Interest paid on borrowed capital for the purchase of a plantation is an expenditure wholly and exclusively laid out for the purpose of the plantation and is therefore deductible under Section 5(e) of the Madras Plantations, Agricultural Income-tax Act (Madras Act. V of 1955).

Judgment

SIKRI J. : The respondent, hereinafter referred to as the assessee, purchased an estate in 1950, known as Silver Cloud Estate, consisting of tea, coffee and rubber plantations, in Gudalur Nilgiris, Madras State. Out of the sale price of Rs. 3,10,000/-, he borrowed Rs. 2,90,000/-, at interest varying from seven to eight per cent, per annurn. For the assessment year 1955-56, the assessee claimed to deduct interest on this sum, amounting to Rs. 22,628/9/8. The Agricultural Income-tax Officer, Gudalur, disallowed Rs. 21;057/15/1, allowing Rs. 1,570/10/l, under S. 5 (k) of the Madras Plantations, Agricultural Income-tax Act (Madras Act. V of 1955), (hereinafter referred to as the Act). The relevant part of the assessment order is reproduced below :

"Interest on borrowing Rs. 21,057-1. The assessee has claimed Rs. 22,628-9-8 towards interest. It is seen that about Rs. 80,000 has been borrowed from various parties, for the maintenance of the estate. Under S. 5 (k) the interest has to be limited to six per cent. on an amount equivalent to 25 per cent of the agricultural income in that year. The gross income is Rs. 1,04,710-13-11. So the borrowing has to be limited to 25 per cent of Rs. 1,04,710-13- 11 which is Rs. 26,177-ll-6. Interest at six per cent on this amount is Rs. 1,570-10-7. So a sum of Rs. 21,057-15-1 is disallowed (22,628-9-8 minus 1,570-10-7).

2. The assessee appealed to the Assistant Commissioner of Agricultural Income-tax, without success. He then appealed to the Madras Plantations Agricultural Income-tax Appellate Tribunal hereinafter referred to as the Tribunal. The Tribunal observed as follows :

"It is not possible to agree with the contention that interest paid in the year of account towards a loan borrowed by the proprietor for the purpose of acquisition of the estate will fall within the category of "expenditure wholly and exclusively laid out for the purpose of the plantation". The immediate objet of the expenditure, i.e. payment of interest, is to liquidate a personal liability of the proprietor, as a debtor. That after such borrowing the debtor used it as sale price-and acquired the estate, cannot make the payment of interest an expenditure wholly and exclusively laid out for the purpose of the plantation." The language of the various subdivisions of S. 5 of the Act referring to the various items of permissible deductions towards expenditure shows that the expenditure and the plantation must have a direct and proximate connection. Here, the proximate connection of the payment is with a personal loan and not with the plantation."

3. The assessee filed a revision application to the High Court under S. 54(1) of the Act, and raised the following question below it :

question of law raised for decision by the High Court-Whether interest paid on monies borrowed for the purchase of the plantation is expenditure of the nature referred to in S. 5 (e) of the Act and should therefore be deducted in assessing the income of the plantation during the year."

4. The High Court held that the deduction claimed by the assessee fell within the scope of S. 5 (e) of the Act and that the whole of Rs. 22,628/9/8, and not merely Rs. 1,570/10/7, should have been deducted from his assessable income. It ordered that the assessment be revised accordingly. The High Court refused to certify the case as a fit one, under Art, 133 (1) (c) of the Constitution. But this Court gave special leave to the appellant to appeal against the judgment and order of the High Court.

5. The relevant statutory provisions are as under. S. 2 (a) defines agricultural income and S. .2(r) defines plantation :-

2(a) agricultural income means-

(1) any rent or revenue derived from a plantation;

(2) any income derived from such plantation in the State by-

(i) agriculture, or .

(ii) the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render the produce raised or received by h