Holding

When the assessee's various ventures form one indivisible business, the entire expenditure laid out for that business is deductible under Section 37, irrespective of the proportion of exempt income.

Summary

The Rajasthan State Warehousing Corporation (appellant) earned income in AY 1977-78 from interest, warehouse rentals and administrative charges, part of which was exempt under Section 10(29) of the Income Tax Act, 1961. It claimed a full deduction of its business expenditure under Section 37, but the assessing officer allowed only the portion attributable to taxable income, disallowing the rest. The Commissioner of Income Tax upheld the full deduction, but the Income Tax Appellate Tribunal and the Rajasthan High Court affirmed the officer’s apportionment. The Supreme Court examined whether, when a business is one and indivisible, the entire expenditure can be deducted even if part of the income is exempt. Relying on earlier decisions (Indian Bank Ltd., Maharashtra Sugar Mills, Punjab State Co‑operative Supply), the Court held that if the ventures constitute a single indivisible business, the whole expenditure is deductible and apportionment is impermissible. Consequently, the Court set aside the High Court order, allowed the appeal, and directed that the entire expenditure be allowed as a deduction.

Issues considered

Whether expenditure incurred in a business that yields both taxable and exempt income can be fully deducted under Section 37 when the business is one and indivisible.
Whether the principle of apportionment of expenditure applies when the assessee's ventures constitute a single indivisible business.

Legislation cited

Income Tax Act, 1961s. 10(29), s. 256(1), s. 37

Subjects

Section 37business expenditure deductionexempt incomeindivisible businessapportionment of expenditureIncome Tax Act 1961Rajasthan State Warehousing Corporation

Judgment

RAJASTHAN STATE WAREHOCSING CORPORATION A
v.
COMMISSIONER OF INCOME TAX

FEBRUARY 23, 2000

(D.P. WADHWA AND S.S.M. QUADRI, JJ.] B

Income Tax:

Income Tax Act 1961:

Section 37-Business expenditure-Deductibility of-A Y 1977-
c
7ErAssessee's bu#ness was one and indivisible and part of its income was
exempt from income tax under S.10(29)-Held : The entire expenditure is
deductible and not only that propo1tion of it which is referable to the taxable
income.
D
The appellant-assessee, a State Government Corporation, derived its
income in is assessment year 1977-78 from interest, letting out the
warehouses and administrative charges for procurement of foodgrains
while working for the Food Corporation of India as well as the State Govern·
ment. The business of the assessee was one and indivisible. The assessee
claimed deduction of expenditure under Section 37 of the Income Tax Act, E
1961 in computing its income under the head 'profits and gains of business
or profession'. The Income Tax Officer allowed only so much of the expendi-
ture as could be allocated to the taxable income and disallowed the rest of it
which was referable to the non-taxable income, being exempt under Section
10(29) of the Act. The Commissioner oflncome Tax accepted the claim of the
F
assessee but the Income Tax Appellate Tribunal allowed the Revenue's ap-
peal. The High Court confirmed the order of the Tribunal. Hence this ap·
peal.

Allowing the appeal, this Court
G
HELD : 1. The following principles may be laid down on the basis of
settled legal petition :

(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. (1118-H] •. H
1113
1114 SUPREME COURT REPORTS [20GOJ l S.C.R.
A (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
focome from the other item is exempt under the Income Tax Act, 1961, the
entire permissible expenditure in earning the income from that head is
deductible; and (1118-H]
B
(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 income and the others do not, the question of allowability of the
expenditure under Section 37 of the Act, will depend on (a) fulfillment of
C requirements of that provision; 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 permissible deduction but if they do not the
principle of appointment of the expenditure will apply. (1119-B]

CIT v. Indian Bank Ltd., 56 ITR 77 (SC) and CIT v. Maharashtra
D Sugar Mills Ltd., 87 ITR 452 (SC), relied on.
Punjab State Co-operative Supply a11d Marketi11g Federatio11 Ltd. v.
CIT, 128 ITR 189 (P & H), approved.

Wateifall Estates Ltd. v. CIT, 131 ITR 207 (Mad.) and Wateifall
E Estates Ltd. v. ClT, 219 ITR 563 (SC), held inapplicable.

2. In view of the above, the impugned order upholding the apportion·
ment of the expenditure and allowing deduction of only that proportion of
it which is referable to the taxable income, is unsustainable.

F CIVIL APPELLATE JCRISDICTION : Civil Appeal No. 4049 of
1994.

