9911796707
TMI Blog1975 (9) TMI 27X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee carries on the business of buying and selling agricultural implements, seeds, etc. The society sells the said articles to its members as well as to outsiders. For the assessment year 1965-66, it filed its return of income declaring the total income of Rs. 61,029 on September 16, 1964, Subsequently, a revised return of income was filed on February 6, 1969, declaring a loss of Rs. 20,816. In its revised return the assessee claimed exemption of Rs. 89,976 under section 81(1)(a) of the Income-tax Act, 1961, stating that the said amount represented the gross profits on the sale of agricultural implements, etc., to its members. The Income-tax Officer did not accept the assessee's claim and observed that the provisions contained in section 81(1)(d) did not provide for total exemption of income but entitled the assessee to claim rebate in tax only. He further observed that the income covered by section 81(1)(d) of the Act is always includible in the computation of the total income in view of sections 66 and 67 read with section 110 of the Act. The appeal before the Appellate Assistant Commissioner failed but the further appeal before the Tribunal succeeded. Thereafter, at the inst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spect of the whole of the gross profit of Rs. 1,00,617 instead of the net profit of Rs. 27,000 attributable to dealings with members of the society. Thereafter, at the instance of revenue, the following two questions have been referred to us for our opinion : " (1) Whether, on the facts and in the circumstances of the case, the finding of the Tribunal that the case of the assessee is covered by section 81(1)(d) only and the provisions of sections 66 and 67 read with section 110 of the Act are not attracted is erroneous in law ? (2) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the assessee was entitled to rebate under section 81(1)(d) of the Act on the whole of the gross profit of Rs. 1,00,617 instead of the net profit of Rs. 27,000 only as determined by the Income-tax Officer ? " We may point out that the same correction as was required in connection with question No. (1) in Income-tax Reference No. 100 of 1974 is also required in this case and, as refrained, question No. (1) will read as under : " (1) Whether, on the facts and in the circumstances of the case, the finding of the Tribunal that the case of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns the rate arrived at by dividing the amount of income-tax calculated on the total income, by such total income. Section 4 is the charging section and under that section where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions of the Act in respect of the total income of the previous year or previous years, as the case may be, of every person. Thus, it is the total income as defined in the Act which bears the charge of income-tax. Under section 5 provision is made for the scope of total income and under that section, subject to the provisions of the Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived. Section 14 provides for "heads of income" and lays down that, save as otherwise provided by the Act, all income shall, for the purposes of charge of income-tax and computation of total income, be classified under the different heads of income set out therein and D is the head of income referring to profits and gains of business or profession. Sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r agriculture for the purpose of supplying them to its members." The rest of the clauses of that sub-section are not material for the purposes of this judgment but the proviso is very much material and is in these terms : " Provided that in the case of a co-operative society which is also engaged in activities other than those mentioned in this clause, nothing contained herein shall apply to that part of its profits and gains as is attributable to such activities and as exceeds fifteen thousand rupees." Section 110 provides for determination of tax where total income includes income on which no tax is payable. For the relevant years, section 110 stood in these terms : " Where there is included in the total income of an assessee any income on which no income-tax is payable under the provisions of this Act, the assessee shall be entitled to a deduction, from the amount of income-tax with which he is chargeable on his total income, of an amount equal to the income-tax calculated at the average rate of income-tax on the amount on which no income-tax is payable." Thus, so far as co-operative societies are concerned, if the society carries on some business activities which are e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scertained. From the amount of income-tax chargeable on the total income of the co-operative society, income-tax at the average rate on the amount of profits and gains of the business carried on by the society for the purchase of agricultural implements, seeds, livestock or other articles intended for agriculture for the purpose of supplying them to the members is to be worked out and excluded. Next, the profits and gains attributable to business activities other than those mentioned in section 81(1)(d), in the light of the facts of this particular case, have to be ascertained and if the profits and gains attributable to such taxable activities exceed fifteen thousand rupees, then the income-tax as ascertained under section 110 will have to be assessed and ultimately paid by the assessee-co-operative