R.V. Easwar, Judicial Member -
(1.) 1 to 3. [These paras are not reproduced here as they involve minor issues.]
4. The last ground is as under :
That on the facts and in the circumstances of the case and having regard to the provision of Section 80AB of the Income-tax Act, the Learned
Commissioner of Income-tax (Appeals) erred in directing the Assessing Officer to allow deduction under Section 80HHC before computation of income under Rule 8 of the Income-tax Rules.
The assessee exported tea in the accounting year. It was entitled to deduction under Section 80HHC in respect of the export. It also sold in India tea grown and manufactured by it. In the assessment, the ITO first computed the income from business at Rs. 16,31,26,552. As per Rule 8(1) of the Income-tax Rules, only 40 per cent of the income from tea is to be taxed under the Income-tax Act and the balance of 60% is to be treated as agricultural income exempt from income-tax under Section 10(1) of the Income-tax Act. Accordingly, the ITO brought to tax 40% of Rs. 16,31,24,552, Le., Rs. 6,52,50,620 as income taxable under the Income-tax Act. After including the income from "other sources", the gross total income was arrived at Rs. 8,41,07,231. From this, the ITO allowed deduction for export profits under Section 80HHC as follows:
Less: Deduction under Section 80HHC:
(The figure of Rs. 6,09,06,615 is the export turnover and the figure of Rs. 44,54,34,776 is the total turnover).
From this working, it will be clear that the ITO computed the deduction under Section 80HHC and allowed the same only against that part of the income from tea which is taxable under the Income-tax Act, viz., 40% of the income. In other words, the deduction was allowed after the application of Rule 8(1) to the income from tea.
5. The assessee contended before the CIT(A) that the ITO should have first granted the deduction under Section 80HHC against the entire tea income of Rs. 16,31,26,552, le., before applying Rule 8(1) and thereafter applied the rule and apportioned the income in the ratio of 40 : 60. The CIT(A) accepted the claim without elaborate discussion. He merely referred to the fact that the claim was accepted in some other cases.
6. The Revenue contends on the basis of the Calcutta High Court judgment in Goodricke Group Ltd. (No. l) v. CIT  201 ITR 261 that the computation of the deduction under Section 80HHC as made by the ITO should be upheld. Dr. Pal, the learned counsel for the assessee, contends that the deduction should be granted from the income from tea before applying Rule 8(1). He relies on the following decisions :
1. Karimtharuvi Tea Estates Ltd. v. State of Kerala  48 ITR 83 (SC).
(2.) Tata Tea Ltd. v. State of West Bengal  173 ITR 18 (SC).
Cait v. Periakaramalai Tea & Produce Co. Ltd.  84 ITR 643 (Mad.).
(3.) CAMBAY Electric Supply Industrial Co. Ltd. v. CIT[ 1978] 113 ITR 84 (SC).
He also points out that the decision relied upon by the revenue is inapplicable since it was concerned with Section 80G which is unconnected with the business income. According to him, the CIT(A)'s view has to be upheld.
7. On a careful consideration of the rival contentions, we are of the view that the ground of the revenue is well-taken and requires to be accepted.
8. The assessee derives income from sale of tea grown and manufactured by it. The income from tea consists of two parts : (i) agricultural income up to the stage of growing the tea, and (ii) non-agricultural or business income from the manufacture and sale of tea grown by it. Under the Constitution, agricultural income can be taxed only by the State Government. Rule 8(1) therefore provides that only 40% of the composite income can be taxed under the Income-tax Act. The power of the State Govern ments to levy tax extends to the balance, viz., 60% of the composite income. This part of the composite income cannot be taxed under the Income-tax Act and this position is recognised in Section 10(2) thereof. Now, Rule 8(1) also provides for the manner in which the composite income is to be computed. It says that the income "shall be computed as if it were income derived from business". It is therefore clear that the computation of the composite income has to be in the manner provided in the Income-tax Act. The Income-tax Act contained provisions for the computation of income under the head "business". The question is whether Section 80HHC is part of such computation provisions. If it is, then the 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. Dr. Pal referred to the Supreme Court decision in CAMBAY Electric Supply Industrial Co. Ltd. 's case (supra) where the Supreme Court held that the provisions of Section 72 have a direct bearing on the computation of business income. But that ratio in our view is not applicable to the present case. That Section (Section 72) provides for the business loss, not fully set-off against the other heads of income under Section 71, to be carried forward and set-off against the profits of the same business in the following year. Inter head and intra-head adjustments and carry-forward are without doubt part of the computation provisions. But we are concerned not with the type of the provision - Section 72 - discussed by the Supreme Court, but with a provision which appears in Chapter VI-A of the Income-tax Act, under sub-head "C-Deductions in respect of certain incomes". Section 80A provides that the deductions specified in Chapter VI-A (Section 80C to Section 80U) will be allowed from the gross total income. This means that it is not possible to view the deduction under Section 80HHC as part of the computation provisions. 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 the gross total income. It is not deductible while computing the business income. "Gross total income" has been defined by Section 80B(5) to mean the total income computed in accordance with the provisions of the Act before making deductions under Chapter VI-A. The very scheme of the Act thus is to treat the deductions under Chapter VI-A as deductions only from the gross total income. It is only after computing the gross total income that one can deduct therefrom the various deductions envisaged by Section 80C to Section SOU in order to arrive at the total income. The existence of a positive figure of gross total income is a condition precedent for the application of the provisions of Chapter VI-A deductions. It is 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 or bearing on the computation of business income in the same manner in which Section 72 affects the computation. In our view Section 80HHC does not impinge on the computation of business income at all. Even in the decision of the Supreme Court in Karimtharuvi Tea Estates Ltd's case (supra), the Supreme Court has referred only to the provisions of Section 10 of the 1922 Act and to the deductions available thereunder as being deductible while computing the composite income. The observations of the Supreme Court in Tata Tea Ltd.'s case (supra) heavily relied upon by Dr. Pal do not support the contention taken by him. The Supreme Court refers only to "the deductions allowable under the Act of 1981 in respect of income derived from business". There is no reference to the deductions under Chapter VI-A, which, in our opinion, are deductions not from a particular head of income but from the gross total income.
