Deductions versus Exemptions in Income Tax Act, 1961 - Disallwance u/s 14A versus Deduction u/s 80P - deduction if allowed does not mean that said income ceases to be part of the total income

Commissioner of Income-tax Versus Kribhco - 2012 (7) TMI 591 - DELHI HIGH COURT

 The Facts of the Case:

As per the return filed, the assessee had claimed deduction under section 80P(2)(d) on dividend of Rs. 2,00,006 received from Nafed and Karnataka State Co-operative Apex Bank Ltd. and interest of Rs. 10,20,75,013 on deposits made with co-operative banks. The Assessing Officer did not disturb the said claim/deduction under section 80P(2)(d) but relying upon section 14A held that the aforesaid incomes were not included in the total income of the assessee and, therefore, expenditure under the head "interest" amounting to Rs. 1,15,45,579 and one-eighth of the employee benefits and remuneration should be disallowed. He observed that the aforesaid expenditure had been incurred for earning of income under section 80P(2)(d) of the Act and, therefore, has to be disallowed under section 14A.

 The substantial Question of Laws before the High Court

"A. Whether the Income-tax Appellate Tribunal was correct in law in holding that no disallowance can be made against income which is not specifically exempt under the Act ?

B. Whether the Income-tax Appellate Tribunal was correct in distinguishing between deduction and exemption, which does not find any support in the language of section 14A ?"

Relied upon / Referred Decisions:

Second ITO v. Stumpp, Schuele and Somappa P. Ltd. [1990 (9) TMI 69 - SUPREME COURT].

Distributors (Baroda) P. Ltd. v. Union of India [1985 (7) TMI 1 - SUPREME COURT].

Cloth Traders P. Ltd. v. Addl. CIT [1979 (5) TMI 2 - SUPREME COURT]

CIT v. South Indian Bank Ltd. [1965 (11) TMI 40 - SUPREME COURT]

Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978 (4) TMI 1 - SUPREME COURT]

CIT v. New Great Insurance Co. Ltd. [1972 (7) TMI 10 - BOMBAY HIGH COURT]

CIT v. Darbhanga Marketing Co. Ltd. [1969 (4) TMI 20 - CALCUTTA HIGH COURT]

CIT v. Madras Motor and General Insurance Co. Ltd. [1974 (6) TMI 23 - MADRAS HIGH COURT]

Madras Auto Service v. ITO [1974 (10) TMI 22 - MADRAS HIGH COURT]

CIT v. Industrial Investment Trust Co. Ltd. [1967 (9) TMI 3 - BOMBAY HIGH COURT]

Dalmia Cement (Bharat) Ltd. [1980 (3) TMI 57 - DELHI HIGH COURT]

Decision

Section 14A states that for the purpose of computing total income under Chapter IV, no deduction shall be allowed in respect of expenditure incurred in relation to the income which does not form part of the total income under this Act. It does not state that income which is entitled to deduction under Chapter VI-A has to be excluded for the purpose of the said section. The words "do not form part of the total income under this Act" is significant and important. As noticed above, before allowing deduction under Chapter VI-A we have to compute the income and include the same in the total income. In this manner, the income which qualifies for deductions under sections 80C to 80U has to be first included in the total income of the assessee. It, therefore, becomes part of the income, which is subjected to tax. Thereafter, deduction is to be allowed in accordance with and subject to the fulfilment of the conditions of the respective provisions. This is also subject to sections 80AB and 80A(1) and (2). Chapter VI-A does not postulate or state that the incomes which qualify for the said deduction will be excluded and not form part of the total income. They form part of the total income but are allowed as a deduction and reduced.

It has been uniformly and consistently held that in the absence of express language to the contrary, deduction if allowed does not mean that the said income ceases to be part of the total income.

Decided in Favor of Assessee and against revenue.

See: Commissioner of Income-tax Versus Kribhco - 2012 (7) TMI 591 - DELHI HIGH COURT