society. Mr. Shah for the assessee-co-operative society has contended that in computing the profits and gains of business carried on by the co-operative society in connection with its non-taxable activities, the entire gross profits earned by the society should be taken out from the total income irrespective of the proportionate expenditure which the revenue claims to set off against ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is to be that amount of tax calculated at the average rate on the dividend income included in the total income which exceeds 25 per cent. of the income so included. The words " so included " have reference to the inclusion in the total income contemplated by the second condition of the first part of the section. In other words, the said dividend income is that income which has become one of the component parts of " total income ". The expression " total income " must be given the same meaning as in section 2. Under section 2(45) " total income " means only that income which is computed in the manner provided in the Act. Dividend income, according to the Division Bench, falls under the sixth head of income in section 14, namely, " Income from other sources ". If dividend income is to be included under " Income from other sources ", then, as provided by section 57(iii), any expenditure which is laid out wholly and exclusively for the purpose of earning that income should first be deducted before arriving at the figure of total income. It is, therefore, evident that the dividend component of total income is not the gross figure of dividend received by the assessee but the net dividend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to receive agricultural lands in repayment of his debts from such constituents, he is entitled to a deduction of the interest paid by him also on so much of the capital borrowed by him for business purposes as is represented by the agricultural lands got in, under section 10(2)(iii) in computing the profits and gains of his money-lending business. It was contended before the Madras High Court that capital was borrowed for the purpose of the business and on the facts it was held that it was an unquestioned fact that the assessee received those lands in repayment of the loans advanced by him and not of his own volition but of necessity, there being no other method of getting payment, and that, therefore, those lands came into his possession directly in the course of his money-lending business and represented the capital originally borrowed. The income from agricultural lands was exempt from income-tax and was not to enter into the computation of total income of the assessee and the question before the Madras High Court was whether any part of the expenditure incurred by the assessee could be excluded as attributable to earning the income from agricultural lands and the Madras High Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per cent. War Loan ; by general rule 2(d) of Schedule C, in respect of the interest on the India Government Stock ; and by that rule, which was applicable by virtue of miscellaneous rule 7(2) of Schedule D, in respect of the interest on the colonial company securities, were absolute and unlimited and that the interest exempted could not be taxed indirectly by inclusion in the bank's trading receipts for the purposes of assessment under Case I, Schedule D ; and that, nevertheless, the cost of obtaining the capital engaged in those investments was allowable as a deduction in computing the bank's liability. In that case, when the matter was before the Court of Appeal, Lord Wright M. R. observed--See [1938] 21 TC 472, 506 ; [1938] 6 ITR 541, 564 (CA) : " ... there remains what Mr. Hills described as the second main head, and that is, what is the amount of deduction for expenses which can be allowed in respect of the general trading profits of the bank at its London branch ? That turns upon the provisions of Schedule D and certain Rules. I am, of course, dealing with Case I of Schedule D. Case I of Schedule D is defined under the Rule applicable to Case I in these terms..." Thereafte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er." (Emphasis supplied by us). Lord Wright M. R. found that there was no provision in the Act and the Rules for any apportionment. He observed--See [1938] 21 TC 472, 508 ; [1938] 6 ITR 541, 566, 567 (CA) : " It may well be that that has followed from the circumstance that these exemptions were introduced at a comparatively late date, and the effect of them was not considered in connection with rule 3. I do not know how that may be, but the short result is that I find no means, consistent with the language of the Act, of giving effect to this contention of the Crown. I think that some such provision ought reasonably to have been included in the Act, but I simply cannot find it." Romer L.J. agreed with the conclusion of Lord Wright M.R. and Greene L.J. and did not think it necessary to differ from them. Greene L.J., dealing with this aspect of the case, said--See [1938] 21 TC 472, 516 ; [1938] 6 ITR 541, 571, 576 (CA) : " The argument for the Crown on that point is of this nature, that, in the account of a trading company made out for the purpose of its return under Case I of Schedule D, the interest with which we are concerned must in the first instance be brought into the acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd that the expense connected with them was wholly and exclusively laid out for the purposes of the trade. Expenditure in course of the