TMI Blog2012 (7) TMI 591X X X X Extracts X X X X X X X X Extracts X X X X ..... ore, becomes part of the income, which is subjected to tax. Thereafter, deduction is to be allowed in accordance with and subject to the fulfillment of the conditions of the respective provisions. This is also subject to Section 80AB and 80A(1) and (2). Chapter VIA 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. Incomes in Chapter III are not chargeable to tax and, therefore, fall outside the ambit of Sections 4 and 5 but while computing the taxable income, deductions are allowed to the extent stipulated in Sections 80C to 80U. The distinction between the two, has been accepted and recognized by the Supreme Court in Second Income Tax Officer and Another v. Stumpp Schuele and Somappa Private Limited [1990 (9) TMI 69 - SUPREME COURT] - deduction if allowed does not mean that the said income ceases to be part of the total income - the income on which the deduction is allowed forms a part of the total income, though not included in the amount or quantum on which tax is paid - in favour of assessee. - SANJIV KHANN ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o substantial questions of law were framed: "A. Whether the ITAT 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 ITAT was correct in distinguishing between deduction and exemption, which does not find any support in the language of Section 14A?" 7. We may only record that the appellant-Revenue had raised certain other aspects/questions, but these have not been framed in view of order passed in ITA No. 1406/2010 on the same date, i.e., 1st September, 2011. 8. In order to appreciate the controversy, we have to refer to Section 2(45), Section 14A, Section 80A(1) (2), Section 80AB and Section 80B(5), which for the sake of convenience are reproduced below in seriatim: "2. Definitions. In this Act, unless the context otherwise requires, (45) total income means the total amount of income referred to in section 5, computed in the manner laid down in this Act; ** ** ** 14A. Expenditure incurred in relation to income not includible in total income. For the purposes of computing the total income under this Chapter, no deduction shall be allowed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a resident assessee includes all income and profits arising in India and outside. We are not concerned with resident but not ordinary resident and non-resident assessee in the present case. 10. Chapter III of the Act consists of Sections 10 to 13B and is with the heading "incomes which do not form part of total income". Thus, incomes falling under Sections 10 to 13B as per the heading itself shall not be included in computing the total income. We note that some of the said Sections only provide for partial exclusion and not complete exclusion of the income, i.e., income which does not form part of the total income. Chapter IV of the Act begins with Section 14 and states that save as otherwise provided by this Act all income for the purpose of charge of tax and computation of total income would be classified under the heads "salary", "income from house property", "profits and gains of business and professions", "capital gains" and "income from other sources". Then comes Section 14A, which we will be examining later on. Chapter IV consists of Sections 14 to 59 and deals with computation/quantification under separate heads of income mentioned in Section 14. Chapter V of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , from the amounts included in the gross total income, deductions are to be allowed in respect of the incomes mentioned and specified in Sections 80C to 80U. In other words, the incomes specified in Sections 80C to 80U are chargeable to tax under Section 4 but have to be reduced/deducted as so stipulated and required by a particular section and on conditions stated therein being satisfied. Sub-section 2 to Section 80A states that the total amount of deduction shall not exceed the gross total income of an assessee. In other words, deduction cannot exceed the total income, i.e., the "gross total income" earned by the assessee in the year. The term "gross total income" has been defined in Section 80B(5) to mean total income computed in accordance with the provisions of this Act, before making any deduction under Chapter VIA. In other words, before computing the deduction under Chapter VIA, the requirement is that total income should be computed in accordance with the Act, but without making any deduction under the Chapter. It means that the income which qualifies for deduction under Chapter VIA has to be included in the gross total income. The income which is included has to be comput ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of High Courts proved by the Supreme Court in Stumpp Schuele and Somappa Private Limited ( supra ) and their ratios have been examined subsequently. 16. We have examined the five Judges decision of the Supreme Court in Distributors (Baroda) Private Limited v. Union of India and Others, [1985] 155 ITR 120. In the said case, the Supreme Court was examining Section 80M after it was incorporated by Finance (No. 2) Act, 1967 and placed in the new Chapter VI-A, the heading of which, as noticed above, reads:- "Deductions to be made in computing total income" 17. Section 80M, at the time of enactment, was as under:- "80M. Deduction in respect of certain intercorporate dividends .-(1) Where the gross total income of an assessee being a company includes any income by way of dividends received by it from a domestic company, 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 from such income by way of dividends of an amount equal to ( a ) where the assessee is a foreign company ( i ) in respect of such income by way of dividends received by it from an Indian company whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... words "where the gross total income of an assessee ... includes any income by way of dividends from a domestic company" are intended only to provide that a particular category of income, namely, income by way of dividends from a domestic company should form a component part of gross total income, irrespective of what is the quantum of the income so included but it is difficult to see how the factor of quantum can altogether be excluded when we talk of any category of income included in the gross total income. What is included in the gross total income in such a case is a particular quantum of income belonging to the specified category. Therefore, the words "such income by way of dividends" must be referable not only to the category of income included in the gross total income but also to the quantum of the income so included. It is obvious, as a matter of plain grammar, that the words "such income by way of dividends" must have reference to the income by way of dividends mentioned earlier and that would be income by way of dividends from a domestic company which is included in the gross total income. Consequently, in order to determine what is "such income by way of dividends", we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppears to have been made under some misapprehension, because what sub-s. (1) of s. 80M requires is that the deduction of the whole or a specified percentage