Jeevan Reddy, J.
1. Three questions are stated for our opinion under section 256(1) of the Income-tax Act. They are :
'(1) Whether, on the facts and in the circumstances of the case, the assessee is entitled to deduction under section 37 of the Income-tax Act, 1961, in respect of the sum of Rs. 1,04,155 being interest paid to the bank on medium and short-term agricultural loans
(2) Whether, on the facts and in the circumstances of the case, the assessee is entitled to deduction under section 35C also on the above interest paid to banks when other conditions laid down in section 35C were not satisfied even though it was held to be an industrial company and
(3) Whether, on the facts and in the circumstances of the case, the assessee is entitled to weighted deduction under section 35C in respect of the agricultural development expenses of Rs. 74,870 though the other conditions mentioned in section 35C were not satisfied even if it was held that the assessee was an industrial company ?'
2. The assessee, Navabharat Enterprises Private Ltd., Hyderabad, is engaged mainly in processing and export of tobacco. It has since been held that it is an 'industrial company' as defined in section 2(7)(d) of the Finance Acts of 1966 and 1967 entitled to the concessional rate of tax provided thereunder. It acquired certain waste lands, took 'medium and short-term agricultural loans' for developing them and employed the necessary man power including a few agricultural science graduates as also a person holding a doctorate in agriculture. On a part of the land, tobacco seedings were raised and upon the remaining land, different crops like cotton, banana, vegetables, paddy, chillies, etc., were raised. The total expenditure on these farming operations was said to be Rs. 9,62,000, interest whereon in the accounting year relevant to the assessment year concerned herein came to Rs. 1,04,155. The assessee claimed the said interest as a deduction by way of business expenditure under section 37 of the Income-tax Act. According to the assessee, it acquired the said lands with the intention of carrying on research and development in tobacco cultivation, and that inasmuch as part of the land was not found suitable for tobacco cultivation, other crops were raised. The Income-tax Officer negatived the claim holding that the loans were taken for developing agricultural lands and inasmuch as the income from the farming operations was not assessable to tax, deducation cannot be allowed . The assessee made another claim for deduction under section 35C in respect of a sum of Rs. 74,870 in respect of agricultural development expenses. This claim made with reference to section 35C was also negatived. We are concerned in this case only with the above two items.
3. On appeal, the Commissioner of Income-tax (Appeals) affirmed the order of the Income-tax Officer substantially. Before the Commissioner of Income-tax (Appeals), it was contended by the assessee that it has got a vast net work of business operations, that the loans taken on the security of the lands were indeed utilised in tobacco operations and that in the circumstances it cannot be said that the loans raised were utilised only for the purpose of agriculture. So far as the claim under section 35C is concerned, it was contended that the main aim of the assessee in developing the said farm was the dissemination of information or advice on modern techniques to agriculturists and, therefore, weighted deduction under the said section ought to have been allowed. The Commissioner of Income-tax (Appeals), however, negatived the plea relating to deduction of Rs. 1,04,155, inasmuch as only a small part of the land was used for raising tobacco and the rest for raising other crops, and also because the loans were taken on the security of agricultural lands as short-term and medium-term agricultural loans. He also observed that no material was placed before the Income-tax Officer or before him, that these loans had in fact been utilised for business purposes. He also negatived the assessee's claim under section 35C with respect to the above expenditure, which argument was advanced as an alternative argument. So far as the claim for weighted deduction in respect of Rs. 74,870 under section 35C is concerned, the Commissioner of Income-tax (Appeals) held that inasmuch as the assessee was not engaged in manufacturer or processing of goods, the said section has no application. (There was another item of Rs. 1,40,400 claimed as a deduction under section 35C, which too was negatived by the Commissioner, while allowing a small portion thereof under section 37. We are not concerned with this item since it is not referred to us.)
4. On further appeal, the Tribunal referred in the first instance to the fact that this very assessee has been held to be an 'industrial company' as defined in section 2(7)(d) of the Finance Acts, 1966 and 1967. Relying then upon the decision of the Supreme Court in CIT v. Maharashtra Sugar Mills Ltd : [1971]82ITR452(SC) and that of this court in Addl. CIT v. Challapalli Sugars Ltd. : [1979]116ITR255(AP) , the Tribunal held that the claim for deduction relating to Rs. 1,04,155 representing interest on borrowings is allowable, though the borrowed moneys were utilised for the purpose of raising tobacco. So far as the assessee's claim under section 35C in concerned, the Tribunal observed that this deduction was claimed by the assessee both under section 37 as well as section 35C, whereas both the sections are mutually exclusive. The Tribunal, accordingly, set aside the orders of the lower authorities and remanded the matter to the Income-tax Officer to dispose of the claim of the assessee afresh in the light of the observations made by it in its judgment. The claim of deduction of Rs. 74,870 towards agricultural development expenses under section 35C was allowed on the only ground that the assessee is an industrial company.
