Commissioner
of Income Tax Vs. Willamson Financial Services & Ors. [2007] Insc 1258 (12 December 2007)
S.H.
Kapadia & B. Sudershan Reddy
With
Civil Appeal No.1021 of 2006, Civil Appeal No.1825 of 2007, Civil Appeal
No.1827 of 2007, Civil Appeal No. 5827 of 2007 arising out of S.L.P.(C) No.2275
of 2007, Civil Appeal Nos.6719-20 of 2004 KAPADIA, J.
1.
Leave granted in S.L.P. (C) No.2275 of 2007.
2. The
intricate question which arises for determination in this batch of civil
appeals is at what stage Section 80HHC Deduction is to be allowed i.e. before
the 60 : 40 apportionment under Rule 8(1) or from 40% profits on sales taxable
as Business Income.
3.
Rule 8(1) of the said Rule provides that 40% of the composite income from sale
of tea, grown and manufactured, arrived at on making of the apportionment
shall be deemed to be income liable to tax.
4. Assessees
exported tea in the accounting year. They were entitled to deduction under
Section 80HHC of Income-tax Act, 1961 (for short, 1961 Act) in
respect of the export. They were in the business of growing and manufacturing
tea. Since they earned Composite Income, their case stood covered by Rule 8(1)
of Income-tax Rules, 1962 (1962 Rule for short).
5. For
the sake of convenience we state the facts occurring in Civil Appeal
No.3803-3808 of 2005- Commissioner of Income Tax v. Willamson Financial
Services & ors. In the returns, the assessee claimed Section 80HHC
Deduction against the entire Composite Income before application of Rule 8(1).
6.
This working was rejected by the A.O. who took the view that deduction under
Section 80HHC can be allowed after 60 : 40 apportionment as 40% income was
gross total income. However, in appeal, CIT (A) reversed the decision of the
A.O. by holding that the A.O. should have first granted Section 80HHC Deduction
against the entire tea income before applying Rule 8(1).
7. In
short, the controversy is : whether Section 80HHC Deduction is admissible
against the entire or part of the income from tea (i.e. 40%).
8.
Against the said decision of CIT(A) the matter was carried in appeal to the
Tribunal who took the view that A.O. was right in allowing Section 80HHC
Deduction only against part of the income from tea which was taxable under the
1961 Act, namely, 40% of the income. This view of the Tribunal stood reversed
by the impugned judgment of the High Court. Hence this civil appeal is filed by
the Department against the judgment of the Division Bench of the Guahati High
Court.
SUBMISSIONS
9. On
behalf of the assessees learned senior counsel submitted that Rule 8 of 1962
Rule which provides for computation of composite income is made under the power
conferred by section 295 of the 1961 Act and as such the said Rule has the
effect as if enacted in that Act. Further, the definition of agricultural
income is bound up with the Rules. Therefore, according to the learned
counsel, such composite income has to be computed in the first instance as if
it is income derived from business. The income has to be computed in accordance
with the provisions of the Act which deals with computation of business income
and, therefore, any deduction permissible under the 1961 Act is to be allowed
while computing the composite income which is treated as business income and,
therefore, deduction admissible under section 80HHC is to be computed on the
basis of the proportion which the export turnover bears to the total turnover,
which proportion is to be applied to the business profits to find out the
export profits derived from export business. According to the learned counsel,
when income is derived from profit computed under the head profits and
gains of business, all deductions and allowances are to be allowed and,
therefore, it is not possible to compute the profit of the business by allowing
only deduction and allowances, which fall under Chapter IV but all other
deductions although they do not appear in Chapter IV but in Chapter VIA, like
deductions under section 80HHC, have also to be allowed to compute business
profits in accordance with the provisions of the Act under the head
profits of the business.
According
to the learned counsel, if total profits from the sale of tea cultivated and
manufactured by the seller are to be included in the computation of business
profits, then, necessarily, any deduction allowed in respect of the profits
from tea export has also to be allowed in computing the business income. In
this connection, learned counsel placed reliance on the definition of
total income in section 2(45) and section 5 of the 1961 Act which defines
the scope of total income. According to learned counsel, business
income is one of the Heads of Income under Section 14 and such income is
included in the total income of an assessee. According to assessees, Section
80A, which is in Chapter VI-A, provides that in computing the total income,
there shall be allowed from gross total income, deductions specified in
sections 80C to 80U of the Act and, therefore, there is no difference between
deductions under Chapter IV and the deductions under Chapter VI-A. Therefore,
according to the learned counsel, in computing the total income, it is not
permissible to restrict the deduction under Chapter IV and not to allow
deduction under Chapter VI-A. In this connection reliance was placed by the
learned counsel on the judgment of this Court in the case of Cambay Electric
Supply Industrial Company Ltd. v. Commissioner of Income Tax (1978) 113 ITR 84
(SC) which had been approved by the Constitution Bench later on in the case of
Distributors (Baroda) Pvt. Ltd. v. Union of India and Ors. (1985) 155 ITR 120
(SC) in which it has been held that though a deduction does not appear in
Chapter IV, it has a direct impact upon the computation of income under the
head business profit and, therefore, even if the deduction does not
fall within the ambit of Sections 29 to 43A, still if the deduction directly
affects the computation of income under the head business profits then such
deduction has got to be taken into account. Placing reliance on the said
judgments, learned counsel submitted that the deduction admissible under
section 80HHC is one of the items of deduction appearing in Chapter VI-A which
has to be taken into account in computing the business income and, therefore,
section 80HHC is a part of the provisions relating to the computation of
business income under the 1961 Act.
