Judgment:
Ajit K. Sengupta, J.
1. In this reference under Section 256(1) of the Income-tax Act, 1961, the following question of law has been referred to this court for the assessment year 1984-85 :
'Whether, on the facts and in the circumstances of the case and on a correct interpretation of Section 41(2) of the Income-tax Act, 1961, read with Rule 8(1) of the Income-tax Rules, 1962, the Tribunal was correct in Jaw in holding that only 40 per cent. of income under Section 41(2) be brought to tax and not 100 per cent. as done by the lower authorities in computing the profit under Section 41(2) of the Income-tax Act on the sale of the tea garden ?'
2. Shortly stated, the facts are that the assessee is engaged in the business of cultivating tea leaves and manufacturing tea therefrom. There is no dispute that the income arising from its tea business is a composite income which is required to be taxed under the Act to the extent of 40 per cent. with reference to Rule 8(1) of the Income-tax Rules, 1962 (in short, 'the Rules'), and the balance 60 per cent. income is to be assessed as agricultural income. During the relevant previous year, the assessee sold Rehabari Tea Estate for a total consideration of Rs. 61 lakhs. After deducting the brokerage incurred in connection with the sale, the net sale proceeds were Rs. 60,39,000. The Assessing Officer computed a sum of Rs. 24,41,350 as the profit under Section 41(2) of the Act being the amount realised in excess of the written down value of the building, plant, machinery, etc. The said sum of Rs. 24,41,350 was assessed in its entirety as income assessable under the Act and the assessee's contention that only 40 per cent. of such sum could be taken into consideration was rejected. The Assessing Officer observed in his order of assessment that Rule 8(1) of the Rules did not apply to the said profit under Section 41(2) of the Act since it was not out of tea grown and manufactured but out of sale of the assets of the tea estate (page 23 of the paper book, lines 25-30).
3. The assessee appealed, inter alia, against the assessment of the said entire sum of Rs. 24,41,350 under Section 41(2) of the Act before the Appellate Assistant Commissioner of Income-tax. The Appellate Assistant Commissioner did not accept the contention of the appellant and held that the entire profits under Section 41(2) were to be assessed and not to the extent of 40 per cent. only as claimed by the appellant. He, however, reduced the amount of the profit under Section 41(2) by Rs. 15,000 (see page 51 of the paper book, lines 33-35).
4. Against the said order of the Appellate Assistant Commissioner, the assessee preferred a further appeal before the Tribunal. The Tribunal accepted the contention of the assessee that only 40 per cent. of the amount could be taken into consideration under Section 41(2) of the Act and not the entire sum of Rs. 24,26,350. The Tribunal, inter alia, held that, in the past assessments of the assessee, only 40 per cent. of the depreciation was actually allowed under the Act since only the said percentage was taken into consideration in computing the profits of the assessee. The Tribunal relied on the decision of the Supreme Court in the case of CIT v. Nandlal Bhandari Mills Ltd. : [1966]60ITR173(SC) in this behalf. The Tribunal further accepted the contention of the assessee that, in respect of the profits arising under Section 41(2) of the Act, the provisions of Rule 8(1) of the Rules were attracted and, accordingly, only 40 per cent. of such profit could be assessed under the Act. The Tribunal relied upon the decision of the Supreme Court in the case of Tata Tea Ltd. v. State of West Bengal : [1988]173ITR18(SC) in this behalf.
5. It has been contended by Mr. R.N. Bajoria, learned advocate appearing for the assessee, that the income from sale of tea grown and manufactured by the assessee is a composite income. Rule 8 of the Rules is not merely a rule of apportionment and computation but is to be treated as incorporated in the definition of the term 'agricultural income' under the Act. Such income has to be computed in the manner laid down in the Act for computation of the business income. In this connection, our attention has been drawn to the decision of the Supreme Court in the case of Tata Tea Ltd. : [1988]173ITR18(SC) . The amendments made by the State Legislatures seeking to tax more than 60 per cent. of the income as computed under the Act was struck down by the Supreme Court in that case. At page 33 of the Reports, the Supreme Court held as under :
'It may be mentioned here that Rule 7 of the Income-tax Rules, 1962, deals with the computation of income which is partially agricultural and partially from business and Rule 8 is the specific rule dealing with income derived from the sale of tea grown and manufactured by the seller in India. Under Sub-rule (1) of Rule 8, it is provided that such income shall be computed as if it were income derived from business, and 40 per cent. of such income is deemed to be income liable to tax.
