Case: Commissioner Of Income-Tax Bombay Vs. Maharashtra Sugar Mills Ltd. Bombay

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. Thai is the first step. Secondly we must look at Sec. 10 (2) and deduct all the allowances permissible to him. In allowing a deduction which is permissible 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 exclusively for the purpose of the business. The legislature stops show 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." 9. On behalf of the department reliance was sought to be placed on the decision of this Court in Badridas Daga v. Commissioner of Income-tax, 34 ITR 10 = (AIR 1958 SC 783 ). 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. 10. It was next urged on behalf of the department that in view of Rule 23 of the Rules framed, it was permissible for the Income-tax Officer to split up the commission given to 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 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 assessee 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 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." 11. Rule 23 lays down the method of computing the taxable income of a business which partly arises front the utilisation of agricultural produce as raw material in the business. It says that in computing the taxable income, agricultural income as defined in Section 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-tax Officer must determine the market value of the agricultural 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 assesseeas a cultivator or receiver of rent in kind." (emphasis supplied). 12. The managing agency commission given to the assessee is not an expenditure incurred by the assessee as a cultivator or as a receiver of the rent in kind. The last part of sub-rule (1) 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 deducted while arriving at the taxable income. Section 2 (1) of the Act defines agricultural income. That section reads :-"agricultural income" means :- (a) any rent or revenue derived from land which is used for agricultural purposes, and is either assessed to land-revenue in the taxable territories or subject to a local rate assessed and collected by officers of the Government as such; (b) any income derived from such land by :- (i) agriculture 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 of rent-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 immediate 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 store-house or other out-building. " 13. If Rule 23 is read along with Section 2 (1) it is clear that reference 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 such as payment of managing agency commission.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]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 permissible under the Act, it has to be rejected.As mentioned 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 Section 10 (1) in respect of a business should be computed after deducting the allowances mentioned therein. One of the allowances allowed is that mentioned in Section 10 (2) (15) 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 Section 10 (2) (15) b plain and unambiguous. Undoubtedly the allowance claimed in this case was laid out or expended for 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 circumstance. For the foregoing reasons we agree with the view taken by the High Court4. 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, 5 ITR 97   = (AIR 1937 Mad 393  ). 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 lower rate of interest and advancing loans to his constituents at a higher rate. In the course 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 by him had been advanced to constituents who, as mentioned earlier, 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 deductible in computing the profits and gains of the assessee. The High Court held that he was entitled to the deduction claimed and further he was also entitled to deduction in respect of the establishment and other charges incurred by him for managing and cultivating such lands and the amount spent for obtaining conveyances of such lands. Sir H. 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 Section 10 (2) (iii), was the capital borrowed for the purpose of the assessees 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 money lending debt and ex necessitate."5. The test applied by the learned Chief Justice appears to us to be the correct one11. Rule 23 lays down the method of computing the taxable income of a business which partly arises front the utilisation of agricultural produce as raw material in the business. It says that in computing the taxable income, agricultural income as defined in Section 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-tax Officer must determine the market value of the agricultural 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 assesseeas a cultivator or receiver of rent in kind."12. The managing agency commission given to the assessee is not an expenditure incurred by the assessee as a cultivator or as a receiver of the rent in kind. The last part of sub-rule (1) 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 deducted while arriving at the taxable income13. If Rule 23 is read along with Section 2 (1) it is clear that reference 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 such as payment of managing agency commission3. The finding of the Tribunal that the cultivation of sugar cane as well as the manufacture of sugar constitutes one business is a finding of fact.