From the Judgment and Order dated 9.11.93 of the Rajasthan High
Court in D.B.l.T.R. No. 86 of 1987.
G C.S. Vaidyanathan, Additional Solicitor General, Ashok Desai, Dr.
V. Gauri Shanker, Dr. D.P. Pal, Joseph Vellapally, K.N. Shukla, Pallav
Shishodia, A.P. Medh, Ms. Priya Hingorani, B.K. Prasad, S.N. Terdol, S.
Rajappa, Ms. Hemantika Wahi, N.L. Garg, C.V. Sobba Rao, Ranbir
Chandra, Ms. Sumita Hazarika, S.K. Dwivedi, Tarun Gulati, Hemant
H Sharma, Arvind Kr. Sharma and (Mrs. Sushma Suri) (NP) for the appear-
R.AJ~i'HAJ"lj S'IA'n::. WAREHOU~ING CORPN. ~- CJ.T. ~s s. MOHAMMED QUAD RI, J.j 1115

ing parties. A
The Judgment of the Court was delivered by

SYED SHAH ~IOHAMMED Ql:ADRI, J. This appeal arises from
the judgment and order of the Division Bench of the High Court of
Judicatun: for Rajasthan Bench at Jaipur in Income-tax Rderem:;e No.86 B
of 1987 dated November 9, 1993. The assessee is the appellant.

By the order undt:r challenge the High Court answered the following
qnt.:stion, reforred to it under Section 256(1) of the Income Tax Act, 1961
(for short 'the Act'), in the affirmative, that is, in favour of the Revenue
and against the assessee:
c
"Whether on the facts and in the circumstances of the case and
the business of the assessee being one and indivisible, the Tribunal
was right in law in holding that the expenses have to allocated in
the same pt:rcentagc as the different sources of income and are D
not to be allowed in entirety as allowed by the Commissioner of
lncom<:-tax (A) after following decisions noted in para U of the
order dated 31.01.1985 for the asst:ssment years 1974-75, 1975-76
and 1980-81 ?"

In the assessment year 1977-78 the appellant, a State Government E
Corporation, derived its income from interest, letting out the warehouses
and administrative;: charges for procun:m<:nt of foodgrains while working
for th<: Food Corporation of India as wdl as the State Government. It
claimt:d deduction of expenditun: of Rs. 38,13,555.17 under Section 37 of
the Act in computing its income under the head 'profits and gains of F
business or profession'. The Income Tax Officer allowed only so much of
the expenditurt: as could be allocated to tht: taxable income and disallowed
the rest of it which was referable to the non-taxable income, being exempt
under Section 10(29) of the Act. On appeal, the Commissioner of Income
Tax (Appeals)-II accepted the claim of the appellant that the entire
expenditure was deductible. The Re::venut:'s appeal therefrom to the In- G
come-tax Appellate Tribunal was allowed upholding the order of the
lncom<: Tax Officer on July 17, 1986. At the instance of the appellant the
question noted above was referred to the High Court. By order under
challenge the High Court confirmed the order of the lncome··tax Appellate
Tribunal. Hence:: this appeal. H
1116 SUPREME COURT REPORTS (2000] 1 S.C.R.

A Mr. Joseph Vellapally, learned senior counsel appearing for the
appellant, relied on the judgments of this Court in Commissioner of In-
come-tax, Madras v. Indian Bank Ltd., 56 ITR 77, Commissioner of Income-
tax, Bombay City I v. Maharashtra Sugar Mills Ltd., 82 ITR 452 and of
Punjab and flaryana High Court in Punjab State Co-operative Supply and
Marketing Federation Ltd. v. Commissioner of Income-tax, Patiala~I, 128
B ITR 189 in support of his contention that the order of the High Court is
unsustainable.

The contention of Mr. K.N. Shukla, learned senior counsel appearing
for the Revenue, is that the expenditure which is attributable to the
c exempted income is not a permissible deduction and it has been rightly
disallowed by the High Court.

To appreciate the contentions of the learned counsel it may be useful
to refer to Section 37(1) of the Act:

D '37. General. - (1) Any expenditure (not being expenditure of the
natun: described in Sections 30 to 36 * * * and not being in the
nature of capital expenditure or personal expenses of the assessee),
laid out or expendtd wholly and exclusively for the purposes of
the business or profession shall be allowed in computing the
income chargeable under the head "Profits and gains of business
E
or profession".

A plain reading of the above provision makes it clear that it is a
residuary provision and allows an expenditure, not covered under Sections
30 to 36, in computing the income chargeable under the head "profits and
F gains of business or profession'', provided its other requiremt:nts are satis-
fied. They are : (i) the expenditure should not be in the nature of capital
expenditure or personal expenses of the assessee; (ii) it should have been
laid out or expended wholly and exclusively for the purposes of the business
or profession; and (iii) it should have been expended in the previous year.
G The disallowance of the expenditure was not for non-compliance of
requirement5 of Section 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 Indian Bank Limited
(supra). In that case the respondent-assessee, in the course of its business,
H borrowed moneys for investment in securities. Part of its income, derived
RAJASfHAN STATE WAREHOUSINGCORPN. '- C.l.T. [S.S. MOHAMMED QUADRl,J.J 1117

