Case: M/S. Waterfall Estates Ltd.Madras Vs. The Commissioner Of Income-Tax, Tamil Nadu I, Madras

The following three questions were referred for the opinion of the High Court under Section 256(1) of the Income Tax Act"(1) Whether on the facts and in the circumstances of the case the conclusion of the Appellate Tribunal that the entire managing agency commission claimed and shown in the accounts was not allowable as a deduction for the Assessment Yearas per the ratio of the decision in CIT v. Maharashtra Sugar Mills Ltd. is valid in law ?(2) Whether on the facts and in the circumstances of the case the decision of the Appellate Tribunal that for the Assessment Yearthe various lines of activity like tea estate, coffee estate, coffee curing, plantation etc., did not constitute one single and integrated activity or business but independent units of business, is a correct inference on the facts found and valid in law ?(3) Whether on the facts and in the circumstances of the case the Appellate Tribunal was justified in its conclusion that the managing agency commission had to be allocated in accordance with the directions given by the Appellate Tribunal in para 39 of its order, by allocating the same to the various sources of income, viz., tea, coffee, coffee curing works and so on ?"assessment years concerned are2. The appellant is a Public Limited Company. Its income is derived from tea and coffee estate and coffee curing works. Its tea and coffee estates are located at different places. It owns extensive forest lands and one of the estates contains cardamom and orange plantations. It acquired other estates during the accounting year relevant to Assessment Yearny was managed by the Managing Agents M/s Kothari Mehta and Company Limited. They were appointed for a period of twenty years with effect fromunder an agreement datedThere was a further agreement onand another onpractically in the same terms. Until the Assessment Yearthe appellant used to work out the net income from taxable andsources separately without taking into account head office expenses and then apportioned the head office expenses including managing agency commission between the three categories of income viz., wholly taxable income, partially taxable income (from the tea estates) and wholly exempted income (from the coffee estates) in the proportion of the expenditure incurred on respective activities. With effect from Assessment Yearhowever, the assessee changed its method of arriving at net income. It worked out its taxable income from tea business by deducting 10% of the total profits from tea business on account of managing agency commission. The method of accounting adopted by it has been set out in detail in the statement of the case and the judgment of the High Court which we do not think it necessary to reproduce here. For the next three assessment years also, the assessee followed the same method of arriving at its net income. For the Assessment Yearit adopted a different method again which too has been set out in detail in the judgment of the High Court. It claimed the whole of the managing agency commission against income from tea. All this was done, it appears, drawing inspiration from the decision of the Bombay High Court in CIT v. Maharashtra Sugar Mills Ltd. The Income Tax Officer rejected the said change. On appeal, the Appellate Assistant Commissioner upheld the assessees claim which indeed had the effect of granting it relief more than asked for by it. The Revenue appealed to the Tribunal. The Tribunal held after an exhaustive consideration of the relevant facts and contentions that the method of accounting adopted by the assessee until the Assessment Yearwas the proper one and that proper allocation of the managing agency commission was called for in proportion to the expenditure incurred on those activities. The matter was remitted to the Income Tax Officer to work out the details. Thereupon the assessee applied for and obtained the reference under Section 256(1)3. The issue arising from Questions 1 and 2 in short depends upon the answer to the questionwhether the various activities being carried on by theconstitute one single integrated activity or do they represent distinct businesses. The question of this nature, it is evident, is essentially a question of fact. The statement of the case drawn up by the Tribunal summarises its findings in the following manner"(a) the various estates and the coffee curing works exist at different places and insofar as the assessee was concerned they were acquired at different times. They are independent and closure of one would not affect the continuance of another;(b) each estate has its own subsidiary accounts and is managed locally although overall the head office controls all the estates and maintains a single profit and loss account;(c) there are separate staff for the various estates and even for tea and coffee estates in Waterfall Estate separately;(d) the various estates areand not in one place; the characters of the business ventures in the various estates are different;(e) apart from the existence of a centralised management and head office where a single set of final accounts is maintained there is no evidence relating to interlacing, interconnection and interdependence of the various estates in theaffairs or of their functioning being dovetailed into one another."It is on the basis of the above findings that the Tribunal held that the several activities carried on by theconstitute separate and distinct activities. On reference, the High Court has agreed with the Tribunal and answered the said questions in favour of the Revenue and against the assessee. We are of the opinion that on the findings recorded by the Tribunal, the High Court was justified in rejecting the assessees contention

Reasoning:
In the present case, there are a number of other factorsapart from what are pointed out as irrelevant (assuming for the sake of argument that they are irrelevant)to support the finding of the Tribunal7. Mr Ramachandran also relied upon the decision in CIT v. Indian Bank Ltd. The appellant therein was a banking company, which invested, in the course of its business, a large sum in securities including securities the interest from which was exempt from tax. While computing the business income of the assessee, profit and losses on the purchase and sale of all such securities were duly taken into account. The contention of the Revenue was that where a part of the profits of a business is not taxable, the expenditure incurred for earning those profits cannot be allowed as deduction. It was accordingly submitted that interest on monies borrowed from various depositors should be proportionately disallowed keeping in view the amounts invested insecurities. This argument was rejected with reference to and on the basis of Section 10(2)(xv) of the 1922 Act (corresponding to Section 37 of the present Act). We are unable to see how this decision helps the assessee on the question at issue8. Once we answer Questions 1 and 2 against the assessee, it is agreed, the third question does not really present any differently. It too has to be answered against the assessee