Integrated business expenditure cannot be proportionately disallowed merely because part of the profits is exempt income.

A proportionate disallowance of managing agency commission was not justified where the remuneration was payable as a percentage of the company's net annual profits and related to the business as an integrated whole. The agricultural operations were treated as part of a composite commercial undertaking with the sugar business, so the expenditure was incurred for general management of the entire business rather than for a separable exempt activity. On that basis, business expenditure allowable under the taxing provision was not to be split merely because part of the profits arose from exempt agricultural income. The disallowance was therefore unsustainable and the issue was answered in favour of the assessee.

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Issues: Whether a proportionate part of the managing agency commission was disallowable on the ground that it was attributable to agricultural income which was outside the scope of taxable business income.

Analysis: The managing agency remuneration was payable as a percentage of the net annual profits of the company under the agreement governing the business as a whole. The agricultural operations were integrated with the sugar business, and the expenditure was incurred for the general management of the entire business. In such a situation, where the business was treated as a composite commercial undertaking, a proportionate disallowance of the commission merely because a part of the profits arose from exempt agricultural activity was not justified. The reasoning was consistent with the principle that business expenditure allowable under the taxing provision is not to be split up by reference to exempt income unless the statute or the facts require such apportionment.

Conclusion: The disallowance of Rs. 9,741 was not sustainable, and the question was answered in the negative in favour of the assessee.

Ratio Decidendi: Where a managing agency commission is incurred for the business as an integrated whole, and the business is not shown to be separable into distinct taxable and non-taxable undertakings, no proportionate disallowance can be made merely because part of the profits is exempt from tax.

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