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PETITIONER: COMMISSIONER OF INCOME-TAX BOMBAY

       Vs.

RESPONDENT: MAHARASHTRA SUGAR MILLS LTD.  BOMBAY

DATE OF JUDGMENT16/08/1971

BENCH: HEGDE, K.S. BENCH: HEGDE, K.S. GROVER, A.N.

CITATION:  1971 AIR 2434            1972 SCR  (1) 202

ACT: Income-tax Act (11 of 1922), s. 10(2)(xv) and r. 23 of Rules --Part  of assessee’s income not exigible to  tax-Commission to  managing  agent-Whether part of commission  relating  to such income not deductible from assessee’s gross profits.

HEADNOTE: The assessee was a limited company. it owned extensive lands in  which sugar cane was grown and the cane was used by  the assessee  for the manufacture of sugar in its factory.   The cultivation  of sugar cane and the manufacture of  sugar  by the   assessee  constituted  one  single   and   indivisible business.   In  the assessment year  1957:58,  the  assessee claimed  deduction  of  remuneration paid  to  its  managing agents under s.10(2)(xv) of the Indian Income-tax Act, 1922, as  an  item of expenditure laid out or expended  wholly  or exclusively for the purpose of its business.  The Income-tax Officer and the Appellate Assistant Commissioner  disallowed a  part of the remuneration on the grounds that part of  the assessee’s business namely cultivation of sugar cane,  being an  agricultural  operation, the income  therefrom  was  not exigible to tax, and therefore, any expenditure incurred  in respect  of that activity was not deductible.  The  Tribunal and the High Court on reference, however, upheld the plea of the assessee that the entire sum was deductible. Dismissing the appeal to this Court, HELD:     (1)  The  mandate  of s. 10(2)(xv)  is  plain  and unambiguous.   To  find out whether a deduction  claimed  is permissible under the Act or not, all that the Court has  to do  is  to  examine  the relevant  provisions  of  the  Act. Equitable considerations are wholly out of the place in con- struing  the  provisions  of the  taxing  statute.   If  the allowance  claimed is permissible under the Act then it  has to  be deducted from the grow profits, and if it is  not  so permissible it has to be rejected. [232 H; 233 A-D]  In the. present case, the allowance claimed was undoubtedly laid out or expended for the purpose of the business carried on by assessee.  The fact that income arising from a part of that business was not exigible to tax under the Act was  not a relevant circumstance. [233 D-E] C.I.T.,  Bombay v. Parakh and (India) Ltd., 29 I.T.R.,  661, and  C.L  T.  Madras  v. Indian Bank  Ltd.,  56  I.T.R.  79, followed.

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S.A.S.S.  Chellappa Chettiar v. C.I.T, Madras, 5 I.T.R.,  97 and Salt & Industries Agencies Ltd.  Bombay v. C.LT., Bombay City, 18 I.T.R. 58, referred to. (2)  Rule  23 of the rules framed under the  Income-tax  Act says that in computing the taxable income of a business  the agricultural income as defined in s. 2 of the Act should  be deducted from the tota  231 income for arriving at the taxable income.  The rule further says  that  No  further  deduction  shall  be  made  of  any expenditure  incurred  by  the  assessee  as  cultivator  or receiver of rent in kind’.  If the rule is read with s. 2(1) it  is clear that reference to the expenditure  incurred  by the  assessee  as a cultivator only applies to  the  process ordinarily employed by a cultivator in raising the crops and all other incidental and supple mentary activities up to the stage  of  sale of the produce, and has nothing to  do  with disbursements such as payment of managing agency commission. [238E-H; 24OA-B]

