Holding

The activities are distinct businesses and the managing agency commission must be apportioned proportionally; the Tribunal's findings are upheld.

Summary

Waterfall Estates Ltd., a public limited company engaged in tea and coffee estates, incurred a managing agency commission. Until AY 1963-64 it allocated head‑office expenses, including the commission, proportionally among wholly taxable, partially taxable and wholly exempt income. From AY 1964-65 it treated all activities as a single integrated business and claimed the entire commission as a deduction against tea income. The Income Tax Appellate Tribunal held that the various estates and curing works were distinct businesses and that the commission must be apportioned according to the expenditure incurred on each activity; the High Court affirmed this view. On reference under Section 256(1), the Supreme Court reiterated that the question of whether activities constitute a single integrated business is a factual determination requiring an overall view of all relevant circumstances, and that the Tribunal's finding of distinct activities was supported by other relevant facts. Consequently, the Court dismissed the appeals, confirming that the managing agency commission is not fully allowable as a deduction and must be allocated proportionally.

Issues considered

Whether the managing agency commission claimed by Waterfall Estates Ltd. is allowable as a deduction for the assessment year 1965-66 under the ratio of the decision in 82 ITR 452.
Whether the various lines of activity (tea estate, coffee estate, coffee curing, plantation, etc.) constitute one single integrated activity or distinct businesses.
Whether the managing agency commission must be allocated to the various sources of income in proportion to the expenditure incurred on each activity.

Legislation cited

Income Tax Act, 1922s. 24(2)
Income Tax Act, 1961s. 256(1), s. 28, s. 37(1)

Subjects

Income TaxManaging Agency CommissionAllocation of ExpensesDistinct Business ActivitiesIntegrated Business TestSection 37 DeductionAssessment YearTax Tribunal Findings

Judgment

M/S. WATERFALL ESTATES LTD., MADRAS A
v.
THE COMMISSIONER OF INCOME-TAX,
TAMIL NADU I, MADRAS

APRIL 10, 1996
B
[B.P. JEEVAN REDDY ANDS. SAGHIR AHMAD, JJ.]

Income Tax Act, 1961: Sections 28 and 37(1).

lnconie Tax-Assessnient year 1964-6~Business expenditure-- C
Managing agency commission-Apportioning of between three categ01ies of
income-Wlwlly taxable, pa1tially taxable (from tea estates) and wholly ex-
empted (from coffee estates )-In proportion to expenditure incwred on
respective activities-Assessment year 1968-69-Assessee deducted managing
agency commission from total income-Held : Income Tax Appellate
Tiibunal rightly held managing agency commission not an allowable deduc- D
tio1t--1he Tribunal was justified in directing allocation of managing agency
comn1ission to each category of income in proportion to expenditure incurred.

Incon1e T~usiness-Single or several-Test to detennine-<Jne or
two i"elevant circumstances-Relied on-By Income Tax Appellate Tribunal E
to anive at conclusion-Existence of other relevant circunzstances which
sustained finding by Tribunal-Held : no single test could be treated as
universal and conclusive-All relevant facts to be taken into considera-
tion-Hence, niere fact that it also relied on one or two in·elevant circunistan-
ces did not waJ?"ant inteiference with its finding.
F
The appellant-assessee was a public limited company. Its income was
derived from tea and coffee during works. It had appointed another limited
company as its Managing Agent. Until the assessment year 1963-64, the asses-
see used work out the net income from taxable and non taxable sources
separately without taking into account head office expenses including Manag- G
ing Agency Commission between the three categories of income viz., wholly
taxable income, partially taxable income (from the tea estates) and wholly
exempted income (from the coffee estate) in the proportion of the expenditure
incurred on respective activities. With effect from Assessment year 1%4-65,
however the assessee changed its method of arriving at net income. It worked
out its taxable income from Tea business on account of managing agency H
. 141
142 SUPREME COURT REPORTS [1996] SUPP. 1 S.C.R.