Before
us, it was further submitted that the legal fiction under Rule 8 became
necessary because it was not possible for the ITO to assess an assessee, who
not only carries on business in selling tea but also grows green tea leaves by
agricultural process and manufactures black tea from the same. Because of the
said legal fiction, the entire sale proceeds is treated as business income and
is computed as such after giving all allowances and deductions admissible in
computation of business income and, therefore, according to the learned
counsel, while computing business income, the legal fiction under Rule 8 must
be given effect by computing the business income after taking into account the
deduction under section 80HHC. Learned counsel for the assessee further
submitted that Chapter VI-A has several headings. Under heading C we
have deductions in respect of certain incomes. That heading would
cover incomes which are includible in the gross total income of the assessee
and, therefore, section 80AB which also falls in Chapter VI-A will apply only
to incomes which fall under heading C. In other words, according to
the learned counsel, section 80AB will not have any application to incomes not
falling under heading C.
Learned
counsel for the assessee has relied upon the above analyses of various
deductions allowed under heading C to show that under certain
provisions, deductions are allowed where the gross total income includes
profits or gains in respect of which such deductions are admissible. For
example, section 80HH provides that where gross total income includes any
profits derived from an industrial undertaking, there shall be allowed, in
computing the total income, a deduction equal to twenty per cent from such
profits. Similar expression finds place in section 80HHB and section 80-IA.
These illustrations have been given by the learned counsel in support of his
contention that where the gross total income includes any business profits referred
to under the specific section, section 80AB would apply and the amount of
income specified in the given section as computed in accordance with the
provisions of the Act (before making any deduction under Chapter VI-A) shall
alone be deemed to be the amount of income of the said nature which is derived
or received by the assessee and which is included in his gross total income.
However,
the said scheme of sections 80HHB, 80-I and 80-IA etc. is not applicable to the
scheme of section 80HHC. According to the learned counsel, section 80HHC is the
separate code by itself.
That
the said section cannot be confused or put on par with sections 80HHB, 80-I or
80-IA. According to the learned counsel, section 80HHC is different from other
sections under Chapter VI- A because it provides that in computing the total
income, the profits and gains from export would be allowed a deduction of the
profits derived by the assessee from the export of such goods.
According
to the learned counsel, in section 80HHC, the following expression is not
there, namely, where gross total income of an assessee includes the
profits derived from export business.
According
to the learned counsel, the said expression is omitted from section 80HHC
because the deduction under section 80HHC is strictly not computed in
accordance with the provisions of the 1961 Act, relating to the computation of
business income.
According
to the learned counsel, the deduction under section 80HHC is only in respect of
profit derived by the assessee from export, which has been defined under
section 80HHC(3). That sub-section lays down that the profits derived from
export shall be the amount which bears to the profits of the business, as
computed under the head profits and gains of business, the same proportion as
the export turnover bears to the total turnover of the business. Therefore,
according to the learned counsel, the profits of the export business which are
allowed deduction under section 80HHC are not computed in accordance with the
provisions of the Act relating to the computation of business income but is
statutorily fixed under section 80HHC(3) of the Act and that is the reason why
section 80HHC does not use the expression where gross total income
includes any profits and gains derived from export business. Therefore,
according to the learned counsel, section 80AB is not applicable to profits
derived from export business. Therefore, according to the learned counsel,
section 80AB will not govern section 80HHC.
Consequently,
according to the learned counsel, the ITO should have first granted Section
80HHC Deduction against the entire tea income, i.e., before applying Rule 8(1)
and, thereafter, the ITO should have applied the said Rule and apportioned the
income in the ratio of 60:40.
Analysis
of relevant provisions of the Constitution, Income-tax Acts, 1922 and 1961
10.
For the sake of convenience we quote hereinbelow relevant sections, rules,
articles and entries:
11.
Section 10 of I.T. Act, 1922 which reads as under:
10.
(1) The tax shall be payable by an assessee under the head Profits and
gains of business, profession or vocation in respect of the profits and
gains of any business, profession or vocation carried by him.
