1. In this appeal the assessee, a public limited company engaged in the business of cultivation and manufacture of tea in India and sales thereof in and outside India, has raised the following four grounds, though the issue involved is only one : 1. That on the facts and in the circumstances of the case, the CIT (Appeals) erred in confirming the Assessing Officer's mode of computation of the amount of deduction under Section 80HHC of the Act.
2. That, the CIT (Appeals) was not justified in holding the 40 per cent of business profit be taken for the purpose of arriving at the proportionate export profit though business profit was determined in proportion to the total turnover which include agricultural proportion of 60 per cent.
3. That, the Assessing Officer be directed to take 100 per cent of the business income computed under the head 'Profits and gains of business or profession' in working out the proportionate export profit in relation to total turnover of the appellant.
4. That, the appellant craves leave to amend, cancel or otherwise modify the grounds stated hereinabove.
2. In the order passed on 22-5-1990 under Section 143(3) read with Section 251 the deduction under Section 80HHC was computed by the Income-tax Officer at Rs. 3,94,377 as under : Section 154 dt. 7-7-1989 Rs. 16,10,84,531Less: Relief allowed by CIT(A) :(i) Flat maintenance expense Rs. 5,93,029 Rs. 16,04,91,50240 per cent of the above Rs. 6,41,96,600Add: Sale of tea manufacturedoriginal order Rs. 57,892 Rs. 6,42,54,492 3. The assessee appealed and contended that the deduction under Section 80HHC should be computed not with reference to 40 per cent of the composite income, but it should be computed with reference to the entire income. In other words, the contention of the assessee was that instead of taking the amount of Rs. 6,42,54,492 as the income computed under the head 'Profits and gains of the business', the Income-tax Officer should have taken the sum of Rs. 16,04,91,502. The CIT(A) did not accept the assessee's contention. He was of the view that if the entire composite income is taken for the purpose of Section 80HHC as contended on behalf of the assessee, that would amount to allowing the deduction even with reference to that portion of the composite income which is statutorily treated as agricultural income. He, therefore, rejected the assessee's contention and upheld the computation of the deduction under Section 80HHC as made by the Income-tax Officer.
4. In the further appeal before us, it is contended on behalf of the assessee that the computation of the deduction should be with reference to the entire composite income and not merely with reference to 40 per cent thereof which is treated as business income as per Rule 8(1) of the I.T. Rules. In other words, the assessee wants the deduction to be given on the basis of the following calculation :Turnover as per accounts - Rs. 52,20,63,921FOB Value on export sales - Rs. 64,08,581*Thus, export profit = 64.08.581 x 16.05.49.394 _________________________ *Composite income before bifurcation into 40 : 60 ratio as per Rule 8(1).
It is pointed out that the object of Section 80HHC as noticed by the Calcutta High Court in the case of CIT v. Indian Products Ltd. [1994] 207 ITR 647 is to give an incentive to boost the foreign exchange earnings and the section has to be interpreted in such a manner as to give effect to the object. Reliance was also placed on the decision of the Supreme Court in the case of CIT v. Gwalior Rayon Silk Manufacturing Co. Ltd. [1992] 196 ITR 149 wherein it has been held that tax laws have to be interpreted reasonably and adopting a purposive approach and a provision for deduction, exemption or relief should be construed reasonably and in favour of the assessee.
5. The Ld. D.R., however, drew our attention to the decision of the Calcutta Bench of the Tribunal reported in the case of Mcleod Russel (India) Ltd. v. Deputy CIT [1994] 49 ITD 396 and submitted that the issue is fully covered by the said order in favour of the revenue. It was, therefore, submitted that the appeal should be dismissed.
6. On a careful consideration of the rival contentions, we are of the view that the contention of the assessee cannot be accepted. The question is not adopting a view in favqur of the assessee because the provision is one for deduction. The issue is much more than that. Under entry 46, list II, 7th Schedule to the Constitution, read with Article 245, entry 82, list 1 to the Constitution, the State Legislature alone is competent to make laws with regard to "taxes on agricultural income" and the Central Parliament is competent to make laws with respect to "taxes on income other than agricultural income". In view of Article 366(1), 'agricultural income" means "agricultural income as defined for the purpose of the enactments relating to Indian Income-tax". It has been held by the Supreme Court in the case of Karimtharuvi Tea Estates Ltd. v. State of Kerala [1963] 48 ITR 83 and in the case of Anglo-American Direct Tea Trading Co. Ltd. v. CAIT [1968] 69 ITR 667 that the definition of 'agricultural income' in the Constitution of India and the Income-tax Act, 1922 was bound up with Rule 24 of the Income-tax Rules which provided that 40 per cent of the composite income shall be treated as business income and 60 per cent shall be treated as agricultural income. The same has been held to be the position under the Income-tax Act, 1961 read with Rule 8 of the Income-tax Rules, 1962 in the case of Tata Tea Limited v. State of West Bengal [1988] 173 ITR 18 (SC). In this decision, after referring to the afore-cited decisions of the Supreme Court, the position was summarised in the following words at pages 36 and 37 of the report : A reading of Article 245 of the Constitution with entry 82 of list I and entry 46 of the list II in the Seventh Schedule makes it clear that the State Legislature has exclusive jurisdiction to legislate in respect of taxes on agricultural income and in respect of taxes on other income, it is Parliament alone which can legislate. The term 'agricultural income' used in that entry has to be construed in accordance with the definition of the said term in Article 366(1) of the Constitution of India and that sub Article states that agricultural income means 'agricultural income' as defined for the purpose of the enactments relating to Indian Income-tax.
