Commissioner Of Income Tax v. Willamson Financial Services And Ors

COMMISSIONER OF INCOME TAX v. WILLAMSON FINANCIAL SERVICES AND ORS. DECEMBER 12, 2007 B [S.H. KAPADIA AND B. SUDERSHAN REDDY, JJ.] Income Tax Act, 1961: c s. 80HHC-Composite income from sale of tea, grown and manufactured-Export of tea-Deduction under s. 80HHC-Held: Allowable after 60: 40 apportionment of income under Rule 8(1)-The said rule segregates agricultural income which is ~xempted income, from business income which is chargeable to tax-For that purpose, D [the ratio ][of ][60 ][: ][40 ][is ][applied-Therefore chargeability and ]computability is confined to only 40% of the income from tea which is taxable under Income Tax Act, 1961-In view of this, assessee cannot claim s.80HHC(3)(a) deduction against the entire tea composite income-Moreover Deductions under Chapter VL4 are deductions not E [from a particular head ][of ][income ][but from gross total ][income-]Therefore, s. 80HHC is not part of provisions for computation of business income-Income Tax Rules, 1962-r.8(1). s.10(1)-"agricultural income "-Power to make laws with respect to taxes on agricultural income-Held: Is on State Legislature under Article 246(1) of Constitution r. w. Entry 82 of List 1 in Seventh Schedule and Article 246(3) r. w. Entry 46 of List II in Seventh Schedule-Expression "agricultural income", means agricultural income as defined in Article 366(1) of Constitution for purpose of enactments relating to Indian Income-tax-Constitution of India, 1950-Articles 246(1), (3), 366(1), Seventh Schedule List I Entry 82 and List II Entry 46. The question which arose for consideration in these appeals is whether Assessing Officer was right in holding that deduction under s.80HHC can be allowed only against part of the income from tea which was taxable under the Income Tax Act, 1961, namely, 40% of the income. Disposing of the appeals, the Court HELD: 1.1. 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) oflncome Tax Rules, 1962, provides that only 40% of the composite income can be taxed under the Income Tax Act, 1961. Power of the State Governments to levy tax extends to the balance, namely, 60% of the composite income. Rule 8(1) provides for the method in which composite income is to be computed. It 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 1961 Act contains provisions for computation of income under the head "Business". The 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 ofincomeunderthehead "Business". [Para41) [400-E-G) Cambay Electric Supply Industrial Company Ltd (1978) 113 ITR 84 SC; The Karim Tharuvi Tea Estates Ltd, Kottayam and Anr. v. State of Ker ala and Ors., (1963) 48 ITR 83 SC and Distributors (Baroda) Pvt . Ltd v. Union of India and Ors., (1985) 155ITR120 SC, held inapplicable. Tea Ltd. v. State of West Bengal, (1988) 173 ITR 18 SC, Distinguished. 1.2. Deductions under Chapter VIA are deductions not from a particular head of income but from gross total income. Therefore, G s.80HHC is not part of the computation of income under the head "Business". S.80HHC Deduction is required to be allowed after apportionment ofincome under Rule 8(1) of the 1962 Rule. [Paras44and45) [402-D-E) A 2. S.10(1) 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 B 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. C The expression "agricultural income", for the purpose of these entries, means agricultural income as defmed for the purpose of the enactments relating to Indian Income-tax vide Article 366(1) of the Constitution. From the definition of"agricultural income" in Article 366(1) it becomes clear that Rule 8 of 1962 Rule (corresponding to Rule 24 framed under D I.T. Act, 1922) pertains to and is integrated with the definition of the expression "agricultural income" for the purposes oflaws 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 Artide 366(1) of the Constitution. The words used in Article E 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". [Paras 21 and 23] [390-G-H; 391-A-E] Tata Tea Ltd: v. State of West Bengal, (1988) 173ITR18 SC, relied F on. 3.1. Rule 8 refers to cases of integrated income. Where the income of the assessee is partly from agriculture and partly from manufacture - the profits on the sales have to be apportioned, and the elements in the profits referable to agricultural activities may be exempted as being G agricultural income. In such cases, the task of apportionment is simplified by Rules 7 and 8 framed in exercise of powers conferred by s.295(2)(b ). 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. Only the balance 60% H of such income would be deemed to be agricultural income on which the State Legislature would have the power to levy agricultural income-tax. However, the State Legislature would have no power to make any law which would have the effect oflevying 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. [Para 24) [391-H; 392-A-C, E-H; 393-A) 3.2. The term "agricultural income" has been defined under s.2(1A)