A commission. For the Assessment Year 1968-69, tlie assessee sought to treat
its various activities as one single activity and deduct various expenses on
that footing. The Income Tax Appellate Tribunal held that the method of
accounting adopted by the assessee until the Assessment Year 1964-65 was
the proper one and that proper allocation of the managing agency commis-
sion was called for in proportion to the expenditure incurred on those
B activities. The Tribunal concluded that for the Assessment Year 1965-66 the
several activities carried on by the assessee constituted separate and dis-
tinct activities. The decision of the Tribunal was upheld by the High Court.
Thereupon the asses see obtained the reference under Section 256(1) of
Income Tax Act, 1961.
c On behalf of the assessee it was contended that some of the tests
applied by the Tribunal were erroneous, which had vitiated its findings; and
that the circumstance that closure of one unit would not affect the activities
of the other units and the fact that the several units were acquired at
different points of time, were irrelevant.
D
Answering the reference against the assessee, this Court

HELD : 1.1. The question as to whether the activities carried on by the
appellant-assessee constituted one single integrated activity or they repre-
sented distinct businesses, is essentially one of tact. No single test can be
E devised as universal and conclusive. The question has to be decided on a
consideration of all the relevant facts and circumstances. Some facts may tend
one way and some others the other way. An overall view has to be taken and a
conclusion arrived at. Even if it is found that one or two circumstances among
the several circumstances relied upon are not relevant, the finding of fact
recorded by the Tribunal cannot be interfered with if there are other relevant
F
circumstances which sustain the finding. [145-B·C; 147-A]

1.2. Jn the present case, there number of other factors - apart from
what are pointed out as irrelevant (assuming for the sake of argument that
they are irrelevant) - to support the finding of the Tribunal. [147-B]
G
Meenakshi Mills v. CIT, 31 ITR 88, relied on.

CIT v. Maharashtra Sugar Mills Ltd., (1968) 68 ITR 512, referred tc.

CIT, Bombay City v.Maharashtra Sugar Mills Ltd., (1971) 82 ITR, 452;
H CIT Madras v. Prithivi Insurance Co. Ltd. (1967) 63 ITR 632; Produce
WATERFALL ESTATES LTD. v. C.i.T. [JEEVAN REDDY,J.] 143

Exchange Corporation Ltd. v. CIT (Central), Calcutta, (1970) 77 ITR 739; A
Standard Refinery and Distille1y Ltd. v' CIT (Central), Calcutta, (1971) 79 ITR
589; B.R. Ltd. v. V.P. Gupta, CIT, Bombay, (1978) 113 ITR 647 and CIT
Madras v. !11dia11 Bank Ltd., (1965) 56 ITR 77. held inapplicable.

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 6108 of
1983 Etc. B

, . From the Judgment and Order dated 7.1.80 of the Madras High
Court in T.C. No. 345 and 346 of 1976.

T.A. Ramachandran and Ms. Janki Ramachandran for the Appel-
lant. c
Dr. V. Gaurishankar, S.N. Terdol and S. Rajappa for the Respon-
dents.

The Judgment of the Court was delivered by
D
B.P. JEEVAN REDDY, J. This batch of appeals preferred against the
Judgment of the Madras High Court raises a common question. The
assessec is the same in all the appeals; only the assessment years are
different. The following three questions were referred for the opinion of
the High Court under Section 256(1) of the Income Tax Act. E
"(1) Whether on the facts and in the circumstances of the case the
conclusion of the Appellate Tribunal that the entire managing
agency commission claimed and shown in the accounts was not
allowable as a deduction for the assessment year 1965-66 as per
the ratio of the decision in 82 I.T.R. 452(SC) is valid in law? F

(2) \Vhether on the facts and in the circu1nstances of the case the
decision of the Appellate Tribunal that for the assessment year
1965-66 the various lines of activity like tea estate, coffee estate,
coffee curing, plantation etc., did not constitute one single and G
integrated activity or business but independent units of business,
is a correct inference on the facts found and valid in law?

(3) Whether on the facts and in the circumstances of the case the
Appellate Tribunal was justified in its conclusion that the Manag-
ing agency commission had to be allocated in accordance with the H
144 SUPREME COURT REPORTS [1996] SUPP. 1 S.C.R.

