Skip to content


Hanuman Sugar and Industries Ltd. Vs. Commissioner of Income-tax, Central - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 147 of 1966
Judge
Reported in[1970]76ITR603(Cal)
ActsIncome Tax Act, 1961 - Section 37; ;Income Tax Act, 1922 - Section 10
AppellantHanuman Sugar and Industries Ltd.
RespondentCommissioner of Income-tax, Central
Appellant AdvocateD. Pal and ;R. Murarka, Advs.
Respondent AdvocateD.K. Sen and ;Suhas Sen, Advs.
Excerpt:
- .....subject to a minimum payment of rs. 2(0,000. the assessee claimed deduction of the managing agency commission amounting to rs. 48,735. the income-tax officer found that the commission was worked out at 10 per cent. of the net profits including the agricultural profits amounting to rs. 97,407. the income-tax officer was of the opinion that the assessee was entitled to claim as deduction from the textile profits only the remuneration at 10 per cent. of the profits which are subjected to income-tax. he disallowed a sum of rs. 9,741 out of the managing agency remuneration.2. on appeal, the appellate assistant commissioner confirmed the order of the income-tax officer.3. there was a further appeal before the tribunal. the tribunal held that there were agricultural operations carried on.....
Judgment:

Sabyasachi Mukharji, J.

1. The assessee is a limited company having a sugar mill at Motihari in North Bihar and also running an agricultural farm for growing sugarcane which is also used for the production of sugar in its mill. Under a managing agency agreement dated the 16th of October, 1954, Messrs. Hanuman Industries (India) Ltd. were appointed managing agents for a period of ten years from 1st of October, 1954, and that the managing agents were entitled to a remuneration, by way of commission, equal to 10% of the pet profits subject to a minimum payment of Rs. 2(0,000. The assessee claimed deduction of the managing agency commission amounting to Rs. 48,735. The Income-tax Officer found that the commission was worked out at 10 per cent. of the net profits including the agricultural profits amounting to Rs. 97,407. The Income-tax Officer was of the opinion that the assessee was entitled to claim as deduction from the textile profits only the remuneration at 10 per cent. of the profits which are subjected to income-tax. He disallowed a sum of Rs. 9,741 out of the managing agency remuneration.

2. On appeal, the Appellate Assistant Commissioner confirmed the order of the Income-tax Officer.

3. There was a further appeal before the Tribunal. The Tribunal held that there were agricultural operations carried on at the sugarcane farm at Motihari. The Tribunal was of the opinion that as agricultural income Was outside the scope of Section 10 of the Income-tax Act any income which was attributable to profits arising out of the; agricultural operations could not be allowed as deduction while computing the income, profits and gains under Section 10 of the Indian Income-tax Act, 1922. The Tribunal found that, as the profit of Rs. 97,407 arising out of the agricultural farm was not assessable to income-tax, the expenditure attributable to earning of the said agricultural income could not be allowed while ascertaining the profits of the sugar mill under Section 10 of the Act. The Tribunal, therefore, upheld the order of disallowance.

4. On an application being made under Section 66(2) of the Indian Income-tax Act, 1922, the following question has been referred to this court:

'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that a sum of Rs. 9,741 out of the managing agency commission of Rs. 48,735 was not allowable as a deduction by way of computing profits of the assessee's business under Section 10 of the Income-tax Act, 1922 ?'

5. The managing agency agreement which is dated 16th, October, 1954, provides that the managing agents would be entitled to receive by way of remuneration for their services commission at 10% of the net annual profits of the company as defined under Section 87(c) of the Indian Companies Act, 1913, provided that such commission shall be subject to a minimum payment of Rs. 20,000 in the case of absence or inadequacy of profits. The said agreement further provides for the offices and the duties and functions of the managing agents and also states that the genereal management of the company affairs, business, assessment, property and factory is to be entrusted to the managing agents.

6. Dr. D Pal, learned counsel for the assessee, contended before us that no part of the managing agency remuneration could be specifically attributable to agricultural operations and as such no part of such managing agency commission could be disallowed as deduction. Dr. Pal also submitted that as expenses for business as a whole were incurred, it was not proper to enquire into the facts whether the said expenses have produced taxable income directly or indirectly. Dr. Pal drew our attention to the decision of the Supreme Court in the case of Commissioner of Income-tax v. Indian Bank Ltd., : [1965]56ITR77(SC) . There the Supreme Court had held that where an assessee had paid interest on monies borrowed from its various depositors, it had to be allowed in its entirety under Section 10(2)(iii) of the Indian Income-tax Act, 1922, and there was no warrant for disallowing a proportionate part of the interest referable to monies borrowed for the purchase of securties whose interest was tax-free. The Supreme Court further observed that in allowing a deduction which is permissible one need not look beyond expenditure and see whether it has the quality of directly or indirectly producing taxable income. Dr. Pal also drew our attention to a decision of the Bombay High Court in the case of Commissioner of Income-tax v. Maharashtra Sugar Mills Ltd., [1968] 68 I.T.R. 512. There the facts were more or less identical with the present case before us. What had happened was that the assessee-company was engaged in the manufacture of sugar and for the purposes of that business the assessee owned extensive estates in which it grew its own sugarcane. From the sugarcane thus grown on its own estates the assessee utilised a major part for conversion into sugar in its factory and the rest, after meeting the requirements of the factory, was disposed of at times. For the purposes of its business the assessee had appointed managing agents and the total remuneration which was debited in the profit and loss account to the assessee for the relevant year as its business expenditure in respect of its managing agency commission was Rs. 4,86,228-6-0. In the relevant year of account the assessee had shown that out of its profits amounting to Rs. 39,70,000 the profit relating to agricultural income would be about Rs. 28,00,000. On that proportion the Income-tax Officer in that case apportioned the item of expenditure of the managing agency commission and out of the total managing agency commission of Rs. 4,86,22 8-6-0 he held that a sum of Rs. 1,26,359 was attributable to the agricultural activity of the assessee-company and therefore disallowed that part of the expenditure. It was held by the Bombay High Court that where part of the income of an assessee is either excluded or is exempt under any provision of the Income-tax Act, it was not permissible to disallow the proportionate part of the expenditure attributable to such excluded or exempt income. The entire managing agency commission was, therefore, held by the Bombay High Court as an expenditure allowable to the assessee for their business of manufacture of sugar under Section 10(2)(xv) of the Indian Income-tax Act, 1922.

7. Mr. D. K. Sen, learned counsel for the revenue, contended that the real basis of the decision of the Supreme Court was that the business was one indivisible business. According to him that is not the case here. It appears from the statement of the case as well as the order of the Income-tax Appellate Tribunal that the assessee had a sugar mill. It had also an agricultural farm for growing its sugar which was used as raw materials for production of sugar in that mill. In that context it is not possible to hold that the agricultural operations carried on by the assessee were not part of the same indivisible business. Furthermore, the question whether this was an indivisible business or not was not raised before the Tribunal and it is not possible for us at this late stage to allow the revenue to agitate this question.

8. In view of the decision of the Supreme Court in the case of Commissioner of Income-tax v. Indian Bank Ltd., : [1965]56ITR77(SC) and of the Bombay High Court in the case of Commissioner of Income-tax v. Maharashtra Sugar Mills Ltd., [1968] 68 I.T.R. 512 and in view of the terms and conditions of the managing agency agreement before us in the instant case, we are of the opinion that the Tribunal was not right in coming to its decision that the disallowance was correctly made. In that view of the matter, the question referred to this court must be answered in the negative and in favour of the assessee.

9. Each party will bear and pay its own costs.

Sankar Prasad Mitra, J.

10. I agree.


Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //