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1969 Supreme(Cal) 156
HIGH COURT OF CALCUTTA
SANKAR PRASAD MITRA, SABYASACHI MUKHERJI
HANUMAN SUGAR AND INDUSTRIES LTD. - Appellant
Versus
COMMISSIONER OF INCOME-TAX, CENTRAL - Respondent
Income-Tax Reference 147 Of 1966
Decided On : JUNE 27, 1969
D.K.SEN, D.PAL, R.Murarka, SUHAS SEN
Expenditure incurred for business as a whole cannot be disallowed merely because it has not produced taxable income directly or indirectly.
Headnote:
INCOME TAX - Managing agency commission - Disallowance of a part of commission attributable to agricultural income - Whether permissible.
Fact of the Case:
The assessee, a limited company, had a sugar mill and an agricultural farm for growing sugarcane. The managing agents were entitled to a commission of 10% of the net profits, subject to a minimum payment of Rs. 20,000. The Income-tax Officer disallowed a part of the commission attributable to agricultural income, which was not taxable.
Finding of the Court:
The court held that the entire managing agency commission was an expenditure allowable to the assessee for their business of manufacture of sugar under Section 10 (2) (xv) of the Indian Income-tax Act, 1922.
Issues: Whether a part of the managing agency commission attributable to agricultural income could be disallowed as a deduction in computing the profits of the assessee's business under Section 10 of the Income-tax Act, 1922.
Ratio Decidendi: The court relied on the decisions of the Supreme Court in Commissioner of Income-tax v. Indian Bank Ltd. and the Bombay High Court in Commissioner of Income-tax v. Maharashtra Sugar Mills Ltd. to hold that where part of the income of an assessee is either excluded or is exempt under any provision of the Income-tax Act, it is not permissible to disallow the proportionate part of the expenditure attributable to such excluded or exempt income.
Final Decision: The court answered the question referred to it in the negative and in favor of the assessee.
( 1 ) THE assessee is a limited company having a sugar mill at Motihari in North Bihar and also running an agricultural farm for growing sugarcane which is also used for the production of sugar in its mill. Under a managing agency agreement dated the 16th of October, 1954, Messrs. Hanuman Industries (India) Ltd. were appointed managing agents for a period of ten years from 1st of October, 1954, and that the managing agents were entitled to a remuneration, by way of commission, equal to 10% of the pet profits subject to a minimum payment of Rs. 2 (0,000. The assessee claimed deduction of the managing agency commission amounting to Rs. 48,735. The Income-tax Officer found that the commission was worked out at 10 per cent. of the net profits including the agricultural profits amounting to Rs. 97,407. The Income-tax Officer was of the opinion that the assessee was entitled to claim as deduction from the textile profits only the remuneration at 10 per cent. of the profits which are subjected to income-tax. He disallowed a sum of Rs. 9,741 out of the managing agency remuneration.
( 2 ) ON appeal, the Appellate Assistant Commissioner confirmed the order of the Income-tax Officer.
( 3 ) THERE was a further appeal before the Tribunal. The Tribunal held that there were agricultural operations carried on at the sugarcane farm at Motihari. The Tribunal was of the opinion that as agricultural income Was outside the scope of Section 10 of the Income-tax Act any income which was attributable to profits arising out of the; agricultural operations could not be allowed as deduction while computing the income, profits and gains under Section 10 of the Indian Income-tax Act, 1922. The Tribunal found that, as the profit of Rs. 97,407 arising out of the agricultural farm was not assessable to income-tax, the expenditure attributable to earning of the said agricultural income could not be allowed while ascertaining the profits of the sugar mill under Section 10 of the Act. The Tribunal, therefore, upheld the order of disallowance.
( 4 ) ON an application being made under Section 66 (2) of the Indian Income-tax Act, 1922, the following question has been referred to this court:"whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that a sum of Rs. 9,741 out of the managing agency commission of Rs. 48,735 was not allowable as a deduction by way of computing profits of the assessee's business under Section 10 of the Income-tax Act, 1922 ?"
( 5 ) THE managing agency agreement which is dated 16th, October, 1954, provides that the managing agents would be entitled to receive by way of remuneration for their services commission at 10% of the net annual profits of the company as defined under Section 87 (c) of the Indian Companies Act, 1913, provided that such commission shall be subject to a minimum payment of Rs. 20,000 in the case of absence or inadequacy of profits. The said agreement further provides for the offices and the duties and functions of the managing agents and also states that the genereal management of the company affairs, business, assessment, property and factory is to be entrusted to the managing agents.
( 6 ) DR. D Pal, learned counsel for the assessee, contended before us that no part of the managing agency remuneration could be specifically attributable to agricultural operations and as such no part of such managing agency commission could be disallowed as deduction. Dr. Pal also submitted that as expenses for business as a whole were incurred, it was not proper to enquire into the facts whether the said expenses have produced taxable income directly or indirectly. Dr. Pal drew our attention to the decision of the Supreme Court in the case of Commissioner of Income-tax v. Indian Bank Ltd. . There the Supreme Court had held that where an assessee had paid interest on monies borrowed from its various depositors, it had to be allowed in its entirety under Section 10 (2)
