Section 80HHC Deduction of the 1961 Act is required to be allowed after apportionment of income under Rule 8(1) of the 1962 Rule.

JUDGMENT:

KAPADIA, J.-- Leave granted in S.L.P. (C) No.2275 of 2007.

2. The intricate question which arises for determination in this batch of civil appeals is at what stage Section 80HHC Deduction is to be allowed i.e. before the 60 : 40 apportionment under Rule 8(1) or from 40% profits on sales taxable as Business Income.

3. Rule 8(1) of the said Rule provides that 40% of the composite income from sale of tea, grown and manufactured, arrived at on making of the apportionment shall be deemed to be income liable to tax .

4. Assessees exported tea in the accounting year. They were entitled to deduction under Section 80HHC of Income-tax Act, 1961 (for short, 1961 Act ) in respect of the export. They were in the business of growing and manufacturing tea. Since they earned Composite Income, their case stood covered by Rule 8(1) of Income-tax Rules, 1962 ( 1962 Rule for short).

5. For the sake of convenience we state the facts occurring in Civil Appeal No.3803-3808 of 2005- Commissioner of Income Tax v. Willamson Financial Services & ors. In the returns, the assessee claimed Section 80HHC Deduction against the entire Composite Income before application of Rule 8(1).

6. This working was rejected by the A.O. who took the view that deduction under Section 80HHC can be allowed after 60 : 40 apportionment as 40% income was gross total income. However, in appeal, CIT (A) reversed the decision of the A.O. by holding that the A.O. should have first granted Section 80HHC Deduction against the entire tea income before applying Rule 8(1).

7. In short, the controversy is : whether Section 80HHC Deduction is admissible against the entire or part of the income from tea (i.e. 40%).

8. Against the said decision of CIT(A) the matter was carried in appeal to the Tribunal who took the view that A.O. was right in allowing Section 80HHC Deduction only against part of the income from tea which was taxable under the 1961 Act, namely, 40% of the income. This view of the Tribunal stood reversed by the impugned judgment of the High Court. Hence this civil appeal is filed by the Department against the judgment of the Division Bench of the Guahati High Court.

SUBMISSIONS

9. On behalf of the assessees learned senior counsel submitted that Rule 8 of 1962 Rule which provides for computation of composite income is made under the power conferred by section 295 of the 1961 Act and as such the said Rule has the effect as if enacted in that Act. Further, the definition of agricultural income is bound up with the Rules. Therefore, according to the learned counsel, such composite income has to be computed in the first instance as if it is income derived from business. The income has to be computed in accordance with the provisions of the Act which deals with computation of business income and, therefore, any deduction permissible under the 1961 Act is to be allowed while computing the composite income which is treated as business income and, therefore, deduction admissible under section 80HHC is to be computed on the basis of the proportion which the export turnover bears to the total turnover, which proportion is to be applied to the business profits to find out the export profits derived from export business. According to the learned counsel, when income is derived from profit computed under the head profits and gains of business , all deductions and allowances are to be allowed and, therefore, it is not possible to compute the profit of the business by allowing only deduction and allowances, which fall under Chapter IV but all other deductions although they do not appear in Chapter IV but in Chapter VIA, like deductions under section 80HHC, have also to be allowed to compute business profits in accordance with the provisions of the Act under the head profits of the busines