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Deduction under section 33AB is allowable against composite income and not against only 40% of composite income- A case of un-necessary litigation by revenue in case of Tea Companies .

Deduction under section 33AB is allowable against composite income and not against only 40% of composite income- A case of un-necessary litigation by revenue in case of Tea Companies . - Income Tax - Direct Tax Code - DTC - By: - C.A. DEV KUMAR KOTHARI - Dated:- 7-10-2011 - Computation provision: Section 33AB is a provision relating to allowing deduction from business income. It falls under Part D of Chapter IV of the Income-tax Act, 1961. This part consists of various sections from section 28-4 .....

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ng words are crucial: 33AB. (1) Where an assessee carrying on business of growing and manufacturing tea in India has, before the expiry of six months from the end of the previous year or before furnishing the return of his income, whichever is earlier, deposited with the National Bank any amount or amounts in an account (hereafter in this section referred to as the special account) maintained by the assessee with the Bank in accordance with, and for the purposes specified in, a scheme (hereafter .....

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n before making any deduction under this section), whichever is less: A reading of the provision clearly shows that it relates to business of growing and manufacturing tea and upper limit of allowable deduction is 20% of profits of such business. There is no ambiguity. However, the revenue is trying to interpret that deduction should be with reference to the 40% of income from such business. The assessees have to face litigation and we find that there have been several cases before High Court. T .....

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assessee and, thereafter, Rule 8 of the Rule should be applied for the purpose of calculation of 40% of the such business income which shall be chargeable to tax under the income-tax Act in terms of Rule 8. On interpretation of the phrase a sum equal to twenty per cent of the profits of such business (computed under the head Profits and gains of business or profession before making any deduction under this section), whichever is less – the court ruled that the question of application of Ru .....

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omposite income (100%) and not from apportioned (40%) income. The provision of section 33AB is similar to the old provisions of rebate and allowances. The Board has consistently held that in case of tea companies amount allowable will be ascertained on the basis of composite income, however, reserve required to be created by assessee will be 40% of the deduction allowable against composite income because only 40% of composite business expenses or deductions are actually allowed under the Act. Fi .....

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icient compliance if relevant reserve is created equal to 40% of rebate or allowance claimed (that is 100%). In this regard extract from some are given below to indicate consistent intention: Relevant part from the Circular no. 27 (LIIX-2), dated 06.07.1955: TEA COMPANIES The rates of development rebate in the case of a tea company are the same as in the case of any other company engaged in a non-priority industry. However, as the total income of a tea company consisting of its non-agricultural .....

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of the amount calculated on the basis of specified percentage of the cost of eligible plant and machinery. Thus suppose development rebate allowable was say 25% of 1000/- that is Rs.250/-. The deduction of Rs.250/- was allowed while computing business income in case of any other company and 100% of composite income in case of tea company. In case of any other company requirement to create development rebate reserve was 75% of 250 that is 188/-. However, in case of tea companies requirement for s .....

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allowed. Relevant portion from some circular issued after I.T.Act, 1961 Vide Board s Circular Letter F. No. 1(8)-58-TPL, dated 1-11-1958, it was clarified that in the case of tea companies it would be sufficient compliance if the reserve created is equal to 75 per cent of the amount actually allowed as development rebate. Since the conditions regarding the creation of reserve for the grant of development allowance under section 33A are identical to those prescribed with regard to the creation of .....

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ar : No. 324 [F. No. 202/47/79-IT(A-II)], dated 3-2-1982 regarding Investment allowance. There was no dispute in relation to development rebate, development allowance and investment allowance. All these deductions were allowed against composite income. Section 33AB is similarly placed and similarly worded provision so far computation of allowable amount is concerned. Therefore, there should not be dispute on such issue. Old Judgment of Kerala High Court: In Commissioner of Income Tax Versus Maha .....

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ld as follows; The only further question to be considered is regarding the scope of rule 8(1) of the Income-tax Rules extracted above. The rule clearly provides that the 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. But, for the purpose of liability to tax under the Act, it is provided that only 40 per cent, of such income shall be deemed to be income liable to tax. According to us, this rule has no .....

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. However this has not been referred before Tribunal , Kolkata and Calcutta High Court. The counsel of revenue or assessee did not bring it to the notice of Tribunal and the Calcutta high Court. Relevant portions from the judgment of Calcutta High Court: The judgment involves several issues. Therefore, herein below relevant portions from the judgment are reproduced for sake of convenience and better understanding of the issue: This appeal under Section 260A of the Income-tax Act is at the instan .....

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sment Year 1997-98 the appellant claimed deduction under Section 33AB of the Act amounting to Rs.50,69,336/-. h) In the order of assessment dated March 31, 2000, the Assessing Officer allowed deduction under Section 33AB as claimed in the return, though with reference to the assessed income, according to the appellant, it was entitled to a higher deduction. i) xxxx With regard to the appellant s claim for higher deduction under Section 33AB with reference to the assessed income, the Commissioner .....

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me-tax (Appeals) for the purpose of deciding the quantum of deduction under Section 33 AB with reference to 40% of the composite income as assessed. Being dissatisfied, the assessee has come up with the present appeal. A Division Bench of this Court at the time of admission of this appeal formulated the following substantial question of law: b) Whether the finding and/or direction of the Commissioner of Income- Tax (Appeals) that deduction under section 33AB was to be allowed after determining 4 .....

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the Division Bench, Mr. Khaitan contended that the provision contained in Section 33AB of the Act should be applied first and after calculating the deduction available under the said provision, the total deduction should be excluded and, thereafter, Rule 8 of the Rule should be applied for the purpose of calculation of 40% of the total income. Mr. Khaitan contends that the Tribunal below committed substantial error of law in holding that the deduction under Section 33AB was to be calculated on 4 .....

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B of the Act without the proviso to the same as those are unnecessary for our purpose and the said provisions are quoted below: 33AB. (1) Where an assessee carrying on business of growing and manufacturing tea in India has, before the expiry of six months from the end of the previous year or before furnishing the return of his income, whichever is earlier, deposited with the National Bank any amount or amounts in an account (hereafter in this section referred to as the special account) maintaine .....

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r cent of the profits of such business (computed under the head Profits and gains of business or profession before making any deduction under this section), whichever is less: We are of the opinion that in a case where the assessee is involved in the business of growing and manufacturing tea, on the question of deduction in terms of Section 33AB of the Act, the answer to the same depends upon the interpretation of the phrase a sum equal to twenty per cent of the profits of such business (compute .....

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mined, Rule 8 of the Income tax Rules would be applicable to find out the amount of tax payable on the said determined amount of profit or loss from business. We find that the Tribunal below erroneously held that the deduction under Section 33AB of the Act would be made after the taxable amount will determine under Rule 8 of the Rules. The question of application of Rule 8 does not come so long the profit or loss from the business of growing and manufacturing tea is determined after deduction of .....

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ered as chargeable income. For example, in case of composite income from tea cultivation and manufacture 100% is considered as business income but only 40% of such income goes into gross total income under the Income-tax Act, therefore , deduction allowable against gross total income, under chapter VI A can be allowed only with reference to such portion of composite income which goes into gross total income and not the entire amount of composite total income. However, when a deduction is allowed .....

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