trade which is unremunerative is none the less a proper deduction, if wholly and exclusively made for the purposes of the trade. It does not require the presence of a receipt on the credit side to justify the deduction of an expense. I agree on this question with the decision of the courts below " and the House of Lords affirmed the decision of the Court of Appeal. We have quoted extensively from this decision in Hughes v. Bank of New Zealand [1938] 21 TC 472 ; [1938] 6 ITR 636 (HL) because in subsequent decisions in India considerable emphasis has been laid upon the observations of the Court of Appeal and of the House of Lords in this case. But we emphasize that, as pointed out by Lord Wright M.R. and Greene L.J., it was because there was no provision either expressly or by necessary implication in the statute that the courts in England decided in the way they did and they recognised that what the Crown was urging was quite proper and reasonable. The decision in Hughes v. Bank of New Zealand [1938] 21 TC 472 ; [1938] 6 ITR 636 (HL) was followe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and part of the income derived by it is excluded from income-tax, then it is not permissible while making deductions for the purpose of arriving at the net assessable income or total income of the assessee to disallow any portion of the total expenditure incurred by the assessee in the course of its business, the proposed disallowable expenditure being proportionate to exempted or excluded income. This is the ratio of the Supreme Court decision in Commissioner of Income-tax v. Indian Bank Ltd. [1965] 56 ITR 77 (SC). We will point out in the course of this judgment that in all subsequent decisions which have followed Commissioner of Income-tax v. Indian Bank Ltd. [1965] 56 ITR 77 (SC) this is the only principle which has been reiterated again and again and no further principle has been laid down and the principle has not been carried any further. In Commissioner of Income-tax v. Industrial Investment Trust Co. Ltd. [l968] 67 ITR 436 (Bom), which was decided by the Bombay High Court, a notification issued by the Governor-General-in-Council in 1933 exempted from super-tax " so much of the income of any investment trust company as is derived from dividends paid by any other company w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n expenditure allowable to the assessee for their business of manufacture of sugar under section 10(2)(xv) of the Income-tax Act. Rule 23 of the Income-tax Rules, 1922, which prohibited the granting of any " further deduction " was limited to the normal expenditure which a cultivator incurred in the process of earning agricultural income as defined in the Act. Managing agency commission can by no stretch of language be held to be expenditure incurred by the assessee as a cultivator and rule 23, therefore, did not prohibit the allowance of the full amount of the remuneration paid to the managing agents in that particular case. The Division Bench of the Bombay High Court observed in [1968] 68 ITR 512 (Bom) at page 517 : "...the business of the assessee is only one, namely, the manufacture of sugar. Their business is not that of cultivation of sugarcane. Whatever sugarcane is grown is for the purposes of the manufacture of sugar. The business being one and indivisible it is clear that the expenditure which the assessee incurs for that business has to be allowed to the assessee " and the decision of the Supreme Court in Commissioner of Income-tax v. Indian Bank Ltd. [1965] 56 ITR 77 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax. Similarly, in Commissioner of Income-tax v. Bhopal Sugar Industries Ltd. [1970] 78 ITR 209 (MP), it was held by the Madhya Pradesh High Court that the expenses in question, even though they were expenses partly incurred by the assessee as a cultivator, were not apportionable between the agricultural and business activities of the assessee-company, provided the business of the assessee was one and indivisible. On the facts, the overhead expenses under the heads " Salaries of general staff, provident fund, directorial expenses, managing agents' office allowance and managing agents' commission on net profit ", incurred by the assessee-company could not be apportioned between agricultural and business activities of the assessee-company and were admissible as deductions in their entirety in computing the income of the assessee-company. In each of these decisions which we have so far discussed, the principal point was in connection with section 10(2)(iii) or section 10(2)(xv) of the Act of 1922, now replaced by section 37, or similar other provision of the Income-tax Act, 1961, and the ratio decidendi which flows from this line of authorities is only to the effect that if an asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits shown therein. It likewise debited a sum of Rs. 1,23,719 to the profit and loss statement of the Karachi branch, and deducting it out of the total profits of Rs. 6,18,599 earned by the branch, showed a sum of Rs. 4,94,879 as its net profits for Karachi branch. The question before the Bombay High Court was whether the amount of Rs. 1,23,719 paid to the managing agents as commission at 20 per cent. of the Karachi Branch was allowable as a revenue deduction against the Indian profits of the assessee-company for the year of account and on this question the Bombay High Court, following the decision of the Calcutta High Court in Birla Brothers Ltd. v. Commissioner of Income-tax [1951] 19 ITR 623 (Cal), held that the