from securities, was exempt under the Income Tax Act, 1922 (for short 'the A
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. Section 10(2)(iii) and (xv) of the Act of 1922,
was precursor of Section 37(1) of the Act. It was held by this Court that B
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 disal-
lowing a proportionate part of the interest referable to money borrowed
for the purchase of securities yielding tax free interest.
c
That judgment was followed in the case of Maharashtra Sugar Mills
Ltd. (supra). There the assessee-company was manufacturing sugar in its
factory and was also growing sugar-cane for purposes of its factory. On the
question of deduction of expenditure, so much of the managing agency
commission which was referable to the growing of sugar-cane, was disal- D
lowed on the ground that the income from sugar-cane cuitivation was
agricultural income and not exigible to tax. The Appellate Tribunal found
that the cultivation of sugar-cane and the manufacture of sugar by the
assessee constituted one single and indivisible business. It was held by this
Court that the entire managing agency commission was laid out for the
purpose of the business carried on by the assessee and was allowable under E
Section 10(2)(xv) of the Act of 1922 and that the fact that the income from
growing of sugar-cane, a part of that business was not taxable under the
Act, was not a relevant circumstance.

The third case cited by Mr. Vellapally is of Punjab and Haryana High F
Court in Punjab State Co-operative Supply and Marketing Federation Ltd.
case (supra). The judgment in that case shows that on the question of
apportionment of the expenditure, with reference to the activity which
yielded income and with reference to the activity which did not yield
income, the High Court, taking note of the finding recorded by the
Tribunal that the business of the assessee was one and indivisible and G
following the aforesaid decisions of this Court, held that the entire expen-
diture incurred by the assessee was deductible.

Mr. Shukla, however, placed reliance on the judgment of the Division
Bench of the Madras High Court in Waterfall Estates Ltd. v. Commissioner H
1118 SUPREME COURT REPORTS \2000] 1 S.C.R.
A of bicome-tax, ,\,fadras (No. I), 131 lTR 207 which was affirmed by this
Court in Wateifall Estates Ltd. v. Commissioner of Income-tax, 219 ITR 563.
That was a case under Section 37(1) of the Act. The assessee in that case
was carrying on different ventures, profits from some of them were taxable
and from the other were exempt under the Act. In respect of the earlier
assessment years t:xpcnditure with reforence to each activity was worked
B out separately without claiming any expenditure referable to the head-of-
fice. In the assessment year 1965-66 the assesset: claimed deduction of the
entire expenditure including that relating to the head-office. The fmding
recorded by the Tribunal was that there was no proof that different
wntures constitukd the same business. On that finding the Tribunal took
c the view that thi.: apportionment of the expenditure was valid. The High
Court of Madras confirmed the order of the Tribunal and the same was
upheld by this Court. There, it is evident, the n::sult turned against the
asse::ssee due to absence of the finding of fact that diffon:nt ventures carried
on by it constituttd one indivisible business, which meant that there was
no nexus between the venture in question and the business comprising of
D
other ventures carried from the head office and therdore so much of the
expenditure incurred on the head office; which was attributable to that
venture was not a permissible deduction in computing profits of the busi-
ness. lndi.:ed, such expenditure:: does not properly fall within the meaning
of thi:: i::xpendituri:: 'laid out or i::xpende::d wholly and exclusively for the
E purposi.: of the busini::ss or profession'.

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
F income, ht: is e::ntitled 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 itt:ms e.g. different house proper-
G ties or diffen;nt 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 permissiblt: expenditurt: in
earning the income from that head is deductible; and

H (iii) in computing 'profits and gains of business or profession'
RAJASIHANS'rAIB WAREHOUSINGCOR!'N." C.cT. [s.S. ~OHAMMED QUADRI, J.J 1119

when an assessee is carrying on business in various ventures A
and some among them yield taxable income and the others
do not, the question of allowability of the expenditure under
Section 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 expendi-
B
ture 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 c
busintss expenditun: of the assessee.

Mr. Shukla has fairly conceded that if the exempted income and the
taxable income are earned from one and indivisible business then the
apportionmtnt of the expenditure cannot be sustained. But, submits the D
learned counsel, in this case the Tribunal did not record a finding that the
business of the assi:ssee is one indivisible, therefore, the apportionment of
the expenditure is valid. We are afraid, we cannot accede to the contention
of the learned counsel inasmuch as a plain reading of the question itself
show~ that it embodies -- "the busintss of the assessee being one and
indivisible". This bt:ing the position, it is not optn to the Rt:wnut to E
cont.ond that tht: busine~; is not one and mdivisible. In view of the fact that
a perusal of the qutstion itsi.;lf disclose; that income from various ventures
is earned in the course of one and indivisible business, the impugned ordtr
upholding the apportionment of the expenditure and allowing deduction of
only that proportion of it which is reforable to taxable income, is unsus- F
tainable.

We, the1 efore, answer the question in the negative, that is, in favour
of the assessee and against the Rtvenue. The order under appeal is
accordingly set aside and the appeal is allowed with costs. G

v.s.s. Appeal allowed.