Full Judgment Text
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PETITIONER:
RAJASTHAN STATE WAREHOUSING CORPORATION
Vs.
RESPONDENT:
COMMISSIONER OF INCOME-TAX
DATE OF JUDGMENT: 23/02/2000
BENCH:
S.S.M.Quadri, D.P.Wadhwa
JUDGMENT:
SYED SHAH MOHAMMED QUADRI, J.
This appeal arises from the judgment and order of the
Division Bench of the High Court of Judicature for Rajasthan
Bench at Jaipur in Income-tax Reference No.86 of 1987 dated
November 9, 1993. The assessee is the appellant. By the
order under challenge the High Court answered the following
question, referred to it under Section 256(1) of the Income
Tax Act, 1961 (for short the Act), in the affirmative,
that is, in favour of the Revenue and against the assessee:
Whether on the facts and in the circumstances of the case
and the business of the assessee being one and indivisible,
the Tribunal was right in law in holding that the expenses
have to allocated in the same percentage as the different
sources of income and are not to be allowed in entirety as
allowed by the Commissioner of Income-tax (A) after
following decisions noted in para 11 of the order dated
31.01.1985 for the assessment years 1974-75, 1975-76 and
1980-81?
In the assessment year 1977-78 the appellant, a State
Government Corporation, derived its income from interest,
letting out the warehouses and administrative charges for
procurement of foodgrains while working for the Food
Corporation of India as well as the State Government. It
claimed deduction of expenditure of Rs.38,13,555.17 under
Section 37 of the Act in computing its income under the head
profits and gains of business of business or profession.
The Income Tax Officer allowed only so much of the
expenditure as could be allocated to the taxable income and
disallowed the rest of it which was referable to the
non-taxable income, being exempt under Section 10(29) of the
Act. On appeal, the Commissioner of Income Tax (Appeals)-II
accepted the claim of the appellant that the entire
expenditure was deductible. The Revenues appeal therefrom
to the Income-tax Appellate Tribunal was allowed upholding
the order of the Income Tax Officer on July 17, 1986. At
the instance of the appellant the question noted above was
referred to the High Court. By order under challenge the
High Court confirmed the order of the Income-tax Appellate
Tribunal. Hence this appeal. Mr. Joseph Vellapally,
learned senior counsel appearing for the appellant, relied
on the judgments of this Court in Commissioner of
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Income-tax, Madras Vs. Indian Bank Ltd. [56 ITR 77],
Commissioner of Income-tax, Bombay City I Vs. Maharashtra
Sugar Mills Ltd. [82 ITR 452] and of Punjab and Haryana
High Court in Punjab State Co-operative Supply and Marketing
Federation Ltd. Vs. Commissioner of Income-tax, Patiala-I
[128 ITR 189] in support of his contention that the order of
the High Court is unsustainable. The contention of Mr.K.N.
Shukla, learned senior counsel appearing for the Revenue, is
that the expenditure which is attributable to the exempted
income is not a permissible deduction and it has been
rightly disallowed by the High Court. To appreciate the
contentions of the learned counsel it may be useful to refer
to Section 37(1) of the Act: 37. General. - (1) Any
expenditure (not being expenditure of the nature described
in Sections 30 to 36 * and not being in the nature of
capital expenditure or personal expenses of the assessee),
laid out or expended wholly and exclusively for the purposes
of the business or profession shall be allowed in computing
the income chargeable under the head Profits and gains of
business or profession.
A plain reading of the above provision makes it clear
that it is a residuary provision and allows an expenditure,
not covered under Sections 30 to 36, in computing the income
chargeable under the head profits and gains of business or
profession, provided its other requirements are satisfied.
They are : (i) the expenditure should not be in the nature
of capital expenditure or personal expenses of the assessee;
(ii) it should have been laid out or expended wholly and
exclusively for the purposes of the business or profession;
and (iii) it should have been expended in the previous year.
The disallowance of the expenditure was not for
non-compliance of requirements of Section 37(1) of the Act
but for the reason that the expenditure was incurred on an
activity from which income was exempted under the Act. A
similar question arose in the case of Indian Bank Limited
(supra). In that case the respondent-assessee, in the
course of its business, borrowed moneys for investment in
securities. Part of its income, derived from securities,
was exempt under the Income Tax Act, 1922 (for short the
Act of 1922). It sought to deduct the interest paid on the
entire borrowed amount. The question before this Court was
whether a portion of the interest, which was referable to
investment on securities from which income was exempt, was
allowable. Section 10(2)(iii) and (xv) of the Act of 1922,
was precursor of Section 37(1) of the Act. It was held by
this Court that in allowing a deduction which was
permissible one need not look beyond the expenditure to see
whether it had the quality of directly or indirectly
producing taxable income and, therefore, there was no
warrant for disallowing a proportionate part of the interest
referable to money borrowed for the purchase of securities
yielding tax free interest. That judgment was followed in
the case of Maharashtra Sugar Mills Ltd. (supra). There
the assessee-company was manufacturing sugar in its factory
and was also growing sugar-cane for purposes of its factory.
