# COMMISSIONER OF INCOME-TAX BOMBAY v. MAHARASHTRA SUGAR MILLS LTD. BOMBAY

- **Citation:** [1972] 1 S.C.R. 230
- **Court:** Supreme Court of India
- **Decided:** 1971-08-16
- **Case number:** Civil Appeal No. 1658 of 1968
- **Bench:** K. S. Hegde, A. N. Grover
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/commissioner-of-income-tax-bombay-v-maharashtra-sugar-mills-ltd-bombay-5349
- **Pages:** 11

## Headnote

Income-tax Act (l 1 of 1922), s. l0(2)(xv) and r. 23 of RulesPart of assessee' s income not exigible to tax-Commission to managing agent-Whether part of commission relating to such income
not deductible from assessee' s gross profits.
The assessee was a limited company. It owned extensive lands
iu which sugar cane was grown and the cane was used by the assessee
for the manufacture of sugar in its factory. The cultivation of sugar
cane and the manufacture of sugar by the assessee constituted one single
and indivisible business. In the assessment year 1957-58, the assessee
claimed deduction of remuneration paid to its managing agents under
s.10(2)(xv) of the Indian Income-tax Act, 1922, as an item of expenditure
laid out or expended wholly or exclusively for the purpose of its business.
The Income-tax Officer and the Appellate Assistant Commissioner
disallowed a part of the remuneration on the grounds that part of
the assessee's business namely cultivation of sugar cane, being an agricultural operation, the income therefrom was not exigible to tax, and
therefore, any expenditure incurred in respect of that activity was not
deductible. The Tribunal and the High Court on reference, however, upheld the plea of the assessee that the entire sum was deductible.
Dismissing the appeal to this Court,
HELD: (!) The mandate of s. 10(2)(xv) is plain and unambiguous.
B
c
D
E
To find out whether a deduction claimed is permissible under the Act
or not, all that the Court has to do is to examine the relevant provisions
of the Act. Equitable considerations are wholly out of the place in construing the provisions of the taxing statute. If the allowance claimed
is permissible under the Act then it has to be deducted from the gros
F
profits, and if it is not so permissible it has to be rejected. [232 H;
233 A-DJ
In the present case, the allowance claimed was undoubtedly laid
out or expended for the purpose of the business carried on by assessee.
The fact that income arising from a part of that business was not exigible
tO tax under the Act was not a relevant circumstance. [233 D-E]
G
C.l.T., Bombay v. Parakh and (India) Ltd., 29 T.T.R .. 661. and C.l.T.
Madras v. Indian Bank Ltd., 56 J.T.R. 79, followed.
S.A.S.S. Che!lappa Chettiar v. C.l.T. Madras, 5 I.T.R. 97 and Salt
& Industries Agencies Ltd. Bombay v. C.l.T., Bombay City. 18 l.T.R. 58,
referred to.
(2) Rule 23 of the rules framed under the Income-tax Act says that
in computing the taxable income of a business the agricultural incom
as defined in s. 2 of the Act
should be deducted from the tota
H
C.I.T. V. MAHARASHTRA SUGAR MILLS (Hegde, J.) 231
A
income for arriving at the taxable income. The rule further says that-
'No further deduction shall be made of any expenditure incurred by
the assessee as a cultivator or receiver of rent in kind'. If the rule is read
with s. 2(1) it is clear that reference to the expenditure incurred by the
assessee as a cultivator only applies to the process ordinarily employed
by a cultivator in raising the crops and all other incrdental and supple
B
mentary activities up to the stage of sale of the produce, and has nothing
to do with disbursements such as payment of managing agency commission. [238E-H; 240A-B]

## Text

230
COMMISSIONER OF INCOME-TAX BOMBAY
A
v.
MAHARASHTRA SUGAR MILLS LTD. BOMBAY
August 16, 1971
(K. S. HEGDE AND A. N. GROVER, JJ:]
Income-tax Act (l 1 of 1922), s. l0(2)(xv) and r. 23 of RulesPart of assessee' s income not exigible to tax-Commission to managing agent-Whether part of commission relating to such income
not deductible from assessee' s gross profits.
The assessee was a limited company. It owned extensive lands
iu which sugar cane was grown and the cane was used by the assessee
for the manufacture of sugar in its factory. The cultivation of sugar
cane and the manufacture of sugar by the assessee constituted one single
and indivisible business. In the assessment year 1957-58, the assessee
claimed deduction of remuneration paid to its managing agents under
s.10(2)(xv) of the Indian Income-tax Act, 1922, as an item of expenditure
laid out or expended wholly or exclusively for the purpose of its business.
