1979 (1) TMI 7 - HC - Income Tax

Summary

Issues Involved:
1. Deductibility of the managing agency commission for the assessment year 1965-66.
2. Determination of whether the various lines of activity constituted a single integrated business or independent units.
3. Allocation of the managing agency commission among different sources of income.

Detailed Analysis:

Issue 1: Deductibility of the Managing Agency Commission
The first issue concerns whether the entire managing agency commission claimed and shown in the accounts was allowable as a deduction for the assessment year 1965-66. The Tribunal concluded that the managing agency commission should be allocated proportionately among different activities, rather than allowing the entire commission as a deduction against taxable income. This conclusion was based on the principle that the managing agency commission should be apportioned in the same manner as head office expenses, which were allocated between taxable and non-taxable income sources. The Tribunal's decision was influenced by the Supreme Court's ruling in CIT v. Maharashtra Sugar Mills Ltd. [1971] 82 ITR 452, which upheld the principle that expenses should be apportioned based on the nature of the income they generate.

Issue 2: Single Integrated Business vs. Independent Units
The second issue involves whether the various lines of activity, such as tea estate, coffee estate, coffee curing, and plantation, constituted a single integrated business or independent units. The Tribunal found that the assessee carried on several distinct businesses rather than a single integrated business. This finding was based on the historical conduct of the assessee, who had been apportioning expenses, including the managing agency commission, among different activities. The Tribunal noted that the assessee maintained separate accounts for each estate and that the activities were managed independently. The Tribunal also referenced the chairman's speech and the directors' report, which indicated that the company viewed its activities as separate businesses. Consequently, the Tribunal concluded that the different activities did not constitute a single business, and the managing agency commission should be allocated accordingly.

Issue 3: Allocation of the Managing Agency Commission
The third issue concerns the allocation of the managing agency commission among different sources of income, such as tea, coffee, and coffee curing works. The Tribunal directed that the managing agency commission be allocated based on the expenditure incurred in each activity, following the same method used for head office expenses. The Tribunal's allocation method was consistent with the assessee's past practice and the principles established in previous court rulings. The Tribunal found no error in its allocation method and upheld the direction given in para. 39 of its order.

Conclusion:
The High Court affirmed the Tribunal's conclusions on all three issues. The managing agency commission must be apportioned among different activities, and the various lines of activity were determined to be independent units rather than a single integrated business. The allocation method used by the Tribunal was deemed appropriate and consistent with past practices and legal principles. The High Court answered all three questions in the affirmative and against the assessee, awarding costs to the revenue.