Commissioner of Income-tax Bombay v. Maharashtra Sugar Mills Ltd. Bombay

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 E 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 corres­ ponding account year ending on 30-9-1956. The assessee is a Limited Company. It carries on business of manu­ facture of sugar from sugar cane. It owns extensive lands in which sugar cane is grown. The sugar cane grown in H 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. CJ/71 232 SUPREME COURT REPORTS [l972J l S.C.R. the cultivation of sugar cane and the manufacture of sugar A by the assessee constitute one single and indivisible business. The assessee comapany 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 B commission roughly worked out at 10 percent of the profits of the company. In the assessment year in question 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 c 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. D 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 deductable under s. 10( 2) (15). It also rejected the contention of the depart­ ment that on the facts of the case rule 23 of the Rules framed under the Act is applicable. In the Reference E referred to earlier, the High Court agreeing with the view taken by the Tribunal answered the question in favour of the <hsessee. Hence this appeal. The finding of the Tribunal that the cultivation of sugar cane as well as the manufacture of sugar constitutes one F 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 G and therefore any expenditure incurred in respect of that acti1 ity 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 b'asis for this contention. To find out whether H a deduction claimed is permissible under the Act or not, all that 11e have to do is to examine the relevant provisions of C.I.T. V. MAHARASHTRA SUGAR MILLS (Hegde, J:) 233 A 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 B 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 allowiinces mentioned therein. c 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 D 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. E 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(!) 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 F lower rate of interest and advancing loans to his consti­ tuents at a higher rate. In the cousre 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 paid by him in respect of his borrowings. Part of the money borrowed G by him had been advanced to constituents who, as mention­ ed ealier, 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. H The High Court held that he was en.titled to the ded~cti~n claimed and further he was also entitled to deductton m (I) 51.T.R. 97. 234 SUPREME COURT REPORTS (1972 J I S.C.R. respect of the establishment and other charges incurred by A him for managing and cultivating such lands and the amount spent for obtaining conveyances of such lands. Sir H. 0. 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 money­ lending 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 E 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 com­ pany 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 F 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 G course of its judgment, the High Court observed: "It is perfectly true that as far as the parent com­ pany 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 com- H mission has nothing whatever to do with those profits. (I) 18 l.T.R. 58. C.l.T. v. MAHARASHTRA SUGAR MILLS (Hegde, I. )235 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 by the parent company, the com- B mission also was accruing or arising to the managing agents." In Commissioner of Income-tax, Bombay v. C. Parakh & Co. (India) Ltd.1. The ratio of that decision bears on the question of law that we are considering. The assessee c company therein was resident and ordinarily resident in J.ndia. 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 D 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 E 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 con­ firmed that order but the Tribunal and the High Court on a reference held that the managing agency commission in F 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 G 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: "Seetion 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 p".Irpose of such business. Now the respondent is carrying on (I) 29 l.T.R. 661. 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 expen­ ses 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 Com- missioner of Income-tax Madras v. Indian Bank Ltd.(1). Therein the respondent, a banking company, in the course E 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 s;tle 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 F 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 G 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 H ambiguity in the terms of a provision, recourse must (I) 561.T.R. 79. C.I.T. v. MAHARASHTRA SUGAR MILLS (Hegde, J.)237 naturally be had to well-established principles of con­ struction 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 employ­ ed. 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 permissi­ ble to him. In allowing a deduction which is per­ missible 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 exclusive­ ly 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 Daga v. 238 SUPREME COURT REPORTS [1972J I S.C.R. Commissioner of Jncome-tax( 1). The ratio of that decision does not bear on the issue arising for decision in this case. That decision is wholly irrelevant for our present purpose Jt was next urged on behalf of the department that in view of rule 23 of the Rules framed, it was permissible for tbe Income-tax Officer to split up the commission given to B 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 c 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 asses see 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 D 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 E. 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- F tax Officer must determine the market value of the agri­ cultural 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 assessee is nor an expenditure incurred by the assessee as a cultivator or as a receiver of the rent in kind. The last part of sub­ rule (I) 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 H deducted while arriving at the taxable income. Section (I) 34 I.T.R. 10. C.I.T. v. MAHARASHTRA SUGAR MILLS (Hegde, J.) 23S A 2(1) of the Act defines agricultural income. That section reads: "agricultural income" means-- (a) any rent or revenue derived from land' B which is used for agricultural purposes, and is either assessed to land-revenue in the taxable territories or subject to a local rate assessed andcollected by officers of the Government as such; C (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 ofrent-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 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 clause (b) is carried on: Provided that the building is on or in the immedfafo 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 SUPREME COURT REPORTS (1972] 1 S.C.R. If rule 23 is read along with s. 2(1 ), it is clear that A oreference 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 B 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.