The Income-tax Officer and the Appellate Assistant Commissioner
disallowed a part of the remuneration on the grounds that part of
the assessee's business namely cultivation of sugar cane, being an agricultural operation, the income therefrom was not exigible to tax, and
therefore, any expenditure incurred in respect of that activity was not
deductible. The Tribunal and the High Court on reference, however, upheld the plea of the assessee that the entire sum was deductible.
Dismissing the appeal to this Court,
HELD: (!) The mandate of s. 10(2)(xv) is plain and unambiguous.
B
c
D
E
To find out whether a deduction claimed is permissible under the Act
or not, all that the Court has to do is to examine the relevant provisions
of the Act. Equitable considerations are wholly out of the place in construing the provisions of the taxing statute. If the allowance claimed
is permissible under the Act then it has to be deducted from the gros
F
profits, and if it is not so permissible it has to be rejected. [232 H;
233 A-DJ
In the present case, the allowance claimed was undoubtedly laid
out or expended for the purpose of the business carried on by assessee.
The fact that income arising from a part of that business was not exigible
tO tax under the Act was not a relevant circumstance. [233 D-E]
G
C.l.T., Bombay v. Parakh and (India) Ltd., 29 T.T.R .. 661. and C.l.T.
Madras v. Indian Bank Ltd., 56 J.T.R. 79, followed.
S.A.S.S. Che!lappa Chettiar v. C.l.T. Madras, 5 I.T.R. 97 and Salt
& Industries Agencies Ltd. Bombay v. C.l.T., Bombay City. 18 l.T.R. 58,
referred to.
(2) Rule 23 of the rules framed under the Income-tax Act says that
in computing the taxable income of a business the agricultural incom
as defined in s. 2 of the Act
should be deducted from the tota
H
C.I.T. V. MAHARASHTRA SUGAR MILLS (Hegde, J.) 231
A
income for arriving at the taxable income. The rule further says that-
'No further deduction shall be made of any expenditure incurred by
the assessee as a cultivator or receiver of rent in kind'. If the rule is read
with s. 2(1) it is clear that reference to the expenditure incurred by the
assessee as a cultivator only applies to the process ordinarily employed
by a cultivator in raising the crops and all other incrdental and supple
B
mentary activities up to the stage of sale of the produce, and has nothing
to do with disbursements such as payment of managing agency commission. [238E-H; 240A-B]
CIVIL APPELLATE JURISDICTION : Civil Appeal No.
1658 of 1968.
c
Appeal by special leave from the judgment and order
dated September 22, 1967 of the Bombay High Court in
Income-tax Reference No. 83 of 1962~
B. D. Sharma, and R. N. Sachthey, for foe appellant
V. Rajagopal, M. M. Vakil, B. Datta, J. B. Dadachanji,
D
0, C. Mathur and Ravinder Narain, for the respondent.
The Judgment of the Court was delivered by
Hegde, J. This is an appeal by special leave. It arises
from the decision of the Bombay High Court in Income-tax
Reference No. 83 of 1962 on its file.
That Reference was
E made by the Income-tax Appellate Tribunal, Bench 'B',
Bombay. The question of law which was referred for the
opinion of the High Court under s.66(1) of the Indian
Income-tax Act, 1922 (to be hereinafter referred to as the
Act) is:
F
G
"Whether on the facts and in the circumstances
of this case the Department could disallow a sum of
Rs. 1,26,359/- a portion of the managing agency
commission paid by the assessee company for the
assessment year 1957-58 in computing the income
from business of the assessee company."
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
H these lands is used by the assessee for manufacture of
sugar in its factory. The finding of the Tribunal is that
16-M 1245 Sup. CJ/71
232
SUPREME COURT REPORTS
[l972J l S.C.R.
the cultivation of sugar cane and the manufacture of sugar A
by the assessee constitute one single and indivisible business.
The assessee comapany 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's
B
commission roughly worked out at 10 percent 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 s.10(2)(15) as an item
of expenditure laid out or expended wholly or exclusively for c
the purpose of its business. Out of that sum, the Incometax Officer disallowed a sum of Rs. 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.
D
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 deductable 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
E
referred to earlier, the High Court agreeing with the view
taken by the Tribunal answered the question in favour of
the <hsessee.
Hence this appeal.
The finding of the Tribunal that the cultivation of sugar
cane as well as the manufacture of sugar constitutes one
F
business is a finding of fact.