9. The contention of the assessee cannot be accepted for one more reason. Rule 8(1} by implication says that 60% of the composite income will be agricultural income and expressly states that only 40% thereof will be income liable to tax under the Income-tax Act. The rule is to be treated as incorporated in the definition of the term "agricultural income" in the Act of 1922 and the Act of 1961, as held by the Supreme Court in Tata Tea Ltd. 's case (supra). It follows that 60% of the income computed as per Rule 8(1) will be wholly exempt from tax under Section 10(i) of the Act as agricultural income. The apportionment in the ratio of 40: 60 is to be made at the stage when the composite income is computed as if it were business income. When the figure of business income, as computed in accordance with the Act, is available, the next step would be to divide or apportion the same in the above ratio between income taxable under the Income-tax Act and income exempt as agricultural income. The result would be that only 40% of the composite income would form part of the gross total income, as income under the head "business", We have already seen that the deductions under Chapter VI-A, of which Section 80I-IHC is one, are to be made only from the gross total income under the scheme of the Act. Therefore, there can be no question of deducting the relief under Section 80HHC even while computing the composite income under Rule 8(1) and even before applying the 40 : 60 apportionment under the rule. If the contention of the assessee is accepted, it would amount to granting deduction under Section 80HHC even with reference to income that is wholly exempt under Section 10( J) of the Act as agricultural income. Such a result cannot be countenanced and would be opposed to the basic scheme underlying the Act.
10. The decision of the Madras High Court cited by Dr. Pal arose under the Madras Agricultural Income-tax Act. Even in that case, the facts would show that the ITO, while making the assessment under the Income-tax Act, 1961, ascertained the composite income at Rs. 39,24,434 apportioned 40% thereof as per Rule 8(1) as income taxable under the Act and thereafter deducted 8%, being the relief under Section 80-1 of the Act as it stood then. This procedure which is similar to the procedure adopted by the ITO in the present case, was not called in question before the High Court. What was contested before the Court was the action of the Agricultural ITO in taking 60% of Rs. 39,24,434 as agricultural income liable to tax under the Madras Agricultural Income-tax Act without deducting therefrom 8% under Section 80-1. The Madras High Court directed the Agricultural ITO to deduct 8% from Rs. 39,24,434 and take 60% of the balance as the true agricultural income taxable under the Agricultural Income-tax Act. The High Court was not sitting in judgment over the action of the ITO under the Income-tax Act, 1961, in apportioning 40% of Rs. 39,24,434 as income liable to income-tax and deducting 8% under Section 80-1 only from the balance. No doubt, the Madras High Court observed that even while computing the composite income as per Rule 8(1) the deductions under Chapter VI are to be given which observation is in support of the assessee's case before us, but having regard to the fact that those observations were not made by the High Court in judging the correctness of the computation made by the ITO under the Income-tax Act and therefore cannot be regarded as the ratio of the decision and in view of the judgment of the Calcutta High Court in Goodricke Group Ltd. (No. l)'s case (supra) relied on by the Learned D.R., we are unable to uphold to claim made by the assessee. Though in that case the Calcutta High Court was concerned with deduction under Section 80G from the composite income from tea manufacturer, the ratio of the decision is that the deduction can be given from only the assessable income under the Income-tax Act and "the part of the income which is not taxable will not be taken into account for the purpose of giving any relief under Section 80G". Criticising the procedure prescribed by the Tribunal for allowing deduction under Section 80G in the case of composite income, it was held by the High Court that if such method was followed, "in that event, before any income is ascertained which is assessable under the Income-tax Act, the deduction will be made. But, it is not the intention of the section". It was further clarified that only from the income computed under the Income-tax Act for the purpose of assessment can deduction under Section 80G be allowed. This means that the agricultural income which is apportioned at 60% of the composite income and which does not enter the field of taxation under the Income-tax Act cannot be considered at all for the purpose of allowing deduction under Section 80HHC. We are respectfully bound by the judgment of the Calcutta High Court. We are therefore unable to accept the contention of the assessee.
11. The result is that the order of the CIT(A) on this point is reversed. The ITO's order is restored insofar as it relates to the deduction under Section 80HHC.
12. [This para is not reproduced here as it involve minor issues.];