2000 (2) TMI 5 - SC - Income Tax

Expenditure for one indivisible business fully deductible despite exempt receipts; apportionment under s.37(1) unjustified principle affirmed

Rajasthan State Warehousing Corporation Versus Commissioner of Income-Tax

The SC held that the disallowance was not for non-compliance with s.37(1) but because the expenditure was incurred in earning exempt income; where an ... Deduction of expenditure u/s 37 - non-compliance of requirements of s. 37(1) - Business of the assessee being one and indivisible - expenditure incurred on an activity from which income was exempted - HELD THAT:- The disallowance of the expenditure was not for non-compliance of requirements of s. 37(1) of the Act but for the reason that the expenditure was incurred on an activity from which income was exempted under the Act. A similar question arose in the case of CIT vs. Indian Bank Ltd. [1964 (10) TMI 14 - SUPREME COURT]. In case the respondent-assessee, in the course of its business, borrowed moneys for investment in securities, part of its income derived from securities was exempt under the IT Act, 1922 (for short 'the Act of 1922'). It sought to deduct the interest paid on the entire borrowed amount. The question before this Court was whether a portion of the interest, which was referable to investment on securities from which income was exempt, was allowable. Sec. 10(2)(iii) and (xv) of the Act of 1922, was precursor of s. 37(1) of the Act, It was held by this Court that in allowing a deduction which was permissible one need not look beyond the expenditure to see whether it had the quality of directly or indirectly producing taxable income and, therefore, there was no warrant for disallowing a proportionate part of the interest referable to money borrowed for the purchase of securities yielding tax-free interest. In view of the above discussion, the following principles may be laid down : (i) if income of an assessee is derived from various heads of income, he is entitled to claim deduction permissible under the respective head whether or not computation under each head results in taxable income ; (ii) if income of an assessee arises under any of the heads of income but from different items e.g., different house properties or different securities, etc., and income from one or more items alone is taxable whereas income from the other item is exempt under the Act, the entire permissible expenditure in earning the income from that head is deductible ; and (iii) in computing 'profits and gains of business or profession' when an assessee is carrying on business in various ventures and some among them yield taxable income and the other do not, the question of allowability of the expenditure under s. 37 of the Act will depend on : (a) fulfilment of requirements of that provision noted above, and (b) on the fact whether all the ventures carried on by him constituted one indivisible business or not, if they do the entire expenditure will be a permissible deduction but if they do not the principle of apportionment of the expenditure will apply because there will be no nexus between the expenditure attributable to the venture not forming integral part of the business and the expenditure sought to be deducted as the business expenditure of the assessee. We cannot accede to the contention of the learned counsel inasmuch as a plain reading of the question itself shows that it embodies---' the business of the assessee being one and indivisible'. This being the position, it is not open to the Revenue to contend that the business is not one and indivisible. In view of the fact that a perusal of the question itself discloses that income from various ventures is earned in the course of one and indivisible business, the impugned order upholding the apportionment of the expenditure and allowing deduction of only that proportion of it which is referable to taxable income, is unsustainable. Issues:Interpretation of Section 37(1) of the Income Tax Act, 1961 regarding deduction of expenditure for business income; Apportionment of expenditure between taxable and non-taxable income in the context of one and indivisible business.Analysis:Issue 1: Interpretation of Section 37(1) of the Income Tax Act, 1961The case involved a State Government Corporation claiming deduction of expenditure under Section 37 of the Income Tax Act, 1961. The corporation derived income from various sources including interest, letting out warehouses, and administrative charges. The Income Tax Officer (ITO) disallowed a portion of the expenditure attributable to non-taxable income under Section 10(29) of the Act. The CIT(A) allowed the entire expenditure, but the Tribunal upheld the ITO's decision. The High Court confirmed the Tribunal's order, leading to the appeal before the Supreme Court.Issue 2: Apportionment of Expenditure in One and Indivisible BusinessThe main contention revolved around whether the expenditure should be apportioned between taxable and non-taxable income or allowed in entirety. The appellant argued that the entire expenditure should be deductible based on judgments from the Supreme Court and High Courts. The Revenue contended that expenditure related to exempted income is not permissible for deduction.Judicial Precedents and Interpretation of Section 37(1)The appellant relied on judgments emphasizing that if income arises from various sources or ventures, the entire permissible expenditure should be deductible. The courts examined whether the business activities were indivisible to determine the deductibility of expenditure. The Supreme Court discussed the principles to be followed in cases where income is derived from different sources within one business entity.Decision and RationaleThe Supreme Court held that if income is earned from one and indivisible business, apportionment of expenditure between taxable and non-taxable income is not valid. The court emphasized that the nature of the business being one and indivisible was crucial in determining the deductibility of expenditure. As the question itself indicated the business as one and indivisible, the Revenue's argument against indivisibility was rejected. Therefore, the court ruled in favor of the appellant, setting aside the previous order and allowing the appeal with costs.In conclusion, the judgment clarified the interpretation of Section 37(1) of the Income Tax Act, 1961 and provided guidance on apportioning expenditure in cases of one and indivisible businesses, ensuring consistency in the treatment of deductible expenses for taxable and non-taxable income within such entities.