A directions given by the Appellate Tribun*l in para 39 of its order,
by allocating the same to the various sources of income vis., tea,
coffee, coffee curing works and so 00? 11

The assessment years concerned are 1964-65 to 1969-70.

B
The appellant is a Public Limited Company. Its income is derived
from tea and coffee estate and coffee curing works. Its tea and coffee
estates arc located at different places. It owns ei<tensive forest lands and
one of the estates contains cardomam and orange plantations. It acquired
other estates during the accounting year relevant to assessment year 1967-
c 68. The a"essee-company was managed by the Managing Agerits Mis.
Kothari Mehta and Company Limited. They were appointed for a period
of twenty years with effect from 1.1.1955 under an agreement dated March
23, 1950. There was a further agreement on March 17, 1960 and another
on October 6, 1965 - practically in same terms. Until the assessment year
D 1963-64, the appellant used to work out the net ~ncome from taxable and
non taxable sources separately without taking into account head office
expenses and then apportion the head office expenses including Managing
Agency Commission between the three categories of income viz., wholly
taxable income, partially taxable income (from the tea estates) and wholly
exempted income (from the coffee estates) in the proportion of the expen-
E diture incurred on respective activities. With effect from Assessment Year
1964-65, however, the assessee changed its method of arriving at net
income. It worked out its taxable income from iea business by deducting
10% of the total profits from Tea business on account of managing agency
commission. The method of accounting adopted by it has been set out in
F detail in the statement of the case and the judb'lllent of the High Court
which we do not think it necessary to reproduce here. For the nei<t three
assessment years also, the assessec followed the same method of arriving
at its net income. For the Assessment year 1968-69, it adopted a different
method again which too has been set out in detail in the judgment of the
High Court. It claimed the whole of the managing agency commission
G against incon1e from tea. All this was done, it appears, drawing inspiration
from the decision of the Bombay High Court in Commissioner of Income
Tax v. Maharashtra Sugar Mills Limited, [1968] 68 l.T.R. 512. The Income
Tax Officer rejected the said change. On appeal, the Appellate Assistant
Commissioner upheld the assessee's claim which indeed had the effect of
H granting it relief more than asked for by it. The Revenue appealed to the
WATERFALL ESTATES LTD. v. C.l.T. [JEEVAN REDDY, J.] 145

Tribunal. The Tribunal held after an exhaustive consideration of the A
relevant facts and contentions that the method of accounting adopted by
the assessee until the Assessment Year 1964-65 was the proper one and
that proper allocation of the managing agency commission was called for
in proportion to the expenditure incurred on those activities. The matter
was remitted to Income Tax Officer to work out the details. Thereupon the
B
assessee applied for and obtained the reference under Section 256(1).

The issue arising from questions No. 1 and 2 in short depends upon
the answer to the question - whether the various activities being carried on
by the appellant-assessee constitute one single integrated activity or do they
represent distinct businesses. The question of this nature, it is evident, is c
essentially a question of fact. The statement of the case drawn up by the
Tribunal summarises its findings in the following manner. :

"(a) the various estates and the coffee curing works exist at dif-
ferent places and in so far as the assessee was concerned they were
acquired at different times. They are independent and closure of D
one would not affect the continuance of another;

(a) each estate has its own subsidiary accounts and is managed
locally although overall the head office controls all the estates and
maintains a single profit and loss account;
E
(c) there are separate staff for the various estates and even for tea
and coffee estates in Waterfall Estates separately;

( d) the various estates are far flung and not in one place; the
characters of the business ventures in the various estates are
different; F

(e) apart from the existence of a centralised management and head
office where a single set of final accounts is maintained there is
no evidence relating to inter-lacing, inter-connection and inter-de-
pendence of the various estates in the day-to-day affairs or of their G
functioning being dovetailed into one another."

It is on the basis of the above findings that the Tribunal held that the
several activities carried on by the appellant-assessee constitute separate
and distinct activities. On reference, the High Court has agreed with the
Tribunal and answered the said questions in favour of the Revenue and H
146 SUPREME COURT REPORTS (1996] SUPP.1 S.C.R.

A against the assessee. We are of the opinion that on the findings recorded
by the Tribunal, the High Court was justified in rejecting the assessee's
contention.

