Citation Codes

Equivalent Citations

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Case Number

Income-tax Reference No. 11 of 1976

Advocates

For the Appellant: T.L. Viswanatha Iyer, P.S. Narayanan, K.S. Menon for , P.K. Ravindranatha Menon, for Respondent.
For the Respondent: T.L. Viswanatha Iyer, P.S. Narayanan, K.S. Menon for , P.K. Ravindranatha Menon, for .

Judges

V.P Gopalan Nambiyar, C.J
G. Balagangadharan Nair, J.

Acts

subsection (1) or sub-section (1A) or clause (ii) of sub-section (2) of section 33,
Act, and the provisions of sub-section (5A) of section 155
SECTION 617 COMPANIES ACT 1956
provisions of section 33A of the Income-tax Act
provisions of clauses (a) and (b) of sub-section (5)
provisions of sub-section (5A) of section 155
clause (ii) of sub-section (2) of this section
SECTION 11 CIVIL PROCEDURE CODE
section 256(1) of the Income-tax Act
sub-section (5) or subsection (6).(5)
provisions of sub-section (2)
sub-section (4) of section 33

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Smart Summary

Structured Summary of the Opinion (Gopalan Nambiyar, C.J.)

Factual and Procedural Background

The Income-tax Appellate Tribunal, Cochin Bench, referred the following question under section 256(1) of the Income-tax Act to this Court: whether, on the facts, the Tribunal was right in holding that the assessee was not entitled to development allowance at 50% on Rs. 71,500 (being part of expenditure incurred during assessment years 1966–67 and 1967–68 on tea clearing) under the provisions of section 33A for assessment year 1971–72.

The assessee is a company with income from tea and coffee estates. The accounting year in question ended 31 March 1971. Preliminary clearing and planting with tea bushes occurred in July 1967 (during the accounting period ended 31 October 1967). The factual statement supplied by the Tribunal set out the year‑wise expenditures for clearing and planting (first year 1966–67: Rs. 44,525; second year 1967–68: Rs. 45,275 — totaling Rs. 89,800 — with Rs. 71,500 considered as cost of clearing to be taken in the fourth year i.e. assessment year 1971–72). Other figures for third and fourth years and additional clearings in 1969 were also set out. The company had created a reserve of Rs. 70,000.

Procedurally: the Income-tax Officer allowed the claim for the 1969 clearing (first and second year) but disallowed the assessee's claim to carry forward part of the 1967/68 first and second year expenses to 1971–72, on the ground that the necessary reserve had not been provided. The Appellate Assistant Commissioner upheld the disallowance on the view that deductions which should have been claimed in earlier years cannot be claimed in the fourth year. The Tribunal agreed with the Appellate Assistant Commissioner and gave reasons in paragraphs 9–14 of its judgment. The question was then referred to this Court.

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was not entitled to development allowance at 50% on Rs. 71,500 (a part of expenditure incurred during assessment years 1966–67 and 1967–68 on tea clearing) under section 33A of the Income-tax Act for assessment year 1971–72?

Arguments of the Parties

Assessee's Position

The assessee had carried forward certain expenditure (including a portion of first and second year expenses) and claimed development allowance in assessment year 1971–72 (the fourth year following the 1967 clearing), asserting entitlement under section 33A.
The company had created a reserve of Rs. 70,000 (noted in the statement of facts).

