2007 (12) TMI 16 - SC - Income Tax

Deduction u/s 80HHC - Assessee claim deduction of 80HHC before the apportionment under rule 8(1) but AO denied the assessee claim on the ground that the deduction allowable only on that part which is includible in the GTI - SC also affirmed the order of AO

Summary

Issues Involved:
1. Determination of the stage at which Section 80HHC Deduction is to be allowed.
2. Interpretation of Rule 8(1) of the Income-tax Rules, 1962 in relation to composite income from tea.
3. Computation of business income and agricultural income under the Income-tax Act, 1961.
4. Applicability of Section 80HHC Deduction to composite income.

Comprehensive, Issue-wise Detailed Analysis:

1. Determination of the Stage at Which Section 80HHC Deduction is to be Allowed:
The core issue was whether the Section 80HHC Deduction should be applied before or after the 60:40 apportionment under Rule 8(1). The court concluded that the 80HHC Deduction should be applied after the apportionment, meaning it is only applicable to the 40% of the composite income which is taxable as business income. This interpretation aligns with the principle that agricultural income is exempt from tax under the Constitution and the Income-tax Act, 1961.

2. Interpretation of Rule 8(1) of the Income-tax Rules, 1962 in Relation to Composite Income from Tea:
Rule 8(1) states that 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 percent of such income shall be deemed to be income liable to tax. The court emphasized that Rule 8(1) creates a legal fiction to apportion composite income into agricultural (60%) and business income (40%). This rule is crucial for segregating the taxable business income from the non-taxable agricultural income.

3. Computation of Business Income and Agricultural Income under the Income-tax Act, 1961:
The court analyzed various sections of the Income-tax Act, including Section 2(24) defining "income," Section 2(45) defining "total income," and Section 10(1) exempting agricultural income from total income. It was established that agricultural income is exempt from tax and not included in the total income, whereas business income is taxable. The court clarified that deductions under Chapter VIA, including Section 80HHC, are deductions from gross total income to arrive at the total income, not from a specific head of income.

4. Applicability of Section 80HHC Deduction to Composite Income:
The court held that Section 80HHC Deduction cannot be applied to the entire composite income but only to the business income portion (40%) after apportionment under Rule 8(1). This ensures that the deduction is not extended to the agricultural income, which is exempt from tax. The court rejected the assessees' argument that the entire composite income should be considered for the deduction, emphasizing that such an interpretation would conflict with the scheme of the Income-tax Act and the constitutional provisions.

Conclusion:
The Supreme Court ruled in favor of the Department, holding that the Section 80HHC Deduction must be allowed after the apportionment of income under Rule 8(1). The court set aside the impugned judgments of the Guahati High Court and affirmed the judgment of the Calcutta High Court, thereby resolving the issue in favor of the Department and against the assessees. The civil appeals were disposed of with no order as to costs.