TMI Blog2007 (12) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... e-tax Act, 1961 (for short, "1961 Act") in respect of the export. They were in the business of growing and manufacturing tea. Since they earned Composite Income, their case stood covered by Rule 8(1) of Income-tax Rules, 1962 ("1962 Rule" for short). 5. For the sake of convenience we state the facts occurring in Civil Appeal No.3803-3808 of 2005- Commissioner of Income Tax v. Willamson Financial Services ors. In the returns, the assessee claimed Section 80HHC Deduction against the entire Composite Income before application of Rule 8(1). 6. This working was rejected by the A.O. who took the view that deduction under Section 80HHC can be allowed after 60 : 40 apportionment as 40% income was gross total income. However, in appeal, CIT (A) reversed the decision of the A.O. by holding that the A.O. should have first granted Section 80HHC Deduction against the entire tea income before applying Rule 8(1). 7. In short, the controversy is : whether Section 80HHC Deduction is admissible against the entire or part of the income from tea (i.e. 40%). 8. Against the said decision of CIT(A) the matter was carried in appeal to the Tribunal who took ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liance on the definition of "total income" in section 2(45) and section 5 of the 1961 Act which defines the scope of total income. According to learned counsel, "business income" is one of the Heads of Income under Section 14 and such income is included in the total income of an assessee. According to assessees, Section 80A, which is in Chapter VI-A, provides that in computing the total income, there shall be allowed from gross total income, deductions specified in sections 80C to 80U of the Act and, therefore, there is no difference between deductions under Chapter IV and the deductions under Chapter VI-A. Therefore, according to the learned counsel, in computing the total income, it is not permissible to restrict the deduction under Chapter IV and not to allow deduction under Chapter VI-A. In this connection reliance was placed by the learned counsel on the judgment of this Court in the case of Cambay Electric Supply Industrial Company Ltd. v. Commissioner of Income Tax - (1978) 113 ITR 84 (SC) which had been approved by the Constitution Bench later on in the case of Distributors (Baroda) Pvt. Ltd. v. Union of India and Ors. - (1985) 155 ITR 120 (SC) in which it has been held t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertaking, there shall be allowed, in computing the total income, a deduction equal to twenty per cent from such profits. Similar expression finds place in section 80HHB and section 80-IA. These illustrations have been given by the learned counsel in support of his contention that where the gross total income includes any business profits referred to under the specific section, section 80AB would apply and the amount of income specified in the given section as computed in accordance with the provisions of the Act (before making any deduction under Chapter VI-A) shall alone be deemed to be the amount of income of the said nature which is derived or received by the assessee and which is included in his gross total income. However, the said scheme of sections 80HHB, 80-I and 80-IA etc. is not applicable to the scheme of section 80HHC. According to the learned counsel, section 80HHC is the separate code by itself. That the said section cannot be confused or put on par with sections 80HHB, 80-I or 80-IA. According to the learned counsel, section 80HHC is different from other sections under Chapter VI-A because it provides that in computing the total income, the profits and gains from ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by him. (2) Such profits or gains shall be computed after making the following allowances, namely:- (i) Any rent paid for the premises in which such business, profession or vocation is carried on, provided that when any substantial part of the premises is used as a dwelling-house by the assessee, the allowance under this clause shall be such sum as the Income-tax Officer may determine having regard to the proportional annual value of the part so used; (ii) in respect of repairs, where the assessee is the tenant only of the premises, and has undertaken to bear the cost of such repairs, the amount paid on account thereof, provided that, if any substantial part of the premises is used by the assessee as a dwelling-house, a proportional part only of such amount shall be allowed; (iii) in respect of capital borrowed for the purposes of the business, profession or vocation, the amount of the interest paid: 12. Rule 24 of the 1961 Act reads as under: "24. Income derived from the sale of tea grown and manufactured by the seller in the taxable territories shall be computed as if it were income derived from business, and 40 per cent. of such in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of not less than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year ; or (B) in any area within such distance, not being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in item (A), as the Central Government may, having regard to the extent of, and scope for, urbanisation of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette: Explanation. - For the removal of doubts, it is hereby declared that revenue derived from land shall not include and shall be deemed never to have included any income arising from the transfer of any land referred to in item (a) or item (b) of sub-clause (iii) of clause (14) of this section;" 14. Section 10(1) of the 1961 Act reads as under: "CHAPTER III INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME Incomes not included in total income. 10. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included (1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eanings hereby respectively assigned to them, that is to say- (1) "agricultural income" means agricultural income as defined for the purposes of the enactments relating to Indian income-tax;" 21. On analysis of the above provisions the position which emerges is as follows. Section 10(1) of 1961 Act exempts "agricultural income" not only from taxable income but also from the "total income" of the assessee. These incomes are different from tax-free incomes under Chapter VIA. The exemption of agricultural income from central taxation is based on the provisions in the Constitution according to which Parliament has exclusive power to make laws with respect to taxes on income other than agricultural income, whereas State Legislature has exclusive power to make laws with respect to taxes on agricultural income, under Article 246(1) of the Constitution read with Entry 82 of List I in the Seventh Schedule and Article 246(3) read with Entry 46 of List II in the Seventh Schedule. 22. The expression "agricultural income", for the purpose of above-mentioned entries, means agricultural income as defined for the purpose of the enactments relating to Indian Inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es 7 and 8 framed in exercise of powers conferred by Section 295(2)(b). Under Rule 7 the market value of the agricultural produce used as raw material in the business is deductible from the business profits, as representing agricultural income. Under Rule 8, which applies only in cases where the assessee himself grows tea-leaves and manufactures tea in India, 40% of the profits on sales is taxable as business income, while the balance is exempt as representing agricultural income. If an income receipt, comprises of both agricultural and non-agricultural elements, it has to be disintegrated - and that portion which represents agricultural income should be exempted from tax. Thus, composite revenue derived from land may be apportioned. In cases where a person subjects agricultural produce to a manufacturing process before selling it, the profits on the sale has to be disintegrated and the portion representing agricultural income would be exempt from tax but the portion attributable to the manufacturing process would be taxable as business profits. This is the basic scheme of Rule 8. Therefore, the position which emerges is that income derived from the sale of tea grown and m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tegral part of the definition "total income". The correct method of approach is to treat nothing as being charged to tax until by the process of computation laid down by the said Act, the status of income, profits and gains, emerges. This principle is very important for deciding the present case. We repeat that computation laid down by the said Act forms an integral part of the definition of "total income". Section 4 charges the total income of an assessee to income-tax. Section 5 of the I.T. Act defines "total income". 27. At this stage we have to analyse Chapter III which deals with Incomes which do not form part of total income. Section 10 groups in one place various incomes which are exempt from tax. The incomes enumerated in Section 10 are not only excluded from the taxable income of the assessee but also from his total income. The exemption embodied in Section 10 can be divided into two categories, namely, exemption to which certain classes of income from their very nature are entitled to exemption and the second category concerns exemption to which the character of the assessee entitles him to claim exemption. In the first category is agricultural income w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch expression, as stated above, is defined in Section 80B(5) of the I.T. Act. It is also important to bear in mind that under Section 4 the levy is on "total income" of the assessee computed in accordance with and subject to the provisions of the I.T. Act. What is chargeable to tax under the I.T. Act is the profits and gains of a year. What is chargeable to tax under the I.T. Act is not gross receipts but income. Under the I.T. Act the tax is on income and not on gross receipts. Section 4 is the charging section. Section 5 defines gamut of "total income". Section 4 charges every person in respect of his total income, however, income cannot be taxed unless it falls within Section 5 subject to it being saved by any other section from taxation. The ambit of taxation, being subject to the provisions of the I.T. Act, involves two consequences. Firstly, provisions of the I.T. Act, example, Section 10 to Section 12 and various sections under Chapter VIA, may have the effect of exempting income which would otherwise be chargeable under Section 5. Secondly, the amount of income from whatever sources derived is to be ascertained subject to the provisions of particular sections deali ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs.10 lacs to arrive at the "total income". FINDINGS 35. The word "income" is defined in Section 2(24) of the 1961 Act. That word finds place in Rule 8(1). The word "income" in Section 2(24) includes "profits and gains". The term "total income" is defined in Section 2(45) to mean the total amount of income referred to in Section 5, computed in the manner laid down in the I.T. Act. The word "total income" is not there in Rule 8. 