1967 (9) TMI 18 - HC - Income Tax

Sugar Manufacturing Company - assessee had appointed managing agents - Whether the department could disallow a portion of the managing agency commission paid by the assessee-company for the A.Y. 1957-58, in computing the income from business of the assessee-company - Held, no

Summary

Issues Involved:
1. Disallowance of a portion of the managing agency commission as business expenditure.
2. Applicability of Rule 23 of the Indian Income-tax Rules, 1922.
3. Double advantage argument regarding exempt agricultural income.

Issue-wise Detailed Analysis:

1. Disallowance of a Portion of the Managing Agency Commission as Business Expenditure

The primary issue is whether the department could disallow 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, engaged in the manufacture of sugar, grew its own sugarcane and occasionally purchased additional sugarcane. The managing agents were remunerated at 10% of the company's profits, totaling Rs. 4,86,228-6-0 for the relevant year. The Income-tax Officer apportioned this expenditure between agricultural and business income, disallowing Rs. 1,26,359 attributable to agricultural activity. The Tribunal, however, held that the entire commission should be allowed as business expenditure, stating that it was not possible to allocate the expenditure to the excluded portion of the profits.

2. Applicability of Rule 23 of the Indian Income-tax Rules, 1922

The Appellate Assistant Commissioner upheld the disallowance based on Rule 23, which permits the splitting up of income and disallowance of expenditure attributable to agricultural income. However, the Tribunal ruled that Rule 23 did not apply because it only determines the part of income to be excluded under section 4(3)(viii) and does not affect the rule that all allowable expenditure must be deducted from assessable profits. The Tribunal's interpretation was that managing agency commission could not be considered expenditure incurred "as a cultivator," and thus, Rule 23 did not prohibit the allowance of the full amount of remuneration paid to managing agents.

3. Double Advantage Argument Regarding Exempt Agricultural Income

The department argued that allowing the deduction would give the assessee a double advantage, as the income from agriculture is exempt under section 4(3)(viii). However, the court rejected this argument, citing the Supreme Court decision in Commissioner of Income-tax v. Indian Bank Limited, which established that exempt income does not preclude the deduction of related expenditure. The court emphasized that the business of the assessee is the manufacture of sugar, not cultivation, and the managing agency commission is an allowable business expenditure under section 10(2)(xv).

Conclusion:

The court concluded that the managing agency commission is an allowable business expenditure and cannot be disallowed based on Rule 23 or the double advantage argument. The question referred was answered in the negative, and the Commissioner was ordered to pay the costs of the assessee.