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TMI Blog2004 (1) TMI 61X X X X Extracts X X X X X X X X Extracts X X X X ..... 962 ("the Rules), read with section 2(1A) of the Income-tax Act, 1961 ("the Act"), in relation to deduction under section 80HHC of the Act. By a judgment and order dated September 24, 1998 (Warren Tea Ltd. v. Union of India [1999] 236 ITR 492), the learned single judge was pleased to hold that the interpretation of the Central Board of Direct Taxes in construing the provisions of section 80HHC and rule 8 through Circular No. 600, dated May 23, 1991, was incorrect and accordingly a declaration was issued that the said circular was not attracted in the case of the petitioners. The Department had preferred APO No. 792 of 1999 and the State of West Bengal, which was not a party to the proceeding, sought leave to and preferred APOT No. 229 of 1999 against the said judgment. During the pendency of these appeals, sub-section (4B) was inserted in section 80HHC through the Finance Act, 1999, with effect from April 1, 1992. Mr. P.K. Mullick, learned senior counsel, appearing on behalf of the Department-appellant in APO No. 792 of 1999, had pointed out that the appeal has since become infructuous by reason of the amendment inserting sub-section (4B) in section 80HHC This contention is suppo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India [1999] 236 ITR 492 is in any way affected or altered? and (iii) Whether the retrospective operation of sub-section (4B) of section 80HHC introduced by the Finance Act of 1999 with retrospective effect from April 1, 1992, is violative of article 14 and article 19(1)(g) of the Constitution and is therefore ultra vires? We may, however, note that the question of vires agitated by Dr. Pal is confined only to the retrospectivity of the amendment brought about in 1999 with effect from April 1, 1992. This contention is resisted on account of its being clarificatory in nature. It is presumed that the position in law was the same as has been sought to be clarified by insertion of sub-section (4B), therefore, in order to determine the vires of the amendment, it is necessary to examine the impact of rule 8 read with section 2(1A) of the Act. Inasmuch as the retrospectivity can be saved if the amendment is clarificatory, seeking to clarify the intent of the Legislature already expressed in the statute as it was held in Channan Singh v. Smt. Jai Kaur, AIR 1970 SC 349 (paras 4 and 5); Allied Motors (P.) Ltd. v. CIT [1997] 224 ITR 677 (SC); AIR 1997 SC 1361 (para. 13) and for the purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from tea manufactured is a business income. If the assessee sells tea grown and manufactured by it, then the income derived out of growth and manufacture of tea is a mixed income consisting of both agricultural and business income. By reason of rule 8, a legal fiction is being created for the purpose of computation of the income under the Act, but for the chargeability the 40 per cent. of the income so computed would be liable to tax under the Act. Section 80HHC allows a deduction of the profits derived by the assessee from the business of export of such goods or merchandise covered under section 80HHC in computing the total income of the assessee. The assessee claimed that such deduction of profit under section 80HHC is to be made out of the total income derived from the profit out of sale of tea grown and manufactured by it, computed under the Act in terms of rule 8 before apportionment, i.e., composite income. In other words, the assessee claimed that the apportionment of 40 : 60 of the total income, i.e., composite income computed under the Act in terms of rule 8 is to be made after allowing deduction of the profits earned on export of tea grown and manufactured by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated by the fiction, we believe that we are supposed to answer the question on all its fronts in order to leave nothing unambiguous and opaque. In order to appreciate the situation, we may now examine the scheme of the Act and the scope and ambit of the relevant provisions vis-a-vis rule 8 and section 80HHC relating to mixed or composite income chargeable under two different Acts. Article 246 of the Constitution of India lays down the exclusive power to make laws in clauses (1) and (3) of Parliament and the Legislature of the State in respect of matters enumerated in Lists I and II in the Seventh Schedule, respectively, of the Constitution of India. List I, Union List, in entry 82, recites the exclusive power of Parliament in the field of taxes on income other than agricultural income. Whereas entry 46 of List II, the State List, enumerates the exclusive power of the Legislature in the field of taxes on agricultural income. Therefore, Parliament cannot levy tax on agricultural income and similarly the State cannot levy tax on income other than agricultural income. Article 366 in clause (1) defines "agricultural income" to mean "agricultural income as defined for the purposes of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia. "Income" defined in section 2(24)(i), namely, profits and gains is the income referred to in section 28(i), namely, profits and gains of any business or profession. When defining "total income", section 2(45) referred to the total amount of income referred to in section 5 computed in the manner laid down in this Act. The computation under the Act is made under section 28 read with section 29 in respect of income related to profits and gains of business or profession. Rule 8 had never contemplated exigibility of agricultural income under the Act in the process of computation. The fiction created is limited only to the computation in accordance with the Act as if it were business income up to the stage of computing total income, i.e., composite