AROORAN SUGARS LTD. VS COMMISSIONER OF INCOME-TAX
2001 P T D 396
[239 I T R 16]
[Madras High Court (India)]
Before N. V. Balasubramanian and P. Thangavel, JJ
AROORAN SUGARS LTD.
versus
COMMISSIONER OF INCOME‑TAX
Tax Cases Nos. 1180 to 1182 of 1985 (References Nos. 687 to 689 of 1985), decided on 23/03/1998.
(a) Income‑tax‑‑‑
‑‑‑‑Agricultural income‑‑‑Business‑‑‑Composite income from business and agriculture‑‑‑Determination of income exempt from income‑tax‑‑‑Sugar manufacturer‑‑‑Rule 7(2)(a) is applicable‑‑‑Price of sugarcane grown by assessee in its own fields and used for manufacture of sugar to be determined in accordance with R. 7(2)(a)‑‑‑Indian Income Tax Rules, 1962, R.7(2)(a), (b).
The assessee, a manufacturer of sugar, claimed deduction of expenses under rule 7(2)(b) of the Income‑tax Rules, 1962, in computing its "agricultural income" from sugarcane grown by it in its fields and also depreciation on its farm assets. The claims were disallowed by the Appellate Tribunal. On a reference:
Tribunal was correct in holding that while computing the income chargeable to income‑tax under the head "Profits and gains of business", the deduction should be made in accordance with the provisions of rule 7(2)(a) of the Income‑tax Rules, 1962.
Thiru Arooran Sugars Ltd. v. CIT (1997) 227 ITR 432 (SC) fol.
(b) Income‑tax ‑‑‑
‑‑‑‑Depreciation‑‑‑Assessee is not entitled to claim depreciation on farm assets used for earning agricultural income‑‑‑Indian Income tax Act, '1961, S.32.
Claim of the assessee for depreciation on its farm assets should fail because of the provisions contained in section 32 of the Income‑tax Act and it was not necessary even to invoke rule 7 of the Income‑tax Rules, 1962, to deny the claim of the assessee for depreciation.
CIT v. Thiru Arooran Sugars Ltd. (1983) 144 ITR 4 (Mad.) ref.
P.P.S. Janathana Raja for Subbaraya Iyer, Padmanabhan and Ramamani for the Assessee.
C.V. Rajan for Mrs. Chitra Venkataraman for the Commissioner
JUDGMENT
N.V. BALASUBRAMANIAN, J.‑‑‑The following two common questions of law have been referred to us for our consideration in respect of the assessment years 1974‑75, 1975‑76 and 1978‑79:
"(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding that in computing the income chargeable to income‑tax under the head 'Profits and gains of business' the deduction to be made to exclude the agricultural portion of the appellant's income should be worked out in accordance with rule 7(2)(a) and not rule 7(2)(b) of the Income‑tax Rules, 1962?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the assessee was not entitled to deduct the depreciation in respect of farm assets used by the assessee in its business?"
The assessee, is a manufacturer of sugar in its factory. The assessee also grows sugarcane in its own lands and the sugarcane so grown is utilised in the manufacture of sugar. The case of the assessee before the Income‑tax Officer was that the income taxable under the Income Tax Act, 1961 (in short "the Act"), should be computed by applying rule 7(2)(b) of the Income-?tax Rules, 1962 (in short "the rules"). Both the Income‑tax Officer and the Commissioner of Income‑tax (Appeals) rejected the claim of the assessee.
The Income‑tax Appellate Tribunal, on an appeal preferred by the assessee, also rejected the claim of the assessee on the basis of judgment of this Court rendered in the assessee's own case in CIT v. Thiru Arooran Sugars Ltd. (1983) 144 ITR 4, for an earlier assessment year. The finding of the Appellate Tribunal was that while computing the income chargeable to income‑tax under the head "Profits and gains of business", the deduction has to be made in accordance with rule 7(2)(a) .of the Rules. It is also not in dispute that the Supreme Court in Thiru Arooran Sugars Ltd. v. CIT (1997) 227 ITR 432 affirming the judgment of this Court in CIT v. Thiru Arooran Sugars Ltd. (1983) 144 ITR 4, held that rule 7(2)(a) of the Rules would squarely apply to the facts of the case and the market value of the sugarcane produced and consumed by the assessee had to be computed accordingly. Following the said decision of the apex Court, we answer the first question of law referred to us by holding that the Tribunal was correct in holding that while computing the income chargeable to income‑tax under the head "Profits and gains of business", the deduction should be made in accordance with the provisions of rule 7(2)(a) of the Rules. Accordingly, we answer the first question of law referred to us in the affirmative and against the assessee.
On the other hand, learned counsel appearing for the Revenue, submitted that the assessee is not entitled to depreciation, after the computation of income in accordance with rule 7 of the Rules.
We have carefully considered the submissions of learned counsel for the assessee and learned counsel for the Revenue. We agree with learned counsel for the Revenue that rule 7 of the Rules restricts the claim of further deduction in respect of the expenditure incurred by the assessee either as a cultivator or as a receiver of rent in kind. It is also no doubt true that the depreciation cannot be regarded as an expenditure incurred by the assessee as a cultivator, but still the claim of the assessee has to fail. We hold that after applying the provisions of rule 7 of the Rules and after deducting the market value of the agricultural produce from the composite income, what remains would be the non‑agricultural income. The assessee is claiming depreciation on the farm assets utilised for the purpose of growing sugarcane and the income relatable to the sugarcane would be agricultural income. The claim of the assessee for depreciation would be on the assets owned and used by the assessee for earning agricultural income and the attempt of the assessee to claim the depreciation allowance on farm assets used for producing agricultural income against the non‑agriculture income portion is impermissible in law. In our view, under the scheme of the Act the assessee is entitled to claim depreciation on the assets owned and used for the purpose of the assessee's business and is not entitled to claim depreciation on assets used for earning agricultural income. The assets on which depreciation claimed are farm assets which were used1or earning the agricultural income, and therefore, under the provisions of section 32 of the Act, the assessee is disentitled to claim depreciation on the farm assets used for earning agricultural income. Further, the principle behind rule 7 of the Rules prohibiting the deduction of expenditure incurred as a cultivator or receiver of rent in kind is also the same and the rule does not permit the expenses relating to the agricultural segment of income as an allowable expenditure against non‑agricultural portion of the income. Hence, the claim of the assessee for depreciation should fail because of the provisions contained in section 32 of the Act and, it is not necessary even to invoke rule 7 of the Rules to deny the claim of the assessee for depreciation.
We are, therefore, of the opinion that the Tribunal was correct in holding that the assessee is not entitled to claim depreciation on the farm assets. Accordingly, we answer the second question of law referred to us also in the affirmative and against the assessee. The Revenue will be entitled to costs of Rs.1,000 (rupees one thousand only) in one set.
M.B.A./193/FC ?????????
Reference answered.