BASI REDDY, J -
(1.) IN this matter arising under the Hyderabad Agricultural INcome-tax Act, 1950 (hereinafter referred to as "the Act"), the Nizam Sugar Factory Limited is the assessee. At its instance, this court, acting under section 26(3) of the Act, by an order dated February 25, 1959, directed the Commissioner of Agricultural INcome-tax, Hyderabad, to state a case. IN compliance with the requisition, the Commissioner has drawn up a statement of the case and referred the following two questions for determination by this cour :
"(1) Whether, on the facts and circumstances of the case, the order of the Appellate Deputy Commissioner, in adding the managing agency commission for computing the profits of the company, is justified in law?
(2) Whether, on the facts and circumstances of the case, the income-tax authority was right in holding that the expenditure towards the construction of huts and camps was not a proper revenue deduction under section 7(2)(e) of the Hyderabad Agricultural INcome-tax Act?"
For a proper appreciation of the issues involved in this reference, it is necessary to advert to the material provisions of the Act and the Rules framed thereunder, and also to the relevant facts of the case. The Act came into force on April 1, 1950, and provided for the levy by the erstwhile Hyderabad State, of a tax on agricultural income derived from land situated within that State. Section 2(a) defines what "agricultural income" is, and under section 2(a)(2)(i) it means any income derived from land by agricultural. Rule 4 of the Hyderabad Agricultural INcome-tax Rules, 1950 (which will be referred to as "the rules") clarifies that if the agricultural produce of the land has been sold, the actual sale prices shall be deemed to be the gross agricultural income of such land; if, however, instead of such produce being sold it is utilised only as raw material for any manufacturing business, the market value of such produce shall be deemed to be the gross agricultural income. Section 3 is the charging section and it lays dow :
"For the financial year commencing on the 1st day of April, 1950, and for every subsequent financial year, agricultural income-tax shall be charged in accordance with, and subject to the provisions of, this Act on the total agricultural income of the previous year of every person."
Section 2(q) of the Act defines "total agricultural income" as the aggregate of the amounts of agricultural income of the different classes specified in sections 6 and 7 of the Act, as determined in the manner laid down in those sections.
(2.) WE are not concerned with section 6, as it deals with the determination of assessable income derived by way of rent of revenue from agricultural land. Section 7, however, is the most important section for purpose of this case and may be extracted in full.
"7. (1) The agricultural income mentioned in sub-clauses (2) and (3) of clause (a) of section 2 shall be assessed on the net amount of such income determined in the prescribed manner.
(2) Rules prescribing the manner of determining the net amount of agricultural income for the purpose of sub-section (1) shall provide that the following deductions shall be made from the gross amounts of such income, namel :
(a) the sum actually paid in the previous year as revenue to the State or as rent to a landlord in respect of the land from which such agricultural income is derived;
(b) the sum actually paid in the previous year in respect of such land as any local cess or rate collected under and law of the Hyderabad State;
(c) any rate paid to a local fund or as a special rate in respect of any building used exclusively for the purpose of the cultivation of the land from which such agricultural income is derived;
(d) any sum paid in respect of the land from which such agricultural income is derived as water cess or tax in accordance with any law or rules for the time being in force;
(e) the expenses of cultivation the crop from which such agricultural income is derived, of transporting such crop to market, including the maintenance of agricultural implements and cattle required for the purpose of such cultivation and for transporting the crop to the market;
(f) any tax, cess or rate paid under any law of the Hyderabad State on the cultivation or sale of the crop from which such agricultural income is derived;
(g) (i) any expense incurred on the maintenance of any irrigation or protective work constructed exclusively for the benefit the land from which such agricultural income is derived;
(ii) any expense incurred exclusively on the maintenance of any capital asset purchased or constructed before the 1st day of April, 1950, if such maintenance is required for the purpose of deriving such agricultural income from such land;
Explanation. - Maintenance includes current repairs and includes also in the case of protective dykes and embankment all such work as may be necessary from year to year for repairing any damage or destruction caused by flood or other natural causes;
(iii) interest paid on any amount borrowed and actually spent in any capital expenditure incurred after the commencement of this Act exclusively for the benefit of the land from which such agricultural income is derived or for the purpose of deriving such agricultural income from such lan :
Provided that the interest allowable under this clause shall not exceed the interest which the assessee is liable to pay in respect of such amount as a borrower under sections 10 and 11 of the Hyderabad Money-Lenders Act 1349-F;
(iv) depreciation at the prescribed rate in respect of any capital asset purchased or constructed after the commencement of this Act exclusively for the benefit of the land from which such agricultural income is derived or for the purpose of deriving such agricultural income from such land; and
(v) any interest paid on any mortgage or other capital charge incurred exclusively for the purpose of a acquiring the property from which such agricultural income is derived or for the purpose of cultivation of the propert :
Provided that no deduction shall be made under this clause, if it has already been made under section :
Provided further that the interest allowable under this clause shall not exceed the interest which the assessee is liable to pay in respect of such mortgage or charge as borrower under section 10 and 11 of the Hyderabad Money-Lenders Act, 1349-F; and
(h) such other deductions as may be prescribed."