A scrutiny of the aforesaid decision of this court in Karimpharuvi Tea Estates Ltd. [1963] 48 ITR and Anglo-American Direct Tea Trading Co. Ltd. [1968] 69 ITR 667, shows that this court has consistently taken the view that the definition of the term 'agricultural income' for the purposes of the Act of 1922 and the Act of 1961, being Act pertaining to the levy of income-tax, has to be considered in the light of Rule 24 of the Indian Income-tax Rules, 1922 in the case of the Act of 1922 and Rules 7 & 8 of the Income-tax Rules, 1962, as far as the Act of 1961 is concerned. An analysis of the said decisions shows that this court has taken the view that, in the case of income from the sale of tea grown and manufactured by an assessee, Rule 24 of the Indian Income-tax Rules, 1922 and Rule 8 of the Income-tax Rule, 1962, although at first glance they appeared to be rules of apportionment and computation, must be treated as incorporated in the definition of the term 'agricultural income' in the Act of 1922 and the Act of 1961, respectively.
The effect of these observations is that 60% of the composite income in the case of tea company is to be treated as agricultural income under Section 2(1) of the Act and exempt under Section 10(1) thereof. If it is exempt as agricultural income, it follows that it does not enter the field of Central income-tax and, therefore, Cannot be considered for the purpose of computing any deduction or relief. It follows from this principle that the assessee's claim that the deduction under Section 80HHC must be computed with reference to the entire composite income cannot be accepted and the computation made by the Income-tax Officer by taking 40 per cent of the composite income, which alone enters the field of Central income-tax, must be upheld as correct.
7. It was submitted on behalf of the assessee that these decisions to which we have referred merely lay down a principle of apportionment for the purpose of bringing. a part of the composite income to tax under the Income-tax Act and the decisions do not prohibit the deduction under Section 80HHC being granted with reference to the entire income since under general principles the business income of the assessee is the entire income and not merely 40 per cent thereof. This submission cannot be accepted since accepting the same would be flying in the teeth of the three decisions of the Supreme Court cited above. The Supreme Court has in terms held that Rule 8 of the I.T. Rules, which at first sight would appear to be only a rule of apportionment or computation, must really be treated as incorporated in the definition of the term "agricultural income" in the Income-tax Act. We do no see how the assessee's submission can be accepted in the face of the categorical ruling of the highest Court of the country which is the law as per Article 141 of the Constitution. To repeat, we hold that Rule 8 is not a mere rule prescribing the apportionment of the composite income in the case of an assessee carrying on tea business but the rule must be considered as part of the definition of the words 'agricultural income'. If that is the law, the income that is exempt as agriculture income cannot at all be considered for computing any kind of deduction or relief under the Act.
8. This is what we had in the effect held in the case of Mcleod Russel (India) Ltd. (supra) The ratio of that order, which we may clarify taking this opportunity, is that contained in the last few sentences of paragraph 10 of the order. In that order, though we had referred to the judgments of the Supreme Court in the cases of Tata Tea Limited (supra) and Mcleod Russel (India) Limited (supra), we did not refer to the earlier two judgments of the Supreme Court, which we have referred to in the present order. Even though we cited the Tata Tea Limited's decision of the Supreme Court (supra), the most relevant and clinching observations of the Supreme Court were not adverted to in our earlier order. However, that does not affect the ultimate decision of ours in that order. The final conclusion was that the deduction under Section 80HHC cannot be computed with reference to the 60 per cent of the composite income which is exempt from the Income-tax Act as agricultural income.
9. For these reasons, we uphold the decision of the CIT(A). The assessee's contentions are rejected and the deduction of Rs. 3,94,377 granted by the Income-tax Officer under Section 80HHC is held correct.