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2007 (12) TMI 16

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..... turing 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 Assessing Officer 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 Assessing Officer. by holding that the Assessing Officer 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 the view that Assessing Officer. was right in allowing Section 80HHC Deducti .....

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..... nd 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 that though a deduction does not appear in Chapter .....

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..... 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 export .....

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..... 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 capital borrowed for the purposes of the business, profession or vocation, the amount of the interest paid: 13. 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 .....

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..... hich 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 from of total income "10. Incomes not included in total income.- 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) agricultural income;" 15. Sections 80HHC(1) and 80HHC(3)(a) of the 1961 Act read as under : "80HHC. Deduction in respect of pr .....

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..... sions have the meanings 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 .....

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..... of apportionment is simplified by Rules 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 w .....

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..... d down in the Income-tax Act.  Therefore, the manner of computation laid down by the I.T. Act forms an integral 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 categ .....

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..... ral cases have to be made with reference to total income.  For example, tax relief under Section 80HH is restricted to the ceiling limit determined by reference to gross total income of the assessee which 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 unde .....

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..... Rs.10 lacs would be liable to income-tax.  34. On the other hand, according to Department, applying the apportionment of 60 : 40 in Rule 8(1) to Rs.50 lacs the business profit would come to Rs.20 lacs which would be allocated between  export  turnover : total  turnover  to  arrive  at   Section 80HHC Deduction which will be : 20  x  100/200 = Rs.10 lakhs.              35. In short, assessee claims 80HHC Deduction at Rs.25 lakhs whereas Department calculates 80HHC Deduction at Rs.10 lacs to arrive at the "total income"  Findings 36. 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.  37. The word "income" is an expression of elastic ambit.  It is not exhaustive.  That is why Section 2(24) defines "income" as .....

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..... is case we are concerned with the composite income.  Therefore, we have to interpret Rule 8(1) of the1962 Rule. 39. At the outset, it may be noticed that Rule 8(1) uses the word "income" In the entire rule the word "total income" is not mentioned.  Further, Rule 8(1) refers to income derived from the sale of tea cultivated and manufactured.  In the case of an assessee deriving income, not from composite activity, one has to calculate agricultural income in the commercial sense.  However, when we come to composite income under Rule 8(1) a part of the composite income is business profit, which is one of the source/head of income under Section 14, and therefore to that extent alone chargeability 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.  40. It is well-settled that chargeability and computation under 1961 Act, constitutes one integral Code.  Rule 8(1), therefore, states that composite/integrated .....

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..... sp; In the Income-tax Act, the expression "income includible in the total income" has a definite connotation.  Similarly, the expression "deduction and allowances" have particular connotation.  Therefore, on one hand we have "agricultural income" which is neither chargeable nor includible in the total income and on the other hand we have "incomes" under Chapter VIA which are part of total income but which are tax-free.  41. In this case, however, we are concerned with composite income which is partly agricultural and partly business.  Therefore, Rule 8(1) segregates agricultural income which is exempted income from business income which is chargeable to tax.  For that purpose we need to apply the ratio of 60 : 40.  Therefore, to the extent of 40% only we have chargeability and computability.  If this distinction 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 o .....

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..... income which is exempt under Section 10(1) of the 1961 Act, namely, agricultural income.  Such a result would be opposed to the basic scheme of the 1961 Act.  In this connection, it is also important to note that under Section 80A which falls in Chapter VIA, deductions are allowed only from "gross total income"  The object for making such provision is to limit the amount of 80HHC Deduction.  It is true that Section 80HHC provides for deduction of a percentage of the export profits.  The percentage is calculated with reference to the export profits, but the deduction is only from "gross total income" as defined under Section 80B(5) of the 1961 Act.  Therefore, the very scheme of 1961 Act is to treat the deductions under Chapter VIA as deductions only from "gross total income" in order to arrive at the "total income"  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 80H .....

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