assessee was entitled to the deduction of Rs. 1,23,719. Chagla C.J., at page 33 of [1953] 24 ITR 24 (Bom), observed : " We must confess that it is with some reluctance that we have come to the conclusion that we have because, as we have already pointed out, there is considerable force in the contention of Sir Nusserwanji. But that is more a matter for the legislature than for us. As far as we are concerned, we must accept the decision of the Calcutta High Court as co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreement, the managing agents are entitled to a 20 per cent. commission on the annual net profits of the company, and to ascertain those profits, one has to take into account the result of the trade in all its branches. In the present case, profits were earned during the accounting period both in Bombay and in Karachi, and the apportionment of the commission between the two branches makes no material difference in the result. But it might happen that the business at Bombay results in profit, while that at Karachi ends in loss. In that event, what the managing agents would be entitled to would be commission not on the profits made in Bombay but on the net profits after setting off the loss in the Karachi branch against the profits of the Bombay business. And that would also be the position if the business at Bombay resulted in loss, while that at Karachi ended in profit. The appropriation, therefore, of Rs. 1,23,719 as proportionate commission in respect of the profits of Rs. 6,18,599 earned at Karachi in the profit and loss statement for that branch is not in accordance either with the terms of the managing agency agreement, or with the rights of the respondent under the law." ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rachi did not arise for consideration before the Supreme Court, nor was the Supreme Court called upon to ascertain the profits and gains of the business carried on by the head office. We must reiterate before we deal with the facts of this case, what was observed by Greene L.J., at page 517 of the report in 21 Tax Cases ([1938] 6 ITR 571(CA)) that under certain circumstances dissection has to be made where the statute clearly requires it and when the statute cannot be effective unless the dissection is made. The question that we have to ask ourselves is whether in view of the scheme of section 81(1)(d) read with the proviso to section 81(1) and the provisions of section 66 read with section 110 of the Act, the dissection has to be made for the purpose of giving effect to the provisions of the statute. In Hughes v. Bank of New Zealand [1938] 21 TC 472 ; [1938] 6 ITR 541, 545 (CA) it was clearly pointed out by the Master of the Rolls, Lord Wright, and by Greene L.J. and also by Lord Thankerton in the House of Lords [1938] 6 ITR 636 (HL) that they were arriving at the particular decision they did because the language of the statute did not permit them to accept the contention urged on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce with the provisions of section 110 of the Act. The profits and gains of business under sections 28 and 29 shall be computed in accordance with the provisions contained in sections 30 to 43A, that is, after making all permissible deductions and granting all deductible allowances. The statutory provision which was absent from the scheme of the English Act in the case considered by the Court of Appeal and the House of Lords in Hughes V. Bank of New Zealand [1938] 21 TC 472 ; [1938] 6 ITR 541 (CA) and 636 (HL) and which was not found in any of the provisions of section 10(2)(iii) or section 10(2)(xv) of the 1922 Act is now present in the instant case in the enactment by reason of the use of the words " profits and gains of business carried on by it ". This phrase "profits and gains of business" occurs both in the main body of section 81(1) and also in the proviso. These words " profits and gains of business " have been used by the legislature both in connection with non-taxable activities and in connection with taxable activities. In some cases apportionment of expenditure has to be resorted to as observed by Greene L.J. in Hughes v. Bank of New Zealand [1938] 21 TC 472 ; [1938] 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of business from taxable activities and profits and gains from non-taxable activities, the two figures arrived at in the light of the contention of the assessee will not add up to the figure of the total income arrived at in the light of section 110 and that would not be permissible and would be also highly illogical. Under these circumstances we have come to the conclusion that the only way of working out the scheme of the provisions of section 81(1)(d) and the proviso to section 81(1) in the light of sections 66 and 110 is first to calculate the total income, secondly, to decide what is the income-tax payable on that total income, thirdly, to ascertain the income in respect of non-taxable activities by setting off against the gross profits of non-taxable activities, the proportionate amount of expenditure. Then, also ascertain by a similar process of setting off proportionate expenditure, the profits and gains of business from taxable activities and then ascertain the amount of income-tax assessable in the case of the assessee. If this procedure is not followed, anomalous results are likely to ensue. In the light of the above discussion, we answer question No. (1) as reframed by ..... X X X X Extracts X X X X X X X X Extracts X X X X
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