36. The word "income" is an expression of elastic ambit. It is not exhaustive. That is why Section 2(24) defines "income" as including a particular category of receipts. Mere gross receipt cannot be taxed as income. 37. Section 80HHC inter alia states that in computing the "total income" a deduction, to the extent of profits derived by the assessee from exports has to be taken into account. The important words are "profits derived from the export". The word "derived" would mean "derived from the source". That source has to be in Section 14. Income covered by Section 10(1) i.e. agricultural income, which is not chargeable to tax, does not fall in Section 14 and, therefore, it will not fall under various comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and computation would arise and that too only to the extent of computation of income under the head "profits and gains from business". Therefore, the charging provision and computation provision will apply only to that limited extent. That is why in Rule 8 a legal fiction is incorporated. 39. It is well-settled that chargeability and computation under 1961 Act, constitutes one integral Code. Rule 8(1), therefore, states that composite/integrated income shall be computed as if it was income derived from business. The words "as if" stand for legal fiction. Therefore, the composite income had an element of agricultural and business incomes which needed to be separated by applying the rule of apportionment under Rule 8. That is because, agricultural income has no linkage with any of the enumerated heads in Section 14 though the non-agricultural element has such linkage. Rule 8(1) says that when income is derived from composite activity such income shall be chargeable to income-tax as "business income". In other words, in the case of composite income, by legal fiction, chargeability is assigned only to non-agricultural part of the composite income which has linkage w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nction is kept in mind we are of the view that the assessee cannot claim 80HHC(3)(a) Deduction against the entire tea composite income. It can be claimed only against proportionate income. Therefore, in the above example, 80HHC Deduction can be claimed not against the entire composite income of Rs.50 lacs but it can be claimed only against a part thereof which is Rs.20 lacs. Similarly, in the other example, 80HHC Deduction can be claimed not against composite income of Rs.16.05 crores, it can be claimed only against the composite income of Rs.6.42 crores. For the above reasons, we are of the view that Section 80HHC Deduction cannot be allowed against the entire tea income. Is Section 80HHC a part of the provisions of the 1961 Act which deals with computation under the head "Profits and Gains from Business"? 41. The contention of the assessees cannot be accepted for one more reason. The tea income consists of two parts: (i) "agricultural income" upto the stage of growing the tea; and (ii) "business income" from the manufacture and sale of tea grown by the assessee. Under the Constitution, "agricultural income" can be taxed only by the State Governments. Rule 8(1), t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowances are deductible from the income but not from "gross total income". It is, therefore, not possible to accept the contention that Section 80HHC is part of the provisions for computation of business income. Section 80HHC does not have any direct impact on the computation of business income in the manner in which, for example, Section 72 affects the computation of business income. On behalf of the assessees heavy reliance was placed on the judgment of this Court in the case of Cambay Electric Supply Industrial Company Ltd. (supra). That was a case where this Court held that Section 72 provides for the business loss, not set-off fully against the other heads of income under Section 71, to be carried forward and adjusted against the profits of the same business in the next year. Inter-head and intra-head adjustments and carry-forwards are part of the computation provisions. However, Section 72 cannot be compared with Section 80HHC because Section 80HHC provides for deduction only from "gross total income". Therefore, the judgment of this Court in Cambay Electric Supply Industrial Company Ltd. (supra) has no application. 42. Reliance was also placed by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