That finding has not
been challenged before us.
What was urged on behalf of
the department is that the assessee's business consisted
of two parts namely (1) cultivation of sugar cane and the
manufacture of sugar. The former part being agricultural
operation, the income therefrom is not
exigible to tax
G
and therefore any expenditure incurred in respect of that
acti1 ity is not deductable. This contention proceeds on
the basis that only expenditure incurred in respect of a
business activity giving rise to income, profit or gains taxable
under the Act can be given deduction to and not otherwise.
We see no b'asis for this contention. To find out whether
H
a deduction claimed is permissible under the Act or not, all
that 11e have to do is to examine the relevant provisions of
C.I.T. V. MAHARASHTRA SUGAR MILLS (Hegde, J:)
233
A the Act. 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
B 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 s. 10(1) in respect of a business should be
computed after deducting the allowiinces mentioned therein.
c One of the allowances allowed is that mentioned in s.10(2)
(xv) 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 s 10
(2)(15) is plain and unambiguous. Undoubtedly
the
allowance claimed in this case was laid out or expended for
D 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 Court.
E
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(!)
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
F lower rate of interest and advancing loans to his constituents at a higher rate. In the cousre 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
G by him had been advanced to constituents who, as mentioned ealier, 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
deductable in computing the profits and gains of the assessee.
H The High Court held that he was en.titled to the ded~cti~n
claimed and further he was also entitled to deductton m
(I) 51.T.R. 97.
234
SUPREME COURT REPORTS
(1972 J I S.C.R.
respect of the establishment and other charges incurred by
A
him for managing and cultivating such lands and the
amount spent for obtaining conveyances of such lands.
Sir H. 0. 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 Sec. 10(2)(iii). Was
the capital borrowed for the purpose of the assessee's
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 a moneylending debt and ex-necessitate."
The test applied by the learned Chief Justice appears to
us to be the correct one.
B
c
D
We shall next take up the decision of the Bombay
High Court in Salt and Industries Agencies Ltd., Bombay
E
v. Commissioner of Income-tax, Bombay City (1).
The
assessee in that case was a company incorporated in
Bombay. They were the managing agents of another company which was also incorporated in Bombay. The
managed company had business both in British India as
well as in the Indian States. The profits arising from the
F
business activities of the managed company in the Indian
States was not exigible to tax but yet the assessee claimed
that a part of the commission earned by it being in respect
of business carried on outside British India, the same could
not be considered as an income earned in British· India.
That contention was rejected by the High Court. In the
G
course of its judgment, the High Court observed:
"It is perfectly true that as far as the parent company is concerned, the profits made at Kandla could
be said to have arisen and accrued at Kandla, but as
far as the managing agents are concerned, their comH
mission has nothing whatever to do with those profits.
(I) 18 l.T.R. 58.
C.l.T. v. MAHARASHTRA SUGAR MILLS (Hegde, I. )235
Their commission is only concerned with the ultimate
determination of all the workings of the company
and the finding out whether and what profits has been
earned by the company. It cannot be said that as
profits were earned by the parent company, the comB
mission also was accruing or arising to the managing
agents."
In Commissioner of Income-tax, Bombay v. C. Parakh &
Co. (India) Ltd.1.
The ratio of that decision bears on the
question of law that we are considering. The assessee
c company therein was resident and ordinarily resident in
J.ndia. It had its head office in Bombay. It maintained
a branch at Karachi for purchasing cotton for shipment to
Bombay or to export direct to other places. By an agreement, the managing agents of the assessee company were
entitled to a remuneration of 20 percent of the annual net
D profits of the assessee company to ascertain which the
result of the trade in all its branches had to be taken into
account. The assessee apportioned the managing
agency
commission and debited the proportionate amount in the
respective profit and loss account for the Bombay head office
and the Karachi branch. In
computing the Pakistan
E income of the assessee for the purpose of double taxation
relief the Income-tax Officer deducted from the income of
the Karachi branch the proportionate managing agency:
commission. The Appellate Assistant Commissioner confirmed that order but the Tribunal and the High Court on a
reference held that the managing agency commission in
F its entirety should be debited to the Bombay branch. On
appeal this- Court held that the entire managing agency
commission was liable to be debited against the Indian
profits and further assessee company could not be estopped
from claiming the benefit of such deduction by reason of
G the fact that it erroneously allocated a part of it toward
the profits earned in Karachi.