Revenue's Position (Income‑tax Officer / Appellate Assistant Commissioner / Tribunal)

The Income‑tax Officer allowed claims for the 1969 clearing (first and second year) and for the third and fourth years of the 1967 clearing, but disallowed the assessee's portion of first and second year expenses claimed in 1971–72 because, according to the officer, the necessary reserve for claiming the expenses had not been provided.
The Appellate Assistant Commissioner held that the expenditure incurred in the first two years should have been claimed in the second year; if the assessee chose to claim only a portion in the first two years (instead of the whole entitlement), the omitted portion could not be claimed in the fourth year. He took the position that the claim for development allowance must be made and allowed in the particular assessment year to which it relates.
The Tribunal agreed with the Appellate Assistant Commissioner, reasoning that (i) section 33A(7) requires recomputation of actual cost at the end of the fourth year because the entire four years' expenditure is totaled to arrive at "actual cost", (ii) section 33A(1)(b) does not give a further opportunity to claim what should have been claimed under section 33A(1)(a) in earlier years, and (iii) because income‑tax proceedings for each year are separate, an allowance claim available in one year cannot be made in another year merely because the assessee omitted to make it earlier.

Table of Precedents Cited

No precedents were cited in the provided opinion.

Court's Reasoning and Analysis

The Court's analysis proceeds from a close reading of section 33A of the Income‑tax Act and the factual matrix provided by the Tribunal. The key steps in the Court's reasoning are:

Interpretation of statutory scheme: Section 33A grants development allowance in respect of planting tea bushes, with sub‑section (1)(a) providing for an initial computation and allowance (with reference to expenditure in the year land is prepared and the following year) and sub‑section (1)(b) requiring a recomputation with reference to the actual cost of planting and allowing any excess in a later year. Section 33A(7) defines "actual cost of planting" as the aggregate of costs relating to the land preparation and three successive years reduced by any portion met by others; thus the entire four‑year span is relevant to determine "actual cost".
Nature of planting process: The Court emphasises that planting/replanting is a continuous process involving evolving plans and adjustments over time. Accordingly, any computation of "actual cost" prior to the end of the four‑year period must be tentative because the full components of actual cost can only be known at the end of the fourth year.
Statutory indicators for recomputation and mandatory excess allowance: The Court notes the phrase in sub‑section (1)(a) that the amount is computed "in the first instance", which implies that such computation is not final. Sub‑section (1)(b) contemplates a subsequent recomputation of actual cost and explicitly provides that any excess after recomputation "shall be allowed" — a mandatory provision once the condition is met. Therefore, the legislature envisaged a process that could adjust earlier computations at the end of the four‑year period.
Rejection of the Tribunal's year‑by‑year estoppel reasoning: The Tribunal's conclusion rested on the idea that each assessment year is a separate proceeding and that an omitted claim in one year cannot be made in another. The Court finds difficulty in sustaining that conclusion on general legal principle or on the scheme of the taxing statute. The Tribunal's approach resembled the doctrine of constructive res judicata (the "might and ought" doctrine) under section 11 of the Civil Procedure Code. The Court observes that even in civil law the doctrine only applies where the omitted plea was one which not only "might" but "ought" to have been raised in the previous proceeding.
Application to the present statutory context: Without finally deciding the broader question of applying constructive res judicata to taxing statutes, the Court concludes that the terms of section 33A indicate that the claim in issue — i.e., the recomputed actual cost component taken into account at the end of the fourth year — was not a claim which "ought" to have been made in the first two years. Given the statutory scheme for recomputation at the end of four years and the mandatory allowance of any excess found on recomputation, the Court saw no basis to sustain the Tribunal's disallowance based on the year‑by‑year omission argument.

The Court's reasoning remains tied to the statutory text of section 33A and the particular scheme of initial computation and later recomputation; it does not rely on any external judicial precedent to resolve the dispute.

Holding and Implications

Holding: The Court answered the referred question in the negative — that is, in favour of the assessee and against the revenue. The Tribunal's conclusion that the assessee was not entitled to development allowance at 50% on Rs. 71,500 for assessment year 1971–72 was not upheld. The Court made no order as to costs.

Implications:

Direct effect on the parties: The decision overturns the Tribunal's and lower authorities' disallowance in respect of the claim described in the reference and thereby favors the assessee's entitlement to the recomputed allowance under section 33A as assessed at the end of the fourth year.
Broader implications: The opinion is founded on the Court's construction of section 33A — in particular the mandatory mechanism of recomputation and allowance of any excess — and it rejects, on the facts and statutory construction, a strict year‑by‑year estoppel argument. The opinion does not, however, purport to establish a broader new principle beyond its statutory interpretation in this context; it contains no express pronouncement that it is laying down novel precedent outside the statutory interpretation applied here.

