Deduction under section 33AB is allowable against composite income and not against only 40% of composite income- A case of un-necessary litigation by revenue in case of Tea Companies .

[C.A. DEV KUMAR KOTHARI]

Computation provision:

Section 33AB is a provision relating to allowing deduction from business income. It falls under Part “D” of  Chapter  IV of the Income-tax Act, 1961. This part consists of various sections from section 28-44DB. As per section 29 the income referred to in section 28 shall be computed in accordance with the provisions of sections 30 to 43D. Therefore, provisions of section 33AB falls within the scope of computation of income from business and profession and is not under Chapter VI A of the Act which relates to allowing deduction from gross total income of assessee.

Crucial words in the Provisions of section 33AB:

For the purpose of ascertaining the basis of computing the  amount allowable the following words are crucial:

              “33AB. (1) Where an assessee carrying on business of growing and manufacturing tea in India has, before the expiry of six months from the end of the previous year or before furnishing the return of his income, whichever is earlier, deposited with the National Bank any amount or amounts in an account (hereafter in this section referred to as the special account) maintained by the assessee with the Bank in accordance with, and for the purposes specified in, a scheme (hereafter in this section referred to as the scheme) approved in this behalf by the Tea Board, the assessee shall, subject to the provisions of this section, be allowed a deduction (such deduction being allowed before the loss, if any, brought form earlier years is set off under section 72) of-  

     (a) a sum equal to the amount or the aggregate of the amounts so deposited; or  

   (b) a sum equal to twenty per cent of the profits of such business (computed under the head “Profits and gains of business or profession” before making any deduction under this section), whichever is less:  

A reading of the provision clearly shows that it relates to business of growing and manufacturing tea and upper limit of allowable deduction is 20% of profits of such business. There is no ambiguity. However, the revenue is trying to interpret that deduction should be with reference to the 40% of income from such business. The assessees have to face litigation and we find that there have been several cases before High Court.

The recent Judgment of Calcutta High Court:

The recent judgment on this issue is rendered on 19^th May 2011 in case of Goodricke Group Ltd.Vs. CIT by the  CALCUTTA HIGH COURT  webhosted / reported as  2011 -TMI - 204456 on  Tax Management India .Com

In this case the Court ruled that where the assessee is involved in the business of growing and manufacturing tea the provision contained in Section 33AB of the Act should be applied first while computing business income from tea grown and manufactured by assessee  and, thereafter, Rule 8 of the Rule should be applied for the purpose of calculation of 40% of the such business  income which shall be chargeable to tax under the income-tax Act in terms of Rule 8.

On interpretation of the phrase “a sum equal to twenty per cent of the profits of such business (computed under the head “Profits and gains of business or profession” before making any deduction under this section), whichever is less – the court ruled that the question of application of Rule 8 does not come so long the profit or loss from the business of growing and manufacturing tea is determined after deduction of all permissible deductions under the Act. Therefore, the matter was decided  in the favour of the assessee.

Old provisions and circular of Board:

We find that earlier we had Development Allowance, Development Rebate and Investment Allowance. These allowances and rebate were allowed to tea producers also where Rules 8 applied. The allowance was allowed while computing composite income (100%) and not from apportioned (40%) income. The provision of section 33AB is similar to the old provisions of rebate and allowances.

The Board has consistently held that in case of tea companies amount allowable will be ascertained on the basis of composite income, however, reserve required to be created by assessee will be 40% of the deduction allowable against composite income because only 40% of composite business expenses or deductions are  actually allowed under the Act.

First circular was issued in the year 1955—that is more than fifty years ago in connection with development rebate and then in relation to  development allowance and investment allowance in which it has consistently been held by the Board that in case of tea companies where rule 8 applies only 40% of total composite income is business income chargeable under the Act, the rebate or allowance actually allowed against business income under income-tax act is only 40% and therefore, there will be sufficient compliance if relevant reserve is created equal to 40% of rebate or allowance claimed (that is 100%). In this regard extract from some are  given below to indicate consistent intention:

Relevant part from the Circular no. 27 (LIIX-2), dated 06.07.1955:

“TEA COMPANIES

The rates of development rebate in the case of a tea company are the same as in the case of any other company engaged in a non-priority industry. However, as the total income of a tea company consisting of its non-agricultural profits is computed at 40 per cent of its total profit and gains from the business of growing and manufacturing tea, the development rebate is, in effect, allowed only to the extent of 40 per cent of the amount of development rebate calculated at the prescribed rates.”

 

It was clarified that the reserve required to be created for claiming development rebate should be calculated at 75 per cent of the amount which is actually allowed by way of development allowance, i.e., 75 per cent of 40 per cent of the amount calculated on the basis of specified percentage of the cost of eligible plant and machinery.

 

Thus suppose development rebate allowable was say  25% of 1000/-  that is Rs.250/-. The deduction of Rs.250/- was allowed while computing business income  in case of any other company and 100% of composite income in case of tea company.

 In case of any other company  requirement to create development rebate reserve  was 75% of  250 that is 188/-. However, in case of tea companies requirement for such reserve was only 40% of 188 that is Rs.75/-  although deduction of Rs.250/- was allowed against composite income.

