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PETITIONER: RAJASTHAN STATE WAREHOUSING CORPORATION

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX

DATE OF JUDGMENT:       23/02/2000

BENCH: S.S.M.Quadri, D.P.Wadhwa

JUDGMENT:

     SYED SHAH MOHAMMED QUADRI, J.

     This  appeal arises from the judgment and order of the Division Bench of the High Court of Judicature for Rajasthan Bench  at Jaipur in Income-tax Reference No.86 of 1987 dated November  9,  1993.  The assessee is the appellant.  By  the order  under challenge the High Court answered the following question,  referred to it under Section 256(1) of the Income Tax  Act,  1961 (for short the Act), in  the  affirmative, that  is, in favour of the Revenue and against the assessee: Whether  on the facts and in the circumstances of the  case and  the business of the assessee being one and indivisible, the  Tribunal was right in law in holding that the  expenses have  to  allocated in the same percentage as the  different sources  of income and are not to be allowed in entirety  as allowed   by  the  Commissioner  of  Income-tax  (A)   after following  decisions  noted  in para 11 of the  order  dated 31.01.1985  for  the assessment years 1974-75,  1975-76  and 1980-81?

     In  the assessment year 1977-78 the appellant, a State Government  Corporation,  derived its income from  interest, letting  out  the warehouses and administrative charges  for procurement  of  foodgrains  while   working  for  the  Food Corporation  of  India as well as the State Government.   It claimed  deduction  of expenditure of Rs.38,13,555.17  under Section 37 of the Act in computing its income under the head profits  and gains of business of business or  profession. The  Income  Tax  Officer  allowed   only  so  much  of  the expenditure  as could be allocated to the taxable income and disallowed  the  rest  of  it which  was  referable  to  the non-taxable income, being exempt under Section 10(29) of the Act.  On appeal, the Commissioner of Income Tax (Appeals)-II accepted  the  claim  of  the   appellant  that  the  entire expenditure  was deductible.  The Revenues appeal therefrom to  the Income-tax Appellate Tribunal was allowed  upholding the  order  of the Income Tax Officer on July 17, 1986.   At the  instance of the appellant the question noted above  was referred  to  the High Court.  By order under challenge  the High  Court confirmed the order of the Income-tax  Appellate Tribunal.   Hence  this  appeal.   Mr.   Joseph  Vellapally, learned  senior counsel appearing for the appellant,  relied on   the  judgments  of  this   Court  in  Commissioner   of

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Income-tax,  Madras  Vs.   Indian Bank Ltd.   [56  ITR  77], Commissioner  of Income-tax, Bombay City I Vs.   Maharashtra Sugar  Mills  Ltd.  [82 ITR 452] and of Punjab  and  Haryana High Court in Punjab State Co-operative Supply and Marketing Federation  Ltd.  Vs.  Commissioner of Income-tax, Patiala-I [128 ITR 189] in support of his contention that the order of the  High Court is unsustainable.  The contention of Mr.K.N. Shukla, learned senior counsel appearing for the Revenue, is that  the expenditure which is attributable to the  exempted income  is  not  a  permissible deduction and  it  has  been rightly  disallowed  by the High Court.  To  appreciate  the contentions of the learned counsel it may be useful to refer to  Section  37(1)  of the Act:  37.  General.  -  (1)  Any expenditure  (not being expenditure of the nature  described in  Sections  30 to 36 * * * and not being in the nature  of capital  expenditure or personal expenses of the  assessee), laid out or expended wholly and exclusively for the purposes of  the business or profession shall be allowed in computing the  income chargeable under the head Profits and gains  of business or profession.

     A  plain reading of the above provision makes it clear that  it is a residuary provision and allows an expenditure, not covered under Sections 30 to 36, in computing the income chargeable  under the head profits and gains of business or profession,  provided its other requirements are satisfied. They  are :  (i) the expenditure should not be in the nature of capital expenditure or personal expenses of the assessee; (ii)  it  should have been laid out or expended  wholly  and exclusively  for the purposes of the business or profession; and (iii) it should have been expended in the previous year. The   disallowance   of   the   expenditure  was   not   for non-compliance  of requirements of Section 37(1) of the  Act but  for the reason that the expenditure was incurred on  an activity  from  which income was exempted under the Act.   A similar  question  arose in the case of Indian Bank  Limited (supra).   In  that  case the  respondent-assessee,  in  the course  of  its business, borrowed moneys for investment  in securities.   Part  of its income, derived from  securities, was  exempt  under the Income Tax Act, 1922 (for short  the Act of 1922).  It sought to deduct the interest paid on the entire  borrowed amount.  The question before this Court was whether  a  portion of the interest, which was referable  to investment  on securities from which income was exempt,  was allowable.   Section 10(2)(iii) and (xv) of the Act of 1922, was  precursor of Section 37(1) of the Act.  It was held  by this   Court  that  in  allowing   a  deduction  which   was permissible  one need not look beyond the expenditure to see whether  it  had  the  quality  of  directly  or  indirectly producing  taxable  income  and,  therefore,  there  was  no warrant for disallowing a proportionate part of the interest referable  to money borrowed for the purchase of  securities yielding  tax free interest.  That judgment was followed  in the  case  of Maharashtra Sugar Mills Ltd.  (supra).   There the  assessee-company was manufacturing sugar in its factory and was also growing sugar-cane for purposes of its factory. On  the question of deduction of expenditure, so much of the managing  agency  commission  which  was  referable  to  the growing of sugar-cane, was disallowed on the ground that the income  from sugar-cane cultivation was agricultural  income and  not exigible to tax.  The Appellate Tribunal found that the  cultivation of sugar-cane and the manufacture of  sugar by  the  assessee  constituted one  single  and  indivisible business.   It  was  held  by this  Court  that  the  entire managing  agency commission was laid out for the purpose  of

