Commissioner Of Income-Tax v. Bhopal Sugar Industries Ltd.

Naik, J.:— This is a reference under sub-section (1) of Section 66 of the Indian Income-tax Act, 1922 (hereinafter referred to as ‘the Act’) at the instance of the Commissioner of Income-tax. The questions referred to us for decision are:

(1) “Whether, on the facts and in the circumstances of the case, the overhead expenses under the heads of Salaries and Travelling expenses of general staff. General charges. Legal expenses, postage, registration fee, etc., Directors' fees and travelling expenses and Managing Agents' office allowance incurred by the assessee could be apportioned between agricultural and business activities of the company and were not admissible as deductions in their entirety in computing the income of the company?”

(2) “Whether, on the facts and in the circumstances of the case, the overhead expenses under the heads Salaries of general staff, Provident fund. Directorial expenses. Managing Agents' office allowance and Managing Agents' commission on net profit incurred by the assessee company could be apportioned between agricultural and business activities of the company and were not admissible as deductions in their entirety in computing the income of the company?”

2. The first question relates to the assessment year 1956–1957 and the second to the assessment year 1957–1958. The facts relevant for our purpose, as appearing in the statement of the case, are as follows:

3. The assessee is a public limited company carrying on business in the manufacture and sale of sugar. The activities of the company are composite. It manufactures sugar. It also owns large farms where sugar-cane is grown, which is used by it in its manufacture of sugar.

4. During the course of assessment proceedings for the assessment year 1956–1957 (the account year being the year ending on 30-9-1955), the assessee claimed deductions in respect of the following items:

“(1) Salaries and travelling expenses of general staff.

(2) General charges.

(3) Provident fund for agricultural staff.

(4) Legal expenses, postage, registration fee, etc.

(5) Directors' fees and travelling expenses.

(6) Managing Agents' office allowances.”

5. Similarly, in respect of the assessment year 1957–1958 (the account year being the year ending on 30-9-1956), it claimed deductions in respect of the following items:—

“(1) Salaries of general staff.

(2) Provident fund contributions.

(3) Company's contribution to Provident fund pertaining to staff and workers of Estate Department.

(4) Expenditure on repairs and maintenance of agricultural buildings.

(5) Registration, insurance and taxes on tractors and trailors.

(6) Directorial expenses.

(7) Managing Agent's office allowances.

(8) Managing Agents' commission on net profits.”

6. The controversy between the Department and the assessee related to the aforesaid items. The assessee claimed full deductions in respect of the aforesaid items. But, according to the Income-tax Officer, as only part of the expenses incurred in respect of the aforesaid items was attributable to agricultural activities of the assessee and as income from agricultural activities was exempt from income-tax, that part of the expenses could alone be excluded. The Income-tax Officer accordingly disallowed a portion of the expenditure on an estimate basis.

7. On appeal by the assessee, the Appellate Assistant Commissioner of Income-tax, relying on a decision of the Income-tax Appellate Tribunal in Maharashtra Sugar Mills Ltd. Bombay v. Income-tax Officer, Companies Circle 1(2). Bombay (which decision has since been approved by the Bombay High Court in Commr. of Income-tax, Bombay City v. Maharashtra Sugar Mills Ltd., (1968) 68 ITR 512 (Bom), allowed the appeal holding, inter alia, that the remuneration paid to the Managing Agents, Directors' fees, Auditors' fees, etc. could not be apportioned as relating partly to the business of manufacturing sugar carried on by the assessee and partly to its agricultural activities and directed that the whole of it be allowed as deduction in computing the income of the assessee.

8. On further appeal to the Income-tax Appellate Tribunal, the orders of the Appellate Assistant Commissioner were confirmed.

9. The Commissioner of Income-tax therefore, prayed that the case be stated to the High Court for its decision on the two questions aforesaid which arose out of the orders of the Tribunal in respect of the two assessments for the years 1956–1957 and 1957–1958 respectively.

