COMMISSIONER OF INCOME TAX Vs. MANJUSHREE PLANTATIONS LIMITED

JUDGEMENT

(1.) THE following questions of law have been referred by the Tribunal under Section 256(2) of the I.T. Act, 1961 in compliance with the directions of this court:

(2.) WHETHER the Tribunal was also right in holding that the managing agency remuneration payable by the company should be allocated to tea and coffee on the basis of profits from tea and coffee and if there are losses from coffee estates and profits from tea estates the entire managing agency remuneration should be allocated to tea?"

(3.) THE above rule contemplates, so far as this State is concerned, taking the receipts of a composite estate consisting of coffee and tea plantations. From out of the receipts from the tea plantations, the expenditure relating to the operations regarding tea will be separately allocated, and the balance of the income from the tea plantations will be arrived at. Similar would be the case with coffee. While deducting the expenses mentioned above, the general overhead expenses and the managing agency remuneration will not be taken into account. THE overhead expenses and the managing agency remuneration will thereafter be allocated between the two in proportion to the respective incomes. It is this rule that was applied by the Tribunal on the ground that the State Legislature had adopted this as the basis, and that there was no reason why the same basis should not be adopted for purposes of assessment under the Central Income-tax Act. THE adoption of the rule enacted under the State Act would in a way provide against any double allowance in a composite estate. For instance, if any other basis than the proportionate income method is adopted, then the result would be that the assessee may get a larger allowance under the Central Act on the basis of proportionate expenditure than what is due under Rule 9 extracted above with the result that the deduction under the two Acts may exceed the total expenditure or he may get a smaller allowance under the Central Act than what is due under the Act, if the expenditure under tea happened to be less than in respect of coffee. THE consequence will be that the assessee would have paid tax on a larger amount or would have paid tax on a smaller amount, as the case may be, taking into account the extent of expenditure which may even be manipulated in any particular year. In the case of general overhead expenses and the managing agency remuneration, it is not possible to allocate the same by restricting it to any particular activity as direct expenditure. Such expenditure has necessarily to be allocated on the. basis of some formula. THE best formula will be one that is of universal application and is also easy to compute. In other words, it should not be complicated. Considered in this manner, the expenditure method which is suggested by the revenue would not be a proper one. For instance, between two estates, one estate may be in a position to get away with a smaller wage bill than the other which, because of certain circumstances, namely, labour being more vociferous, had to pay a larger amount of salaries and wages. In such an event, the allocation would be different. THE net receipts, if taken into account, would avoid any such fluctuation on the basis of the difference existing between the two estates. Further, all the expenses are incurred only to get the receipts, and should thus be linked to the net receipts. . In the case of commodities like coffee and tea the prices realised, though they may fluctuate in each year, will still have the same kind of uniformity throughout the country or at any rate throughout a particular State, depending upon the quality of the products and the demand for them. In such a case, we consider that the more equitable method is to take the income, that is, the receipts minus other expenditure, and then allocate the overhead expenses.