5. We shall first take up the question of deductibility of Rs. 1,04,155 under section 37. The facts stated above would disclose that the loans taken by the assessee were agricultural loans, called 'short-term and medium-term agricultural loans.' According to the Commissioner of Income-tax (Appeals), these loans were taken on the security of the lands. Be that as it may, the fact remains that the loans taken were agricultural loans and were taken expressly for the purpose of developing the agricultural lands. It also appears that tobacco was raised only on a small portion of the lands acquired; a major portion of the lands is utilised for raising other crops. The business of the assessee is processing and export of tobacco; it has no business in any other crops; neither does it process them nor does it undertake any other manufacturing activity relatable to such other crops. The question that arises is : whether the said amount can be deducted as business expenditure under section 37 of the Act
6. Ordinarily speaking, in respect of the amount of interest on loans taken exclusively for agricultural operations, the assessee cannot claim deduction under section 37, for the reason that income from such operation is not taxable. But, where the agricultural operations are so indivisibly and integrally connected with the business operations as to constitute a single indivisible business, such deduction can be granted to the assessee, since it is not possible to dissociate the manufacturing and the agricultural operations. Though the loan is taken with reference to agricultural lands, it may not be possible to say that the loan amount was exclusively and directly utilised for agricultural operations in such a case. This is the ratio of the decision of this court in Addl. CIT v. Challapalli Sugars Ltd. : [1979]116ITR255(AP) . There, the assessee, a public limited company, was engaged in the manufacture of sugar. It possessed about 2,000 acres of agricultural land on which it grew sugarcane for manufacture of sugar in its factory. A loan was raised by the assessee which was credited to the agricultural section of the assessee. The interest payable on the said loan was claimed as a deduction by way of business expenditure. It was disallowed by the Income-tax Officer and the first appellate authority. On further appeal, however, the Tribunal held that it is a permissible deduction, which was affirmed by this court on reference. This court found that the cultivation of sugarcane and the manufacturing of sugar constitute one single indivisible business and that since the borrowing of money and payment of interest is a mere commercial transactions of the assessee, deduction has rightly been allowed. It was also observed that merely because the amount borrowed was utilised by the assessee in cultivating and producing sugarcane, it cannot be said that the expenditure incurred by way of payment of interest on such borrowings has any connection with, or was attributable directly to the agricultural operations. This was so observed because it was not possible to dissociate the agricultural operations from the manufacturing operations.
7. Similar is the decision of the Supreme Court in CIT v. Maharashtra Sugar Mills Ltd. : [1971]82ITR452(SC) . In that case, the question arose with reference to the deductibility of the managing agency commission paid by the assessee. The assessee was engaged in the manufacture of sugar. It also owned extensive lands upon which it grew sugarcane for the manufacture of sugar in its own factory. It was found as a fact by the Appellate Tribunal that the cultivation of sugarcane and manufacture of sugar by the assessee constituted one single indivisible business. The dispute was whether the managing agency commission paid by the assessee should be apportioned between the manufacturing operations and the agricultural operations, or should the whole of it be allowed as a deduction The Supreme Court held that the entire amount has to be deducted because the assessee had only one business which was single and indivisible and the fact that part of its income was not taxable had no relevance upon the deductibility of the commission paid by the assessee. Applying the reasoning of the said decisions to the facts of this case, it can only be held that interest on the amount apportionable to tobacco raising operations can alone be allowed as a deduction, since it can be said that the tobacco raising operations by the assessee on its own land, for processing by itself, constitute a single and indivisible business. This indeed seems to be the finding of the Tribunal, though not recorded expressly as such. (That this is the factual basis upon which the Tribunal decided the matter is evident from the fact that it allowed the said deduction applying the principle of the aforesaid two decisions which is applicable only in a case where the agricultural operations and the manufacturing operations constitute one single indivisible business). But, we are of the opinion that in so far as the interest apportionable to the amount spent for raising the crops other than tobacco is concerned, it cannot be allowed as a deduction, for, the raising of the said crops cannot be said to have any connection with the tobacco processing operations carried on by the assessee, much less can it be said that the raising of the said other crops is indivisibly and inseparably connected with the tobacco raising operations of the assessee. It may be noted that the assessee's main business is processing and export of tobacco. It has no business whatsoever either in cotton or paddy or any other crops. We may demonstrate this aspect by giving an illustration. Suppose, the assessee herein had raised only paddy or cotton upon all the lands (i.e., corps other than tobacco). Can we still apply the ratio of Maharashtra Sugar Mills' case : [1971]82ITR452(SC) or Challapalli Sugar Mills' case : [1979]116ITR255(AP) We think not. It would neither be reasonable nor realistic to say in such a case that the agricultural operations of the assessee are so integrally connected with the business operations as to constitute a single indivisible operation. There may be any number of assessee engaged in both agricultural and business/manufacturing operations. By dint of that fact alone, both the operations do not constitute one single indivisible activity - even if the assessee chooses to maintain one set of accounts for both the operations. There must be such intimate and real connection between both the operations as was found in the case of the sugar mills in the aforesaid decisions. Unless it is found as a fact that both the operations are so indivisibly connected as to constitute a single activity, it is not possible to apply the principle of the aforesaid cases. Now, as we have stated above, the Tribunal has not recorded as specific finding that raising of all the crops by the assessee and the processing and export of tobacco constitute one single indivisible operation. As we have stated a little while ago, such a finding can be inferred at least in the case of sugarcane cultivation, applying the principle of the aforesaid cases, but certainly the said inference cannot be extended to other crops wholly unconnected with the business operations of the assessee. We are, therefore, of the opinion that the entire interest of Rs. 1,04,155 cannot be deducted. Only that portion of the said interest amount as is attributable to the loan amount spent upon the land utilised for raising tobacco can be deducted, but not the other amount. The Tribunal, while passing final orders in pursuance of this opinion, shall determine the amount to be deducted on the above basis and grant deduction to that extent only.