income and not beyond. For the purpose of deductions mentioned in section 29, deductions are allowed from the income in order to arrive at the total income. The expression "gross total income" has neither been defined nor has been used in section 29 or anywhere in the provisions of sections 30 to 430 of the Act. The expression "gross total income" is being used in Chapter VI-A. The expression "gross total income" defined in section 80 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble to tax under the Act. The imposition of tax or allowance of tax benefit or exemption of tax from income exigible to tax under the Act stands on the same footing. Therefore, when by fiction created under rule 8, agricultural income is computed in the manner provided in the Act, it had never meant for being taxed or being subjected to tax benefit under the Act. If the whole of the income out of the tea grown is included for the purpose of exemption as profit derived from the business of export of tea grown and manufactured under section 80HHC then the agricultural income would be subjected to taxation under the Act and the deduction may be hit by the prohibition contained in sections 10(1) and 80A(2). The deduction under Chapter VI-A is allowed only on income exigible to tax under the Act. By reason of the fiction, the exibility to tax of the agricultural income under the State Act cannot be reduced or affected. If the proposition of Dr. Pal is accepted, then it would be allowing deduction on something which is not exigible to tax under the Act and which is otherwise not taxable under the Act would be allowed to be utilised for allowing higher deduction under the Act, encroaching ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icultural income in respect of which Parliament has no power to enact any law. It is not a question of legislative intent but of competence. Therefore, the deductions permitted under Chapter VI-A out of the gross total income must be the total income chargeable to tax under the Act without the agricultural income though computed under the Act in view of rule 8. In as much as by reason of section 10(1) agricultural income cannot be exposed to chargeability under the Act. This is apparent from section 80AB. This section makes it clear that the nature of the income specified in the section under which deduction is allowed under Chapter VI-A, if included in the gross total income, notwithstanding anything contained in that section, the amount of that nature as computed in accordance with the provisions of this Act before making deduction under Chapter VI-A shall alone be deemed to be the amount of income of that nature which is derived or received by the assessee and included in his gross total income. In the present case, section 80HHC allows deduction of the profits derived by the assessee from the export of goods or merchandise out of the business of export. Thus, section 80HHC de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Such deduction under a particular section would not be available on an income other than the nature of the income admissible under that particular section. It is only that particular nature of the income alone as included in the gross total income chargeable under the Act would be available for deduction. Section 80A, subsection (2), prohibits deduction under Chapter VI-A exceeding gross total income of the assessee. Section 10(1) excludes agricultural income from total income. If apportionment is not made before deduction then there may be a likelihood that the amount of deduction may exceed the gross total income exigible to tax under the Act since the deduction available on the agricultural income, which is 60 per cent. of the component, might result into an excess of the business income. Since section 80AB confines the deduction only on the nature of the income permissible under the particular section alone, the question has to be looked into on the basis of the construction of that particular section under which the deduction is allowed. The question of the admissibility of the deduction under different sections has been the subject matter of consideration before different H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igh Courts has since been resolved in the decision in Distributors (Baroda) P. Ltd. [1985] 155 ITR 120 (SC). The ratio decided therein leads us to ascertain the situation on the strength of sections 80AB and 80A(2) depending on the construction of the particular section and its scheme with an attempt to find out the intention of the Legislature, in this case in section 80HHC Sections 80AA and 80AB were introduced in 1992 giving retrospective effect since 1981 (sic), namely, with the introduction of Chapter VI-A. This retrospectivity of sections 80AA and 80AB were held to be clarificatory in nature and as such though impose additional burden of tax, yet were held to be intra vires and valid pieces of legislation. In the present case, if we hold that amended sub-section (4B) introduced in section 80HHC is clarificatory in nature, in that event, its retrospectivity is bound to be held intra vires and a valid piece of legislation. In order to arrive at such a conclusion that sub-section (4B) of section 80HHC is clarificatory in nature, we are to examine the intent vis-a-vis the competence of the Legislature from the scheme of section 80HHC itself having regard to sections 80AB and 80 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he total income has to be computed. This total income so computed is the gross total income on which deduction under Chapter VI-A is available. But Chapter VI-A under section 80AB makes it clear that it is only that component of income the nature whereof is indicated in the particular section under which deduction is claimed and included in the gross total income, that