TMI Blog1993 (4) TMI 59X X X X Extracts X X X X X X X X Extracts X X X X ..... e extent of 40 per cent. with reference to rule 8(1) of the Income-tax-Rules, 1962 (in short, "the Rules"), and the balance 60 per cent. income is to be assessed as agricultural income. During the relevant previous year, the assessee sold Rehabari Tea Estate for a total consideration of Rs. 61 lakhs. After deducting the brokerage incurred in connection with the sale, the net sale proceeds were Rs. 60,39,000. The Assessing Officer computed a sum of Rs. 24,41,350 as the profit under section 41(2) of the Act being the amount realised in excess of the written down value of the building, plant, machinery, etc. The said sum of Rs. 24,41,350 was assessed in its entirety as income assessable under the Act and the assessee's contention that only 40 per cent. of such sum could be taken into consideration was rejected. The Assessing Officer observed in his order of assessment that rule 8(1) of the Rules did not apply to the said profit under section 41(2) of the Act since it was not out of tea grown and manufactured but out of sale of the assets of the tea estate (page 23 of the paper book, lines 25-30). The assessee appealed, inter alia, against the assessment of the said entire sum of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Supreme Court held as under "It may be mentioned here that rule 7 of the Income-tax Rules, 1962, deals with the computation of income which is partially agricultural and partially from business and rule 8 is the specific rule dealing with income derived from the sale of tea grown and manufactured by the seller in India. 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. A perusal of the aforesaid rule 8(1) makes it clear that under the said rule, income from the sale of tea grown and manufactured by a seller in India has to be computed as if it were income derived from business which would imply that the deductions allowable under the Act of 1961 in respect of income derived from business would be allowable in the case of income derived from the sale of tea grown and manufactured by seller and further allowance would be granted as set out in rule 8(2) and 40 per cent. of the income so computed would be deemed to be income liable to the levy of income-tax and the balance of the income would be liable to tax as agricultural income subjec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue in a previous year in which the business or profession for the purpose of which the building, machinery, plant or furniture was being used is no longer in existence, the provisions of the said sub-section shall apply as if the business or profession is in existence in the previous year. The fiction provided under section 41(2) thus treats the business in which the asset in question had been used as in existence and provides that any amount realised in excess of the written down value not exceeding the actual cost is to be charged to income-tax as income of the business of the previous year in which such moneys become payable. The effect of section 41(2) read with the Explanation is that the excess over the written down value is deemed to be the income of the tea business and has to be accordingly computed with reference to rule 8 of the Rules. The contention of the income-tax authorities that such income does not arise out of cultivation of tea leaves and/ or manufacture of tea is not correct in view of the statutory fiction created under section 41(2) read with the Explanation thereto and the provisions of section 29 of the Act. But for the fiction created under section 41(2) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax Rules, 1922 (in short, "the 1922 Rules"), corresponding to rule 7 of the Rules, is applicable. In respect of the tea income only a specific provision was made in rule 24 of the 1922 Rules corresponding to rule 8 of the Rules. The distinction between the two rules has been noticed by the Supreme Court in the case of Tata Tea Ltd. [1988] 173 ITR 18. In respect of tea income, rule 7 of the Rules or rule 23 of the 1922 Rules has no application. Maharashtra Sugar Mills [1971] 82 ITR 452 (SC) relied upon by the Department refers to computation of the income under rule 23 of the 1922 Rules corresponding to rule 7 of the Rules. It would be noticed that in Maharashtra Sugar Mills' case [1971] 82 ITR 452 (SC), the Supreme Court has held that, where the computation was to be made with reference to rule 23 of the 1922 Rules, that is rule 7 of the Rules, the deduction had to be allowed in its entirety as business expenditure. No question of any specified percentage only being brought to tax under the Act arose as in the case of tea income. In the case of Maharashtra Sugar Mills [1971] 82 ITR 452 (SC), 100 per cent. deduction was allowed for the common overhead expenditure like manag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ries on business of growing and manufacturing tea. . . ." (emphasis supplied). " 33AB. (1) Where an assessee carrying on business of growing and manufacturing tea in India . . . ... (emphasis supplied). It is this unity of the activity peculiar to growing and manufacturing tea which makes for two sets of rules, viz., rule 7 and rule 8. To sum up, by virtue of the fiction under section 41(2), profit, though in the nature of a capital gain, is treated as income of the business, though not in existence, where profit arises on sale of depreciable assets of the business after being used for the purpose of the business. The business in the present case being business of growing and manufacturing tea, the fictional profit of the business so arising under section 41(2) cannot but be a profit of the same composite business. Thus, the apportionment to the prescribed percentage as between growing tea and manufacturing tea under rule 8(1) is unavoidable. The statute as also the rules framed thereunder consistently accept the business of growing tea and the business of manufacturing tea as one indivisible composite business calling for apportionment of its income under all circumstances. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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