1970 (3) TMI 14 - HC - Income Tax

Whether the overhead expenses under the heads of salaries and travelling expenses of general staff general charges legal expenses postage registration fee etc. directors fees and travelling expenses and managing agents office allowance incurred by the assessee could be apportioned between agricultural and business activities of the company and were not admissible as deductions in their entirety in computing the income of the company - Held no

Summary

Issues:
- Apportionment of overhead expenses between agricultural and business activities for deduction in income tax computation.

Analysis:
The judgment by the High Court of Madhya Pradesh involved a reference under section 66 of the Indian Income-tax Act, 1922, regarding the apportionment of overhead expenses between agricultural and business activities for income tax deduction. The first issue pertained to the assessment year 1956-57, while the second issue related to the assessment year 1957-58. The controversy arose from the assessee, a public limited company engaged in sugar manufacturing and farming activities, claiming full deductions for various expenses incurred. The Income-tax Officer disallowed a portion of the expenses, attributing only the part related to agricultural activities as non-taxable income. However, the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal allowed the entire expenses as deductions, emphasizing that expenses for the business of manufacturing sugar should be allowed wholly under section 10(2)(xv) of the Act.

The Commissioner of Income-tax challenged the decision, arguing that the expenses should be apportioned between agricultural and business activities. The High Court referred to a Bombay case and upheld the Tribunal's decision, stating that if there is only one business, the expenses incurred for that business should be allowed as deductions. The Court analyzed rule 23 of the Indian Income-tax Rules, emphasizing that managing agents' expenses cannot be considered as cultivator expenses, thus not subject to apportionment. The Court also cited the Supreme Court decision in Commissioner of Income-tax v. Indian Bank Ltd., supporting the allowance of entire business expenses even if part of the profits is not taxable.

The Court clarified that the principle applies to various overhead expenses, including managing agents' commission, directors' fees, and other expenses, as long as the business is indivisible. Consequently, the Court ruled that all overhead expenses listed in the case could not be apportioned between agricultural and business activities and were admissible as deductions in their entirety for income tax computation for the respective assessment years. The Commissioner was directed to bear the costs of the reference.