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M.S.M.M Meyyappa Chettiar v. Commissioner Of Income-Tax, Madras.

Madras High Court

Mar 28, 1961

Judgment

Subsequent
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CaseIQ

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Judgment Summary — Srinivasan, J.

Factual and Procedural Background

The assessee purchased an estate in 1938 and planted it with rubber in 1941. The rubber plants reached maturity and began yielding in January 1947. During the previous year ending 13 April 1947 (the previous year for assessment year 1947–48), the assessee incurred expenditure of 14,237 dollars on maintenance of the immature plantation; the expenditure had actually been incurred between 13 April 1946 and 30 November 1946.

The Income-tax Officer disallowed the expenditure on the ground that the estate had not begun to yield and therefore the expenditure was of a capital nature. On appeal, the Appellate Assistant Commissioner held that expenses incurred up to the end of December 1946 were preliminary (not allowable), but directed the Income-tax Officer to allow the amount incurred after January 1947 (excluding capital items). The Appellate Tribunal reversed that approach and treated the entire amount as capital, observing that the estate's actual working for profit began in January 1947 and that expenses up to first tapping were for rearing the area and therefore added to the cost of the estate.

Under section 66(1) of the Income-tax Act a reference was made to this Court on the question whether the expenditure of 14,237 dollars incurred on the Ambika Estate till November 1946 was of a revenue nature.

Legal Issues Presented

Whether the expenditure of 14,237 dollars incurred on the Ambika (rubber) Estate up to November 1946 (prior to the first tapping and prior to the estate yielding in January 1947) is of a revenue nature.

Arguments of the Parties

Department's Arguments

The Income-tax Officer disallowed the expenses on the ground that the estate had not begun to yield and therefore the expenditure was capital in nature.
The Appellate Tribunal and departmental officers maintained that the estate's "actual working for profit" started only from January 1947 and, consequently, all expenses up to the first tapping were part of the cost of rearing the area (capital expenditure).
Learned counsel for the department argued that before any expenditure of this kind can be allowed as revenue expenditure there should be at least a single tree capable of yielding.
The department contended that in the absence of profit derived during the period in question, the expenditure would not be allowable as a deduction (this view was reflected in the Tribunal's reasoning that profit-making activity had not yet commenced).
The department attempted to rely on a bench decision in R.C. No. 67 of 1958 (a case in which a company had incurred establishment expenditure before the business came into being and sought set-off against income from investments), and on the definition of "previous year" in section 2(11)(i)(c) of the Act (referring to "date of setting up of a business"), to support its contention that the expenditure could not be treated as revenue expenditure.
Finally, the department claimed that the aggregate sum of 14,237 dollars comprised items which could not properly be revenue expenditure; it implicitly invited the Court to examine the constituent items at this stage.

Assessee's Arguments

It was conceded on behalf of the assessee that the estate began to yield rubber from January 1947 (first sales in January 1947).
The position argued in the appellate process (and accepted by the Court as the assessee’s substantive claim) was that expenditure on maintenance of the immature rubber plantation — items such as superintendence, weeding, forking, manuring and annual upkeep — are revenue in nature and deductible despite the trees not yet having come into bearing.
The Appellate Assistant Commissioner had directed that the Income-tax Officer ascertain the net amount of expenditure incurred after January 1947 (excluding capital items) and allow it as a deduction; that approach reflects the assessee’s contention that maintenance costs after the estate begins to yield should be deductible. (The Court, however, ultimately takes a broader stance in favour of treating relevant maintenance costs as revenue even before yielding.)