Order note: A copy of the judgment will be sent to the Income‑tax Appellate Tribunal, Cochin Bench, under the seal of the Court and the signature of the Registrar, as required by law.

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Kilkotagiri Tea And Coffee Estate Ltd. v. Commissioner Of Income-Tax, Ernakulam

Gopalan Nambiyar, C.J:— The question of law referred for our opinion by the Income-tax Appellate Tribunal, Cochin Bench, under section 256(1) of the Income-tax Act is:

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was not entitled to development allowance at 50% on the sum of Rs. 71,500 being a part of the expenditure incurred during the assessment years 1966–67 and 1967–68 on tea clearing under the provisions of section 33A of the Income-tax Act for the assessment year 1971–72?”

2. The statement of facts sent up by the Tribunal shows that the assessee is a company having income from tea and coffee estates. The accounting year in question ended on March 31, 1971. The preliminary clearing of the land and planting with tea bushes was done in July, 1967, during the accounting period for the year ended October 31, 1967.

3. The expenses for that year and for the subsequent year ended October 31, 1968, could have been considered for development allowance under section 33A(1)(a) of the Act in the second assessment year, i.e 1969–70. In the succeeding two years, i.e, the third and fourth year of clearing and planting, the claim for development allowance would again come up for consideration. The statement of the case discloses that the relevant figures relating to the claim for development allowance are as follows:

“1967 Tea clearing—Planting July, 1967 (13.63 Hectares)

Rs. 1st year 1966–67 44,525 2nd year 1967–68 45,275 89,800 Less cost of clearing to be consideredin the 4th year, i.e, a.y 71-72. 71,500 18,300

Rs. 50% thereof 9,150 Balance of expenses for which no claim was made 71,500 For the year 1971–72, the fourth year of 1967 clearing, the further expenses incurred were:— 3rd year 26,832 4th year 35,172 62,004

4. To this was added the expenditure of 1st and 2nd year not covered by the claim in that year of Rs. 71,500. In 1969, there was another clearing of 3.59 hectares for which 1971–72 would be the 2nd year. The expenses incurred were Rs. 33,861. In that year the company claimed development allowance on the following figures:

1967 clearing:

Rs. Unclaimed expenses of 1967 & 1968 71,500 Expenses of 1969 and 1970–1969 clearing: 62,004 1st and 2nd year expenses 33,861 1,67,365 50% thereof 83,682