8. We may next take up the claim for deduction of the said amount under section 35C of the Act. Indeed, the matter has been remanded by the Tribunal to the Income-tax Officer for a fresh determination in the light of the observations made by it in its judgment. We are, however, of the opinion that it would be appropriate to clarify the legal position. Both counsel have addressed arguments on the applicability of section 35C in the facts of this case and we, therefore, proceed to deal with the same, keeping in mind the facts of this case. An analysis of section 35C, leaving out the inapplicable words and phrases, discloses that the following are the requirements to attract the provision :
(a) the assessee claiming a deduction should be a company or a co-operative society engaged in processing as raw material, a product of agriculture :
(b) the assessee must have incurred, after February 29, 1968, directly or through an approved association or body, any expenditure in the provision of any goods, services or facilities, specified in clause (b) of sub-section (1);
(c) the provision of goods, services or facilities must be to a person who is cultivator, grower or producer of such product in India;
(d) the goods, services or facilities referred to in the section are only those as are mentioned in clause (b);
(e) if the above ingredients are satisfied, a sum equal to one-fifth of the amount of expenditure incurred shall be granted as deduction; and
(f) where a deduction is claimed and allowed under this section for any assessment year, no deduction shall be allowed in respect of such expenditure under any other provision of the Act for the same or any other assessment year.
9. It would be evident from the above analysis that if any amount is spent by the assessee for developing his/its own land, or for improving seeds or providing modern or better techniques for its own purposes, deduction cannot be allowed, because the section contemplates goods, services or facilities being provided to another person, and not by the assessee to himself/itself. It may, however, happen that though the agricultural operations are carried on on its own land, yet the land may be used for providing better seeds to other agriculturists, or for dissemination of information to them, or the land may be used as a demonstration farm for application of modern techniques or methods of agriculture, etc., for the benefit of other agriculturists engaged in raising tobacco. In such a case, deduction would be permissible. If deduction is granted under this provision, deduction under any other provision of the Act, including section 37, cannot be granted either for the same assessment year, or for any other assessment year. The Income-tax Officer to whom the matter has been remanded by the Tribunal shall look into the facts and circumstances of this case in the light of the above analysis of the section and pass orders according to law.
10. Now coming to the deductibility of the sum of Rs. 74,870 under section 35C, we are of the opinion that the approach adopted by the Tribunal on this question is unsupportable. It has allowed the deduction on the only ground that the assessee has since been held to be an industrial company. It has not looked into, nor was it satisfied about the other requirements of the section. The Tribunal was in error in allowing the said deduction on being satisfied about only one of the several requirements of the section. The matter has to be examined afresh by the Tribunal in the light of the analysis of the section set out hereinbefore. The Tribunal shall do so while passing final orders under section 260.
11. For the above reasons, we answer question No. (1) thus : Only the interest on the amount spent upon the land used for raising tobacco is deductible under section 37 and not the whole amount of Rs. 1,04,155. We decline to answer question No. (2) and observe that while passing final orders, the Income-tax Officer (to whom the matter has already been remanded by the Tribunal) shall decide whether the amount spent upon the land utilised for raising tobacco can be deducted under section 35C. It is, however, clear that the same amount cannot be deducted simultaneously under both the provisions. It must fall under one or the other.
12. So far as question No. (3) is concerned, we answer the same in the negative, for the reasons mentioned above. We are of the opinion that since all the facts necessary for deciding the applicability of otherwise of section 35C were not looked into by any of the three authorities, the Tribunal may remand this aspect too to the Income-tax Officer for a fuller examination in the light of the analysis of section 35C contained in this judgment.
13. Reference answered accordingly. No costs.