2007 (12) TMI 4 - SC - Income Tax

Whether section 80HHC deduction is admissible against the entire or part of the income from the tea business (i.e. 40%).- Held that deduction is admissible only to the part of income - for the purpose of deduction under ch. VI-A determination of income under ch. IV should be made correctly

Summary

Issues Involved:
1. Stage at which Section 80HHC Deduction is to be allowed.
2. Interpretation and application of Rule 8(1) of the Income-tax Rules, 1962.
3. Computation of composite income from tea cultivation and manufacture.
4. Applicability of Section 80HHC in relation to agricultural and business income.

Issue-wise Detailed Analysis:

1. Stage at which Section 80HHC Deduction is to be allowed:
The primary issue was whether the Section 80HHC Deduction should be allowed before or after the 60:40 apportionment under Rule 8(1). The assessees argued that the deduction should be granted against the entire composite income before applying Rule 8(1), while the Department contended that the deduction should be allowed only against the 40% of income taxable as business income.

2. Interpretation and application of Rule 8(1) of the Income-tax Rules, 1962:
Rule 8(1) provides that 40% of the composite income from the sale of tea grown and manufactured shall be deemed to be income liable to tax. The Court analyzed the rule and concluded that the legal fiction created by Rule 8(1) should be confined to the rule itself and cannot be extended to Section 80HHC(3)(a). The rule segregates agricultural income, which is exempt, from business income, which is taxable.

3. Computation of composite income from tea cultivation and manufacture:
The Court discussed the method of computing composite income, which involves both agricultural and business elements. The income from tea cultivation and manufacture is first computed as business income, and then 40% of such income is deemed to be taxable under the Income-tax Act. The remaining 60% is considered agricultural income and is exempt from tax.

4. Applicability of Section 80HHC in relation to agricultural and business income:
The Court highlighted the distinction between exempted income (agricultural income) and tax-free income (deductions under Chapter VIA). Section 80HHC provides for a deduction of profits derived from exports, which is a tax-free income but part of the total income. The Court held that Section 80HHC Deduction could not be allowed against the entire composite income but only against the 40% business income portion.

Findings:
The Court concluded that the Section 80HHC Deduction must be applied after the 60:40 apportionment under Rule 8(1). The deduction can only be claimed against the taxable portion of the composite income (40%), not the entire income from tea cultivation and manufacture. The Court emphasized that Section 80HHC is not part of the provisions for the computation of business income but rather a deduction from gross total income under Chapter VIA.

Conclusion:
The Supreme Court set aside the judgments of the Guahati High Court and affirmed the judgment of the Calcutta High Court, ruling in favor of the Department. The Section 80HHC Deduction is to be allowed after the apportionment of income under Rule 8(1), and not against the entire composite income. The civil appeals were disposed of with no order as to costs.