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TMI Blog2012 (7) TMI 591X X X X Extracts X X X X X X X X Extracts X X X X ..... tal income of Rs. 2,82,50,91,480/-. 4. As per the return filed, the assessee had claimed deduction under Section 80P(2)(d) on dividend of Rs. 2,00,006/- received from Nafed and Karnataka State Cooperative Apex Bank Limited and interest of Rs. 10,20,75,013/- on deposits made with cooperative banks. The Assessing Officer did not disturb the said claim/deduction under Section 80P(2)(d) but relying upon Section 14A held that the aforesaid incomes were not included in the total income of the assessee and, therefore, expenditure under the head "interest" amounting to Rs. 1,15,45,579 and 1/8 of the employee benefits and remuneration should be disallowed. He observed that the aforesaid expenditure had been incurred for earning of income under Section 80P(2)(d) of the Act and, therefore, has to be disallowed under Section 14A. 5. The assessee succeeded in the first appeal and before the tribunal. We may notice that in the first appeal, the assessee had raised several contentions on merits as to the quantum of disallowance of the expenditure under the head "interest" and had pointed out that the entire disallowance made of Rs. 1,15,45,579/- was erroneous and contrary to law. The CIT(Appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... required to be made or allowed under any section included in this Chapter under the heading "C. Deductions in respect of certain incomes" in respect of any income of the nature specified in that section which is included in the gross total income of the assessee, then, notwithstanding anything contained in that section, for the purpose of computing the deduction under that section, the amount of income of that nature as computed in accordance with the provisions of this Act (before making any deduction under this Chapter) shall alone be deemed to be the amount of income of that nature which is derived or received by the assessee and which is included in his gross total income. ** ** ** 80-B. Definitions.-In this Chapter- (5) "gross total income" means the total income computed in accordance with the provisions of this Act, before making any deduction under this Chapter;" 9. Section 2(45) defines the expression "total income" to mean the total amount of income referred to in Section 5 computed in the manner laid down under the Act. Section 4 of the Act states that income tax shall be charged for the assessment year in accordance with and subject to the provisions of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s far as deductions, which are permissible and allowed under Chapter VIA are concerned. Section 14A is applicable only if an income is not included in the total income as per the provisions of Chapter III of the Act. 13. We find merit in the contention raised by the assessee. There are several reasons and grounds for the same apart from the placement of Section 14A in Chapter IV of the Act. Chapter VIA as noticed above does not consist of one section but there are numerous sections under which deductions are allowed. Some of the sections relate to deductions in case of priority industries or industries/units set up in the specified area or export earnings etc. In these provisions/sections, it is not the gross income or entire receipt on which deduction is allowed. The deduction in several sections like Section 80I, 80HHC is allowed on the net amount of income, i.e., gross income less the expenditure incurred to earn the said income. 14. Section 80A(1) states that in computing total income an assessee will be allowed on the gross total income in accordance and subject to the provisions of the Chapter, deductions specified in Section 80C to 80U. The language of the section itself p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cted to and chargeable to tax but under specific provisions under Chapter VIA, an assessee is entitled to deductions. Thus, such incomes do form part of the income stated in Section 4 read with Section 5 but while computing the taxable income, deductions are allowed to the extent stipulated in Sections 80C to 80U of the Act. The distinction between the two, has been accepted and recognized by the Supreme Court in Second Income Tax Officer and Another v. Stumpp Schuele and Somappa Private Limited [1991] 187 ITR 108 (SC). It was held approving several decisions that the deductions under Chapter VIA cannot be equated with incomes not included in the total income or which are not chargeable to tax. Chapter VIA in several provisions makes reference to net income as computed in accordance with the provisions of the Act and not with reference to gross amount/entire receipt. For the purpose of computing the said deductions, profits/income is not computed as commercial profits but with reference to the provisions of the Act. In some cases, the qualifying units have to be treated as a separate entity for the purpose of computing the deduction and thereafter the net income is computed. Sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me. It was held that section in question did not refer to the gross total income, but the net total income and, therefore, clearly refers to the quantum of income and not the quality or character of income alone. Thus, the deduction under Section 80M was on net dividend income and not on the full or gross dividend. This is elucidate by the following observations of the Supreme Court in the said decision: "Now, it was urged on behalf of the assessee that the words "where the gross total income of an assessee ... includes any income by way of dividends from a domestic company" in the opening part of sub-s. (1) of s. 80M refer only to the inclusion of the category of income and not to the quantum of such income and, therefore, the words "such income by way of dividends" following upon the specification of this condition, cannot have reference to the quantum of the income included but must be held referable only to the category of income included, that is income by way of dividends from a domestic company. This was the same argument which found favour with the court in Cloth Traders' case [1979] 118 ITR 243, but on fuller consideration, we do not think it is well founded. We may assum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s total income" (Emphasis* supplied). Otherwise, we would not be giving to the word "such" its full meaning and effect. The word "such" in the context in which it occurs can only mean that income by way of dividends from a domestic company which is included in the gross total income and that must necessarily be income by way of dividends computed in accordance with the provisions of the Act. There is also one other strong indication in the language of sub-s. (1) of s. 80M which clearly compels us to take the view that the deduction envisaged by that provision is required to be made with reference to the income by way of dividends computed in accordance with the provisions of the Act and not with reference to the full amount of dividend received by the assessee. This indication was also unfortunately lost sight of by the court in Cloth Traders' case [1979] 118 ITR 243, presumably because it was not brought to the attention of the court. The court observed in Cloth Traders' case [1979] 118 ITR 243, that the whole of the income by way of dividends from a domestic company or 60% of such income, as the case may be, would be deductible from the gross total income