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Vallambrosa Rubber Co. Ltd. v. Farmer (1910) 5 Tax Cas. 529	Established that after planting (once the plantation has been laid out and trees planted) expenditure on superintendence, weeding, etc., is revenue expenditure even though trees may not be yielding for several years; rejected approach that only expenses referable to profits actually reaped within the year are deductible.	The Court treated Vallambrosa as the leading authority drawing a clear line between capital expenditure (land acquisition, preparation, buildings) and revenue expenditure (annual maintenance) and held that the Tribunal's contrary approach was erroneous.
Ouchterlony Valley Estates Ltd. v. Government of Madras (bench of this Court)	Applied the principle in Vallambrosa to agricultural/plantation contexts and rejected the view that all expenditure on new clearings until they come to bearing is capital expenditure.	The Court cited this as a follow-up authority supporting the view that maintenance and upkeep of immature plantations can be revenue expenditure.
Travancore Rubber and Tea Co. Ltd. v. Commissioner of Agricultural Income-tax [1961] 41 I.T.R. 751 (S.C.)	Held that sums expended for superintendence, weeding, forking, manuring, etc., of immature rubber trees are permissible deductions in calculating assessable agricultural income under a provision (section 5(j) of the Travancore‑Cochin Agricultural Income‑tax Act) that excludes capital and personal expenditure and allows expenditure wholly and exclusively for deriving agricultural income.	The Court relied on this Supreme Court decision to support the conclusion that items of upkeep for immature rubber plantations are deductible under provisions of similar effect in the Indian Income‑tax Act.
R.C. No. 67 of 1958 (bench of this Court)	Concerned a company that had incurred establishment expenditure before the factory/business came into being and sought to set off that expenditure against income from investments; earlier stages in that case showed the assessee itself described the expenditure as capital.	The Court held this authority inapplicable to the present facts and said it does not support the department's contention that the maintenance expenditure on the rubber estate must be treated as capital.
Hughes v. Bank of New Zealand (Lord Thankerton)	Expressed the principle that expenditure in the course of trade which is unremunerative is nevertheless deductible if wholly and exclusively made for the purposes of the trade; deduction does not require presence of a receipt on the credit side in the accounting year.	The Court invoked this principle to reject the department's argument that absence of profit in the period in question precludes treating the expenditure as revenue in nature.

Court's Reasoning and Analysis

The Court found the Tribunal's and departmental approach to be wholly erroneous and premised upon a fundamental misconception of how to distinguish capital expenditure from revenue expenditure in relation to plantations.

The Court's analysis proceeded along these lines:

It identified the Tribunal's apparent proposition that any expenditure incurred before the "actual working of the estate for profit" must be treated as capital and added to the cost of the estate. The Court rejected this categorical rule.
The Court relied on the established line of authorities beginning with Vallambrosa Rubber Co. Ltd., which drew a clear distinction between outlays required to acquire and prepare land and lay the plantation (capital) and recurring maintenance costs—superintendence, weeding, forking, manuring, annual upkeep—incurred after planting (revenue).
The Court explained that once the plantation has been laid (land acquired, made fit, trees planted), the stage of capital expenditure ends; subsequent maintenance expenditure is in the nature of revenue expenditure even though trees may take several years to yield.
The Court rejected the department’s narrower reading that revenue expenditure requires at least one tree capable of yielding or the actual derivation of profit in the relevant year. It said Vallambrosa expressly negatived the proposition that an expense is deductible only when it is "purely and solely referable to a profit which was reaped within the year."
The Court considered and rejected the department's reliance on R.C. No. 67 of 1958, explaining the factual differences (there the company had treated expenditure as capital and the income involved was from investments prior to business commencement) and concluded that that authority does not support the department's case here.
The Court also referred to the Supreme Court decision in Travancore Rubber and Tea Co. Ltd., which expressly held that upkeep expenses of immature rubber trees are deductible under an agriculturally‑oriented exemption wording similar in effect to provisions of the Indian Income‑tax Act.
The Court invoked Hughes v. Bank of New Zealand for the proposition that unremunerative trade expenditure may still be a proper deduction if wholly and exclusively for the purposes of the trade; thus absence of contemporaneous profit does not preclude deductibility.
Regarding the department's contention that the aggregate sum contained non‑revenue items, the Court refused to undertake a detailed re‑examination of the constituent items at the reference stage because departmental officers and the Tribunal had proceeded on the footing that the items were in fact for superintendence, weeding, etc. The Court proceeded on the assumption that no part of the sum represented capital expenditure.

In sum, the Court applied established precedent to hold that maintenance costs of the immature rubber plantation are revenue in nature once the plantation has been laid and trees planted, and that the absence of actual receipts in the year in question does not defeat a revenue characterization.

Holding and Implications

QUESTION ANSWERED IN THE AFFIRMATIVE — THE EXPENDITURE WAS HELD TO BE OF A REVENUE NATURE.

Direct consequences and orders expressly stated in the opinion:

The Court answered the referred question in the affirmative and in favour of the assessee.
The Court awarded costs to the assessee and directed payment of counsel's fee of Rs. 250.

Broader implications discussed (as recorded in the opinion): the decision reaffirms established authorities (Vallambrosa, Ouchterlony, and Travancore Rubber & Tea Co. Ltd.) that distinguish capital outlays for creating a plantation from recurring maintenance expenses, and it rejects the proposition that absence of yield or profit at the time of expenditure automatically converts necessary maintenance into capital. The opinion does not state that it establishes a new principle beyond application of those authorities; the effect stated in the judgment is the direct entitlement of the assessee to have the expenditure treated as revenue for the purposes of assessment and to receive costs.

Show all summary ...