JUDGMENT: CIVIL  APPELLATE  JURISDICTION : Civil Appeal  No.  1658  of 1968. Appeal  by special leave from the judgment and  order  dated September  22, 1967 of the Bombay High Court  in  Income-tax Reference No. 83 of 1962. B.   D. Sharma, and R. N. Sachthey, for the appellant V.   Rajagopal, M. M. Vakil, B. Datta, J. B. Dadachanji, O.   C. Mathur and Ravinder Narain, for the respondent. The Judgment of the Court was delivered by Hegde,  J.  This is an appeal by special leave.   It  arises from  the  decision of the Bombay High Court  in  Income-tax Reference  No. 83 of 1962 on its file.  That  Reference  was made  by  the  Income-tax  Appellate  Tribunal,  Bench  ’B’, Bombay.   The  question of law which was referred  for  the. opinion  of  the  High Court under  s.66(1)  of  the  Indian Income-tax  Act, 1922 (to be hereinafter referred to as  the Act) is:               "Whether on the facts and in the circumstances               -of this case the Department could disallow  a               sum  of  Rs.  1,26,359/-  a  portion  of   the               managing   agency  ,commission  paid  by   the               assessee  company  for  the  ,assessment  year               1957-58 in computing the income from  business               of the assessee company." The  assessee  is M/s.  Maharashtra Sugar  Mills  Ltd.   The concerned  assessment  year is  1957-58,  the  corresponding account  year  ending  on 30-9-1956. ,  The  assessee  is  a Limited  Company. it carries on business of  manufacture  of sugar  from.sugar  cane.  It owns extensive lands  in  which sugar cane is grown.  The sugar cane grown in these lands is used  by  the  assessee  for manufacture  of  sugar  in  its factory.  The finding of the Tribunal is that 16-M 1245 Sup.  Cl/71 232 the  cultivation of sugar cane and the manufacture of  sugar by  the  assessee  constitute  one  single  and  indivisible business.   The  assessee  company is  managed  by  managing agents.   The  managing  agents were  paid  remuneration  in accordance  with  the  agreement entered  into  between  the assessee  company  and  the managing  agents;  The  managing agents’s commission roughly worked out at 10 percent of  the profits of the company.  In the assessment year in  question

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the  managing  agents were entitled to a commission  of  Rs. 4,86,228 /6 /-.  In its assessment proceedings, the assessee claimed  deduction of this sum under s.10(2)(15) as an  item of  expenditure laid out or expended wholly  or  exclusively for  the  purpose  of its business.  Out of  that  sum,  the Income-tax Officer disallowed a sum of Rs. 1,26,359/- on the ground  that  the  same relates to  the  commission  of  the managing agents for managing the sugar cane cultivation part of  the  business.   In  appeal,  the  Appellate   Assistant Commissioner concurred with the view taken by the Income-tax Officer.   The assessee took up the matter in second  appeal to  the Income-tax Appellate Tribunal.  The Tribunal  upheld the  plea of the assessee that the entire sum is  deductible under S. 10(2) (15).  It also rejected the contention of the department  that  on the facts of the case rule  23  of  the Rules framed under the Act is applicable.  In the  Reference -referred to earlier, the High Court agreeing with the view. taken by the Tribunal answered the question in favour of the assessee.  Hence this appeal. The  finding of the Tribunal that the cultivation  of  sugar cane  as  well as the manufacture of sugar  constitutes  one business  is a finding of fact.  That finding has  not  been challenged  before  us  What. was urged  on  behalf  of  the department is that the assessee’s business consisted of  two parts   namely  (1)  cultivation  of  sugar  cane  and   the manufacture  of sugar.  The former part  being  agricultural operation,  the income therefrom is not exigible to tax  and therefore  any  expenditure  incurred  in  respect  of  that activity is not deductable.  This contention proceeds on the basis  that  only  expenditure  incurred  in  respect  of  a business  activity  giving rise to income, profit  or  gains taxable  under  the Act can be given deduction  to  and  not otherwise.   We see no basis for this contention.   To  find out whether a deduction claimed is permissible under the Act or  not, all that we have to do is to examine  the  relevant provisions of 233 the  Act.  Equitable considerations are wholly out of  place in construing the  provisions of a taxing statute.  We  have to take the provisions of the statute as they stand.  If the allowance claimed is permissible under the Act then the same has  to  be deducted from the gross profit.  If  it  is  not permissible  under the Act, it has to be rejected.  As  men- tioned  earlier, it is not disputed that the cultivation  of sugar  cane  and the manufacture of  sugar  constituted  one single  and indivisible business.  Section 10(2)  says  that profits  under S. 10(1) in respect of a business  should  be computed  after deducting the allowances mentioned  therein. One  of the allowances allowed is that mentioned in  s.10(2) (xv)  which says that any expenditure laid out  or  expended wholly  and  exclusively for the purpose  of  such  business shall  be  deducted as an allowance.  The mandate  of  s  10 (2)(15) is plain and unambiguous.  Undoubtedly the allowance claimed  in  this  case was laid out  or  expended  for  the purpose  of  the business carried on by the  assessee.   The fact that the income arising from a part of that business is not exigible to tax under the Act is not a relevant  circum- stance.   For the foregoing reasons we agree with  the  view taken by the High Court. Turning  now to the decided cases, we shall first  refer  to the  decision  of  the  Madras High  Court  in  S.  A.  S.S. Chellappa Chettiar v. Commissioner of Income-tax, Madras( 1) The  facts of that case are, : The assessee was carrying  on the business of money lending in Burma.  For the purpose  of that business he was borrowing money from others at a  lower