for arriving at the to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rkar J., in Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84. This decision was rendered by the court on April 11, 1978, at least a year before the decision in Cloth Traders' case [1979] 118 ITR 243, but, unfortunately, it appears, it was not brought to the attention of the court when the Cloth Traders' case [1979] 118 ITR 243 was argued, because we have no doubt that if it had been cited, the court would have certainly made a reference to it in the judgment in Cloth Traders' case [1979] 118 ITR 243. The section which came up for consideration before the court in Cambay Electric Supply Co.'s case [1978] 113 ITR 84 was undoubtedly a different one, namely, s. 80E, but the reasoning which prevailed with the court in placing a particular interpretation on sub-s. (1) of s. 80E would equally be applicable to the interpretation of sub-s. (1) of s. 80M." 20. The penultimate paragraph of the above quote refers to Section 99 and 85A before they were substituted and it was clarified that the Supreme Court had not examined the correctness of the interpretation given to the said Sections in earlier judgments of the High Courts or Supreme Court. This is important and relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the securities in question. It will be noticed that this notification does not refer to the provisions of section 8 of the Income-tax Act at all. It gives a total exemption from income-tax to an assessee in respect of the interest receivable on income-tax free loans mentioned therein. It gives that exemption subject to two conditions, namely, (i) that the interest is received within the territories of the State of Travancore-Cochin, and (ii) that it is not brought into any other part of the taxable territories. It includes the said exempted interest in the total income of the assessee for the purpose of section 16 of the Income-tax Act. Shortly stated, the notification is a self-contained one; it provides an exemption from income-tax payable by an assessee on a particular class of income subject to specified conditions. Therefore, there is no scope for controlling the provisions of the notification with reference to section 8 of the Income-tax Act. The expression "interest receivable on income-tax free loans" is clear and unambiguous. Though the point of time from which the exemption works is when it is received within the territories of the State of Travancore-Cochin, what is ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which have to be taken by an Assessing Officer to compute the said deduction and these are: (1) Determining profits and gains attributable to business of specified industry. (2) As per parenthesis clause, the qualifying "income" has to be computed in accordance with all the provisions of the Act except Section 80E. Therefore, Sections 30 to 43A will apply. Accordingly, unabsorbed depreciation and unabsorbed development rebate had to be deducted. (3) Lastly, computation of the deduction has to be made @ 8% on the profits and gains to arrive at the net total income, i.e. income computed as per the Act. It was observed that Section 72 appearing in Chapter VI would also apply as the provisions of the said Chapter have direct impact on computation of income under the head "Profits and gains of business or profession". The Supreme Court emphasized as under:- "First, in sub-section (1) of section 80E, the expression "total income" is followed by the words "as computed in accordance with the other provisions of this Act" in parenthesis and the mandate of these words clearly negatives the argument that the expression "total income" has been used in the sense of comme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. [1977] 106 ITR 399. The said six reasons recorded in Dalmia Cement (Bharat) Ltd. (supra) are:- "(a) Any amount in respect of which deduction is claimed under any of the provisions in sections 80C to 80V is already included in the gross total income of the assessee and, therefore, cannot be stated to be not includible in the income of the assessee. (b) The expression " not includible " means not capable of being included. It cannot refer to an amount which already formed part of the total income. It refers to the classes of income, which Chap. III directs, " shall not be included " in the total income of the assessee. (c) The concept of deductions by way of expenses, rebates, allowances, etc., under Chaps. IV & VI-A is totally different from that of non-inclusion. (d) Form No. 1 prescribed by r. 5, while giving instances of the items contemplated under r. 4, refers to agricultural income and foreign income of a non-resident which fall in Chap. III (e) The history of the legislation showed that some of the items now included in Chap. VI-A were previously in Chap. VII (e.g., s. 80J corresponding to s. 84) and did not affect the capital computati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mere portion or amount of such income. The question raised should be "whether this income was included" and not "whether any deduction was allowed". The use of the word 'part' contemplates a type of income which by its very nature does not form part of the total income. The word 'includible' supports that reference to the general nature and class of income rather than factual inclusion. (2) It is not the actual quantification of the income which matters but whether or not income was excluded from the total income. It is the class of income rather than the amount which would determine whether or not the said class of income forms part of the total income. Incomes of the categories referred to in Chapter VIA were to be taken into account as a part of total income and they do form part of the gross total income which was the first step in the process. Accordingly, even after the deduction allowable under Chapter VIA, they form a part of the total income and do not get excluded merely because deduction is allowed. (3) The Legislature had enacted Section 80C to 80U in Chapter VIA, as a measure of relief from taxable liability. It incorporates and allowes deductions. The i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the said Section. The words "do not form part of the total income under this Act" is significant and important. As noticed above, before allowing deduction under Chapter VIA we have to compute the income and include the same in the total income. In this manner, the income which qualifies for deductions under Sections 80C to 80U has to be first included in the total income of the assessee. It, therefore, becomes part of the income, which is subjected to tax. Thereafter, deduction is to be allowed in accordance with and subject to the fulfillment of the conditions of the respective provisions. This is also subject to Section 80AB and 80A(1) and (2). Chapter VIA does not postulate or state that the incomes which qualify for the said deduction will be excluded and not form part of the total income. They form part of the total income but are allowed as a deduction and reduced. 33. It is clear from the aforesaid reasoning that the decisions in the case of Distributors (Baroda) Private Limited and Cambay Electric Supply Industrial Co. Ltd. (supra) have proceeded on the specific language of the said Sections, whereas in the other decisions Stumpp Schuele and Somappa Private Limited an ..... X X X X Extracts X X X X X X X X Extracts X X X X
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