1. The Income-tax Appellate Tribunal, Ahmedabad Bench 'C', as per the direction of this court in Income-tax Application No. 85 of 1975, decided on 17th November, 1975, has referred three questions of law for our opinion at the instance of the Commissioner of Income-tax, Gujrat-I. The said three questions are as under :
'(1) Whether, on the facts and in the circumstances of the case, before arriving at the finding as to whether the expenditure was incurred in course of business or not, the Tribunal was right in law in allowing the deduction of Rs. 33,467 to the assesse
(2) Whether, the finding of the Tribunal that the entire expenditure of Rs. 40,323 was allowable as business expenditure is based on no evidence or without any materials on record or perverse in la
(3) Whether the observations of the Tribunal that it was not the case of the revenue that the said expenditure did not relate to the business of the assessee are without any evidence or material on record and contrary to the material on recor '
2. In order to appreciate the nature of the controversy between the parties in the present proceedings, it is necessary to have a look at a few relevant facts.
3. The assessee is a limited company. It derives income mainly from property. It also derives income from utilisation of a weighing machine. The assessee claimed an expenditure of Rs. 40,323 on account of salary, telephone, stationery, printing, auditors' fees and other miscellaneous expenses as allowable deductions under s. 37 of the I. T. Act from the income from weighing machine. The ITO found that the aforesaid expenditure of Rs. 40,323 cannot be said to have been incurred wholly for the purpose of the business and, therefore, a portion of the expenditure to the expent of Rs. 4,032 being 1/10 th of the expenditure, was allowed. The balance of the expenditure was treated by the ITO as having been incurred for the assessee's other activities. The ITO noted that the assessee had income from the weighing machine s well as substantial income from property; that as per the profit and loss account, rents from property were worth Rs. 3,10,415 while receipts from the weighing machine were only Rs. 2,892; that from the weighing machine, the assessee had shown loss of Rs. 26,092. The ITO noted three types of expenses which were incurred by the assessee during the relevant accounting year. It was seen by him that the assessee had incurred expenses which, firstly, pertained entirely to the property. Then there were certain other expenses which exclusively pertained to the weighing machine and there were also as separate types of expenses which were of general in nature and were attributable to both the activities f the assessee, viz., management of real property as well as running of the weighing machine business. In the view of the ITO, since the assessee was carrying on two definite and distinct activities, the general expences had to be allocated between these two activities on some reasonable basis. One way to allocate would be on the basis of income earned from these two activities. The ITO noted in that connection that if receipts are adopted as the basis, the expenses pertaining to weighing machine would not be even 1%. Taking a liberal view of the matter, the ITO allocated 10% of the general expenses as pertaining to the weighing machine.
4. It is necessary to note at this stage the details of the expenses of Rs. 40,323 which the assessee had claimed by way of permissible deductions under s. 37 of the Act :
Rs. Salary ... 29,781 Director's fees ... 540 Auditor ... 600 Registration fees ... 75 Misc. expences ... 4,215 Postage ... 550 Telephone ... 3,283 Stationery ... 232 Printing charges ... 1,047 --------- 40,323 ---------
5. Aggrieved by the aforesaid order of the ITO, the assessee filed an appeal before the AAC. It was contended by the assessee before the AAC that the ITO had erred in allowing deductions for expenses of Rs. 4,032 only (being 10% of the total expenses of Rs. 40,323). The AAC observed that the assessee was no more carrying on the original business of manufacture and sale of cloth. The only business activities now was that of weighing trucks at the weighing machine owned by the assessee company. In addition to this income from business, the assessee had considerable income from property. The assessee submitted before the AAC that the entire expenses ought to have been allowed as permissible deductions under s. 37 of the Act. While considering the aforesaid submission on behalf of the assessee, the AAC found that the entire expenditure certainly could not be described as pertaining to the business of using the weighing machine to earn weighing charges. He, however, felt that it would be more appropriate to ascertain those expenses which pertained clearly to the weighing machine business and to allow the same as deduction against business income. Thereafter, the AAC proceeded to examine each of the items comprising of the total expenses of Rs. 40,323 as claimed by the assessee as permissible deductions and ultimately came to the conclusion that the total admissible expenditure permissible under s. 37 in connection with the weighing machine business would come to Rs. 6,856. The break-up of this amount is as under :
Rs. Salaries 5,570 Printing charges 184 1/10th of legal exp. 215 1/10 th of audit fees 60 1/10th of other miscellaneous expenses as above 827 --------- 6,856 ---------
6. The AAC accordingly allowed Rs. 6,856 as against Rs. 4,032 allowed by the ITO. The assessment was accordingly reduced by Rs. 2,824 by the AAC.