(2)
Such profits or gains shall be computed after making the following allowances,
namely:-
(i)
Any rent paid for the premises in which such business, profession or vocation
is carried on, provided that when any substantial part of the premises is used
as a dwelling- house by the assessee, the allowance under this clause shall be
such sum as the Income-tax Officer may determine having regard to the
proportional annual value of the part so used;
(ii)
in respect of repairs, where the assessee is the tenant only of the premises,
and has undertaken to bear the cost of such repairs, the amount paid on account
thereof, provided that, if any substantial part of the premises is used by the assessee
as a dwelling-house, a proportional part only of such amount shall be allowed;
(iii) in
respect of capital borrowed for the purposes of the business, profession or
vocation, the amount of the interest paid:
12.
Rule 24 of the 1961 Act reads as under:
24.
Income derived from the sale of tea grown and manufactured by the seller in the
taxable territories shall be computed as if it were income derived from
business, and 40 per cent. of such income shall be deemed to be income, profits
and gains liable to tax:
Provided
that in computing such income an allowance shall be made in respect of the cost
of planting bushes in replacement of bushes that have died or become
permanently useless in an area already planted, unless such area has previously
been abandoned. 13. Section 2(1A) of the 1961 Act reads as under:
Definitions.
2. In
this Act, unless the context otherwise requires, -
(1A)
agricultural income means
(a) any
rent or revenue derived from land which is situated in India and is used for agricultural
purposes;
(b) any
income derived from such land by
(i) agriculture;
or
(ii)
the performance by a cultivator or receiver of rent-in-kind of any process
ordinarily employed by a cultivator or receiver of rent-in-kind to render the
produce raised or received by him fit to be taken to market; or
(iii)
the sale by a cultivator or receiver of rent- in-kind of the produce raised or
received by him, in respect of which no process has been performed other than a
process of the nature described in paragraph (ii) of this sub-clause;
(c)
any income derived from any building owned and occupied by the receiver of the
rent or revenue of any such land, or occupied by the cultivator or the receiver
of rent-in-kind, of any land with respect to which, or the produce of which,
any process mentioned in paragraphs (ii) and (iii) of sub-clause (b) is carried
on :
Provided
that
(i)
the building is on or in the immediate vicinity of the land, and is a building
which the receiver of the rent or revenue or the cultivator, or the receiver of
rent-in-kind, by reason of his connection with the land, requires as a dwelling
house, or as a store-house, or other out-building, and
(ii)
the land is either assessed to land revenue in India or is subject to a local
rate assessed and collected by officers of the Government as such or where the
land is not so assessed to land revenue or subject to a local rate, it is not
situated - (A) in any area which is comprised within the jurisdiction of a
municipality (whether known as a municipality, municipal corporation, notified
area committee, town area committee, town committee or by any other name) or a
cantonment board and which has a population of not less than ten thousand
according to the last preceding census of which the relevant figures have been
published before the first day of the previous year ; or
(B) in
any area within such distance, not being more than eight kilometres, from the
local limits of any municipality or cantonment board referred to in item (A),
as the Central Government may, having regard to the extent of, and scope for, urbanisation
of that area and other relevant considerations, specify in this behalf by
notification in the Official Gazette:
Explanation. For the removal of doubts, it is
hereby declared that revenue derived from land shall not include and shall be
deemed never to have included any income arising from the transfer of any land
referred to in item
(a) or
item
(b) of
sub-clause (iii) of clause (14) of this section; 14. Section 10(1) of the
1961 Act reads as under:
CHAPTER
III INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME Incomes not included in
total income.
10. In
computing the total income of a previous year of any person, any income falling
within any of the following clauses shall not be included (1) agricultural
income;
15.
Sections 80HHC(1) and 80HHC(3)(a) of the 1961 Act read as under:
Deduction
in respect of profits retained for export business 80HHC.
(1)
Where an assessee, being an Indian company or a person (other than a company)
resident in India, is engaged in the business of export out of India of any
goods or merchandise to which this section applies, there shall, in accordance
with and subject to the provisions of this section, be allowed, in computing
the total income of the assessee, a deduction of the profits derived by the assessee
from the export of such goods or merchandise :
(1A)
to (2A) xxx xxx xxx
(3)
For the purposes of sub-section (1),--
(a)
where the export out of India is of goods or merchandise manufactured or
processed by the assessee, the profits derived from such export shall be the
amount which bears to the profits of the business, the same proportion as the
export turnover in respect of such goods bears to the total turnover of the
business carried on by the assessee; 16. Rule 8(1) of the 1962 Rule reads
as under:
Income
from the manufacture of tea.
8. (1)
Income derived from the sale of tea grown and manufactured by the seller in
India shall be computed as if it were income derived from business, and forty
per cent of such income shall be deemed to be income liable to tax.