The Judgment of the Court was delivered by

Srinivasan, J.:— The assessee purchased an estate in 1938 and planted it with rubber in 1941. The rubber plants reached maturity only in January, 1947, and started yielding thereafter. During the year ended April 13, 1947, which was the previous year for the assessment year 1947–48, an expenditure of 14,237 dollars was incurred on the maintenance of the immature plantation, the expenditure having been actually incurred between April 13, 1946, and November 30, 1946. The Income-tax Officer disallowed these expenses; the only reason that is found in the order of assessment is that “the estate had not begun to yield. The expenditure will, therefore, be treated as of a capital nature.” The disallowance of this expenditure was canvassed in appeal before the Appellate Assistant Commissioner, who stated:

“This estate began to yield rubber from 1947. First sales of rubber took place in January, 1947. I, therefore, hold that the expense incurred up to the end of December, 1946, should be considered as of a preliminary nature not allowable under the Act, while the expenses incurred thereafter should be considered as of a revenue nature. The Income-tax Officer is, therefore, directed to ascertain the net amount of expenditure incurred after January, 1947, of course, after excluding the capital items of expense and to allow the same as a deduction.”

2. When the matter came before the Appellate Tribunal, the matter was disposed of shortly in these words:

“it [the rubber estate] began to yield, that is, the actual working of the estate for profit, started to be carried on only from January, 1947. as conceded by the appellant's counsel. The amount in question was spent prior to the said period and as such we see no reason to interfere with the decision of the department on this point. All expenses up to the first tapping relate to rearing of the area in its immature stage and consequently add to the cost of the estate.”

3. That is to say, the view was taken that the expenditure was of a capital nature. Under section 66(1) of the Income-tax Act, the following question stands referred for the decision of this court:

“Whether the aforesaid expenditure of 14,237 dollars incurred on the rubber estate called Ambika Estate aforesaid till November, 1946, soon after which alone it attained full maturity is of a revenue nature?”

4. We are of the view that the decision of the Tribunal and of the department is wholly erroneous, and the approach to the question they had before them appears to have proceeded on an entire misconception of what can properly be regarded as revenue expenses in relation to a plantation of this type. The view of the Tribunal appears to be that any expenditure incurred before the actual working of the estate for profit must be regarded as adding to the cost of the estate, and consequently should be treated as of a capital nature. This view is entirely opposed to the line of cases commencing from Vallambrosa Rubber Co. Ltd. v. Farmer 1910 5 Tax Cas. 529.. That case also dealt with a rubber estate of which only one-seventh of the trees produced rubber, the other six-sevenths being in the process of cultivation for the production of rubber. It is undisputed that rubber trees do not yield until they are about six years old. The company incurred expenditure for superintendence, weeding, etc., similar to the items of expenditure incurred in the present case. The revenue took the view that the entirety of the expenditure should not be allowed as a deduction but only one-seventh of such expenditure apparently holding that only that proportion of the expenses could be expenses of “the ordinary business and as such deductible.” This view was characterised by the learned judges as startling, based as it was on the proposition “that nothing ever could be deducted as an expense unless that expense was purely and solely referable to a profit which was reaped within the year.” It was further observed2:

“This very case, which deals with a class of thing that takes six years to mature before you pluck or tap it, is a very good illustration, but, of course, without any ingenuity one could multiply cases by the score…. But when you come to think of the expense in this particular case that is incurred, for instance, in the weeding, which is necessary in order that a particular tree should bear rubber, how can it possibly be said that that is not a necessary expense for the rearing of the tree from which alone the profit eventually comes?”

5. And further:

“… but in a rough way I think it is not a bad criterion of what is capital expenditure as against what is income expenditure to say that capital expenditure is a thing that is going to be spent once and for all, and income expenditure is a thing that is going to recur every year. Therefore, prima facie, weeding, which does occur every year, seems to me to be income expenditure.”

6. Lord Johnston also said in that case:

“It appears to me that, as at present worked, the trade, manufacture, adventure or concern of the company is the cultivation and production for sale at profit of rubber and other tropical products. For this purpose, land had to be acquired, cleared, and drained, roads made, and buildings erected, before the cultivation began. What was expended for these purposes was I think capital expenditure, and not, in the sense of the Income-tax Act, money laid out and expended for the purposes of the trade, & c. But once the cultivation began with the planting, expenditure on cultivation, production, and marketing was I think revenue expenditure for the purposes of the trade, & c.”

7. A clear line of demarcation has thus been drawn between capital expenditure and revenue expenditure in relation to trades of this kind. When once the plantation has been laid, that is to say, the land has been acquired, made fit for planting and the trees actually planted, the stage of capital expenditure ceases, and, whatever is spent thereafter upon the maintenance, such as weeding, superintendence, etc., would appear to be in the nature of revenue expenditure, notwithstanding that the trees have not started to yield and will not yield for as long as six years thereafter.