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the  business  carried on by the assessee and was  allowable under Section 10(2)(xv) of the Act of 1922 and that the fact that  the income from growing of sugar-cane, a part of  that business  was not taxable under the Act, was not a  relevant circumstance.  The third case cited by Mr.  Vellapally is of Punjab  and Haryana High Court in Punjab State  Co-operative Supply  and  Marketing Federation Ltd.  case  (supra).   The judgment  in  that  case  shows  that  on  the  question  of apportionment  of  the  expenditure, with reference  to  the activity  which  yielded  income and with reference  to  the activity  which did not yield income, the High Court, taking note  of  the  finding  recorded by the  Tribunal  that  the business  of  the  assessee  was  one  and  indivisible  and following  the aforesaid decisions of this Court, held  that the   entire  expenditure  incurred  by  the  assessee   was deductible.   Mr.   Shukla, however, placed reliance on  the judgment  of the Division Bench of the Madras High Court  in Waterfall  Estates  Ltd.  Vs.  Commissioner  of  Income-tax, Madras (No.1) [131 ITR 207] which was affirmed by this Court in  Waterfall Estates Ltd.  Vs.  Commissioner of  Income-tax [219  ITR 563].  That was a case under Section 37(1) of  the Act.   The  assessee in that case was carrying on  different ventures,  profits  from some of them were taxable and  from the  other  were  exempt under the Act.  In respect  of  the earlier  assessment years expenditure with reference to each activity  was  worked  out separately without  claiming  any expenditure referable to the head-office.  In the assessment year  1965-66  the assessee claimed deduction of the  entire expenditure including that relating to the head-office.  The finding recorded by the Tribunal was that there was no proof that  different ventures constituted the same business.   On that   finding  the  Tribunal  took   the  view   that   the apportionment  of the expenditure was valid.  The High Court of  Madras confirmed the order of the Tribunal and the  same was  upheld by this Court.  There, it is evident, the result turned against the assessee due to absence of the finding of fact  that  different ventures carried on by it  constituted one  indivisible  business,  which meant that there  was  no nexus  between  the  venture in question  and  the  business comprising  of  other ventures carried from the head  office and  therefore  so much of the expenditure incurred  on  the head office which was attributable to that venture was not a permissible  deduction in computing profits of the business. Indeed,  such expenditure does not properly fall within  the meaning  of the expenditure laid out or expended wholly and exclusively   for   the   purpose   of   the   business   or professional.   In  view  of   the  above  discussion,  the following principles may be laid down :  (i) if income of an assessee  is  derived  from various heads of income,  he  is entitled to claim deduction permissible under the respective head  whether or not computation under each head results  in taxable  income;  (ii) if income of an assessee arises under any  of  the heads of income but from different  items  e.g. different house properties or different securities etc., and income  from  one  or more items alone  is  taxable  whereas income  from  the  other item is exempt under the  Act,  the entire  permissible  expenditure in earning the income  from that  head  is deductible;  and (iii) in computing  profits and  gains  of business or profession when an  assessee  is carrying on business in various ventures and some among them yield  taxable income and the others do not, the question of allowability  of the expenditure under Section 37 of the Act will  depend  on :  (a) fulfilment of requirements  of  that provision  noted above;  and (b) on the fact whether all the ventures  carried  on  by him  constituted  one  indivisible

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business  or not;  if they do the entire expenditure will be a  permissible deduction but if they do not the principle of apportionment  of  the expenditure will apply because  there will be no nexus between the expenditure attributable to the venture  not  forming integral part of the business and  the expenditure   sought   to  be   deducted  as  the   business expenditure  of  the  assessee.    Mr.   Shukla  has  fairly conceded  that if the exempted income and the taxable income are  earned  from  one  and indivisible  business  then  the apportionment  of the expenditure cannot be sustained.  But, submits  the learned counsel, in this case the Tribunal  did not  record  a finding that the business of the assessee  is one  indivisible,  therefore,  the   apportionment  of   the expenditure  is  valid.  We are afraid, we cannot accede  to the  contention  of the learned counsel inasmuch as a  plain reading  of  the question itself shows that it  embodies  -- the  business  of the assessee being one and  indivisible. This  being  the position, it is not open to the Revenue  to contend  that  the business is not one and indivisible.   In view  of  the  fact that a perusal of  the  question  itself discloses that income from various ventures is earned in the course  of one and indivisible business, the impugned  order upholding  the apportionment of the expenditure and allowing deduction  of only that proportion of it which is  referable to  taxable income, is unsustainable.  We, therefore, answer the  question  in  the negative, that is, in favour  of  the assessee and against the Revenue.  The order under appeal is accordingly set aside and the appeal is allowed with costs.