 

Again in 1958 also similar views were take by the Board Vide Board’s Circular Letter F. No. 1(8)-58-TPL, dated 1-11-1958.

From the above two referred circulars we find  that even in context of I.T.Act, 1922 it was consistently considered that in case of tea company where only 40% of total tea income is taxable, only 40% of total allowance deducted from composite income is actually allowed.

Relevant portion from some circular issued after I.T.Act, 1961

                           Vide Board’s Circular Letter F. No. 1(8)-58-TPL, dated 1-11-1958, it was clarified that in the case of tea companies it would be sufficient compliance if the reserve created is equal to 75 per cent of the amount actually allowed as development rebate. Since the conditions regarding the creation of reserve for the grant of development allowance under section 33A are identical to those prescribed with regard to the creation of reserve for claiming deduction on account of development rebate, it is clarified that the reserve required to be created for claiming development allowance should be calculated at 75 per cent of the amount which is actually allowed by way of development allowance, i.e., 75 per cent of 40 per cent of the amount calculated on the basis of specified percentage of the cost of planting tea bushes.

         Circular : No. 325 [F. No. 202/62/77-IT(A-II)], dated 3-2-1982.

Similar view is expressed in the Circular : No. 324 [F. No. 202/47/79-IT(A-II)], dated 3-2-1982 regarding Investment allowance.

There was no dispute in relation to development rebate, development allowance and investment allowance. All these deductions were allowed against composite income. Section 33AB is similarly placed and similarly worded provision so far computation of allowable amount is concerned. Therefore, there should not be dispute on such issue. 

Old Judgment of Kerala High Court:

In Commissioner of Income Tax Versus Mahavir Plantations Limited. 2008 -TMI - 11073 - KERALA High Court Other Citation: [2004] 269 ITR 552, 191 CTR 518, 142 TAXMANN 538  judgment dated - 22 May 2003 the question referred was        "Whether, Tribunal is right in law in holding that the tea development allowance under section 33AB, must be in relation to the income of the business of growing and manufacturing tea, rather than to the taxable portion of such income?"

While considering computation provisions and charging provision of Rule 8 Court held as follows;

              “The only further question to be considered is regarding the scope of rule 8(1) of the Income-tax Rules extracted above. The rule clearly provides that the income derived from the sale of tea grown and manufactured by the seller in India shall be computed as if it were income derived from business. But, for the purpose of liability to tax under the Act, it is provided that only 40 per cent, of such income shall be deemed to be income liable to tax. According to us, this rule has nothing to do with the deduction provided under section 33AB(1) of the Act, which in clear terms provides that the deduction must be geared to the profits of the business of growing and manufacturing tea in India.

Thus the High Court answered the question referred in the affirmative, that is, in favour of the assessee and against the Revenue.

 It seems that the said judgment of Kerala High Court  has attained finality and therefore, the revenue should not raise dispute on such settled legal position. However this has not been referred before Tribunal , Kolkata and Calcutta High Court. The counsel of revenue or assessee did not bring it to the notice of Tribunal and the Calcutta high Court.

Relevant portions from the judgment of Calcutta High Court:

The judgment involves several issues. Therefore, herein below relevant portions from the judgment are reproduced for sake of convenience and better understanding of the issue:

This appeal under Section 260A of the Income-tax Act is at the instance of an assessee and is directed against an order dated April 23, 2004, passed by the Income-tax Appellate Tribunal, “B” Bench, Kolkata in ITA No.895 (kol)/2002 for the Assessment Year 1997-98 dismissing the appeal preferred by the assessee.  

The facts giving rise to filing of this appeal may be summed up thus:  

a) The assessee is a public limited liability company within the meaning of the Companies Act, 1956. The appellant carries on the business of growing and manufacturing tea.  

g) For the Assessment Year 1997-98 the appellant claimed deduction under Section 33AB of the Act amounting to Rs.50,69,336/-.

h) In the order of assessment dated March 31, 2000, the Assessing Officer allowed deduction under Section 33AB as claimed in the return, though with reference to the assessed income, according to the appellant, it was entitled to a higher deduction.

i) xxxx With regard to the appellant’s claim for higher deduction under Section 33AB with reference to the assessed income, the Commissioner of Income-tax (Appeals) held that deduction under Section 33 AB was to be allowed after apportioning the composite income in the ration 60:40 and with reference to 40% of the composite income.

j) With regard to the appellant’s income of higher income under Section 33AB of the Act. The Tribunal observed that deduction under Section 33 AB was to be calculated on 40% of the composite income determined under Rule 8 of the Rules. The Tribunal, however, remanded the matter to the Commissioner of Income-tax (Appeals) for the purpose of deciding the quantum of deduction under Section 33 AB with reference to 40% of the composite income as assessed.  

Being dissatisfied, the assessee has come up with the present appeal. A Division Bench of this Court at the time of admission of this appeal formulated the following substantial question of law:  

 “b) Whether the finding and/or direction of the Commissioner of Income- Tax (Appeals) that deduction under section 33AB was to be allowed after determining 40% of the composite income under rule 8 was without and/or in excess of jurisdiction and the Tribunal was justified in law in not setting aside the said finding/direction?