10. The learned counsel for the Commissioner contends that the judgment in the Bombay case in (1968) 68 ITR 512 (Bom), has not been correctly decided and required reconsideration. He reiterated before us all the arguments which were urged on behalf of the Department before the Bombay High Court and which, in our opinion, have been rightly answered in that iudgment. The learned Judges of the Division Bench of the Bombay High Court have held that where there is only one business of the assessee, namely, the manufacture of sugar (and not of cultivation of sugar-cane) the expenditure which the assessee incurs for that business has to be allowed to the assessee under Section 10(2)(xv) of the Act, being “any expenditure…………not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly and exclusively the purpose of such business, profession or vocation”. They have then examined whether Rule 23 of the Indian Income-tax Rules, 1922 (which have been framed under Section 59 of the Act), which, so far as relevant for our purpose, is in the following terms:

“In the case of income which is partially agricultural income as defined in Section 2 and partially income chargeable to income-tax under the head ‘Business’. In determining that part which is chargeable to income-tax the market value of any agricultural produce which has been raised by the assessee or received by him as rent in kind and which has been utilised as raw material in such business or the sale receipts of which are included in the accounts of the business shall be deducted, and no further deduction shall be made in respect of any expenditure incurred by the assessee as a cultivator or receiver of rent in kind”.

11. It could be said to be a statutory provision which would take the case out of the provisions of Section 10(2)(xv) of the Act, and have held that there were three reasons why it would not. In the first place, the words ‘further deduction’ occurring in the latter part of the rule refer to deductions of an expenditure relating to the agricultural activity of the assessee; and as Managing Agents are not normally appointed by a cultivator, expenditure on Managing Agents can hardly be said to be expenditure incurred by an assessee as a cultivator. Secondly, the words ‘further deduction’ have been used with reference to the definition of ‘agricultural income’ in Section 2(1) of the Act; and as that definition emphasises the process ordinarily employed by a cultivator in raising crops and contemplates all the processes up to the stage of sale of those crops, the expression ‘further deduction’ is referable to the expenditure incurred by the assessee as a cultivator. Thirdly, where the rules intended that any part of the income earned from agriculture should be treated as a business income, the rule expressly says so, as a comparison with the phraseology of Rule 24, which is in the following terms:

“Income derived from the sale of tea grown and manufactured by the seller in the taxable territories shall be computed as if it were income derived from business, and 40 per cent, of such income shall be deemed to be income, profits and gains liable to tax.”

amply shows. Answering the further contention that the assessee should not be allowed to claim the amount paid to the Managing Agents as a commission as an allowable expenditure, because it would give to the assessee a double exemption, it relied on the decision of the Supreme Court in Commr. of Commissioner Of Income Tax, Madras v. Indian Bank Limited, Madras, 56 ITR 77 : (AIR 1965 SC 1473) where it has been held that where the assessee carries on any indivisible business and a part of its profits is not liable to tax, the entire expenditure incurred for the purpose of the business should be allowed, although a part of the expenses may have been incurred for earning non-taxable profits.

12. We may further add that though the case in the Bombay High Court related to amounts paid to the Managing agents as commission, that is to say, to one species of overhead expenses of the assessee company, and our cases relate to amounts paid by the assessee not only to the Managing Agents as commission but also to Directors as fees and travelling expenses, and various other kinds of overhead expenses, such as provident fund for agricultural staff, general charges and salaries and travelling expenses to general staff, etc., the principle governing the two types of cases would be the same. In both types of cases, expenses in question, even though they were expenses partly incurred by the assessee as a cultivator, were not apportion able between the agricultural and business activities of the assessee company, provided the business of the assessee was one and indivisible. In the result, we answer the reference in respect of the assessment years 1956–1957 and 1957–1958 respectively as follows:

(1) That, on the facts and in the circumstances of the case, the overhead expenses under the heads of Salaries and Travelling expenses of general staff. General charges. Legal expenses, postage, registration fee, etc., Director's fees and travelling expenses and Managing Agents' office allowance incurred by the assessee could not be apportioned between agricultural and business activities of the assessee company and were admissible as deductions in their entirety in computing the income of the assessee company.

(2) That, on the facts and in the circumstances of the case, the overhead expenses under the heads Salaries of general staff. Provident fund. Directorial expenses. Managing Agents' office allowances and Managing Agents' commission on net profit incurred by the assessee company could not be apportioned between agricultural and business activities of the assessee company and were admissible as deductions in their entirety in computing the income of the assessee company.

13. Costs of this reference shall be paid by the Commissioner. Counsel's fee Rupees 1000/-.

14. Answer accordingly.