is eligible for deduction. The component included in the gross total income, which is different in nature than that eligible under a particular section of Chapter VI-A for deduction cannot form the basis for the eligibility to deduction. It is only the profit derived from the business of export of tea which is eligible for deduction under section 80HHC. Therefore, the nature of the income is an income from business not from agriculture. Therefore, the first step is to determine what is the business from which the profit is being earned and then to ascertain the profit out of such business. In the process if it appears that the profit would also include a component, which is not in the nature of an income derived from business of export of tea then that part of the income the nature whereof is different from the profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "adjusted export turnover" and "adjusted total turnover" have been defined in the Explanation. These "adjusted profits of the business", "adjusted export turnover" and "adjusted total turnover" have been used for the purpose of making distinction between the export of goods or merchandise manufactured and processed by the assessee on the one hand and the export of trading goods by the assessee on the other. The "trading goods" have been defined as goods, which are not manufactured or processed by the assessee. Therefore, the goods, which are not manufactured, stand distinct and different from the goods manufactured and processed. When the Legislature had intended through particular expression to make a distinction between the goods manufactured and processed and trading goods, then we cannot overlook the greater distinction when the same goods which are manufactured and processed include goods or merchandise not manufactured and processed, as in the case of tea, comprising two components, i.e., one is tea grown and the other is tea manufactured and processed. Inasmuch as if the tea is not grown by the assessee, then the cost of purchasing raw tea would have been excluded from the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nature of trade, commerce or manufacture. Therefore, the profit of the business and turnover of the business would relate to the trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture distinct from agriculture. Adventure in agriculture is not in the nature of trade, commerce or manufacture. The profits and gains of business are distinct from profits and gains from agriculture otherwise excluded under section 10(1). Therefore, the nature of the profit contemplated under section 80HHC(1) is the profit out of the business and the turnover from the business, which by no stretch of imagination could include the profit derived from agriculture. The Explanation to section 80HHC at the end while defining "export turnover", "total turnover" and "profits of the business" also expresses the legislative intent which leads us to hold that section 80HHC had never intended to include the component of the income derived from agriculture in relation to tea when grown and manufactured by the assessee. Inasmuch as "export turn'" over" and "total turnover" exclude freight, insurance, etc., attributable to the transport of goods or merchandise beyo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s encroaching on the legislative domain of the two legislative mechanisms as well as the revenue to be collected by the Centre and the State and create a conflict in between the interest of the two different agencies. In the result, in our view, having regard to the provisions of sections 80AB and 80A(2) read with section 80HHC, the fiction created by rule 8 would not permit us to extend the assessment under the Act for computing total income beyond the gross total income for the purpose of being eligible for deduction under section 80HHC in respect of profit out of business of export of tea grown and manufactured by the assessee. The apportionment postulated in rule 8 is to be made before deduction under section 80HHC is allowed. In other words, the benefit of deduction under section 80HHC would be available only on the income derived from the profit out of the business of export of tea processed and manufactured and not out of the profit of growing tea which is subject to the Agricultural Income-tax Act outside the scope and purview of the Act. Therefore, sub-section (4B) introduced through the amendment under the Finance Act, 1999, is clarificatory in nature. Therefore, its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m to help us in the present context in view of the discussion we have made hereinbefore. Dr. Pal then relied on the decision in CAIT v. Periakaramalai Tea and Produce Co. Ltd. [1972] 84 ITR 643 (Mad). In this decision, the Division Bench of the Madras High Court had held that such apportionment is to be made after allowing the deductions including those under Chapter VI-A of the Act. With due respect, we are unable to agree with the said proposition for the reason that this decision has not considered the impact of the various provisions of the Act as discussed hereinbefore. The decision in Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 (SC) cited by Dr. Pal does not help us in view of the subsequent decisions in Distributors (Baroda) P. Ltd. [1985] 155 ITR 120 (SC); H.H. Sir Rama Varma [1994] 205 ITR 433 (SC) and CIT v. Kotagiri Industrial Co-operative Tea Factory Ltd. [1997] 224 ITR 604 (SC). The apex court had no occasion to deal with the question of the stage of apportionment of agricultural income in respect of sale of tea, grown and manufactured by the assessee in relation to Chapter VI-A and as such the decision in Tata Tea Ltd. v. State of West Bengal [ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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