7. The revenue being aggrieved, by a part of the order of the AAC which was against it, preferred a further appeal before the Income-tax Appellate Tribunal. The assesse filed cross-objections pertaining to that part of the order of the AAC by which the claim for grant of entire business expenses of Rs. 40,323 was not upheld by the AAC. We are not concerned with the appeal of the revenue before the Tribunal. The claim put forward by the assessee in cross-objectioned is the only relevant claim for the present purpose. In the cross-objections, the assessee claimed before the Tribunal that the assessee was entitled to the full claim of Rs. 40,323 by way of business expenditure and that the AAC had errd in reducing permissible deductions to a smaller amount of Rs. 6,856 only. The Tribunal, while appreciating the contention of the assessee on this aspect, referred to the judgment of the Supreme Court in CIT v. Maharashtra Sugar Mills Ltd. : 82ITR452(SC) . In the said decision, the supreme Court had observed that in order to find out whether a deduction of expenses is permissible under s. 10(2)(xv) of the Act of 1922, all that had to be done is t examine the relevant provisions of the Act, and equitable considerations were wholly out of place in that exercise. The Tribunal observed that if the expenditure incurred by the assessee was in the course of the business, the fact that the assessee-company had little or negligible income would be of no consequence. What has to be looked into is whether the expenditure had been incurred in the course of business. The Tribunal noted the fact that the departmental representative relied on the orders passed by the authorities below. The Tribunal thereafter held that as per the observations of the Supreme Court in Maharashtra Sugar Mill's case : 82ITR452(SC) , the contention on behalf of the assessee was correct. Thereafter, the Tribunal observed that it was not the case of the revenue that the expenditure incurred was not bona fide or that the said expenditure against the assessee was that the expenditure claimed was disproportionate to the income. The Tribunal observed that this approach was not correct and, therefore, it was held by the Tribunal that the disallowance made by the ITO and upheld by the AAC was not correct. Thus, in substance, the entire claim of the assessee for the grant of deductions of Rs. 40,323 by way of permissible expenditure under s. 37 of the Act was granted by the Tribunal. Thereafter, the Commissioner attempted, unsuccessfully, to get a few questions of law referred to this court under s. 256(1) of the Act by the Tribunal. Ultimately, the Commissioner could persuade this court to get three questions of law referred to us for our opinion by the Tribunal in the proceedings which the Commissioner took before this court under s. 256(2) of the Act. Pursuant to the direction of this court in the aforesaid proceedings, the Tribunal has referred three questions of law for our opinion in the present proceedings. These questions have already been extracted in extenso in the earlier part of this judgment.
8. Mr. N. U. Rawal, learned advocate appearing for the revenue, contended that the Tribunal has really not applied its mind to the real question in controversy between the parties. That the Tribunal proceeded only on the basis of the Supreme Court judgment in Maharashtra Sugar Mill's case : 82ITR452(SC) and without going into the further question as to whether any part of the claim for deductions amounting to Rs. 40,323 was actually referable to the business of weighing machine, the Tribunal almost automatically granted the full claim. Mr. Rawal submitted that the principles of law as laid down by the Supreme Court in Maharashtra Sugar Mills' case : 82ITR452(SC) were not in dispute and cannot be disputed, but while applying these principles to the facts of the present case, the Tribunal had clearly misdirected itself and consequently the Tribunal had failed to focus its attention to the main grievance voiced by the revenue and the counter-grievance put forward by the assessee itself. In short, in the submission of Mr. Rawal, the Tribunal had really not come to the grips of the matter and had disposed of the appeal by sidetracking the main issue.
