TMI Blog2004 (8) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... laws. It is in effect, whether in the computation of the composite income derived from sale of tea grown and manufactured by the seller and exported out of India under section 2(1A) of the Income-tax Act, 1961 (hereinafter referred to as "the Act of 1961"), read with rule 8 of the Income-tax Rules, 1962 (hereinafter referred to as "the Rules of 1962"), the deduction under section 80HHC in respect of profits derived from export of tea out of India should be allowed as per permissible deduction before apportionment of non-agricultural income and agricultural income under rule 8 of the Rules of 1962 and thereafter the income so computed, as if it is a business income, is to be apportioned on the basis of 40 per cent, being non-agricultural income and 60 per cent, being the agricultural income. The facts necessary, in brief are-M/s. George Williamson (Assam) Ltd., and the Williamson Financial Services Ltd., are assessees under the Income-tax Act, and are limited companies engaged in the business of cultivation, manufacture and sale of tea. The appeals covers the assessment years 1989-90, 1990-91,1992-93,1993-94 and 1994-95 in respect of M/s. George Williamson (Assam) Ltd. and the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rged before this court that rule 8 of the Rules of 1962 provides for computation of composite income return from the sale of tea manufactured by the seller. Such composite income is to be computed in the first instance as if it were income derived from business. Income shall be computed in accordance with the provisions of the Income-tax Act, which deals with computation of business income and, thereafter, rule 8 of the Rules of 1962 is to be applied to find out what the agricultural income is and what is the business income of the assessee. It is further urged that the decision rendered by the High Court as reported in Assam Co. Ltd. v. State of Assam [1996] 219 ITR 59 having been overruled by the apex court in Assam Co. Ltd. v. State of Assam [2001] 248 ITR 567, the Tribunal has committed an error in computing the business income of the assessee mainly based on the Division Bench judgment of the Gauhati High Court reported in Assam Co. Ltd. v. State of Assam [1996] 219 ITR 59. The submission of learned counsel is that the decision rendered by the High Court having been merged into the decision of the apex court, the decision of the High Court loses its force. It is the submissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be computed in accordance with the provisions contained in sections 30 to 43D. 80HHC. (1) Where an assessee, being an Indian company or a person (other than a company) resident in India, is engaged in the business of export out of India of any goods or merchandise to which this section applies, there shall in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of the profits derived by the assessee from the export of such goods or merchandise. Rule 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 any subsidy which, under the provisions of clause (30) of section 10, is not includi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al Income-tax Act, 1939, to the assessee for assessment under the Act, on the ground that the deduction allowed under section 80HHC before computation of the composite income under rule 8 of the Income-tax Rules by the Income-tax Officer, was detrimental to the Revenue's interest and, therefore, it is necessary to re-determine the income under the proviso to section 49 of the Agricultural Income-tax Act, 1939, of the assessee for computation of the agricultural income. By virtue of the proviso to rule 5 of the Assam Agricultural Income-tax Rules 1939, the Agricultural Income-tax Officer, Assam, was empowered to refuse to accept the computation of agricultural income made by the Central Income-tax Officer. Feeling aggrieved, the assessee has challenged the issuance of notices and the constitutional validity of the proviso to rule 5 of the Assam Agricultural Income-tax Rules, 1939, in the High Court. Two issues came up for consideration before the Division Bench of the High Court, viz., (1) Whether the proviso to rule 5 of the Assam Agricultural Income-tax Rules, 1939, empowering the Agricultural Income-tax Officer to refuse to accept the computation made by the Central income-tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome made by the Central officers, after examining the books already examined by such Central officers. A perusal of section 50 of the Agricultural Income-tax Act shows that the State Government has been empowered to make such rules as may be necessary for the purpose of carrying out the purposes of the Act. The object and the scheme of the Act do not contemplate the State authorities, being empowered to re-compute the agricultural income contrary to the computation made by the Central officers, nor do the subjects specified in sub-sections (2)(a) to (m) of section 50 provide for making such Rules empowering the State officers to make computation of agricultural income contrary to what is computed by the Central officers under the Central Act. By virtue of the provisions made by the Legislature in the Explanation to section 2(a)(2), the second proviso to section 8 and section 20D, it is clear that the State Legislature intended to adopt the computation of agricultural income made under the provisions of the Central Act. Under section 50, we do not see any provision which specifically authorises the State Government to make any such Rules in the nature of the proviso to rule 5 of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ine of merger came for consideration before the apex court in the matter of Kunhayammed v. State of Kerala [2000] 245 ITR 360 (SC); [2000] 6 SCC 359. In the factual scenario a family consisting of 71 members raised a dispute before the Forest Tribunal, Kozhikode, that the land to the tune of 1,020 acres did not vest in the State Government. The Tribunal held in favour of the applicants that the land did not vest in the State Government. Appeal was preferred by the State before the High Court and the Kerala High Court dismissed the appeal. The State of Kerala filed a petition for special leave to appeal under article 136 of the Constitution, however, the petition was dismissed by an order dated July 18, 1983, stating that-"Special leave petition is dismissed on merits." By Act 36 of 1986, the Kerala Private Forests (Vesting and Assignment) Act, 1971, was amended. Section 8C amongst others was enacted into the body of the Act giving it a retrospective effect. In pursuance of the amendment, the State of Kerala filed an application for review of the order passed by the Kerala High Court. A preliminary objection was raised as to the maintainability of the review petition. The High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nes for application of the principles of the doctrine of merger and they are summed up in paragraph 44 of the judgment, which reads: "To sum up, our conclusions are: (i) Where an appeal or revision is provided against an order passed by a court, tribunal or any other authority before a superior forum and such superior forum modifies, reverses or affirms the decision put in issue before it, the decision by the subordinate forum merges in the decision by the superior forum and it is the latter which subsists, remains operative and is capable of enforcement in the eye of law. (ii) The jurisdiction conferred by article 136 of the Constitution is divisible into two stages. The first stage is up to the disposal of the prayer for special leave to file an appeal. The second stage commences if and when the leave to appeal is granted and the special leave petition is converted into an appeal. (iii) The doctrine of merger is not a doctrine of universal or unlimited application. It will depend on the nature of jurisdiction exercised by the superior forum and the content or subject-matter of challenge laid or capable of being laid shall be determinative of the applicability of merger. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nciples, we have to find out, in the facts and circumstances of the present case, whether the doctrine of merger has any application and the extent to which the doctrine of merger shall apply. In the case in hand, admittedly, the High Court has decided two issues, viz., first, the validity of the proviso to rule 5 of the Assam Agricultural Income-tax Rules, 1939; secondly, the manner of computation of agricultural and business income of the assessee on application of section 80HHC and rule 8 of the Rules, 1962. The first question has been specifically dealt with, whereas no decision was rendered by the apex court in the appeals so far as the second question is concerned. We have also to note that the apex court after entertaining the petitions and appeals, after issuing notice to the other side, has decided the issues on the merits and the appeals and petitions are allowed. Thus we can safely draw the inference that the judgment of the High Court has been set aside on the merits. Now the question is whether the point which has not been decided by the court can also be said to have been set aside, because of the doctrine of merger, inasmuch as the judgment of the High Court merged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iction to reopen the assessment of the business income made by the Central income-tax authority and therefore, has an authority to redetermine the stage of applicability of the provisions of section 80HHC and rule 8 of the Rules of 1962. Therefore, the decision on the interpretation of application of section 80HHC and rule 8 of the Rules of 1962 was dependent on the question of validity of the proviso to rule 5 of the Assam Agricultural Income-tax Rules. When the apex court has declared the rule not to be valid, there was no occasion for consideration of the second question of application of section 80HHC and rule 8 of the Rules of 1962 by the High Court nor was it necessary for the apex court to adjudicate on that question which becomes non-considerable, the moment the Supreme Court decides the validity of the proviso to rule 5 of the Rules. The decision of the Gauhati High Court on the merits of the question, was mainly dependent upon its conclusion that the proviso to rule 5 of the Assam Agricultural Income-tax Rules was intra vires and within the power of the State Income-tax Officer to redetermine the composite income. On that basis, the proceedings were reopened for assessmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he notification is issued before each House of Parliament and shall have effect subject to any modification or deletion made by both Houses of Parliament. Rule 7 of the Rules of 1962 made under section 295 of the Act of 1961 deals with the computation of income which is partially agricultural and partially from business. Rule 8 deals with income derived from the sale of tea grown and manufactured by the seller in India and such income shall be computed as if it were income derived from business and 40 per cent, of such income is deemed to be income liable to tax. Under sub-rule (1) of rule 8, it is provided that such income shall be computed as if it were income derived from business and 40 per cent, of such income is deemed to be income liable to tax. Rule 8 of the Rules of 1962 is incorporated in the definition of term "agricultural income" in the Act of 1961. Under section 80HHC, where an assessee, being an Indian company or a person other than a company resident in India, is engaged in the business of export out of India of any goods or merchandise, he shall be allowed in accordance with and subject to the provisions of section 80HHC and deduct the profit referred to in sub-s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce with rule 24 of the Indian Income-tax Rules, 1922, is limited and the income derived from the sale of tea grown and manufactured by the seller is first to be computed under section 10 of the Act of 1922, as if it were income derived from business. Any expenditure by the assessee, not being an allowance described in clauses (i) to (xiv) of section 10(2) of the Act of 1922 and not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly and exclusively for the purposes of such business would be deductible. Of the income so computed, 40 per cent, being under rule 24 of the Indian Income-tax Rules, 1922, treated as income liable to income-tax, the other 60 per cent, alone will be "agricultural income". The aforesaid decision clearly lays down that while computing "agricultural income" and "business income" in accordance with rule 24 of the Indian Income-tax Rules, 1922, deduction is permissible for arriving at the business income, so as to compute 40 per cent, for business and 60 per cent, for agricultural income. Another Constitution Bench of the apex court in Tata Tea Ltd. v. State of West Bengal [1988] 173 ITR 18, while consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplying the 40 per cent, rule, income should be first computed in accordance with the provisions of the Act, i.e., after allowing deductions including those encompassed by Chapter VI-A. A legal fiction is to be limited to the purposes for which it was created and should not be extended beyond the language of the section by which it is created. It is to be noted that rule 8 deals with two types of income, i.e., agricultural income and non-agricultural income at the ratio of 60:40 of the total income. After computing the total income, the same has to be bifurcated in the above manner. Therefore, the total income would necessarily mean the net income and not gross income. Before the charging section is given effect, taxable income must accrue and while computing the total income, all expenditure and other deductions and allowances must be taken into account. From the aforesaid decisions, we are of the considered view that for computation of the composite income derived from sale of tea grown and manufactured by the seller and exported out of India under section 2(1A) of the Act of 1961 read with rule 8 of the Rules of 1962, the deduction under section 80HHC in respect of profits der ..... X X X X Extracts X X X X X X X X Extracts X X X X
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