It is to be noted that this section provides for the determination of net income derived from land by agriculture, after allowing certain deductions from the gross income. Under clause (e) of sub-section (2) - which is the crucial clause - the expenses of cultivating the crop have to be deducted from the gross agricultural income and the balance alone (together with other deductions, if any,) would be assessable to tax, as constituting the net agricultural income.
In this context rule 4(1)(b) of the Rules has also to be referred to. It says, inter alia, that for arriving at the net assessable amount of agricultural income, deductions in respect of items of expenses mentioned in clauses (a) to (g) of sub-sections (2) of section 7 of the Act shall be made from the gross agricultural income. The latter, in a case where the agricultural produce is not sold, but is used as raw material for any manufacturing business, is calculated at the market value of such produce. These are the relevant provisions of the Act and the Rules which have to be borne in mind in considering the questions referred to us.
We will now set out the facts of the case in so far as they are necessary for the decision of the two questions under reference. The Nizam Sugar Factory Limited was incorporated as a joint-stock company under the Hyderabad Companies Act in April, 1937. Its main objects, as they appear from the memorandum of association, ar :
"(1) To carry on the business of manufacturers of and dealers in all kinds of sugar, gur, and sugar, and gur preparations, and their by-products.
(2) To carry on the business of planters and cultivators of sugar plants."
Thus, the company has a manufacturing side and an agricultural side. Here in this case we are concerned with the agricultural operations of the company for the three assessments year 1950-51, 1951-52 and 1951-53. The company owns about 13,500 acres of land, which is used for raising sugarcane, and sugarcane is utilised as raw produce for manufacturing sugar in the factory owned by the company. About 15,000 labourers are employed for performing the various agricultural operations in growing sugarcane. During the agricultural season, large sums are expended by the company for providing accommodation to the workmen by erecting huts any running camps near the plantations, as it would be very difficult and costly to transport a large labour force to the work-spot day after day throughout the agricultural season.
(3.) CONTEMPORANEOUSLY with the formation of the company, i.e., on April 18, 1937, a managing agency agreement was entered into between the company and one Dhanrajgir Raja Narsingirji, whereby the latter was appointed as the managing agent of the company for a term of 23 years from the date of incorporation of the company, his remuneration was fixed and his duties were specified. Clause 2 of the agreement fixes the remuneration to be paid to the managing agent. It read :
"(2) The remuneration of the said Dhanrajgir as such agent shall be as follows, viz :
(a) From and after the registration of the said company a commission on the annual net profits of the company at the rate of 10 per cent. or the minimum of Rs. 12,000 whichever may be higher per annum.