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rate of interest and advancing loans to his- constituents at a  higher  rate.   In the course of  his  business,  he  was obliged  to receive agricultural lands in repayment  of  his debts  from  some of his constituents.   In  his  assessment proceedings  he claimed deduction of the interest  David  by him  in  respect  of  his borrowings.   Part  of  the  money borrowed  by him had been advanced to constituents  who,  as mentioned earlier, had made over their agricultural lands to the assessee.  The question arose whether the interest  paid in  respect of the money advanced to those constituents  was deductable  in  computing  the  profits  and  gains  of  the assessee.   The High Court held that he was entitled to  the deduction  claimed  and  further he  was  also  entitled  to deduction in (1)  5 I.T. P,. 97. 234 respect  of the establishment and other charges incurred  by him  for managing and cultivating such lands and the  amount spent for obtaining conveyances of such lands. Sir H. O. C. Beasley C. J., speaking for the Court observed:               "It seems to us that the governing section  in               order  to  decide  this matter  must  be  Sec.               10(2)(iii).  Was the capital borrowed for  the               purpose  of  the  assessee’s  business  ?   No               difficulty  arises  about  that,  for  it   is               ,conceded  that  it was so borrowed.   It  was               also  unquestionably used for the  purpose  of               the business because it is again conceded that               it  was  lent  to  the  borrowers.   Does   it               continue to be so used ? It is in that respect               that  it is important again to emphasise  that               this  case has been argued, before us  on  the               basis  that  these lands came  into  and  were               retained in the possession of the assessee  in               payment   of  a  moneylending  debt  and   ex-               necessitate." The test applied by the learned Chief Justice appears to  us to be the correct one. We shall next take up the decision of the Bombay High  Court in Salt and Industries Agencies Ltd., Bombay v. Commissioner of  Income-tax, Bombay City (1).  The assessee in that  case was  a  company  incorporated  in  Bombay.   They  were  the managing   agents   of  another  company  which   was   also incorporated  in Bombay.  The managed company  had  business both in British India as well as in the Indian States.   The profits arising from the business activities of the  managed company in the Indian States was not exigible to tax but yet the assessee claimed that a part of the commission earned by it  being in respect of business carried on outside  British India, the same could not be considered as an income  earned in British India.  That contention was rejected by the  High Court.   In  the  course of its  judgment,  the  High  Court observed:               "It  is  perfectly  true that as  far  as  the               parent company is concerned, the profits  made               at  Kandla  could be said to have  arisen  and               accrued at Kandla, but as far as the  managing               agents  are  concerned, their  commission  has               nothing whatever to do with those profits.               (1)   18 L.T.R. 58.               Their  commission is only concerned  with  the               ultimate determination of all the workings  of               the  company and the finding out  whether  and               what  profits has been earned by the  company.               It cannot be said that as profits were  earned

