SUPREME COURT OF INDIA
Commissioner
of Income-tax
v.
Willamson
Financial Services
Section 80HHC of the Income-tax Act, 1961, read with rule 8 of the Income-tax Rules, 1962 - Deductions - Exporters - Whether deduction under section 80HHC cannot be allowed against entire tea composite and it is required to be allowed after apportionment of income under rule 8(1) - Held, yes
Section
80HHC, read with section 28, of the Income-tax Act, 1961 - Deductions -
Exporters - Whether section 80HHC is part of computation of income under head
‘Profits and gains of business or profession’ - Held, no
Words and phrases: ‘as if’ as occurring in rule 8(1) of the Income-tax Rules, 1962.
The assessee-company, engaged in the business of growing, manufacturing and exporting tea, claimed deduction under section 80HHC against the entire composite income which consisted of both agricultural income and business income, before application of rule 8(1). This working was rejected by the Assessing Officer who took the view that deduction under section 80HHC could be allowed after 60:40 apportionment as 40 per cent income was gross total income. The Commissioner (Appeals), however, reversed the decision of the Assessing Officer by holding that the Assessing Officer should have first granted deduction under section 80HHC against the entire tea income before applying rule 8(1). The Tribunal set aside the order of the Commissioner (Appeals) and upheld the order of the Assessing Officer. The High Court held that deduction under section 80HHC was admissible against entire income from tea.
On appeal to the Supreme Court:
Whether section 80HHC deduction is admissible against entire or part of
income from tea
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 of exempted income. It is neither chargeable nor includible in the total income. On the other hand, deduction under Chapter VIA is for ‘income’ which forms part of total income but which is tax-free. Thus, it is clear that ‘income’, covered under section 10 and section 11 which is not chargeable to tax, does not fall under section 14 and under various computation sections from section 15 to section 59. However, on account of legal fiction built into rule 8(1), which applies to composite income, a part of the composite income/integrated income is agricultural income and the balance is the business income. The object of rule 8(1) is to disintegrate the two. If the income from agriculture cannot be computed under the Act then the income from agriculture has to be arrived at in a normal commercial manner. There is no scope for computing such income by complying with the computation section under the Act. In other words, the real income has to be taken into account for the purpose of considering the exemption under section 10(1). This position emerges in a case where one has to deal solely with agricultural income. However, the instant case was concerned with the composite income. Therefore, rule 8(1) has to be interpreted. [Para 37]
The 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 one 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 of business or profession’. 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. [Para 38]
It is well settled that chargeability and computation under the 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, stand attracted. Therefore, rule 8(1) makes it clear that chargeability and computability shall be confined to 40 per cent of such income which shall be deemed to be income liable to tax. Here the legal fiction in rule 8(1) is confined to that rule alone. The Court cannot extend the legal fiction in rule 8(1) to section 80HHC(3)(a). There is a vital difference between income not chargeable to tax and not includible in the total income (for example, agricultural income) and income which forms part of total income but which is made tax-free. Deductions under Chapter VIA fall in the category of tax-free incomes. In fact, history shows that some of the incomes in Chapter VIA have been transferred from Chapter VII to Chapter VIA. Chapter VII has been deleted. However, at the relevant time Chapter VII referred to incomes forming part of total income on which no tax was payable. That is why, there is a difference between ‘exempted incomes’ and ‘tax-free incomes’. This distinction is of some importance. Section 5 provides what the ‘total income’ shall include. Chapter III refers to ‘incomes which do not form part of total income’. Chapter IV deals with ‘Computation of total income’. It classifies the ‘income’ under different heads and the deductions to be made in respect of each of the different heads of income. In the 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 there is ‘agricultural income’ which is neither chargeable nor includible in the total income and on the other hand there are ‘incomes’ under Chapter VIA which are part of total income but which are tax-free. [Para 39]
In the instant case, the composite income which was partly agricultural and partly business was in dispute. Rule 8(1) segregates agricultural income which is exempted income from business income which is chargeable to tax. For that purpose the ratio of 60:40 was to be applied. Therefore, to the extent of 40 per cent only of said income was chargeable. If this distinction is kept in mind the assessee cannot claim under section 80HHC(3)(a) deduction against the entire tea composite income. It can be claimed only against proportionate income. For the above reasons, section 80HHC deduction cannot be allowed against the entire tea income. [Para 40]
Is section 80HHC a part of the provisions of the 1961 Act which deals
with computation under the head ‘Profits and gains of business or profession’?
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), therefore, provides that only 40 per cent of the composite income can be taxed under the Act. Power of the State Governments to levy tax extends to the balance, namely, 60 per cent of the composite income. This part of the composite income (60 per cent) cannot be taxed under the Act. Rule 8(1) provides for the method in which composite income is to be computed. Rule 8(1) says that income shall be computed as if it were income derived from business. Rule 8(1) uses the word ‘income’ and not ‘total income’. The Act contains provisions for computation of income under the head ‘Profits and gains of business or profession’. The question is whether section 80HHC is part of the provisions in the Act which deals with computation of income under the head ‘Profits and gains of business or profession’? If it is, then apportionment prescribed by rule 8(1) can be applied only after deducting the allowance under section 80HHC from the composite income as contended by the assessee. However, computation in rule 8(1) in respect of composite income, by reason of legal fiction in-built in rule 8, cannot be read in entirety into computation of income under the head ‘Profits and gains of business or profession’. If the contention of the assessees that the entire computation of composite income under rule 8(1) is part of computation provisions under the head ‘Profits and gains of business or profession’ was accepted, then it would amount to granting deduction under section 80HHC even with reference to income which is exempt under section 10(1), namely, agricultural income. Such a result would be opposed to the basic scheme of the 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). Therefore, the very scheme of the 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 ‘Profits and gains of business or profession’, allowances are deductible from the income but not from ‘gross total income’. It was, 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. However, section 72 cannot be compared with section 80HHC because section 80HHC provides for deduction only from ‘gross total income’. [Para 41]
Thus, the deductions under Chapter VIA are deductions not from a particular head of income but from gross total income. Therefore, section 80HHC is not part of the computation of income under the head ‘Profits and gains of business or profession’. [Para 44]
For the aforestated reasons, it is clear that 80HHC deduction is required to be allowed after apportionment of income under rule 8(1). [Para 45]
For the aforestated reasons, the impugned judgments of the High Court was to be set aside.