9. Mr. K. H. Kaji, learned advocate appearing for the assessee, in all fairness to him submitted that it appeared clear that the Tribunal had not really addressed itself to the real question in controversy between the parties and the decision of the Supreme Court in Maharashtra Sugar Mills' case : 82ITR452(SC) was not directly applicable to the facts of the present case and the principles enunciated therein were not in dispute between the parties. But Mr. Kaji submitted that out of the total claim of Rs. 40,323 by way of permissible deductions under s. 37 of the Act, the authorities below had erred in not granting full claim to the assessee and the Tribunal ought to have considered the main grievance of the assessee to the effect that even for the existence of the company and to enable the assessee-company to carry on the weighing machine business, some overhead cost had to be incurred by it and it would be directly connected with the business activities pertaining to the weighing machine business which cannot be treated as expenses quite foreign to the scope of the weighing machine business.
10. In view of the aforesaid rival contentions of the parties, it is necessary to concentrate on the question as how the Tribunal has disposed of the appeal of the assessee before it. A mere look at the judgment of the Tribunal shows that it has bypassed the main grievance of the revenue to the effect that the assesee had income during the relevant accounting year under two heads, (1) property income and (2) business income from weighing machine. It is trite to say that before any expense can be granted as a permissible expenses for the purpose of business as per the requirement of s. 37 of the Act, it must be established that the concerned expenditure was not in the nature of capital expenditure or personal expenses of the assessee and were laid out or expended wholly and exclusively for the purposes of the business in question. As during the relevant accounting year, the assessee carried on business of weighing machine and had one weighing machine for it, if the assessee could show that the entire claim of permissible deduction under s. 37 referred to the expenses which were laid out or expended wholly and exclusively for the purposes of the weighing machine business, then the said claim could be granted under s. 37. In the present case, as noted by the ITO and the AAC, the total income of the assessee was comprised of the main two heads, (1) property income, and (2) income from the weighing machine business. Hence the question of apportionment of expenses qua these two heads of income necessarily arises for consideration. As laid down by this court in Gujarat Ginning and Mfg. Co. Ltd. v. CIT : 107ITR590(Guj) , an effort has to be made to apportion expenses for different types of income if the assessee is found to have earned income under different heads during a given assessment year. In Gujarat Ginning Co's. case : 107ITR590(Guj) , the facts were that during the accounting year relevant to the assessment years 1962-63 to 1967-68, the assessee-company paid interest on loan secured by the mortgage of house property, the annual value of which was included in its total income. The mortgage was on the property together with the machinery kept therein. The assessee-company claimed deduction of the entire amount of interest for the mortgage under s. 24(1)(iii) of the I. T. Act, 1961, which was then on the statute book. The ITO apportioned the amount of interest between the house property on the one hand and the machinery on the other and allowed deduction of only the interest attributable to the mortgage of the house property, the value of which was included in the company's total income. His order was confirmed on appeal. On a reference to this court, it was held (headnote).
'It is only the buildings or lands appurtenant thereto which constitute house property, the annual value of which is brought to tax under the head 'income from house property' and under section 24(1), it is only while computing income from such house property that the question of any deduction in respect of interest paid on a mortgage or other capital charge has to be deducted. The deduction is from the income of 'the property' which in the light of section 22 means the property consisting of buildings and lands appurtenant thereto. It is only such property, consisting of buildings and lands, the income of which has to be ascertained in accordance with section 23. Therefore, it is only the income in respect of buildings and lands appurtenant thereto from which deduction of interest paid in respect of mortgage has to be made. In the present case, by the very scheme of sections 24(1)(iii), 22 and 23, an apportionment of interest between machinery on the hand and the rest of the properties on the other has to be made and the assessee-company was not entitled to deduction of the entire interest paid on the mortgage of building and machineries.'