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             by the parent company, the commission also was               accruing or arising to the managing agents." - In  Commissioner  of Income-tax, Bombay v. C  Parakh  &  Co. (India)  Ltd.   I. The ratio of that decision bears  on  the question  of  law  that we are  considering.   The  assessee company  therein  was resident and  ordinarily  resident  in India.   It had its head office in Bombay.  It maintained  a branch  at  Karachi for purchasing cotton  for  shipment  to Bombay  or to export direct to other places.’ By  an  agree- ment,  the  managing  agents of the  assessee  company  were entitled  to a remuneration of 20 percent of the annual  net profits  of  the  assessee company to  ascertain  which  the result of the trade in all its branches had to be taken into account.   The  assessee  apportioned  the  managing  agency commission  and  debited  the proportionate  amount  in  the respective  profit  and  loss account for  the  Bombay  head office  and the Karachi branch.  In computing  the  Pakistan income  of the assessee for the purpose of  double  taxation relief  the Income-tax Officer deducted from the  income  of the   Karachi  branch  the  proportionate  managing   agency commission.  The Appellate Assistant Commissioner  confirmed that  order  but  the  Tribunal and  the  High  Court  on  a reference  held that the managing agency commission  in  its entirety should be debited to the Bombay branch.  On  appeal this  Court held that the entire managing agency  commission was  liable  to be debited against the  Indian  profits  and further assessee company could not be estopped from claiming the benefit of such deduction by reason: of the fact that it erroneously allocated a part of it toward the profits earned in  Karachi.   In  the course of; its  judgment  this  Court observed:               "Section  10(2)(xv) of the  Indian  Income-tax               Act provides that in computing the profits  of               a  business  allowance is to be made  for  any               expenditure  laid out or expended  wholly  and               exclusively for the purpose of such business..               Now the respondent is carrying on               (1)   29 I.T.R. 661.               236               business  in  cotton  both  in  India  and  in               Karachi.  When an assessee carries on the same               business  at a number of places there  is  for               the  purpose of section 10 ,only one  business               and the net profits of the business have to be                             ascertained  by  pooling together  the   profits               ,earned  in  all the, branches  and  deducting               therefrom  all  the expenses.  The  fact  that               some   of   the  branches   are   in   foreign               territories  will  make no difference  in  the               position if the assessee is as in the  present               case  resident and ordinarily resident  within               the   taxable  territories.    Therefore   the               profits earned in India and in Karachi have to               be thrown together and the expenses  including               the commission payable to the managing  agents               deducted  therefrom and it is the net  profits               thus  struck that become chargeable under  the               Act.   That is how the Income-tax Officer  has               worked  out  the figures.  The  respondent  is               therefore  clearly entitled to a deduction  of               the  whole of the commission of  Rs.  3,12,699               paid to the managing agents including the  sum               of Rs. 1,23,719 against the Indian profits." Lastly we refer to the decision of this Court in Co  mission

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of  Income-tax  Madras v. Indian Bank  Ltd(1).  Therein  the respondent,  a  banking  company,  in  the  course  of   its business,  invested  a large sum  in  securities,  including securities  the  interest  on which  was  exempt  from  tax. Profits  and  losses  on  the  purchase  and  sale  of  such securities  were  duly taken into account in  computing  the business  income  of  the  respondent.   The%  question  for decision was whether the interest paid by the respondent  on the  amount invested in securities, whose interest  was  tax free,  was  deductable from its gross profits.   This  Court held that interest paid by the respondent on moneys borrowed from  its  various  depositors  had to  be  allowed  in  its entirety  under S. 10(2) (iii) of the Act and there  was  no warrant for disallowing a proportionate part of the interest referable  to money borrowed for the purchase of  securities whose interest was tax-free.  In the course of the  Judgment Subba Rao, J. (as he then was) observed:               "In  our opinion,, in construing the  Act,  we               must  adhere  closely to the language  of  the               Act.  If there is ambiguity in the terms of  a               provision, recourse must               (1)   56 I.T.R. 79.               237               naturally    be   had   to    well-established               principles  of  construction  but  it  is  not               permissible  first  to  create  an  artificial               ambiguity   and  then  try  to   resolve   the               ambiguity by resort to some general principle. We  are  concerned with the interpretation of  section,  10. Let  us then look at the language employed. Sub-section  (1) directs that an assessee be taxed in respect of the  profits and  gains  of  business carried on by  him.   What  is  the business  of the assessee must first be looked at.  Does  he carry  on one business or two businesses or along  with  the business  carried  on by him some activity  which  is/not  a business  ?  If he is carrying on an activity which  is  not business, we must leave out of account the receipts of  that activity.   That is the first step.  Secondly, we must  look at section 10(2) and deduct all the allowances permission    ale to  him.  In allowing a deduction which is  permissible  the question arises: Do we look behind the ,expenditure and  see whether  it  has  the quality  of  ,directly  or  indirectly producing  taxable  income  ?  ’The answer must  be  in  the negative for two reasons: First, Parliament has not directed us to undertake this     enquiry.   There  are no  words  in section   10(2)  to  that  effect.   On  the   other   hand, indications are to the contrary.  In Section 10(2)(xv), what Parliament  requires  to  be  ascertained  is  whether   the expenditure  has  been  laid  out  or  expended  wholly  and exclusively   for   the  purpose  of  the   business.    The legislature    stops   short   at  directing  that   it   be ascertained what was the purpose of the expenditure.  If the answer  is  that  ,it is for the purpose  of  the  business, Parliament  is  not  concerned  to  find  out  whether   the expenditure  has  produced or will produce  taxable  income. Secondly,  the reason may well- be that  Parliament  assumes that most types of expenditure which are laid out wholly and exclusively  for the purpose of business would  directly  or indirectly  produce taxable income, and it is not worth  the administrative  effort involved to go further and trace  the expenditure to some taxable income." On behalf of the department reliance was sought to be placed on the decision of this Court in Badridas Doga v. 238 Commissioner  of Income-tax(1).  The ratio of that  decision