17.
Entry 46, List II (State List) of the Seventh Schedule to the Constitution
which reads as under:
46.
Taxes on agricultural income. 18. Article 245 of the Constitution reads as
under:
245.
Extent of laws made by Parliament and by the Legislatures of States.-
(1)
Subject to the provisions of this Constitution, Parliament may make laws for
the whole or any part of the territory of India, and the Legislature of a State may
make laws for the whole or any part of the State.
(2) No
law made by Parliament shall be deemed to be invalid on the ground that it
would have extra-territorial operation.
19.
Entry 82, List I (Union List) of the Seventh Schedule to the Constitution reads
as under:
82.
Taxes on income other than agricultural income. 20. Article 366(1) of the
Constitution reads as under:
366.
Definitions.- In this Constitution, unless the context otherwise requires, the
following expressions have the meanings hereby respectively assigned to them,
that is to say- (1) agricultural income means agricultural income as
defined for the purposes of the enactments relating to Indian income-tax;
21. On
analysis of the above provisions the position which emerges is as follows.
Section 10(1) of 1961 Act exempts agricultural income not only from
taxable income but also from the total income of the assessee. These incomes
are different from tax-free incomes under Chapter VIA. The exemption of
agricultural income from central taxation is based on the provisions in the
Constitution according to which Parliament has exclusive power to make laws
with respect to taxes on income other than agricultural income, whereas State
Legislature has exclusive power to make laws with respect to taxes on
agricultural income, under Article 246(1) of the Constitution read with Entry
82 of List I in the Seventh Schedule and Article 246(3) read with Entry 46 of
List II in the Seventh Schedule.
22.
The expression agricultural income, for the purpose of
above-mentioned entries, means agricultural income as defined for the purpose
of the enactments relating to Indian Income-tax vide Article 366(1) of the
Constitution. Therefore, the definition of agricultural income in
Article 366(1) indicates that it is open to the income-tax enactments in force
from time to time to define agricultural income in any particular
manner and that would be the meaning not only for tax enactments but also for
the Constitution. This mechanism has been devised to avoid a conflict with the
legislative power of States in respect of agricultural income. From the said
definition of agricultural income in Article 366(1) it becomes clear
that Rule 8 of 1962 Rule (corresponding to Rule 24 framed under I.T. Act, 1922)
pertains to and is integrated with the definition of the expression
agricultural income for the purposes of laws pertaining to Indian
Income-tax and, therefore, the said rule has to be taken into account in
considering the meaning of the expression agricultural income in
Article 366(1) of the Constitution. It is significant to note that the words
used in Article 366(1) of the Constitution are not as defined by the
enactments relating to Indian Income-tax but as defined for the
purposes of the enactments relating to Indian Income-tax. Therefore, it is
clear from the definition in Article 366(1), that Rule 8 of 1962 Rule (Rule 24
of I.T. Rules, 1922), defines the term agricultural income for the
purposes of laws pertaining to Indian Income-tax and, therefore, the said rule
has to be taken into account in considering the meaning of the term
agricultural income under Article 366(1) of the Constitution. [See: Tata
Tea Ltd. v. State of West Bengal (1988) 173 ITR 18 (SC) ].
23. In
short, whatever definition is given in the I.T. Act shall be deemed to be
adopted under the Constitution by virtue of Article 366(1) of the Constitution
of India.
24. It
is in the above context that one has to examine the scope of Rule 8 of 1962
Rule. Rule 8 refers to cases of integrated income. Where the income of the assessee
is partly from agriculture and partly from manufacture example, where the assessee
grows tea and subjects it to a manufacturing process, and sells the
manufactured product the profits on the sales have to be apportioned, and the
elements in the profits referable to agricultural activities may be exempted as
being agricultural income. In such cases, the task of apportionment is
simplified by Rules 7 and 8 framed in exercise of powers conferred by Section
295(2)(b). Under Rule 7 the market value of the agricultural produce used as
raw material in the business is deductible from the business profits, as
representing agricultural income. Under Rule 8, which applies only in cases
where the assessee himself grows tea-leaves and manufactures tea in India, 40%
of the profits on sales is taxable as business income, while the balance is
exempt as representing agricultural income. If an income receipt, comprises of
both agricultural and non-agricultural elements, it has to be disintegrated and
that portion which represents agricultural income should be exempted from tax.
Thus,
composite revenue derived from land may be apportioned.
In
cases where a person subjects agricultural produce to a manufacturing process
before selling it, the profits on the sale has to be disintegrated and the
portion representing agricultural income would be exempt from tax but the portion
attributable to the manufacturing process would be taxable as business profits.