“c) Whether and in any event and on a true and proper interpretation of the provisions of section 33AB of the Act and rule 8 of the Rules, the Tribunal was justified in law in holding that deduction under section 33AB was to be calculated on 40% of the income determined under rule 8?  

      As regards the third question formulated by the Division Bench, Mr. Khaitan contended that the provision contained in Section 33AB of the Act should be applied first and after calculating the deduction available under the said provision, the total deduction should be excluded and, thereafter, Rule 8 of the Rule should be applied for the purpose of calculation of 40% of the total income. Mr. Khaitan contends that the Tribunal below committed substantial error of law in holding that the deduction under Section 33AB was to be calculated on 40% of the income determined under Rule 8. He, therefore, prays for setting aside the aforesaid finding of the Tribunal below.

Mr. Banerjee, the learned Advocate appearing on behalf of the Revenue, however, tried to defend the order passed by the Tribunal on the second and the third question by supporting the reasons assigned by the Tribunal. As the regards the third question formulated by the Division Bench mentioned above, it will be profitable to refer to the provision contained in Section 33AB of the Act without the proviso to the same as those are unnecessary for our purpose and the said provisions are quoted below:

“33AB. (1) Where an assessee carrying on business of growing and manufacturing tea in India has, before the expiry of six months from the end of the previous year or before furnishing the return of his income, whichever is earlier, deposited with the National Bank any amount or amounts in an account (hereafter in this section referred to as the special account) maintained by the assessee with the Bank in accordance with, and for the purposes specified in, a scheme (hereafter in this section referred to as the scheme) approved in this behalf by the Tea Board, the assessee shall, subject to the provisions of this section, be allowed a deduction (such deduction being allowed before the loss, if any, brought form earlier years is set off under section 72) of-  

(a) a sum equal to the amount or the aggregate of the amounts so deposited; or  

(b) a sum equal to twenty per cent of the profits of such business (computed under the head “Profits and gains of business or profession” before making any deduction under this section), whichever is less:  

We are of the opinion that in a case where the assessee is involved in the business of growing and manufacturing tea, on the question of deduction in terms of Section 33AB of the Act, the answer to the same depends upon the interpretation of the phrase “a sum equal to twenty per cent of the profits of such business (computed under the head “Profits and gains of business or profession” before making any deduction under this section), whichever is less:” as indicated above. Thus, of the two amounts, i.e. the amount deposited in the Nationalised Bank in terms of the first part of Section 33AB (1) and the aforesaid sum, whichever is less, should be deducted first. After such deduction and other available deductions under the Act, the profit or loss from such business will be determined. After such profit or loss is determined, Rule 8 of the Income tax Rules would be applicable to find out the amount of tax payable on the said determined amount of profit or loss from business. We find that the Tribunal below erroneously held that the deduction under Section 33AB of the Act would be made after the taxable amount will determine under Rule 8 of the Rules. The question of application of Rule 8 does not come so long the profit or loss from the business of growing and manufacturing tea is determined after deduction of all permissible deductions under the Act. We, thus, answer the third question in the negative and against the Revenue.

Confusions:

The provisions of computation of business income are confused with provisions relating to deduction from ‘gross total income’. The computation of business income is one aspect and computation of taxable income are two different aspects. In some cases full business income is considered as taxable whereas in some situation a certain portion of business income is considered as chargeable income. For example, in case of composite income from tea cultivation and manufacture 100% is considered as business income but only 40% of such income goes into gross total income under the Income-tax Act,  therefore , deduction  allowable against gross total income, under chapter VI A can be allowed only with reference to such portion of composite income which goes into ‘gross total income’ and not the entire amount of composite total income. However, when a deduction is allowed while computing income from ‘sale of tea cultivated and manufactured by assessee’ or  ‘tea grown and manufactured by assessee’, then the deduction is to be allowed against composite income under section S.32,32A,33,33A,33AB etc. 

It seems that the case was not properly argued before the Tribunal with reference to all old provisions, circulars, judgments  and therefore the Tribunal, Kolkata Bench  committed an error by deciding the issue against the assessee and therefore, the assessee had to move to Calcutta High Court.

The applicability in case of rubber and coffee income:

Section 33AB also provide deduction from composite income from cultivation, manufacture and sale of coffee and rubber for deposits made in prescribed deposit accounts. In those cases also composite income is computed as business income and then a certain prescribed portion of such composite income is considered as chargeable to income-tax, and the balance portion is considered as agricultural and exempted income. The Rule laid down in case of Mahavir Plantions and Goodrick Tea will equally apply to such cases of rubber and coffee income.

The Judgment of High Court deserves to be accepted:

The judgment of Calcutta High Court in case of Goodrick deserves to be accepted by the revenue, as it is in accordance with provisions, and the views consistently taken by CBDT. Further the judgment in case of Mahaveer Plantations on S. 33AB  seems to have attained finality.  Therefore, let us hope that the revenue will not indulge into further litigation on this issue by appealing before the Supreme Court.