8. Learned counsel for the department purports to argue that before any expenditure of this kind can be allowed as revenue expenditure, there should be at least a single tree capable of yielding. We are unable to interpret the above decision in this manner. Even on that basis, it should necessarily follow upon the argument of the learned counsel that the major part of the expenditure would have been incurred upon trees which were immature and which were not yielding and should, therefore, be regarded as capital expenditure. But that was not the basis upon which the Vallambrosa Rubber Co. case proceeded. In effect, this argument is nothing more than saying that unless profits are actually derived, no expense incurred in relation to the estate could be regarded as being laid out for the purpose of the business. Such a contention has been expressly negatived in the above decision.

9. The principle of this decision was followed by a bench of this court in Ouchterlony Valley Estates Ltd. v. Government of Madras. That was a case which arose under the Agricultural Income-tax Act. There too the Agricultural Income-tax Appellate Tribunal agreed in the view taken by the department that all expenditure on new clearings till they come to bearing is capital expenditure. That view was held to be erroneous in the light of the Vallambrosa Rubber Co. Ltd. case. We find further support for the view that we have expressed in a recent decision of the Supreme Court in Travancore Rubber and Tea Co. Ltd. v. Commissioner of Agricultural Income-tax [1961] 41 I.T.R 751 S.C., where their Lordships laid down that sums expended for purposes of superintendence, weeding, forking, manuring etc., of immature rubber trees, which have not come into bearing and the annual expenses for the upkeep and maintenance of such rubber plants are permissible deductions in calculating the assessable agricultural income of the rubber estate. The question arose whether under section 5(j) of the Travancore-Cochin Agricultural Income-tax Act, these items of expenditure came within that clause which runs:

“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 agricultural income.”

10. Their Lordships held that the expenditure came within the scope of this exemption. Though the case arose under the Agricultural Income-tax Act, it is clear that the content of the relevant provision of that Act is of the same nature as that contained in the Indian Income-tax Act.

11. Learned counsel for the department relied upon a decision of a bench of this court in R.C No. 67 of 1958. That case has no application. What happened in that case was that the assessee, a public company, invested a large amount of its subscribed share capital in deposits and securities pending the completion of the factory intended for the purpose of manufacturing rayon products. From these securities, an income of over Rs. two lakhs was derived. The company had incurred expenditure upon its establishment and had claimed that it was entitled to set off the amount of expenditure against the interest earned from the securities. The learned judges found that in the earlier stages the plea of the assessee was that the expenditure was of a capital nature. There was no assessment under section 10 of the Act as the business itself had not come into being and an expenditure of this kind, in order to be allowable as a revenue expenditure must have relation to the business. It was under these circumstances that the High Court had to deal with that question. This decision to our minds gives no support to the contention of the department.

12. The further contention of the department that in the absence of any profit derived during the period in question, the expenditure would not be an allowable item, as expressed by the Tribunal in these words “the actual working of the estate for profit started to be carried on only from January, 1947 “, and “all expenses up to the first tapping relate to the rearing of the area in its immature stage and consequently, add to the cost of the estate “, is based upon an alleged principle for which we find no support in any decided authority. On the other hand, in Hughes v. Bank of New Zealand, Lord Thankerton expressed himself thus:

“Expenditure in course of the trade which is un-remunerative is none the less a proper deduction, if wholly and exclusively made for the purposes of the trade. It does not require the presence of a receipt on the credit side to justify the deduction of an expense.”

13. Learned counsel for the department purported to draw some support for his contention, that, until business is commenced to be carried on, in the sense that its profit-making activity actually starts an expenditure of the kind we are dealing with cannot be a revenue expenditure, from the definition of the expression “previous year” found in section 2(11)(i)(c) of the Act, which refers to the “date of setting up of a business” in determining what the “previous year” for purposes of the Act should be. We are unable to find anything in this definition which can serve to support the argument of the learned counsel.

14. Lastly, it was claimed by the department that this amount of 14,237 dollars is made up of items which cannot properly come within the scope of revenue expenditure. It seems to us that this contention is not open to the department. All the departmental officers and the Tribunal have proceeded on the footing that these items of expenditure were in fact incurred for purposes of superintendence, weeding, etc., that is to say, which would normally be regarded as revenue expenditure. It is not open to the department to ask us to investigate at this stage the nature of the various items going to make up this total. We must proceed on the footing that no part of this sum represented any expenditure on a capital head of account. We answer the question referred to us in the affirmative and in favour of the assessee. The assessee will be entitled to his costs. Counsel's fee Rs. 250.

15. Question answered in the affirmative.