11. Thus, it is now well settled that in cases where the income of the assessee is of a composite nature and it is received from different heads of income as recognised by the Act before deciding the question regarding permissible expenses to be deducted from the total income for the purposes of computation of the taxable income, the expenses have to be apportioned headwise in connection with the income arising under the concerned heads. In the present case, therefore, the Tribunal was required to go into the question as to what extent of the total expenses of Rs. 40,323 which were claimed to be permissible deductions by the assessee, as per s. 37 of the Act, was actually referable to the weighing machine business. Only after arriving at the finding on this aspect and on deciding as to whether the concerned expenses were laid out or expended wholly and exclusively for the purposes of the weighing machine business during the relevant assessment year that the question of permitting the said expenditure as permissible expenditure would arise. Unfortunately the Tribunal has not addressed itself to this main question in controversy between the parties and instead, with respect, has sidetracked the main issue perhaps overawed by the observations of the Supreme Court in Maharashtra Sugar Mills' case : 82ITR452(SC) , which are found to have no bearing on the present case. Mr. Rawal for the revenue submitted that it was the revenue's case all throughout that the entire expenditure of Rs. 40,323 which the assessee claimed as permissible deduction under s. 37 did not refer to the business activity and still by some apparent error, the Tribunal thought that such was not the case of the revenue. Mr. Kaji, learned advocate appearing for the assessee, did not seriously controvert this aspect of the matter. It, therefore, appears clear to us that the Tribunal without going into the main grievance of the parties and without coming to grips with the matter, had almost automatically came to the conclusion that the entire expenditure of Rs. 40,323 was allowable as business expenditure. The Tribunal did not consider the evidence in the case while arriving at the aforesaid finding and the Tribunal also wrongly assumed that it was not the case of the revenue that the entire expenditure did not refer to the business of the assessee. The said assumption was based on no evidence whatsoever. Under these circumstances, it is necessary for the Tribunal to re-examine the entire question afresh. At this stage, it must be stated that after the decision of the Tribunal, some rectification came to be made in the earlier judgment of the Tribunal under s. 154 of the Act and as per the said rectification, the Tribunal has held that out of the total claim of the assessee for grant of deduction of Rs. 40,323 by way of business expenditure, amount of Rs. 15,000 is overlapping with the figure of expenditure for which deduction is already granted to the assessee for the relevant accounting year under another head by way of permissible expenses while also accepted this position. Hence, now, the grievance of the assessee survives to the extent of Rs. 25,302. The said figure works out as under : Rs. 40,323 were the total expenses claimed by the assessee as permissible deduction under s. 37. We have already mentioned the break-up of these expenses in the earlier part of this judgment. As per the rectification order of the Tribunal which the assessee has accepted, the amount of Rs. 15,021 is found to have been overlapped by the aforesaid figure of Rs. 40,323. Deducting the said figure, the net claim of the assessee which now survives for consideration would be Rs. 25,302. Even out of the said amount, the AAC has already allowed Rs. 6,856 by way of permissible deduction to the assessee being the amount which, according to the AAC, was directly referable to the weighing machine business. The Tribunal will have, therefore, to go into the real and the only question in controversy between the parties which now survives as to whether out of Rs. 25,302 by way of permissible expenditure, what part of this claim is referable to the business of weighing machine which was run by the assessee during the relevant accounting year and which was laid out or expended wholly and exclusively for the purpose of the said business. Of course, the assessee will be entitled to urge before the Tribunal that while deciding this question, that part of the expenditure which the assessee had to incur for running the company and which part was directly or indirectly referable to the weighing machine business can also be included as permissible expenses for the purpose of the weighing machine business as required by s. 37. The Tribunal will have, therefore, to reconsider the entire question afresh in the light of the observations made by us in this judgment.
12. As a result of the aforesaid discussion, our answers to the referred questions will be as under :
Question No. 1 :-In the negative, that is, in favour of the revenue and against the assessee; Question No. 2 :-In the affirmative, that is, in favour of the revenue and against the assessee; Question No. 3 :-In the affirmative, that is, in favour of the revenue and against the assessee.
13. In view of the peculiar facts and circumstances of this case, there will be no order as to costs of this reference.