JAGADISAN J. - A tea and coffee estate named Havukal estate at Kotagiri is owned by a firm consisting of nine partners. The petitioners are some of the partners. The firm is registered under the provisions of the Madras Agricultural Income-tax Act for the year of assessment 1958-59 (accounting period May 1, 1957, to March 31, 1958). The petitioners had borrowed money from money-lenders and bankers for contributing towards the purchase price of acquisition of the estate. The Agricultural Income-tax Officer determined the assessable income of the firm from the estate as 60% of the total income determined by the Income-tax Officer acting under the Indian Income-tax Act. Each one of these petitioners claimed by way of deduction 60% of the interest paid on their respective capital borrowing. In computing the income under the Indian Income-tax Act the petitioners were allowed deduction to the extent of 40% on their borrowed capital as 40% of the income alone was taxable under that Act. The claim to deduct interest on borrowed capital, to the extent of 60%, in computing the petitioners share of the agricultural income having been negatived by the taxing authorities as well as by the Appellate Tribunal, these revision petitions have been preferred.
The particulars of interest paid and the claim for deduction against agricultural income by the petitioners are given in the tabular statement below :
Name of Party
Total interest paid
Claim against agricultural income- 60%
Claim against business income allowed 40%
Rs.
Rs.
Rs.
1. Perianna Pillai
3,490
2,094
1,396
Kamakshi Ammal (wife)
349
290
140
2. M. Thangavelu
3,490
2,094
1,396
3. M. Rangaswamy
3,490
2,094
1,396
4. M. Ramaswamy
3,490
2,094
1,396
5. C. Ramaswamy
3,490
2,094
1,396
6. S. R. Arunachalam
3,490
2,094
1,396
The sole question that arises for determination is whether a partner of a registered firm earning agricultural income is entitled to claim by way of deduction interest paid on the capital borrowed by him for acquiring the estate giving rise to the income. The material provisions of the Act and the Rules are as follows. The assessment of income of the registered firm is provided for under section 17 of the Act.
'17. (5) Notwithstanding anything contained in the foregoing sub-sections, when the assessee is a firm and the total income of the firm has been assessed under sub-section (1), sub-section (3) or sub-section (4), as the case may be -
(a) in the case of a registered firm, the sum payable by the firm itself shall not be determined but the total income of each partner of the firm, including therein his share of its income, profits and gains of the previous year, shall be assessed, and the sum payable by him on the basis of such assessment shall be determined.'
What comes in for computation of agricultural income in respect of a registered firm is the total income of each partner of the firm. Section 5 of the Act provides for deductions which can be made in determining the taxable income. Section 5 (k) reads :
'5. (k) Any interest paid in the previous year on any amount borrowed and actually spent on the land from which the agricultural income is derived :
Provided that the need for borrowing was genuine having due regard to the assets of the assessee at the time :
Provided further that the interest allowed under this clause shall be limited to nine per cent. on an amount equivalent to twenty-five per cent. of the agricultural income from the land in that year.'
Section 5 (e) reads :
'5. (e) Any expenditure incurred in the previous year (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 the land.'
Rule 7 relates to computation of income from tea. It is in these terms :
'In respect of agricultural income from tea grown and manufactured by the seller in the State of Madras, the portion of the income worked out under the Indian Income-tax Act and left unassessed as being agricultural shall be assessed under the Act after allowing such deductions under the Act and the rules made thereunder :...
Provided further that if the income for the purpose of the Indian Income-tax Act has not been determined before the filing of returns under section 16, the assessee shall submit along with the returns a statement of profit and loss in respect of his entire income derived partly from agriculture and partly from business and thereupon he shall be assessed treating his agricultural income to be 60 per centum of the income derived from tea grown and manufactured in the State of Madras after allowing the deductions allowed by this Act : this assessment being subject to revision after the income for the year has been determined for the purpose of the Indian Income-tax Act, 1922...
(2) The deductions referred to above are specified in section 5 and rules 3, 4 and 5.'
These provisions make it quite clear that the share of each partner of the firm owning the Havukal estate is liable to tax under the Act to the extent of 60 per cent. of the income from tea. But computing the share income each partner is entitled to deduction as provided for under section 5 of the Act. The claim of the petitioners to allow the interest payment as a charge upon their respective share income can be brought only within section 5 (e) or 5 (k). A Division Bench of this court has held in G. J. Coelho v. State of Madras, that interest paid on capital borrowed for the purpose of purchasing a plantation will be a permissible deduction not under section 5 (k) but under section 5 (e) of the Act. The applicability of section 5 (k) was negatived in the following words at page 688 : 'What section 5 (k) requires is that the borrowed amount should have been actually spent on the land. When the petitioner used the money he had borrowed for the purchase of the land itself, it is difficult to look upon it as an expenditure on the land within the scope of section 5 (k). No portion of that borrowed money was spent on the land itself, for example, for any agricultural or horticultural purposes or any purpose subservient thereto. The expenditure for the purchase of the land is not, in our opinion, an expenditure on the land as we understand the scope of that expression in section 5 (k) of Act V of 1955.' We respectfully agree with this observation.
Section 5 (e) is a general provision and the conditions necessary to its applicability are : (i) the expenditure should not be in the nature of capital expenditure; (ii) it should not be in the nature of personal expenses of the assessee; and (iii) it should be laid out or expended wholly and exclusively for the purpose of the land. Interest paid on borrowed capital by an assessee is not a capital expense. Payment of interest is necessitates to raise the capital. The capital may be employed in several ways, like investment in a business or purchase of property. It is only the investment of capital that can be called the incurring of a capital expense. The liability to pay interest being only an incident of the procurement of the capital cannot partake of the character or the nature of the disbursement or utilisation of the capital. We have no doubt that the payment of interest for a borrowed capital is not in the nature of capital expenditure. We have equally no doubt in holding that the expenses incurred by paying interest for such a capital cannot be called personal expenses of the assessee.
Can it be said that the expense was laid out or expended wholly and exclusively for the purpose of the land It is worthwhile to note the difference in terminology between section 5 (e) and section 5 (k). The words in section 5 (k) are 'amount borrowed and actually spent on the land'; and the words in section 5 (e) 'expenses of the assessee laid out or expended wholly and exclusively for the purpose of the land'. The plain words of section 5 (e) clearly indicate that amount borrowed for the purpose of purchasing the land giving rise to the agricultural income is amount laid out or expended wholly and exclusively for the purpose of the land. But the borrowed capital cannot be claimed as deduction as the spending of the amount is in the nature of a capital expense. Interest paid on such borrowing would however stand on a different footing as the expense incurred by paying interest is not a capital expense; but yet it is laid out and expended wholly and exclusively for the purpose of the land.
The Division Bench referred to above has, in our opinion, quite rightly, if we may say so with respect, taken the view that interest paid on borrowed capital for acquisition of the estate will be a permissible deduction under section 5 (e) of the Act. We find ourselves completely in agreement with the reasoning and conclusion of that decision. We, therefore, hold that the deduction claimed by the petitioners in these cases ought to have been allowed in computing the agricultural income.
These petitions are allowed. There will, however, be no order as to costs.