1971 (8) TMI 14 - SC - Income Tax

Assessee was carrying out one composite business of growing sugar-cane and manufacturing sugar - managing agency commission - entire commission was spent for the purposes of business carried on by the assessee and was allowable under s. 10(2)(xv) - Revenue s appeal dismissed

Issues Involved:
1. Whether the department could disallow a portion of the managing agency commission paid by the assessee-company for the assessment year 1957-58 in computing the income from business.

Detailed Analysis:

Issue 1: Disallowance of Managing Agency Commission
The primary issue in this case was whether the department could disallow a sum of Rs. 1,26,359, a portion of the managing agency commission paid by the assessee-company, in computing the income from business for the assessment year 1957-58. The assessee, M/s. Maharashtra Sugar Mills Ltd., claimed deduction of the entire managing agency commission of Rs. 4,86,228-6-0 under section 10(2)(xv) of the Indian Income-tax Act, 1922, as an item of expenditure laid out or expended wholly and exclusively for the purpose of its business. The Income-tax Officer disallowed Rs. 1,26,359, attributing it to the commission for managing the sugar-cane cultivation part of the business, which he considered an agricultural operation and not exigible to tax.

The Tribunal found that the cultivation of sugar-cane and the manufacture of sugar constituted one single and indivisible business, a finding of fact not challenged before the Supreme Court. The department contended that only expenditure incurred in respect of a business activity giving rise to taxable income could be deducted. The Supreme Court rejected this contention, stating that equitable considerations are out of place in construing the provisions of a taxing statute. The court emphasized that if the allowance claimed is permissible under the Act, it must be deducted from the gross profit, irrespective of whether part of the income is not exigible to tax.

The Supreme Court referenced several decided cases to support its judgment:

1. S. A. S. S. Chellappa Chettiar v. Commissioner of Income-tax: The Madras High Court held that interest paid on borrowed money, even if part of it was used for acquiring agricultural lands, was deductible as it was borrowed for the purpose of the business.

2. Salt and Industries Agencies Ltd. v. Commissioner of Income-tax: The Bombay High Court ruled that the commission earned by managing agents, irrespective of whether the profits arose from business activities in Indian States, was considered as income earned in British India.

3. Commissioner of Income-tax v. C. Parakh & Co. (India) Ltd.: The Supreme Court held that when an assessee carries on the same business at multiple locations, there is only one business for the purpose of section 10, and all expenses, including managing agency commission, must be deducted from the pooled profits.

4. Commissioner of Income-tax v. Indian Bank Ltd.: The Supreme Court ruled that interest paid on borrowed money invested in tax-free securities was deductible in its entirety under section 10(2)(iii), emphasizing that the purpose of the expenditure is the key factor, not whether it produces taxable income.

The Supreme Court also addressed the department's reliance on rule 23 of the Rules framed under the Act, which was deemed irrelevant. Rule 23 pertains to the computation of taxable income from a business utilizing agricultural produce as raw material, and it does not apply to managing agency commission.

Conclusion:
The Supreme Court upheld the High Court's decision, agreeing that the entire managing agency commission was deductible under section 10(2)(xv). The appeal by the department was dismissed with costs, and the judgment emphasized the importance of adhering to the statutory provisions without introducing equitable considerations or artificial ambiguities.

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