This
is the basic scheme of Rule 8. Therefore, the position which emerges is that
income derived from the sale of tea grown and manufactured by the seller in
India shall be computed as income derived from business and 40% of such income
shall be deemed to be liable to tax under the I.T. Act. Only the balance 60% of
such income would be deemed to be agricultural income on which the State
Legislature would have the power to levy agricultural income-tax under Article
246(3) r/w Entry 46, List II of the Seventh Schedule to the Constitution.
However, the State Legislature would have no power to make any law which would
have the effect of levying tax on the aforestated 40% of such income on which
tax is payable under the I.T. Act by virtue of the provisions of the I.T. Act.
The computation of income from tea has to be in accordance with the relevant
provisions of the enactments relating to the Indian Income-tax and the deductions
towards various expenses incurred for earning the income shall be liable under
the said enactments relating to Indian Income- tax. Thus, where computation of
income from cultivation, manufacture and sale of tea is made in accordance with
the provisions of the I.T. Act, the Agricultural Income-tax Officer would have
no option but to accept the computation by the A.O. under 1961 Act and treat
40% of such income, as business income and the balance 60%, as agricultural
income.
25. To
the above extent there is no dispute. The question before us is whether
computation of Section 80HHC Deduction could be said to be part of computation
provision under the 1961 Act, particularly, provisions dealing with computation
of income under the head Business Income and particularly when the
said Deduction has to be made from gross total income under Chapter
VIA
26.
The term agricultural income has been defined under Section 2(1A) of
the 1961 Act. It is exempted from tax under 1961 Act because Parliament has no
power under the Constitution to levy tax on agricultural income. The word
income has been defined in Section 2(24) of the said Act to include
profits and gains. The term total income is defined in Section 2(45)
of the said Act. The definition of the term total income involves two
ingredients firstly, that the income must consist of the total amount of
income referred to in Section 5 and secondly, it must be computed in the manner
laid down in the Income-tax Act. Therefore, the manner of computation laid down
by the I.T. Act forms an integral part of the definition total
income. The correct method of approach is to treat nothing as being
charged to tax until by the process of computation laid down by the said Act,
the status of income, profits and gains, emerges. This principle is very
important for deciding the present case. We repeat that computation laid down
by the said Act forms an integral part of the definition of total
income. Section 4 charges the total income of an assessee to income-tax.
Section 5 of the I.T. Act defines total income.
27. At
this stage we have to analyse Chapter III which deals with Incomes which do not
form part of total income. Section 10 groups in one place various incomes which
are exempt from tax.
The
incomes enumerated in Section 10 are not only excluded from the taxable income
of the assessee but also from his total income. The exemption embodied in
Section 10 can be divided into two categories, namely, exemption to which
certain classes of income from their very nature are entitled to exemption and
the second category concerns exemption to which the character of the assessee
entitles him to claim exemption. In the first category is agricultural income
whereas in the second category of exempted income is the income of local
authorities and diplomatic officers. We are concerned with the first category.
28. In
addition to the above two categories there is a third kind of income. These
incomes are wholly or partly tax-free incomes on account of special deductions
under Chapter VIA. We are essentially concerned with these tax-free
incomes.
29. In
the present matter we are required to adjudicate upon the fiction in Rule 8 vis-`-vis
the computation contemplated by Chapter VIA in which Section 80B(5) finds place
and which defines the expression gross total income as total income
computed in accordance with the provisions of the said Act before making any
deduction under Chapter VIA. Section 10(1) inter alia provides that
agricultural income is not includible in the total income of the assessee. The
result is that agricultural income is not only exempt from tax but, under the
scheme of the I.T. Act, is also to be excluded from computation of the total
income. Exemptions granted under the I.T. Act covers incomes which
are exempt from Charge and also from total income of the assessee whereas there
are incomes which are exempted from income-tax but they are to be
included in the total income of the assessee. In the first case, we have
agricultural income which is exempt from Charge as also from total income
whereas in the second case we have incomes which are exempted from the Charge
but they are included in the total income of the assessee, for example, at one
point of time certain incomes were exempted under Sections 86 and 86A but
expressly declared by Section 66 to be included in the total income. Section
110 indicates incomes which are free from the Charge but which are required to
be included in the total income of the assessee. The effect of including
exempted income in the total income of the assessee is of two-fold. Firstly,
the rate of tax is determined with reference to the total income and,
therefore, exempted income which is included in the total income would affect
the rate of tax applicable to the chargeable portion of total income. Secondly,
calculations in several cases have to be made with reference to total income.
