K.K. Usha, J.
1. The matter arises under the Agricultural Income-tax Act, 1950. Reference is at the instance of the assessee. Malayalam Plantations Ltd., was a foreign company up to March 31, 1978. Pursuant to an order passed by this court in Company Petition No. 25 of 1978, connected with Company Application No. 545 of 1978, a scheme of arrangement and amalgamation was sanctioned by which the foreign company ceased to exist with effect from April 1, 1978. The entire asset was taken over by the domestic company, Malayalam Plantations (India) Ltd.
2. For the assessment year 1979-80, by order dated August 25, 1984, the Inspecting Assistant Commissioner (Special), Trichur, completed the assessment in respect of Harrisons Malayalam Ltd., fixing a total agricultural income of Rs. 2,73,52,670. Thereafter, the Inspecting Assistant Commissioner, Ernakulam, in exercise of his powers under Section 36 of the Act, revised the assessment and fixed the net income at Rs. 2,75,58,360. Notice was then issued by the Commissioner of Agrl. Income-tax under Section 34 of the Kerala Agricultural Income-tax Act, 1950, proposing to revise the assessment by adding back the inadmissible deduction of Rs. 33,64,144. The assessee filed its reply. The Commissioner passed an order on February 2, 1989. In that order, it was found that the assessee was not entitled to the deductions granted by the assessing authority as follows :
1. Bonus amounting to Rs. 31,17,803 payable for 1977-78 but paid during the accounting year 1978-79.
2. Payment of sales tax arrears amounting to Rs. 2,29,950.71 relating to the period of 1967-68 to 1972-73.
3. Estate valuation fee amounting to Rs. 16,390.
3. The application filed by the assessee under Section 60(2) of the Act praying to draw up a statement of facts of the case and to refer five questions to this court was rejected by the Commissioner, under order dated August 19, 1989. The assessee thereupon approached this court by filing O. P. No. 860 of 1990. This court, under judgment dated July 19, 1994, directed the Commissioner of Agricultural Income-tax, Thiruvanantha-puram, to refer the following questions of law for opinion of this court :
'1. Whether, on the facts and in the circumstances of the case and particularly in view of Clauses (7) and (8) of the scheme contained in the judgment of the High Court of Kerala in 0. P. No. 25 of 1978 dated April 4, 1979, was the Commissioner right in directing disallowance of the bonus of Rs. 31,17,803 paid by the assessee during the relevant accounting year and allowed as deduction in the original assessment for the assessment year 1979-80.
2. Whether, on the facts and in the circumstances of the case, is not finding of the Commissioner that the bonus payment constitutes capital expenditure forming part of consideration for acquiring the assets by the assessee arbitrary and without any material or basis.
3. Whether, on the facts and in the circumstances of the case, was the Commissioner right in holding that the sales tax arrears of 1967-68 to 1972-73 paid by the assessee during the relevant accounting year is not allowable because the same is capital expenditure constituting consideration for acquisition of assets by the assessee ?
4. Whether, on the facts and circumstances of the case, was the Commissioner right in holding that the estate valuation fee amounting to Rs. 16,390 was wrongly allowed in the original assessment and in setting aside the original assessment on that basis ?'
4. The Commissioner of Agricultural Income-tax, under proceedings dated February 2, 1989, took the view that the three items of expenditure, namely, payment of bonus, payment of sales tax arrears and estate valuation fee were in the nature of capital expenditure and therefore the assessee is not entitled to claim deduction in respect of the above three items. According to him, the assessee incurred these expenses as a result of amalgamation and therefore for bringing the asset into existence. It was not incurred for deriving agricultural income by the assessee-company during the relevant accounting period. The expenditure would form part of consideration for acquiring the assets and thus it is a capital expenditure.
5. It is contended on behalf of the assessee before us that the Commissioner of Agricultural Income-tax has committed a grave error in not taking into consideration the conditions contained under Clauses (7) and (8) of the scheme as approved by this court while rejecting the assessee's claim for deduction. Clauses (7) and (8) read as follows :
'(7) All the employees of the transferor company in its service at the close of business on the transfer date shall become employees of Indian company without interruption in service and on terms no less favourable to such employees than those applicable to them at such close of business.
(8) The transferor company shall with effect from the transfer date be deemed to have carried on its business for and on behalf of the Indian company and, accordingly, the profits and losses of the transferor company for the period commencing from the transfer date shall belong to the Indian company and shall be available to the Indian company for disposition in any manner including the declaration of any dividend by the Indian company after the transfer date.'
6. Since employees of the transferor company are to continue in service without any interruption in their service and on terms no less favourable than what they were enjoying, bonus could not have been denied to them. It is also pointed out that since the profits made by the foreign company with effect from the date of transfer is to be treated as the profit of the transferee Indian company, there was no justification in denying the benefit of the expenditure also to the transferee Indian company. Learned counsel relied on a decision of the Calcutta High Court in CIT v. Moran Tea Co. (I.) Ltd. : [1992]195ITR702(Cal) , in support of his contention. He also pointed out that even though a specific contention was taken in the reply given by the assessee to the notice issued under Section 34 of the Act to the effect that for the assessment under the Central Income-tax, when income from tea was computed, the claim for deduction in respect of bonus was allowed. Even though this argument is noted in the order passed by the Commissioner, there is no reason given for rejecting the above contention.
7. On a close scrutiny of the scheme as approved by this court, we are inclined to accept the contention raised by the assessee. The transfer date as per the scheme was March 31, 1978. For the purpose of the scheme, the undertaking and business of the transferor company shall include all the assets of the transferor company immediately before the amalgamation and all the liabilities of the transferor company immediately before the amalgamation. Clause (8) specifically provides that the profits and losses of the transferor company for the period commencing from the transfer date shall belong to the Indian company. Even though the transferor company was to carry on the business from the date of transfer, it would be deemed to have been carried on for and on behalf of the Indian company. Clause (7) refers to the continuity of service of the employees of the transferor company on the same terms. The bonus for the financial year 1977-78 was paid by the transferor company in 1978-79 which is the accounting period relevant for the assessment proceedings in this case. There is no case for the Revenue that such amount was not paid by the transferor company. When such amount is paid towards bonus due to the employees, such payment also shall be taken into consideration for the purpose of computing profits and losses of the transferor company for the period commencing from the transfer date. Going by the provisions contained under Clause (8), it is only the profits and losses of the transferor company after making even such payments that would come to the transferee company. Similar is the nature of the other two items, namely, payment of sales tax arrears as well as estate valuation fee. In the light of the above, we find that the assessing authority had correctly allowed deduction of the three items referred above. Such payments cannot be treated as capital expenditure. There was no payment made for the purpose of acquiring the assets as held by the Commissioner.
8. In view of the above, we answer questions Nos. 1, 3 and 4 in the negative, in favour of the assessee and against the Revenue. Since question No. 2 is another facet of question No. 1, we refuse to answer question No. 2.
9. A copy of this judgment under the seal of this court and the signature of the Registrar shall be forwarded to the Commissioner of Agricultural Income-tax, Thiruvananthapuram.