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TMI Blog2007 (12) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the profits from tea export has also to be allowed in computing the business income. In this connection, learned counsel placed reliance 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch deductions are admissible. For example, section 80HH provides that where gross total income includes any profits derived from an industrial undertaking, 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 cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as under: 10. (1) The tax shall be payable by an assessee under the head "Profits and gains of business, profession or vocation" in respect of the profits and gains of any business, profession or vocation carried 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 ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... land, and is a building which the receiver of the rent or revenue or the cultivator, or the receiver of rent-in-kind, by reason of his connection with the land, requires as a dwelling house, or as a store-house, or other out-building, and (ii) the land is either assessed to land revenue in India or is subject to a local rate assessed and collected by officers of the Government as such or where the land is not so assessed to land revenue or subject to a local rate, it is not situated - (A) in any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee or by any other name) or a cantonment board and which has a population 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) & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the business, the same proportion as the export turnover in respect of such goods bears to the total turnover of the business carried on by the assessee;" 16. Rule 8(1) of the 1962 Rule reads as under: Income from the manufacture of tea. 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. 17. Entry 46, List II (State List) of the Seventh Schedule to the Constitution which reads as under: "46. Taxes on agricultural income." 18. Article 245 of the Constitution reads as under: "245. Extent of laws made by Parliament and by the Legislatures of States.- (1) Subject to the provisions of this Constitution, Parliament may make laws for the whole or any part of the territory of India, and the Legislature of a State may make laws for the whole or any part of the State. (2) No law made by Pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of "agricultural income" in Article 366(1) it becomes clear that Rule 8 of 1962 Rule (corresponding to Rule 24 framed under I.T. Act, 1922) pertains to and is integrated with the definition of the expression "agricultural income" for the purposes of laws pertaining to Indian Income-tax and, therefore, the said rule has to be taken into account in considering the meaning of the expression "agricultural income" in Article 366(1) of the Constitution. It is significant to note that the words used in Article 366(1) of the Constitution are not "as defined by the enactments relating to Indian Income-tax" but "as defined for the purposes of the enactments relating to Indian Income-tax". Therefore, it is clear from the definition in Article 366(1), that Rule 8 of 1962 Rule (Rule 24 of I.T. Rules, 1922), defines the term "agricultural income" for the purposes of laws pertaining to Indian Income-tax and, therefore, the said rule has to be taken into account in considering the meaning of the term "agricultural income" under Article 366(1) of the Constitution. [See: Tata Tea Ltd. v. State of West Bengal - (1988) 173 ITR 18 (SC) ]. 23. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x under Article 246(3) r/w Entry 46, List II of the Seventh Schedule to the Constitution. However, the State Legislature would have no power to make any law which would have the effect of levying tax on the aforestated 40% of such income on which tax is payable under the I.T. Act by virtue of the provisions of the I.T. Act. The computation of income from tea has to be in accordance with the relevant provisions of the enactments relating to the Indian Income-tax and the deductions towards various expenses incurred for earning the income shall be liable under the said enactments relating to Indian Income-tax. Thus, where computation of income from cultivation, manufacture and sale of tea is made in accordance with the provisions of the I.T. Act, the Agricultural Income-tax Officer would have no option but to accept the computation by the A.O. under 1961 Act and treat 40% of such income, as business income and the balance 60%, as agricultural income. 25. To the above extent there is no dispute. The question before us is whether computation of Section 80HHC Deduction could be said to be part of computation provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are concerned with the first category. 28. In addition to the above two categories there is a third kind of income. These incomes are wholly or partly tax-free incomes on account of special deductions under Chapter VIA. We are essentially concerned with these "tax-free incomes". 29. In the present matter we are required to adjudicate upon the fiction in Rule 8 vis-`-vis the computation contemplated by Chapter VIA in which Section 80B(5) finds place and which defines the expression "gross total income" as total income computed in accordance with the provisions of the said Act before making any deduction under Chapter VIA. Section 10(1) inter alia provides that agricultural income is not includible in the total income of the assessee. The result is that agricultural income is not only exempt from tax but, under the scheme of the I.T. Act, is also to be excluded from computation of the total income. Exemptions granted under the I.T. Act covers "incomes" which are exempt from Charge and also from total income of the assessee whereas the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s derived is to be ascertained subject to the provisions of particular sections dealing with the sources, namely, Section 15 to Section 59. ASSUMPTION 30. Before coming to the reasons in support of our findings we would like to explain the claim of the assessees. For that purpose we need to give a mathematical illustration based on certain assumptions. (a) Calculation according to assessees: Composite Income as business profits : Rs.16.05 crores Total turnover : Rs.52.20 crores FOB Value of Export Sales : Rs.64.08 lakhs Thus, Deduction under Section 80HHC = 64.08 lakhs x16.05 crores = Rs.19.70 lacs (Apprx.) (Rounded off to Rs.20Lacs) 52.20 crores After deducting Rs.20 lacs from Rs.16.05 crores the total income will come to Rs.15,85,00,000/- (Approx.) to which apportionment of 60:40 under Rule 8(1) will be applied to arrive at income liable to tax. (b) Calculation according to A.O.Composite Income as business profits : Rs.16.05 crores 40% of composite income : Rs.6.42 crores (Approx.) Total turnover : Rs.52.20 crores FOB Value of Exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 computation sections commencing from Section 15 to Section 59. Section 14 classifies "all income" into five enumerated heads for the purpose of charge of income-tax and computation of total income. As stated hereinabove, "exempted income" is different from "tax-free income". In the present case, we are concerned with both these types of income. "Agricultural income" falls in the category ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 with one of the enumerated heads in Section 14, namely, "business income". Therefore only to that extent, the computation provisions, mentioned in Section 15 to Section 59 of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come". In other cases falling under Section 28 where computation of income falls under the head "Business", allowances 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, t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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