A perusal of the aforesaid Rule 8(1) makes it clear that under the said rule, income from the sale of tea grown and manufactured by a seller in India has to be computed as if it were income derived from business which would imply that the deductions allowable under the Act of 1961in respect of income derived from business would be allowable in the case of income derived from the sale of tea grown and manufactured by a seller and further allowance would be granted as set out in Rule 8(2) and 40 per cent. of the income so computed would be deemed to be income liable to the levy of income-tax and the balance of the income would be liable to tax as agricultural income subject to such further deductions as the law pertaining to the levy of agricultural income-tax might allow. The question is whether Rule 24 of the Income-tax Rules, 1922, and Rule 8 of the Income-tax Rules, 1962, can be said to form part of the definition of the term 'agricultural income' under the Act of 1922 and the Act of 1961, respectively.'
6. At page 37 of the Reports, the Supreme Court, after examining the issue in detail, held as under :
'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 Rules, 1962, although at first glance they appear 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.'
7. Rule 8 of the Rules 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 and 40 per cent. of such income shall be deemed to be income liable to tax under the Act. Section 29 of the Act provides that the business income referred to in Section 28 shall be computed in accordance with the provisions contained in Sections 30 to 43D. Accordingly, the income from tea business has to be computed as provided in Section 29 in accordance with the provisions contained in Sections 30 to 43D and 40 per cent. of the income so computed alone can be assessed under the Act. Section 41(2) falls within the scope of Section 29 and only 40 per cent. of such income can be subjected to tax under the Act. There cannot be a separate computation of the income under Section 41(2) of the Act. Under Rule 8, tax cannot be levied on the entire sum assessed under Section 41(2) of the Act. Section 41(2) applies in respect of assets which were used for the purposes of tea business and on sale whereof, the amount in excess of the written down value is realised.
8. Section 41(2) is a deeming provision. It fictionally treats a capital receipt as a business receipt. (See CIT v. Bipinchandra Maganlal and Co. Ltd. : [1961]41ITR290(SC) ). The Explanation to Section 41(2)provides that, where the moneys payable in respect of the building, machinery, plant or furniture become due in a previous year in which the business or profession for the purpose of which the building, machinery, plant or furniture was being used is no longer in existence, the provisions of the said Sub-section shall apply as if the business or profession is in existence in the previous year. The fiction provided under Section 41(2) thus treats the business in which the asset in question had been used as in existence and provides that any amount realised in excess of the written down value not exceeding the actual cost is to be charged to income-tax as income of the business of the previous year in which such moneys become payable. The effect of Section 41(2) read with the Explanation is that the excess over the written down value is deemed to be the income of the tea business and has to be accordingly computed with reference to Rule 8 of the Rules. The contention of the income-tax authorities that such income does not arise out of cultivation of tea leaves and/ or manufacture of tea is not correct in view of the statutory fiction created under Section 41(2) read with the Explanation thereto and the provisions of Section 29 of the Act. But for the fiction created under Section 41(2) of the Act, the realisation made in excess of the written down value could never be brought to tax since it was not income in the business sense but was merely a receipt on capital account as held by the Supreme Court in the said case of Bipinchandra Maganlal : [1961]41ITR290(SC) . It is well-settled that a fiction has to be given its full effect and has to be carried to its logical conclusion.
9. The matter may be considered also from another angle. In all the past assessments under the Act, only 40 per cent. of the income arrived at after considering the depreciation has been taken into consideration and brought to tax. Accordingly, the allowance for depreciation in such past assessments has been only to the extent of 40 per cent. It is well-settled that Section 41(2) only provides for recovering the depreciation that had been actually allowed as deduction in the past assessments when it is found that such depreciation has not in fact been suffered by the assessee by reason of realisation on subsequent sale of the asset at a higher amount than its written down value. Accordingly, even on this basis, what could be brought to tax is only what had actually been availed of and/ or allowed to the assessee under the provisions of the Act by way of depreciation for the assets in question in the past assessments. Such allowance had been only to the extent of 40 per cent. Thus, in any view of the matter, the amount that can be brought to tax with reference toSection 41(2) of the Act can only be to the extent of 40 per cent. of the excess over the written down value.
10. Mr. Moitra, learned advocate appearing for the Revenue, has, however, placed reliance on the decision of the Supreme Court in the case of CIT v. Maharashtra Sugar Mills Ltd. : [1971]82ITR452(SC) . He has submitted that the decision in Tata Tea Ltd.'s case : [1988]173ITR18(SC) is not relevant.
