TMI Blog2014 (7) TMI 1118X X X X Extracts X X X X X X X X Extracts X X X X ..... The submission made by Mrs. Gutgutia that the expenditure on account of fringe benefits has already been taken into account is not correct. The net profit and loss of the business has to be arrived at after deducting all the expenses as indicated in illustration A in the case of Doom Dooma (supra). Once that is done 40 per cent. of the net profit and loss has to be worked out which shall be chargeable to tax. Once this is done the expenditure on account of fringe benefits would automatically stand reduced to 40 per cent. as would appear from illustration B in the case of Doom Dooma (supra). The Revenue is interested in contending as would appear from the impugned orders that the expenditure on account of fringe benefit cannot be reduced to 40 per cent. for the purpose of computing fringe benefit tax. If that is done, the result would be that the agricultural income itself would become liable to tax, which is not permissible under sub-section (1) of section 10 of the Income-tax Act. The provisions contained in Chapter XII-H of the Income-tax Act have to be read subject to section 10 of the Income-tax Act. For the aforesaid reasons, we are of the opinion that the judgment of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppeals) by rejecting the grounds of appeal taken by the assessee. Aggrieved by the aforesaid order of the learned Tribunal the present appeal has been preferred. The sole question for consideration is whether rule 8 is applicable for the purpose of computing valuation of the fringe benefits for the purpose of Chapter XII-H of the Income-tax Act ? Rule 8 provides as follows : 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. (2) 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, if such area has not previously been abandoned, and for the purpose of determining such cost, no deduction shall be made in respect of the amount of subsidy which, under the provisions of clause (30) of section 10, is not includible in the total income. Mr. Majumdar, learned advocate appearing in support of the appeal, submitted that fringe benefit tax is an additio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax on proportionate basis. The third judgment relied upon by Mr. Majumdar is in the case of Hindustan Unilever Ltd. v. Deputy CIT reported in [2010] 325 ITR 102 (Bom). The question which cropped up for consideration in the aforesaid case was whether rule 8 was applicable to the losses suffered by a tea company. The question was answered in the affirmative. The view expressed by the Bombay High Court to be precise is as follows (page 111) : Now, what rule 8 postulates is the process of segregating the income derived from the sale of tea upon its computation as if it were income derived from business. Rule 8 creates a legal fiction, as a result of which the income which is derived from the sale of tea which is grown and manufactured by the assessee is to be computed as if it were income derived from business. It needs no line of elaborate reasoning to state the well-settled position in law that once a legal fiction is created by the Legislature or, as in this case, in subordinate legislation, the legal fiction has to be given force and effect so as to operate within the area in which it was intended to operate. In applying a legal fiction, it is tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Supreme Court held that if the capital was not chargeable to tax during the period between April 1, 1948 and April 1, 1957, the assessee did not possess an independent right to carry forward his capital loss even if it could not be set off, owing to the non-taxability of the capital gains, against profits in subsequent years. The decision of the Supreme Court emphasises that under the charging provisions of the Act, income must be comprehensively understood as including a loss. The principle that income would include a loss has also been re-affirmed in a subsequent judgment of the Supreme Court in CIT v. J. H. Gotla [1985] 156 ITR 323 (SC). In the present case, the Assessing Officer, while issuing a notice for reopening the assessment, observed that the provisions of rule 8 are applicable 'only in the case of income' and the claim of the assessee to set off 40 per cent. of losses against normal business profits could not be allowed. On the basis, the Assessing Officer has formed the opinion that the loss of ₹ 10.84 crores attributable to the business activity of the assessee involving the manufacture and sale of tea was liable to be disallowed. It must be noted her ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R and B Falcon (A) Pty. Ltd. v. CIT reported in [2008] 301 ITR 309 (SC) ; AIR 2008 SCW 4096. 8. We have considered the rival submissions advanced by the learned advocates. For the purpose of resolving the disputes, we would like to refer to the illustration appearing from the judgment of the apex court in the case of CIT v. Doom Dooma India Ltd. (supra). The illustration in paragraphs 12 and 13 of the judgment reads as follows (page 397) : Be that as it may, we can give the following illustration(s) which will give an example of how the written down value needs to be computed : Illustration A (Rs.) Income from sale of tea 1,000 Less : Expenses : Depreciation (100) Others (300) Business profit 600 Income subject to charge under the Income-tax Act by application of rule 8 (40% of 600) 240 Illustration B (Rs.) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 40 per cent. of ₹ 300 had been taken into account. We shall take assistance of the illustration to resolve the issue. Let us assume that the other expenses in illustration A amounting to ₹ 300 include ₹ 100 spent by the employer on account of fringe benefits made available to its employees. In that case, 40 per cent. of the aforesaid sum of ₹ 100 would also be includible in illustration B. Therefore, the question posed before us has really been answered by the illustration given by the apex court in the aforesaid judgment. It cannot be disputed that the amount of expenditure incurred by the assessee in extending fringe benefits to its employees was not solely for the purpose of business. The expenditure incurred is both for the purpose of business and for the purpose of agriculture. The submission made by Mrs. Gutgutia that the expenditure on account of fringe benefits has already been taken into account is not correct. The net profit and loss of the business has to be arrived at after deducting all the expenses as indicated in illustration A in the case of Doom Dooma (supra). Once that is done 40 per cent. of the net profit and loss has to be worked ou ..... X X X X Extracts X X X X X X X X Extracts X X X X
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