Commissioner of Income Tax vs Brihan Maharashtra Sugar Syndicate Ltd.

Sugla, J.—Two questions of law in this reference at the instance of the department are-

''1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in allowing as a deduction the payment of bonus made to the agricultural staff and workers in the computation of the total income of the assessee-company for the assessment years 1962-63 to 1966-67?

Whether, on the facts and in the circumstances of the case, the Tribunal erred in law in allowing the entire amount of the provident fund contribution to the agricultural staff, gratuity paid to the agricultural staff, and 1/3rd gratuity paid to the head office staff without apportioning the same between the expenditure as attributable to the agricultural activities and those attributable to business activities, in computing the total income of the assessee-company for the assessment years 1962-63 to 1966-67?"

The assessee-company owns a sugar mill. It also owns sugar farms and grows sugarcane. Its business is that of manufacture of sugar involving activities which are partly agricultural and partly non-agricultural. The proceedings relate to assessment years 1962-63 to 1966-67 (both inclusive). The assessee, inter alia, claimed deduction in respect of bonus, amount of provident fund contribution and gratuity paid to agricultural staff and workmen. It also claimed deduction in respect of gratuity paid to the head office staff. According to die ITO, bonus, provident fund contribution and gratuity paid to agricultural staff and workmen was related to the agricultural activity of the assessee and no part of it was allowable against its business income as deduction. So far as gratuity paid to the head office staff was concerned, he apportioned the payment attributable to agricultural and non-agricultural activities and disallowed 1/3 of the amount paid as deduction against business income.

The AAC confirmed the disallowances made by the ITO before the Tribunal, the assessee relied on this Court''s decisions in Commissioner of Income Tax Bombay City I Vs. Maharashtra Sugar Mills Ltd., , Walchandnagar Industries Ltd. Vs. Commissioner of Income Tax, Bombay City I, , and the Madhya Pradesh High Court decision in The Commissioner of Income Tax, M.P., Nagpur and Bhandara, Nagpur Vs. Bhopal Sugar Industries Ltd., Sehore, , and stated that it had to pay bonus, provident fund and gratuity to the agricultural staff and workmen not in the capacity of an agriculturist but in its capacity as an owner of industry and, therefore, the expenditure should have been allowed as deduction. For reasons given in paragraphs 4 and 5 of its order, the Tribunal accepted the assessee''s claim except in respect of gratuity paid to the head office staff.

Shri Jetley, the learned counsel for the department, submitted that the assessee- company was carrying on agricultural activity as well as running an industry in so far as it was manufacturing sugar from the sugarcane. The cost of sugarcane in the hands of the assessee was taken to be the cost of growing sugarcane as well as all other expenses incurred in connection therewith. Income arising from such an activity was treated as agricultural income and was liable to agricultural income tax. A part of that expenditure could not also be allowed as deduction while computing the assessee-company''s business income. As regards the decisions relied upon by the Tribunal, Shri Jetley stated that the expenses involved in those cases were expenses which were paid to the staff mainly engaged in the industry and/or was interest paid on money borrowed for the purpose of the assessee''s composite activity.

In the present case, it was pointed out, the payments in question were made to the staff and workers employed exclusively for the agricultural activity. Shri Jetley, thus, submitted that the allowance of the assessee''s claim was not justified.

Shri Inamdar, the learned counsel for the assessee, on the other hand, stated that the agricultural staff and workmen were not entitled to bonus as such. In this case they were entitled to bonus only because the assessee was not merely an agriculturist but was also an industrialist. In support of the proposition, Shri Inamdar reiterated his reliance on the Supreme Court decision in the case of Harinagar Cane Farm v. State of Bihar [1963] I ILJ 692, and the Madras High Court decision in Thiru Arooram Sugars Ltd. v. Industrial Tribunal [1970] II ILJ 249. He argued that what was applicable to ''bonus'' would be equally applicable to provident fund and the gratuity. It was, Jiowever, admitted that the salary paid to the agricultural staff and workmen was neither claimed nor allowed as deduction.

In our judgment, Shri Jetley''s submission as regards payment of bonus is without any merit. The Supreme Court in Harinagar Cane Farm''s case (supra) and the Madras High Court in Thiru Arooram Sugars Ltd.''s case (supra), admittedly, held that sugar mill which owns a farm and cultivates sugarcane is an industry and is, therefore, liable to pay bonus to its agricultural staff. The Tribunal has, on that basis, given a finding in paragraph 4 of its order to the effect, viz., that the assessee-company constitutes an industry, for that reason the workers were entitled to bonus, and as such the claim of the assessee to deduct amounts paid as bonus even to the agricultural staff and workmen was an allowable expenditure. Accordingly, we are in agreement with the Tribunal that but for the fact that the assessee was an industry, the assessee would not have been liable to pay bonus to the agricultural staff and workmen. The payment having been made in the capacity as owner of industry as distinct from owner of a agricultural farm, the same was, therefore, clearly allowable. Accordingly, the first question is answered in the affirmative and in favour of the assessee. However, this cannot be said about the provident fund contribution and gratuity paid to the agricultural staff. No decision has been brought to our notice where it has been held that these payments were also made by the assessee-company in the capacity of owner of industry and not as owner of agricultural farm. It is true that the Tribunal has followed the Madhya Pradesh High Court decision in the case of Bhopal Sugar Industries Ltd. (supra) in which there are observations which suggest that expenses of this type could also be allowed as deduction against business income. It is, however, seen that the Madhya Pradesh High Court, in that case, followed this Court''s decision in the case of Maharashtra Sugar Mills Ltd. (supra). In this Court''s decision, there are no such observations. Moreover, there is no reason given in the judgment for holding that other expenses like provident fund contribution and gratuity paid to the agricultural staff should also stand on the same footing as bonus. There is no such finding given by the Tribunal.

As regards the disallowance of one-third of the amount of gratuity paid to the head office staff, it is pertinent to mention that by similarly apportioning other overhead expenses like interest, bonus and provident fund contribution to the head office staff, the ITO had disallowed one-third of the expenses as pertaining to agricultural activities of the assessee. The disallowances were deleted by the AAC himself. Against that part of the AAC''s order the department had came up in appeal before the Tribunal which was dismissed. The department had not challenged the deletion of other overhead expenses in full by raising a question of law. Apart from the fact that in view of this Court''s decision in Maharashtra Sugar Mills Ltd.''s case (supra). There is no provision justifying disallowance of a part of the expenditure by apportioning it in the manner it was done, the very fact that the department had not challenged deletion of other overhead expenses made in similar circumstances shows that there is no merit whatsoever in this part of the question raised at the instance of the department.

Accordingly, the second question also requires to be and is answered in the negative and in favour of the revenue. No order as to costs.