5. The company had created a reserve of Rs. 70,000.”

6. The Income-tax Officer allowed the claim in respect of the year 1969 clearing, i.e, in respect of the first and the second year. For 1967 clearing, he took into consideration, the expenses in respect of the third and fourth years. The assessee's claim included a part of the expenses of the first and the second year. This was not admitted by the Income-tax Officer as, according to him, the necessary reserve for claiming the expenses had not been provided for by the assessee. The assessee chose to carry forward this expenditure claiming the development allowance in the assessment year 1971–72. This, the officer disallowed. The Appellate Assistant Commissioner concurred on appeal, observing that the expenditure incurred in the first two years should be claimed deduction of in the second year, and only the balance of expenditure, not taken into account in the first two years, could be claimed in the fourth year. He was of the view that if the assessee chose to make a claim only for a portion of what he was entitled to, in the first two years, instead of the whole which he ought to have claimed, he would be precluded from claiming the omitted portion in the fourth year. The claim for development allowance, according to him, had to be made and allowed in the particular assessment year to which it relates. On further appeal, the Tribunal agreed with the view of the Appellate Assistant Commissioner. The reasons are given by the Tribunal in paragraphs 9 to 14 of its judgment. It recognized that the reason for recompilation of the actual cost of planting in the fourth year arose because the said cost could be known only in that year. “Actual cost” has been defined in section 33A(7). Under that provision, the entire four years' expenditure is totaled up to get at the actual cost. Actual cost till then is a notional figure representing the actual expenditure for a period of four years on the items mentioned in section 33A(7). This is reduced by the subsidies received from the Tea Board or other authority, either directly or indirectly, subject to a maximum of Rs. 10,000 per hectare for lands in hilly areas and Rs. 12,500 per hectare for lands in other areas. All the ingredients which enter into the “actual cost” of planting can be known only at the end of the fourth year. The Tribunal recognized that that was the reason why the computation is to be made in the fourth year. It noted that no provision had been made to recall the excess amount of the subsidies in cases where there was such excess; and was of the view that section 33A(1)(b) does not give a further opportunity to the assessee to get the allowance comprehended under section 33A(1)(a). In paragraph 13 of its judgment, the Tribunal noticed that the granting of the development allowance under section 33A(1)(a) was mandatory, if the necessary conditions had been established. The income-tax proceedings for each year being separate proceedings, the Tribunal was of the view that the allowance which can be claimed in one year cannot be claimed in another year, merely because the assessee did not make his claim which he could have made in the first year. Equally, the Tribunal was clear that the Income-tax Officer cannot assess in any one year what he forgot or omitted to assess in an earlier year.

7. Section 33A of the Act may well be quoted:

“Development allowance.— (1) In respect of planting of tea bushes on any land in India owned by an assessee who carries on the business of growing and manufacturing tea in India, a sum by way of development allowance equivalent to—

(i) where tea bushes have been planted on any land not planted at any time with tea bushes or on any land which had been previously abandoned, fifty per cent. of the actual cost of planting; and

(ii) where tea bushes are planted in replacement of tea bushes that have died or have become permanently useless on any land already planted, thirty per cent, of the actual cost of planting, shall, subject to the provisions of this section, be allowed as a deduction in the manner specified hereunder, namely:—

(a) the amount of the development allowance shall, in the first instance, be computed with reference to that portion of the actual cost of planting which is incurred during the previous year in which the land is prepared for planting or replanting, as the case may be, and in the previous year next following, and the amount so computed shall be allowed as a deduction in respect of such previous year next following; and

(b) thereafter, the development allowance shall again be computed with reference to actual cost of planting, and if the sum so computed exceeds the amount allowed as a deduction under clause (a), the amount of the excess shall be allowed as a deduction in respect of the third succeeding previous year next following the previous year in which the land has been prepared for planting or replanting, as the case may be:

Provided that no deduction under clause (i) shall be allowed unless the planting has commenced after the 31st day of March, 1965, and no deduction shall be allowed under clause (ii) unless the planting has commenced after the 31st day of March, 1965, and been completed before the 1st day of April, 1970.

(2) Where the total income of the assessee assessable for the assessment year relevant to the previous year in respect of which the deduction is required to be allowed under sub-section (1) [the total income for this purpose being computed after deduction of the allowance under subsection (1) or sub-section (1A) or clause (ii) of sub-section (2) of section 33, but without making any deduction under sub-section (1) of this section or any deduction under Chapter VIA or section 280-0] is nil or is less than the full amount of the development allowance calculated at the rates and in the manner specified in sub-section (1)—

(i) the sum to be allowed by way of development allowance for that assessment year under sub-section (1) shall be only such amount as is sufficient to reduce the said total income to nil; and

(ii) the amount of the development allowance, to the extent to which it has not been allowed as aforesaid, shall be carried forward to the following assessment year, and the development allowance to be allowed for the following assessment year shall be such amount as is sufficient to reduce the total income of the assessee assessable for that assessment year, computed in the manner aforesaid, to nil, and the balance of the development allowance, if any, still outstanding shall be carried forward to the following assessment year and so on, so, however, that no portion of the development allowance shall be carried forward for more than eight assessment years immediately succeeding the assessment year in which the deduction was first allowable.

Explanation.— Where for any assessment year development allowance is to be allowed in accordance with the provisions of sub-section (2) in respect of more than one previous year, and the total income of the assessee assessable for that assessment-year [the total income for this purpose being computed after deduction of the allowance under sub-section (1) or subsection (1A) or clause (ii) of sub-section (2) of section 33, but without making any deduction under sub-section (1) of this section or any deduction under Chapter VIA or section 280-0] is less than the amount of the development allowance due to be made in respect of that assessment year, the following procedure shall be followed, namely:—

(i) the allowance under clause (ii) of sub-section (2) of this section shall be made before any allowance under clause (i) of that sub-section is made; and

(ii) where an allowance has to be made under clause (ii) of subsection (2) of this section in respect of amounts carried forward from more than one assessment year, the amount carried forward from an earlier assessment year shall be allowed before any amount carried forward from a later assessment year.

(3) The deduction under sub-section (1) shall be allowed only if the following conditions are fulfilled, namely:—

(i) the particulars prescribed in this behalf have been furnished by the assessee;

(ii) an amount equal to seventy-five per cent, of the development allowance to be actually allowed is debited to the profit and loss account of the relevant previous year and credited to a reserve account to be utilized by the assessee during a period of eight years next following for the purposes of the business of the undertaking, other than—

(a) for distribution by way of dividends or profits; or

(b) for remittance outside India as profits or for the creation of any asset outside India; and

(iii) such other conditions as may be prescribed.

(4) If any such land is sold or otherwise transferred by the assessee to any person at any time before the expiry of eight years from the end of the previous year in which the deduction under sub-section (1) was allowed, any allowance under this section shall be deemed to have been wrongly made for the purposes of this Act, and the provisions of sub-section (5A) of section 155 shall apply accordingly:

Provided that this sub-section shall not apply—

(i) where the land is sold or otherwise transferred by the assessee to the Government, a local authority, a corporation established by a Central, State or Provincial Act, or a Government company as defined in section 617 of the Companies Act, 1956 (1 of 1956); or

(ii) where the sale or transfer of the land is made in connection with the amalgamation or succession referred to in sub-section (5) or subsection (6).

(5) Where, in a scheme of amalgamation, the amalgamating company sells or otherwise transfers to the amalgamated company any land in respect of which development allowance has been allowed to the amalgamating company under sub-section (1),—

(a) the amalgamated company shall continue to fulfill the conditions mentioned in sub-section (3) in respect of the reserve created by the amalgamating company and in respect of the period within which such land shall not be sold or otherwise transferred and in default of any of these conditions, the provisions of sub-section (5A) of section 155 shall apply to the amalgamated company as they would have applied to the amalgamating company had it committed the default; and

(b) the balance of development allowance, if any, still outstanding to the amalgamating company in respect of such land shall be allowed to the amalgamated company in accordance with the provisions of subsection (2), so, however, that the total period for which the balance of development allowance shall be carried forward in the assessments of the amalgamating company and the amalgamated company shall not exceed the period of eight years specified in sub-section (2) and the amalgamated Company shall be treated as the assessee in respect of such land for the purposes of this section.

(6) Where a firm is succeeded to by a company in the business carried on by it as a result of which the firm sells or otherwise transfers to the company any land on which development allowance has been allowed, the provisions of clauses (a) and (b) of sub-section (5) shall, so far as may be, apply to the firm and the company.

Explanation.— The provisions of this sub-section shall apply if the conditions laid down in the Explanation to sub-section (4) of section 33 are fulfilled.

(7) For the purposes of this section, ‘actual cost of planting’ means the aggregate of—

(i) the cost of preparing the land;

(ii) the cost of seeds, cutting and nurseries;

(iii) the cost of planting and replanting; and

(iv) the cost of upkeep thereof for the previous year in which the land has been prepared and the three successive previous years next following such previous year, reduced by that portion of the cost, if any, as has been met directly or indirectly by any other person or authority:

Provided that where such cost exceeds twelve thousand five hundred rupees per hectare in respect of land situate in a hilly area or exceeds ten thousand rupees per hectare in any other area, then the excess shall be ignored.