Sri Ramachandran learned counsel for th~ appellant, however, con-
tended that the some of the tests applied by t* Tribunal are erroneous,
B which has vitiated its finding. In particular, the learned counsel submitted
that the circumstance~ that closure of one unit would not affect the
activities of the other units is not at all a relevant consideration. Similarly,
the fact that the several units were acquired at different points of time is
said to be equally irrelevant. He strongly relied upon certain decisions
c including the decision of this Court in Commissioner of Income Tax,
Bombay City I v. Maharashtra Sugar Mills Limited, (1971) 82 I.T.R. 452 in
support of his contention.

So far as Maharashtra Sugar Mills is concerned the factual findings
D therein are entirely distinct and different. In that case it was found by the
Tribunal "that the cultivation of the sugarcane as well as the manufacture
of the sugar constitute one business" - and that finding was not challenged
by the Revenue before this Court. It was contended all the same that the
assessees business consisted of two distinct parts. It was this contention
which was rejected. The said decision is therefore clearly distinguishable
E in the light of the facts found in the present case. Mr. Ramachandran then
relied upon the decisions in Commissioner of In~ome-Tax, Madras v. Prithvi
Insurance Co. Ltd., (1967) 63 I.T.R. 632, Produce Exchange C01poration
Ltd. v. Commissioner of Income-Tax (Central), Calcutta, [1970] 77 I.T.R.
739, Standard Refinery and Distillery Ltd. v. Commissioner of Income-Tax
F (Ce1itral) Calcutta, (1971] 79 l.T.R. 589 and B.R. Ltd. v. V.P. Gupta,
Commissioner of Income-tax, Bombay, (1978) 113 I.T.R. 647. All the
decisions were rendered with reference to Section 24(2) of the Indian
Income Tax Act, 1922. The question in all these cases was whether the
business continued by the assessee in the relevant assessment years is the
very same business wherein loss was originally sustained within the meaning
G of Section 24(2). The question considered in these decbions is not the same
as concerned herein. The object of enquiry in both the cases is not
identical. We do not think it necessary to deal with the facts of each of the
decisions for the aforesaid reason and also because the said question is
essentially a question of fact. No single test can be devised as universal and
H conclusive. The question has to be decided on a consideration of all the
WATERFALL ESTATES LTD. v. C.l.T. [JEEVAN REDDY, J.] 147

relevant facts and circumstances. Some facts may tend one way and some A
others the other way. An overall view has to be taken and a conclusion
arrived at. Even if it is found that one or two circumstances among the
several circumstances relied upon are not relevant, the finding of fact
recorded by the Tribunal cannot be interfered with if there are other
relevant circumstances which sustain the finding, as held by this Court in
B
Meenakshi Mills v. Commissioner of Income Tax, 91 I.T.R. 88. In the
present case, there are number of other factors - apart from what are
pointed out as irrelevant (assuming for the sake of argument that they are
irrelevant) - to support the finding of the Tribunal.

Mr. Rarnachandran also relied upon the decision in Commissioner C
of Income-Tax, Madras v. Indian Bank Limited, [1965] 56 I.T.R. 77. The
appellant therein was a banking company, which invested, in the course of
its business, a large sum in securities including securities the interest from
which was exempt from tax. While computing the business income of the
assessee, profits and losses on the purchase and sale of all such securities
were duly taken into account. The contention of the Revenue was that D
where a part of the profits of a business is not taxable, the expenditure
incurred for earning those profits cannot be allowed as deduction. It was
accordingly submitted that interest on monies borrowed from various
depositers should be proportionately disallowed keeping in view the
amounts invested in non-taxable securities. This argument was rejected E
with reference to and on the basis of Section 10(2)(xv) of the 1992 Act
(corresponding to Section 37 of the present Act). We are unable to see
how this decision helps the assessee on the question.at issue.

Once we answer the questions 1 and 2 against the assessee it is
agreed, the third question does not really present any differently. It too has F
lo be answered against the assessee.

For all the above reasons the appeals fail and are dismissed. No
costs.

v.s.s. Appeals dismissed. G