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does  not  bear on the issue arising for  decision  in  this case.   That decision is wholly irrelevant for  our  present purpose  It was next urged on behalf of the department that in  view of  rule 23 of the Rules framed, it was permissible for  the Income-tax  Officer to split up the commission given to  the managing agents.  We see no merit in this contention.   Rule 23 to the extent material for our present purpose reads:               "23(1)   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." Rule 23 lays down the method of computing the taxable income of  a business which partly arises from the  utilisation  of agricultural  produce as raw material in the  business.   It says  that  in computing the  taxable  income,  agricultural income as defined in S. 2 of the Act should be deducted from the  total income for arriving at the taxable  income.   For determining  what the agricultural income is the  Income-tax Officer must determine the market value of the  agricultural produce  used  as raw material in the  business.   The  rule further says that "no further deduction shall be made of any expenditure  incurred  by the assessee as  a  cultivator  or receiver of rent in kind." (emphasis supplied). The managing agency commission given to the assesses is  not an  expenditure incurred by the assessee as a cultivator  or as a receiver of the rent in kind.  The last part of subrule (1)  of  Rule  23 merely  stipulates  that  the  expenditure incurred  by the assessee for his agricultural operation  or incurred  by  him as receiver of rent in kind is not  to  be deducted while arriving at the taxable income.  Section (1)  34 I.T.R. 10.  239 2(1)  of the Act defines agricultural income.  That  section reads: "agricultural income" means-               (a)   any  rent or revenue derived  from  land               which  is used for agricultural purposes,  and               is  either  assessed to  land-revenue  in  the               taxable territories or subject to a local rate               assessed  and  collected by  officers  of  the               Government as such;               (b)   any income derived from such land by-               (i)   agricultural 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 him fit to be taken  to               market, or               (iii) the sale by a cultivator or receiver  of               rent-in-kind of the produce raised or received               by  him,  in respect of which no  process  has               been  performed  other than a process  of  the

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             nature described in sub-clause (ii).               (c)   any  income  derived from  any  building               owned and occupied by the receiver of the rent               or  revenue of any such land, or  occupied  by               the  cultivator,  or the receiver of  rent  in               kind, of any land with respect to , which,  or               the  produce of which any operation  mentioned                             in sub-clauses (ii) and (iii) of claus e (b)  is               carried on:               Provided  that the building is on’ or  in  the               immediate  vicinity  of  the land,  and  is  a               building  which  the receiver of the  rent  or               revenue  or the cultivator or the receiver  of               the  rent-in-kind by reason of his  connection               with  the land, requires as a dwelling  house,               or as a storehouse, or other out-building," 240 If  rule  23 is read along with S. 2(1), it  is  clear  that Preference  to,  expenditure incurred by the assessee  as  a -cultivator applies to the process ordinarily employed  by,a cultivator in raising the crops and all other incidental and supplementary  activities  upto  the stage of  sale  of  the produce.’  That  rule has nothing to do  with  disbursements such as payment of managing agency commission. In  the result this appeal fails and the same  is  dismissed with costs. V.P.S.                                Appeal dismissed. 241