(b) net profits of the company for the purpose of the last preceding sub-clause means the profits of the company after allowing for all the usual working charges, interest on loans and advances, repairs and outgoings, depreciation on the fixed assets and other assets of the said company as would have been from time to time allowed in calculating profits had the British Indian Income-tax Act (in force at the date hereof) been in force in Hyderabad for the whole period of this agreement and such deductions shall be made irrespective of whether the amount such depreciations actually set aside or entered in the balance-sheet or accounts of the said company or not, bounties or subsidies received from Government or from a public body, profits by way of premium on shares sold, profits on sale proceeds of forfeited shares or profits from the sale of the whole or part of the undertaking of the company, but without any deduction in respect of income-tax or super-tax or any other tax or duty or income or revenue or expenditure by way of interest on debentures or otherwise on capital account of any sum which may be set aside in each year out of the profits for reserve or any other special fund,
(c) The said allowance and commission shall be exclusive of and shall not include any remuneration or wages which shall be payable to the banker, solicitors, engineers, experts, cashiers, accountants, managers, clerks, canvassers and other employees by the said Dhanrajgir for or an behalf of the said Dhanrajgir for or an behalf of the said company or for carrying on and conducting the business of the said company, all of which expenses as also rent of the office premises of the said company at Hyderabad used for the purpose of the business of the company shall be paid by the said company.
(d) The said commission shall be paid immediately after the annual accounts of the company have been passed by the shareholders."
Clause 4 prescribes the duties of the managing agent as unde :
"The said Dhanrajgir shall, unless prevented by ill-health, throughout the said term devote the whole of his time, attention and abilities to the business of the said company, and shall obey the orders from time to time of the board of the said company and in all respects conform to and comply with the directions and regulations made by such board and shall well and faithfully serve the said company and use his utmost endeavours to promote the interest thereof, provided that the said Dhanrajgir shall be at liberty to appoint an agent on his behalf to perform all or any of the duties entrusted to him for the time being under these presents, such agent to be approved of in writing previous to his appointment by the board of directors of the said company. Such agent shall be paid by the said Dhanrajgir and the said Dhanrajgir shall be solely responsible for his acts and omissions."
Clause 5 says that subject to the supervision and control of the directors, the said Raja Dhanrajgir shall have the general conduct and management of the business and affairs of the company.
Shortly after the managing agency agreement was entered into, it would appear that the managing agency was transferred by Raja Dhanrajgir in favour of H.E.H. the Nizams Industrial Trust Fund under a duly executed indenture dated October 17, 1937. This circumstance, however, does not affect the decision on the issues involved in this case.
For the assessment year 1950-51, the company returned an agricultural income of O.S. Rs. 15,59,411 and claimed deductions under two heads amongst others. First, it claimed that a sum of Rs. 1,89,020 representing the commission paid to the managing agent, forming 10% of the profits on the agricultural operations, should be deducted as an item of agricultural expenditure. Secondly, the company claimed that hutting and camp expenses for labour amounting to Rs. 2,26,523 spent for constructing huts and maintaining camps for the labourers during the cultivation season, was an admissible deduction from the gross agricultural income, in computing the net assessable amount of agricultural income. The companys contention with regard to the managing agency commission was accepted by the Agricultural Income-tax Officer, but he refused to allow the deduction in respect of the other item, viz., hutting and camp expenses for labour. In the result, the Income-tax Officer arrived at an assessable net agricultural income of O.S. Rs. 17,23,869. The company took the matter in appeal to the Deputy Commissioner of Agricultural Income-tax. It was contended before him that the Income-tax Officer had erred in disallowing the deduction of the sum of Rs. 2,26,523, representing the expenses for putting up temporary structures for the labourers and providing amenities for them during the cultivation season. In support of this contention, the company filed before the Deputy Commissioner a detailed statement showing the particulars of expenses as unde :
"(a) Amenities to camp :
To this statement, the following certificate issued by the general manager of the company, was appende :
"THE NIZAM SUGAR FACTORY LTD.
P.O. Box No. 109,
Abid Road, Hyderabad-Deccan.
We hereby certify that the expenditure of Rs. 25,649-4-10 on staff huts, and Rs. 85,346-11-8 on labour huts, incurred during the year ended 30th June, 1950, wholly represents expenses of maintenance and replacements and that no part of it relates to expenses on the erection of new huts.
(Sd.) G.K. Tatake,
for GENERAL MANAGER."