must be made from "such income by way of dividends" and not from the gross total income. Sub-s. (1) of s. 80M provides that in computing the total income of the assessee, there shall be allowed a deduction from "such income by way of dividends" of an amount equal to the whole or a specified percentage of such income. Now, when in computing the total income of the assessee, a deduction has to be made from "such income by way of dividends", it is elementary that It such income by way of dividends "from which deduction has to be made must be part of gross total income. It is difficult to see how the language of this part of sub-s. (1) of s. 80M can possibly fit in if "such income by way of dividends" were interpreted to mean the full amount of dividend received by the assessee. The full amount of dividend received by the assessee would not be included in the gross total income : what would be included would only be the amount of dividend as computed in accordance with the provisions of the Act. If that be so, it is difficult to ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was as under: "99. (1) Super-tax shall not be payable by an assessee in respect of the following amounts which are included in the total income... ** ** ** ( iv ) if the assessee is a company, any dividend received by it from an Indian company, subject to the provisions contained in the Fifth Schedule." 22. The said Section was interpreted by judgments of the High Courts of Bombay, Calcutta and Madras in CIT v. New Great Insurance Company Limited [1973] 90 ITR 348 (Bom), CIT v. Darbhanga Marketing Company Limited [1971] 80 ITR 72 (Cal.) and CIT v. Madras Motor and General Insurance Company Limited [1975] 99 ITR 243 (Mad.) and Madras Auto Services Private Limited v. ITO [1975] 101 ITR 589 (Mad.). It was held that the gross amount of dividend received from an Indian company was excluded from super tax and the exemption was not limited or restricted to the net dividend income computed in accordance with the provisions of the Act. The argument of the Revenue, that it is the net amount which is included in the total income, was rejected. 23. Reference was also made to an earlier Division Bench judgment of the High Court of B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re-Cochin, what is exempted is the interest receivable. "Interest receivable" can only mean the amount of interest calculated as per the terms of the securities. It cannot obviously mean interest receivable minus the amount spent in receiving the same. We, therefore, hold agreeing with the High Court, that no income-tax is payable in respect of the entire interest of Rs. 44,720 earned by the assessee from securities issued by the former Native States." 24. We may note that in the notification in question before the Supreme Court in South Indian Bank ( supra ), reference was only made to Section 16 of the applicable Act and not to Section 8 thereof. 25. Cambay Electric Supply Industrial Co. Ltd. v. Commission of Income Tax, Gujarat-II, [1978] 113 ITR 84 (SC), was relied upon and quoted in Distributor Baroda's case ( supra ). In this case, the Supreme Court had interpreted Section 80E of the Act which at the relevant time was as under:- "80E. Deduction in respect of profits and gains from specified industries in the case of certain companies.-(1) In the case of a company to which this section applies, where the total income (as computed in accordance with the othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s been used in the sense of commercial profits. Secondly, the expression "total income " has been defined in section 2(45) of the Act as meaning "the total amount of income referred to in section 5, computed in the manner laid down in this Act" and when this definition has been furnished by the Act itself the expression as appearing in section 80E(1) must, in the absence of anything in the context suggesting to the contrary, be construed in accordance with such definition. Since the words in the parenthesis occurring in sub-section (1) lay down the manner in which the total income of the concerned assessee is to be computed there would be no scope for excluding items like unabsorbed depreciation and unabsorbed development rebate while computing the total income on the basis that the total income spoken of by sub-section (1) means commercial profits." 27. It was accordingly observed that on proper construction of Section 80E(1) full effect has to be give to the word 'such profits' and this was not possible without computing the income in accordance with the provisions of Sections 30 to 43A and then Chapter VI. 28. At this stage, we may refer to the decision of Delhi High Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onding to s. 84) and did not affect the capital computation for surtax purposes. ( f ) Logically, the argument of the revenue would mean that even deductions permitted under Chap. IV should be taken into account for r. 4 and the capital reduced correspondingly. This result is certainly not intended." 30. While dealing with the detailed arguments raised by the Revenue, the Division Bench of this Court observed that broadly speaking the figure of total income is arrived at, as per the Act, in four stages. Firstly, the income of the resident assessee is computed by including all incomes, profits and gains arising in India or outside. Similarly income of resident but not ordinary resident or non-resident, are computed in accordance with Section 5 Chapter II, which forms the basis of Charge. Secondly, Chapter III with the heading "incomes not included in the total income", comprises of Section 10 to 13 and these incomes are not included in total income but some exemptions are only partial and not total. Thirdly, even in case of income, profit and gains included for arriving at the total income, the entire income is not liable to tax. Deductions as stipulated in Chapter IV can app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity. It incorporates and allowes deductions. The income from these "sources" was included in the income, but subjected to deduction. Qualification would vary from Section to Section. Further in some cases the deduction was full and in some cases it was partial but this was not material and it did not mean that if an amount was deducted it did not form part of the total income. Thus, the income on which the deduction is allowed forms a part of the total income, though not included in the amount or quantum on which tax is paid. 31. It can be urged (though it was not specifically argued by the Revenue) that in case of complete or entire deduction of the gross amount, Section 14A will be applicable, and Section 14A will not apply in case only the net amount (as stipulated in several Sections in Chapter VIA of the Act) is allowable as a deduction. There will be a fallacy in this argument. Even were partial or net amount is to be allowed as a deduction, the figure can be minus or in a loss. Logically, as a squiter, it will follow that in case the assessee has a negative/minus figure as per the computation made any of the provisions of Chapter VIA, the expenditure incurred cannot al ..... X X X X Extracts X X X X X X X X Extracts X X X X
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