For example, tax relief under Section 80HH is restricted to the ceiling limit
determined by reference to gross total income of the assessee which expression,
as stated above, is defined in Section 80B(5) of the I.T. Act. It is also
important to bear in mind that under Section 4 the levy is on total
income of the assessee computed in accordance with and subject to the
provisions of the I.T. Act. What is chargeable to tax under the I.T. Act is the
profits and gains of a year. What is chargeable to tax under the I.T. Act is
not gross receipts but income. Under the I.T. Act the tax is on income and not
on gross receipts. Section 4 is the charging section. Section 5 defines gamut
of total income. Section 4 charges every person in respect of his
total income, however, income cannot be taxed unless it falls within Section 5
subject to it being saved by any other section from taxation. The ambit of
taxation, being subject to the provisions of the I.T. Act, involves two
consequences. Firstly, provisions of the I.T. Act, example, Section 10 to
Section 12 and various sections under Chapter VIA, may have the effect of
exempting income which would otherwise be chargeable under Section 5. Secondly,
the amount of income from whatever sources derived is to be ascertained subject
to the provisions of particular sections dealing with the sources, namely,
Section 15 to Section 59.
ASSUMPTION
30.
Before coming to the reasons in support of our findings we would like to
explain the claim of the assessees. For that purpose we need to give a
mathematical illustration based on certain assumptions.
(a)
Calculation according to assessees:
Composite
Income as business profits : Rs.16.05 crores Total turnover : Rs.52.20 crores
FOB Value of Export Sales : Rs.64.08 lakhs Thus, Deduction under Section 80HHC
= 64.08 lakhs x16.05 crores = Rs.19.70 lacs (Apprx.) (Rounded off to Rs.20Lacs)
52.20 crores After deducting Rs.20 lacs from Rs.16.05 crores the total income
will come to Rs.15,85,00,000/- (Approx.) to which apportionment of 60:40 under
Rule 8(1) will be applied to arrive at income liable to tax.
(b)
Calculation according to A.O. Composite Income as business profits : Rs.16.05 crores
40% of composite income : Rs.6.42 crores (Approx.) Total turnover : Rs.52.20 crores
FOB Value of Export Sales : Rs.64.08 lakhs Thus, Deduction = 64.08 lakhs x 6.42
crores = Rs.7.88 lacs (approx.) 52.20 crores NB : The main difference is on the
amount of deduction i.e. between Rs.19.70 lacs (approx.) in the former case and
Rs.7.88 lacs (approx.) according to A.O.
ISSUE
31. As
stated, the case of the assessees is that 80HHC Deduction should be granted
against the entire tea income before applying Rule 8(1).
32. To
put it simply, if the business profit is Rs.50 lacs, the total turnover is
Rs.200 lacs and export turnover is Rs.100 lacs then Section 80HHC Deduction
will be: 50 x 100 = Rs. 25 lacs and 200 accordingly assessee would claim
deduction of Rs.25 lacs from business profits of Rs.50 lacs to arrive at the
total income of Rs.25 lacs which would be liable to be apportioned in the ratio
of 60 : 40 and consequently Rs.10 lacs would be liable to income- tax.
33. On
the other hand, according to Department, applying the apportionment of 60 : 40
in Rule 8(1) to Rs.50 lacs the business profit would come to Rs.20 lacs which
would be allocated between export turnover : total turnover to arrive at
Section 80HHC Deduction which will be : 20 x 100 = Rs.10 lacs. 200
34. In
short, assessee claims 80HHC Deduction at Rs.25 lacs whereas Department
calculates 80HHC Deduction at Rs.10 lacs to arrive at the total
income.
FINDINGS
35.
The word income is defined in Section 2(24) of the 1961 Act. That
word finds place in Rule 8(1). The word income in Section 2(24)
includes profits and gains. The term total income is
defined in Section 2(45) to mean the total amount of income referred to in
Section 5, computed in the manner laid down in the I.T. Act. The word total
income is not there in Rule 8.
36.
The word income is an expression of elastic ambit. It is not
exhaustive. That is why Section 2(24) defines income as including a
particular category of receipts. Mere gross receipt cannot be taxed as income.
37.
Section 80HHC inter alia states that in computing the total income a
deduction, to the extent of profits derived by the assessee from exports has to
be taken into account. The important words are profits derived from the
export. The word derived would mean derived from the
source. That source has to be in Section 14. Income covered by Section
10(1) i.e. agricultural income, which is not chargeable to tax, does not fall
in Section 14 and, therefore, it will not fall under various computation sections
commencing from Section 15 to Section 59.
Section
14 classifies all income into five enumerated heads for the purpose
of charge of income-tax and computation of total income. As stated hereinabove,
exempted income is different from tax-free income. In the
present case, we are concerned with both these types of income.