In the course of its
judgment this Court observed:
H
"Seetion 10(2)(xv) of the Indian Income-tax Act
provides that in computing the profits of a business
allowance is to be made for any expenditure laid out
or expended wholly and exclusively for the p".Irpose
of such business. Now the respondent is carrying on
(I) 29 l.T.R. 661.
236
SUPREME COURT REPORTS
[1972] 1 S.C.R.
business in cotton both in India
and in Karachi.
When an assessee carries on the same business at a
number of places there is for the purpose of section 10
only one business and the net profits of the business
have to be ascertained by pooling together the profits
earned in all the branches and deducting therefrom all
the expenses. The fact that some of the branches are
in foreign territories will make no difference in the
position if the assessee is as in the present case
resident and ordinarily resident within the taxable
territories. Therefore the profits earned in India and
in Karachi have to be thrown together and the expenses including
the
commission payable to the
managing agents deducted therefrom and it is the net
profits thus struck that become chargeable under the
Act. That is how the Income-tax Officer has worked
out the figures. The respondent is therefore clearly
entitled to a deduction of the whole of the commission
of Rs. 3, 12,699 paid to the managing agents including
the sum of Rs. 1,23,719 against the Indian profits."
Lastly we refer to the decision of this Court in ComA
B
c
D
missioner of Income-tax Madras v. Indian Bank Ltd.(1).
Therein the respondent, a banking company, in the course
E
of its business, invested a large sum in securities, including
securities the interest on which was exempt from tax. Profits
and losses on the purchase and s;tle of such securities were
duly taken into account in computing the business income
of the respondent. The question for decision was whether
the interest paid by the respondent on the amount invested
F
in securities, whose interest was tax free, was deductable
from its gross profits. This Court held that interest paid
by the respondent on moneys borrowed from its various
depositors had to be allowed in its entirety under s. 10(2)
(iii) of the Act and there was no warrant for disallowing a
proportionate part of the interest referable to money
G
borrowed for the purchase of securities whose interest was
tax-free. In the course of the Judgment Subba Rao, J.
(as he then was) observed:
"In our opinion, in construing the Act, we must
adhere closely to the language of the Act. If there is
H
ambiguity in the terms of a provision, recourse must
(I) 561.T.R. 79.
A
B
c
D
E
F
G
H
C.I.T. v. MAHARASHTRA SUGAR MILLS (Hegde, J.)237
naturally be had to well-established principles of construction but it is not permissible first to create an
artificial ambiguity and then try to resolve the
ambiguity by resort to some general principle.
We are concerned with the interpretation of
section 10. Let us then look at the language employed. Sub-section (1) directs that an assessee be taxed
in respect of the profits and gains of business carried
on by him. What is the business of the assessee must
first be looked at. Does he carry on one business or
two businesses or along 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.
That is the first step. Secondly, we must look at
section 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 short 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."
On behalf of the department reliance was sought to be
placed on the decision of this Court in Badridas Daga v.
238
SUPREME COURT REPORTS
[1972J I S.C.R.
A
Commissioner of Jncome-tax( 1).
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
Jt was next urged on behalf of the department that in
view of rule 23 of the Rules framed, it was permissible for
tbe Income-tax Officer to split up the commission given to
B
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
c
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 asses see 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
D
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."
Rule 23 lays down the method of computing the taxable
E.
income of a business which partly arises from the utilisation
of agricultural produce as raw material in the business. It
says that in computing the taxable income, agricultural
income as defined in s. 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. IncomeF
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 assessee as a
cultivator or receiver of rent in kind." (emphasis supplied).
The managing agency commission given to the assessee
is nor an expenditure incurred by the assessee as a cultivator
or as a receiver of the rent in kind. The last part of subrule (I) 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
H
deducted while arriving at the taxable income. Section
(I) 34 I.T.R. 10.
C.I.T. v. MAHARASHTRA SUGAR MILLS (Hegde, J.) 23S
A 2(1) of the Act defines agricultural income. That section
reads:
"agricultural income" means--
(a) any rent or revenue derived from land'
B
which is used for agricultural purposes, and
is either assessed to land-revenue in the
taxable territories or subject to a local rate
assessed
andcollected by officers of the
Government as such;
C
(b) any income derived from such land byD
E
F
G
H
(i) agricultural 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 ofrent-inkind 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 immedfafo 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 storehouse, or other out-building."
240
SUPREME COURT REPORTS
(1972] 1 S.C.R.
If rule 23 is read along with s. 2(1 ), it is clear that
A
oreference 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
B
such as payment of managing agency commission.
In the result this appeal fails and the same is dismissed
with costs.
V.P.S.
Appeal dismissed.