On the question of deduction of expenditure, so much of the
managing agency commission which was referable to the
growing of sugar-cane, was disallowed on the ground that the
income from sugar-cane cultivation was agricultural income
and not exigible to tax. The Appellate Tribunal found that
the cultivation of sugar-cane and the manufacture of sugar
by the assessee constituted one single and indivisible
business. It was held by this Court that the entire
managing agency commission was laid out for the purpose of
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the business carried on by the assessee and was allowable
under Section 10(2)(xv) of the Act of 1922 and that the fact
that the income from growing of sugar-cane, a part of that
business was not taxable under the Act, was not a relevant
circumstance. The third case cited by Mr. Vellapally is of
Punjab and Haryana High Court in Punjab State Co-operative
Supply and Marketing Federation Ltd. case (supra). The
judgment in that case shows that on the question of
apportionment of the expenditure, with reference to the
activity which yielded income and with reference to the
activity which did not yield income, the High Court, taking
note of the finding recorded by the Tribunal that the
business of the assessee was one and indivisible and
following the aforesaid decisions of this Court, held that
the entire expenditure incurred by the assessee was
deductible. Mr. Shukla, however, placed reliance on the
judgment of the Division Bench of the Madras High Court in
Waterfall Estates Ltd. Vs. Commissioner of Income-tax,
Madras (No.1) [131 ITR 207] which was affirmed by this Court
in Waterfall Estates Ltd. Vs. Commissioner of Income-tax
[219 ITR 563]. That was a case under Section 37(1) of the
Act. The assessee in that case was carrying on different
ventures, profits from some of them were taxable and from
the other were exempt under the Act. In respect of the
earlier assessment years expenditure with reference to each
activity was worked out separately without claiming any
expenditure referable to the head-office. In the assessment
year 1965-66 the assessee claimed deduction of the entire
expenditure including that relating to the head-office. The
finding recorded by the Tribunal was that there was no proof
that different ventures constituted the same business. On
that finding the Tribunal took the view that the
apportionment of the expenditure was valid. The High Court
of Madras confirmed the order of the Tribunal and the same
was upheld by this Court. There, it is evident, the result
turned against the assessee due to absence of the finding of
fact that different ventures carried on by it constituted
one indivisible business, which meant that there was no
nexus between the venture in question and the business
comprising of other ventures carried from the head office
and therefore so much of the expenditure incurred on the
head office which was attributable to that venture was not a
permissible deduction in computing profits of the business.
Indeed, such expenditure does not properly fall within the
meaning of the expenditure laid out or expended wholly and
exclusively for the purpose of the business or
professional. In view of the above discussion, the
following principles may be laid down : (i) if income of an
assessee is derived from various heads of income, he is
entitled to claim deduction permissible under the respective
head whether or not computation under each head results in
taxable income; (ii) if income of an assessee arises under
any of the heads of income but from different items e.g.
different house properties or different securities etc., and
income from one or more items alone is taxable whereas
income from the other item is exempt under the Act, the
entire permissible expenditure in earning the income from
that head is deductible; and (iii) in computing profits
and gains of business or profession when an assessee is
carrying on business in various ventures and some among them
yield taxable income and the others do not, the question of
allowability of the expenditure under Section 37 of the Act
will depend on : (a) fulfilment of requirements of that
provision noted above; and (b) on the fact whether all the
ventures carried on by him constituted one indivisible
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business or not; if they do the entire expenditure will be
a permissible deduction but if they do not the principle of
apportionment of the expenditure will apply because there
will be no nexus between the expenditure attributable to the
venture not forming integral part of the business and the
expenditure sought to be deducted as the business
expenditure of the assessee. Mr. Shukla has fairly
conceded that if the exempted income and the taxable income
are earned from one and indivisible business then the
apportionment of the expenditure cannot be sustained. But,
submits the learned counsel, in this case the Tribunal did
not record a finding that the business of the assessee is
one indivisible, therefore, the apportionment of the
expenditure is valid. We are afraid, we cannot accede to
the contention of the learned counsel inasmuch as a plain
reading of the question itself shows that it embodies --
the business of the assessee being one and indivisible.
This being the position, it is not open to the Revenue to
contend that the business is not one and indivisible. In
view of the fact that a perusal of the question itself
discloses that income from various ventures is earned in the
course of one and indivisible business, the impugned order
upholding the apportionment of the expenditure and allowing
deduction of only that proportion of it which is referable
to taxable income, is unsustainable. We, therefore, answer
the question in the negative, that is, in favour of the
assessee and against the Revenue. The order under appeal is
accordingly set aside and the appeal is allowed with costs.