Agricultural income falls in the category of exempted income. It is
neither chargeable nor includible in the total income. On the other hand,
deduction under Chapter VIA is for income which forms part of total
income but which is tax-free. In the present case, we have to balance both
these types of income, namely, exempted income vis-`-vis tax-free income. Thus,
it is clear that income, covered under Section 10 and Section 11 which
is not chargeable to tax, does not fall under Section 14 and under various
computation sections from Section 15 to Section 59. However, on account of
legal fiction built into Rule 8(1), which applies to composite income, a part
of the composite income/integrated income is agricultural income and the
balance is the business income. The object of Rule 8(1) is to disintegrate the
two. If the income from agriculture cannot be computed under 1961 Act then the
income from agriculture has to be arrived at in a normal commercial manner.
There is no scope for computing such income by complying with the computation
section under the I.T. Act. In other words, the real income has to be taken
into account for the purpose of considering the exemption under Section 10(1).
This position emerges in a case where we have to deal solely with agricultural
income. However, as stated above, in this case we are concerned with the
composite income. Therefore, we have to interpret Rule 8(1) of the1962 Rule.
38. At
the outset, it may be noticed that Rule 8(1) uses the word income. In
the entire rule the word total income is not mentioned. Further, Rule
8(1) refers to income derived from the sale of tea cultivated and manufactured.
In the case of an assessee deriving income, not from composite activity, one
has to calculate agricultural income in the commercial sense. However, when we
come to composite income under Rule 8(1) a part of the composite income is
business profit, which is one of the source/head of income under Section 14,
and therefore to that extent alone chargeability and computation would arise
and that too only to the extent of computation of income under the head
profits and gains from business. Therefore, the charging provision
and computation provision will apply only to that limited extent. That is why
in Rule 8 a legal fiction is incorporated.
39. It
is well-settled that chargeability and computation under 1961 Act, constitutes
one integral Code. Rule 8(1), therefore, states that composite/integrated income
shall be computed as if it was income derived from business. The words as
if stand for legal fiction. Therefore, the composite income had an element
of agricultural and business incomes which needed to be separated by applying
the rule of apportionment under Rule 8. That is because, agricultural income
has no linkage with any of the enumerated heads in Section 14 though the
non-agricultural element has such linkage. Rule 8(1) says that when income is
derived from composite activity such income shall be chargeable to income-tax
as business income. In other words, in the case of composite income,
by legal fiction, chargeability is assigned only to non-agricultural part of
the composite income which has linkage with one of the enumerated heads in
Section 14, namely, business income. Therefore only to that extent,
the computation provisions, mentioned in Section 15 to Section 59 of the I.T.
Act, stand attracted. Therefore, Rule 8(1) makes it clear that chargeability
and computability shall be confined to 40% of such income which shall be deemed
to be income liable to tax.
We
have to confine the legal fiction in Rule 8(1) to that rule alone.
We
cannot extend the legal fiction in Rule 8(1) to Section 80HHC(3)(a). As stated
above, there is a vital difference between income not chargeable to tax and not
includible in the total income (for example, agricultural income) and income
which forms part of total income but which is made tax-free.
Deductions
under Chapter VIA fall in the category of tax-free incomes. In fact, history
shows that some of the incomes in Chapter VIA have been transferred from
Chapter VII to Chapter VIA. Chapter VII has been deleted. However, at the
relevant time Chapter VII referred to incomes forming part of total income on
which no tax was payable. That is why, we have stated that there is a
difference between exempted incomes and tax-free incomes.
This distinction is of some importance. As stated above, Section 5 provides
what the total income shall include.
Chapter
III refers to incomes which do not form part of total income. Chapter
IV deals with computation of total income. It classifies the
income under different heads and the deductions to be made in respect
of each of the different heads of income. In the Income-tax Act, the expression
income includible in the total income has a definite connotation.
Similarly, the expression deduction and allowances have particular
connotation.
Therefore,
on one hand we have agricultural income which is neither chargeable
nor includible in the total income and on the other hand we have
incomes under Chapter VIA which are part of total income but which
are tax-free.
40. In
this case, however, we are concerned with composite income which is partly
agricultural and partly business.
Therefore,
Rule 8(1) segregates agricultural income which is exempted income from business
income which is chargeable to tax. For that purpose we need to apply the ratio
of 60 : 40.
Therefore,
to the extent of 40% only we have chargeability and computability. If this
distinction is kept in mind we are of the view that the assessee cannot claim 80HHC(3)(a)
Deduction against the entire tea composite income. It can be claimed only
against proportionate income. Therefore, in the above example, 80HHC Deduction
can be claimed not against the entire composite income of Rs.50 lacs but it can
be claimed only against a part thereof which is Rs.20 lacs. Similarly, in the
other example, 80HHC Deduction can be claimed not against composite income of
Rs.16.05 crores, it can be claimed only against the composite income of Rs.6.42
crores. For the above reasons, we are of the view that Section 80HHC Deduction
cannot be allowed against the entire tea income.
Is
Section 80HHC a part of the provisions of the 1961 Act which deals with
computation under the head Profits and Gains from Business?
41.
