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

2. The assessee is M/s. Maharashtra Sugar Mills Ltd. The concerned assessment year is 1957-58 the corresponding account year ending on 30-9-1956. The assessee is a Limited Company. It carries on business of manufacture of sugar from sugar cane. It owns extensive lands in which sugar cane is grown. The sugar cane grown in these lands is used by the assessee for manufacture of sugar in its factory. The finding of the Tribunal is that the cultivation of sugar cane and the manufacture of sugar by the assessee constitute one single and indivisible business. The assessee company is managed by managing agents. The managing agents were paid remuneration in accordance with the agreement entered into between the assessee company and the managing agents. The managing agents commission roughly worked out at 10 per cent of the profits of the company. In the assessment year in question the managing agents were entitled to a commission of Rs. 4,86,228/6/ in its assessment proceedings, the assessee claimed deduction of this sum under Section 10 (2) (15) as an item of expenditure laid out or expended wholly or exclusively for the purpose of its business. Out of that sum, the Income-tax Officer disallowed a sum of Rupees 1,26,359/- on the ground that the same relates to the commission of the managing agents for managing the sugar cane cultivation part of the business. In appeal the Appellate Assistant Commissioner concurred with the view taken by the Income-tax Officer. The assessee took up the matter in second appeal to the Income-tax Appellate. Tribunal. The Tribunal upheld the plea of the assessee that the entire sum is deductible under S 10 (2) (15) It also rejected the contention of the Department that on the facts of the case Rule 23 of the Rules framed under the Act is applicable. In the reference referred to earlier, the High Court agreeing with the view taken by the Tribunal answered the question in favour of the assessee Hence this appeal.

Court's reasoning:
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.