the Statement of Objects and Reasons which had indicated that the amendment provided for confiscation in cases of misdeclaration of value. The Supreme Court observed that, in order to interpret the provision and to infer the intention of the Legislature, the Statement of Objects and Reasons stated in the Bill could be used. It is the mischief to be remedied that gave an indication of the intention.
50. As already stated, the mischief sought to be remedied is referred to in the Statement of Objects and Reasons as well as in the proceedings of the Legislature. In the Statement of Objects and Reasons, it is stated, after referring to the reversal of the High Court judgment by the Supreme Court, in connection with Section 5(j) :
“Since agricultural income tax has been collected without allowing such deductions, the question of paying large amounts by way of refunds also arose.” (emphasis supplied ).
51. The proceedings of the State Legislature dated March 21, 1961, have also been placed before us. They too show that the purpose of the amendment was to get over the decision of the Supreme Court in relation to Section 5(j).
52. Thus, our earlier conclusion arrived at on the basis of internal aids is clearly confirmed by the external aids also. In the result, we hold on point No. 2 that Explanation 2 to Section 5 is intended to explain what
expenditure is not deductible under Section 5(j) and the said Explanation is not intended to explain the deductions in the other clauses of Section 5. On point No. 3, we hold that Explanation 2 does not cover the entire field covered by Section 5(j). While Section 5(j) relates to the deductibility of direct as well as indirect expenses falling within the residuary deductions, Explanation 2 is confined to a part of the direct expenses, i.e., expenses for “cultivation, upkeep and maintenance” of immature plants. Points Nos. 2 and 3 are decided accordingly in favour of the assessee and against the Revenue.
53. Coming to the facts of the cases, the deductions involved relate to “rent” payable in regard to the entire estate and to interest on amounts borrowed for purposes of oil palm. The Tribunal disallowed deduction in respect of both the items in so far as they related to immature plantations.
54. In the light of the principles laid down above, it has to be held that, so far as the deduction towards rent is concerned, the entire rent is deductible in the various years in question and there is no valid basis for not permitting the deduction of rent in so far as it related to the area covered by immature plants. To this extent, all the six revisions are allowed covering assessment years 1975-76, 1976-77 and 1977-78, so far as rent is concerned.
55. So far as the interest on the borrowals is concerned, the assessee claimed deduction of interest under Clauses (e), (h) and (i) for the assessment years 1975-76 and 1976-77. But, there is no specific finding by the Tribunal as to whether this claim falls under any of the Clauses (e), (h) or (i) as claimed. If it falls under any of those clauses, the assessee will be entitled to deduction of the entire interest without application of Explanation 2. But, however, if the interest does not fall under Clauses (e), (h) or (i) and is to fall under Clause (j), then Explanation 2 will become applicable. In view of the absence of finding as stated above, the matter has to be remitted to the Tribunal for the years 1975 76 (i.e., T. R. Cs. Nos. 143 of 1991 and 106 of 1991) and for the year 1976-77 (i.e., T. R. Cs. Nos. 111 of 1991 and 162 of 1991).
56. In the result, T. R. Cs. Nos. 133 of 1991 and 129 of 1991 for the assessment year 1977-78 where the question of rent alone arises are fully allowed. In the other four T. R. Cs., i.e., T. R. Cs. Nos. 143, 106, 111 and 162 of 1991 for the assessment yours 1975-76 and 1976-77, the deduction of rent is fully allowed and so far as interest is concerned, these four T. R. Cs. are remitted to the Tribunal to the extent indicated above.