(8) The Board may, having regard to the elevation and topography, by general or special order, declare any areas to be hilly areas for the purposes of this section and such order shall not be questioned before any court of law or any other authority.

Explanation.— For the purposes of this section, an assessee having a leasehold or other right of occupancy in any land shall be deemed to own such land and where the assessee transfers such right, he shall be deemed to have sold or otherwise transferred; such land.”

8. From the section, it is clear that the development allowance is granted for the process of planting or replanting any land with tea bushes. The process is a continuous one, spread over a length of time, and involving alteration and readjustment of ideas and operations from time to time. The reckoning of the “actual cost” incurred for planting and replanting must, in the nature of things, await the finalization of the plans and ideas and termination of the process of planting and replanting. It is only there after that an allowance can be given for “the actual cost of planting” as defined in section 33A(7). Any cost worked out till the final evolution of ideas and their execution must, in the nature of things, be only tentative. This aspect, we think, is sufficiently indicated by the terms of the section; itself. Section 33A(1)(a) speaks of the computation “in the first instance” (underlining* ours) of the development allowance, meaning and implying that such computation is not to be final and decisive. Sub-clause (b) accordingly provides that “the development allowance shall again be computed with reference to the actual cost of planting”, etc. The sub-clause thus contemplates a recompilation of the actual cost of planting; and we see nothing on the terms of the section why the recompilation should not cover the entire gamut of the planting operations, but should stop short of what could and should have been claimed, to state it broadly, in the first two years. Whether it should be so confined, on any acceptable principle, apart from the terms of the section, we shall examine presently. There is again the further indication in sub-clause (b) that if, after recompilation, the recomputed amount exceeds the amount allowed as deduction under clause (a), “the excess shall be allowed” as a deduction, etc. The provision to allow excess deduction is mandatory, once the condition visualized is satisfied.

9. Apart from the terms of the section we find it difficult to sustain the conclusion of the Tribunal on any general considerations of legal principle, or the scheme of the taxing statute. The Tribunal seems to think that each assessment year is a separate unit for purposes of assessment, and if a deduction or allowance which could have been claimed in the course of one assessment year is not so claimed, the assessee is precluded from making the same claim for the next year. This appears reminiscent of the doctrine of constructive res judicata embodied in section 11 of the Civil Procedure Code, and known to the civil law—what is generally referred to as the doctrine of “might and ought”. Even in that region, the position is well settled that before a party's mouth is shut on considerations of constructive res judicata, the plea omitted to be taken should have been one which not only “might” have been raised in the previous proceeding, but “ought” to have been so raised. We doubt whether this doctrine of constructive res judicata in all its rigour and severity can be applied to a taxing statute, on the ground that each assessment year is a separate unit of assessment. Without finally pronouncing on that question, we think, there is sufficient indication in the terms of section 33A, from the provisions we have already adverted to, to show that even if the claim here in question might have been made in the first and the second year of planting, it was not one which “ought” to have been so made.

10. We answer the question referred in the negative, that is, in favour of the assessee and against the revenue. We make no order as to costs.

11. A copy of this judgment under the seal of the court and the signature of the Registrar will be sent to the Income-tax Appellate Tribunal, Cochin Bench, as required by law.

Kilkotagiri Tea And Coffee Estate Ltd. v. Commissioner Of Income-Tax, Ernakulam

Structured Summary of the Opinion (Gopalan Nambiyar, C.J.)

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Assessee's Position

Revenue's Position (Income‑tax Officer / Appellate Assistant Commissioner / Tribunal)

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Kilkotagiri Tea And Coffee Estate Ltd. v. Commissioner Of Income-Tax, Ernakulam

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