The contention of the assessees cannot be accepted for one more reason. The tea
income consists of two parts :
(i)
agricultural income upto the stage of growing the tea; and
(ii)
business income from the manufacture and sale of tea grown by the assessee.
Under the Constitution, agricultural income can be taxed only by the
State Governments. Rule 8(1), therefore, provides that only 40% of the
composite income can be taxed under the 1961 Act. Power of the State
Governments to levy tax extends to the balance, namely, 60% of the composite
income.
This
part of the composite income (60%) cannot be taxed under the 1961 Act (See:
Section 10(1) of the 1961 Act). As stated above, Rule 8(1) provides for the
method in which composite income is to be computed. Rule 8(1) says that income
shall be computed as if it were income derived from business. Rule 8(1) uses
the word income and not total income. The 1961Act contains
provisions for computation of income under the head Business. The
question is whether Section 80HHC is part of the provisions in the 1961 Act
which deals with computation of income under the head profits and gains
from business? If it is, then apportionment prescribed by Rule 8(1) can be
applied only after deducting the allowance under Section 80HHC from the
composite income as contended by the assessees. However, in our view
computation in Rule 8(1) in respect of composite income, by reason of legal
fiction in-built in Rule 8, cannot be read in entirety into computation of
income under the head Business. If the contention of the assessees is
accepted, namely, that the entire computation of composite income under Rule
8(1) is part of computation provisions under the head Business then
it would amount to granting deduction under Section 80HHC even with reference
to income which is exempt under Section 10(1) of the 1961 Act, namely,
agricultural income.
Such a
result would be opposed to the basic scheme of the 1961 Act. In this
connection, it is also important to note that under Section 80A which falls in
Chapter VIA, deductions are allowed only from gross total income. The
object for making such provision is to limit the amount of 80HHC Deduction. It is
true that Section 80HHC provides for deduction of a percentage of the export
profits. The percentage is calculated with reference to the export profits, but
the deduction is only from gross total income as defined under
Section 80B(5) of the 1961 Act. Therefore, the very scheme of 1961 Act is to
treat the deductions under Chapter VIA as deductions only from gross total
income in order to arrive at the total income. In other cases
falling under Section 28 where computation of income falls under the head
Business, allowances are deductible from the income but not from
gross total income. It is, therefore, not possible to accept the
contention that Section 80HHC is part of the provisions for computation of
business income. Section 80HHC does not have any direct impact on the
computation of business income in the manner in which, for example, Section 72
affects the computation of business income. On behalf of the assessees heavy
reliance was placed on the judgment of this Court in the case of Cambay
Electric Supply Industrial Company Ltd.
(supra).
That was a case where this Court held that Section 72 provides for the business
loss, not set-off fully against the other heads of income under Section 71, to
be carried forward and adjusted against the profits of the same business in the
next year. Inter-head and intra-head adjustments and carry-forwards are part of
the computation provisions. However, Section 72 cannot be compared with Section
80HHC because Section 80HHC provides for deduction only from gross total
income.
Therefore,
the judgment of this Court in Cambay Electric Supply Industrial Company Ltd.
(supra) has no application.
42.
Reliance was also placed by the assessees on the judgment of this Court in the
case of The Karim Tharuvi Tea Estates Ltd., Kottayam and Anr. v. State of Kerala and Ors. (1963) 48 ITR 83 (SC). In
that decision this Court referred to the provisions of Section 10 of I.T. Act,
1922 and to the deduction available thereunder as being deductible while
computing the composite income. It was not concerned with Section 80HHC
Deduction. Therefore, that judgment has no application to the present case.
43.
Even in the case of Tata Tea Ltd. v. State of West Bengal (1988) 173 ITR 18
(SC), there is no reference to the deductions under Chapter VIA.
44. In
short, deductions under Chapter VIA are deductions not from a particular head
of income but from gross total income.
Therefore,
Section 80HHC is not part of the computation of income under the head
Business.
45.
For the aforestated reasons, we hold that 80HHC Deduction of the 1961 Act is
required to be allowed after apportionment of income under Rule 8(1) of the
1962 Rule.
46.
For the aforestated reasons, we set aside the impugned judgments of the Guahati
High Court in Civil Appeal Nos. 3803- 3808 of 2005, Civil Appeal No.1021 of
2006, Civil Appeal No.1825 of 2007, Civil Appeal No. 1827 of 2007 and Civil
Appeal No..........of 2007 arising out of S.L.P.(C) No.2275 of 2007 and affirm
the impugned judgment of the Calcutta High Court in Civil Appeal Nos.6719-20 of
2004 Warren Tea Ltd. & Anr. etc. v. Union
of India & Ors. etc. Accordingly, the above issue is answered in favour of
the Department and against the assessees.
Civil
appeals are, accordingly, disposed of with no order as to costs.
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