11. In our view, the decision in the case of Maharashtra Sugar Mills : [1971]82ITR452(SC) relied upon by the Department has no relevance while computing the tea income. The case of Maharashtra Sugar Mills : [1971]82ITR452(SC) , was not concerned with computation of tea income but income of a sugar manufacturing unit which had its own sugarcane farm and the cane grown therein was crushed in its sugar factory. In cases other than tea where both agricultural and non-agricultural activities are involved, Rule 23 of the Indian Income-tax Rules, 1922 (in short, 'the 1922 Rules'), corresponding to Rule 7 of the Rules, is applicable. In respect of the tea income only a specific provision was made in Rule 24 of the 1922 Rules corresponding to Rule 8 of the Rules. The distinction between the two rules has been noticed by the Supreme Court in the case of Tata Tea Ltd. : [1988]173ITR18(SC) . In respect of tea income, Rule 7 of the Rules or Rule 23 of the 1922 Rules has no application. Maharashtra Sugar Mills : [1971]82ITR452(SC) relied upon by the Department refers to computation of the income under Rule 23 of the 1922 Rules corresponding to Rule 7 of the Rules. It would be noticed that in Maharashtra Sugar Mills' case : [1971]82ITR452(SC) , the Supreme Court has held that, where the computation was to be made with reference to Rule 23 of the 1922 Rules, that is Rule 7 of the Rules, the deduction had to be allowed in its entirety as business expenditure. No question of any specified percentage only being brought to tax under the Act arose as in the case of tea income. In the case of Maharashtra Sugar Mills : [1971]82ITR452(SC) , 100 per cent. deduction was allowed for the common overhead expenditure like managing director's salary and other administrative expenses. It was held that a part of such expenditure could not be disallowed on the ground that part of the income arising due to such expenditure was not taxable. The said decision has no relevance to the facts of the instant case. The said case is more akin to a case where a part of the income is exempt and a part is taxable but the entire expenditure relating to the business has to be allowed as business expenditure. In the Maharashtra Sugar Mill's case : [1971]82ITR452(SC) , the Supreme Court referred to those caseswhere income from securities was partly exempt and partly taxable. In a case like that of Maharashtra Sugar Mitts : [1971]82ITR452(SC) , since the entire expenditure itself would be allowed, the amount taxable with reference to Section 41(1) would also be similarly taxable in its entirety. The case of Maharashtra Sugar Mills : [1971]82ITR452(SC) has no application to tea income where only 40 per cent. of the income is to be treated as taxable under the Act and the balance 60 per cent. is to be assessed as agricultural income. Where the entire expenditure and/or allowance is not allowed and is limited to only 40 per cent., then by no logic, in case of reimbursement of such expenditure and/or allowance in the later years, 100 per cent. thereof can be assessed.
12. It has been contended by Mr. Moitra that Rule 23 of the 1922 Rules was considered by the Supreme Court in Maharashtra Sugar Mills' case : [1971]82ITR452(SC) , which corresponds to Rule 8(1) of the Rules. As a matter of fact, in that case, Rule 7 of the Rules was considered and not Rule 8(1) which is referable to Rule 24 of the 1922 Rules. Rule 23 of the 1922 Rules or Rule 7 of the Rules has no relevance to the tea income. As held by the Supreme Court in the case of Tata Tea Ltd. : [1988]173ITR18(SC) , Rule 8 is the specific rule dealing with tea income.
13. The Act itself treats growing and manufacturing tea as a composite business, one part being inextricable from the other. This indivisibility is statutorily acknowledged. In the complement of Sections 29 to 44D occur Sections 33A and 33AB which refer to tea business as one business of growing and manufacturing tea. The introductory words of the said sections make the legislative intent quite clear :
'33A. (1) In respect of planting of tea bushes on any land in India owned by an assessee who carries on business of growing and manufacturing tea. ...' .
'33AB. (1) Where an assessee carrying on business of growing and manufacturing tea in India. . . .'
14. It is this unity of the activity peculiar to growing and manufacturing tea which makes for two sets of rules, viz., Rule 7 and Rule 8.
15. To sum up, by virtue of the fiction under Section 41(2), profit, though in the nature of a capital gain, is treated as income of the business, though not in existence, where profit arises on sale of depreciable assets of the business after being used for the purpose of the business. The businessin the present case being business of growing and manufacturing tea, the fictional profit of the business so arising under Section 41(2) cannot but be a profit of the same composite business. Thus, the apportionment to the prescribed percentage as between growing tea and manufacturing tea under Rule 8(1) is unavoidable. The statute as also the rules framed thereunder consistently accept the business of growing tea and the business of manufacturing tea as one indivisible composite business calling for apportionment of its income under all circumstances.
16. Secondly, depreciation of the assets, even though used exclusively for manufacturing tea, also gets sliced down to 40 per cent. by the operation of the said Rule 8(1). It is illogical to say that the same rule of apportionment shall not apply to the fictional profit arising under the circumstances described under Section 41(2). The fiction is that the capital profit under Section 41(2) is to be treated as profit of the pre-existing business of growing and manufacturing tea.
17. The contention of the Revenue, if accepted, would land us in the fallacy of assuming that the sale of the depreciable assets constitutes by itself a business, distinct and different from the business of growing and manufacturing tea. That would be tantamount to superadding to the fiction a further fiction totally inconsistent with the former one provided by law.
18. For the reasons aforesaid, we answer the question in the affirmative and in favour of the assessee and against the Revenue.
19. There will be no order as to costs.
Nure Alam Chowdhury, J.
20. I agree.