# COMMISSIONER OF INCOME TAX _ v. WILLAMSON FINANCIAL SERVICES AND ORS

- **Citation:** [2007] 13 S.C.R. 376
- **Court:** Supreme Court of India
- **Decided:** 2007-12-12
- **Case number:** Civil Appeal Nos. 3803- A 3808 of 2005
- **Bench:** S.H. Kapadia, B. Sudershan Reddy
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/commissioner-of-income-tax-v-willamson-financial-services-and-ors-22397
- **Pages:** 27

## Headnote

-+
Income Tax Act, 1961:
c
s. 80HHC-Composite income from sale of tea, grown and
manufactured-Export of tea-Deduction under s. 80HHC-Held:
Allowable after 60: 40 apportionment of income under Rule 8(1)-The
said rule segregates agricultural income which is ~xempted income,
from business income which is chargeable to tax-For that purpose,
D the ratio of 60 : 40 is applied-Therefore chargeability and
computability is confined to only 40% of the income from tea which is
taxable under Income Tax Act, 1961-In view of this, assessee cannot
claim s.80HHC(3)(a) deduction against the entire tea composite
income-Moreover Deductions under Chapter VL4 are deductions not
E from a particular head of income but from gross total incomeTherefore, s. 80HHC is not part of provisions for computation of
business income-Income Tax Rules, 1962-r.8(1).
s.10(1)-"agricultural income "-Power to make laws with
F
respect to taxes on agricultural income-Held: Is on State Legislature
under Article 246(1) of Constitution r. w. Entry 82 of List 1 in Seventh
)'
~
Schedule and Article 246(3) r. w. Entry 46 of List II in Seventh
Schedule-Expression "agricultural income", means agricultural
income as defined in Article 366(1) of Constitution for purpose of
G
enactments relating to Indian Income-tax-Constitution of India,
1950-Articles 246(1), (3), 366(1), Seventh Schedule List I Entry 82
and List II Entry 46.
r~
The question which arose for consideration in these appeals is
H
376
·-
~
.... y
COMMISSIONER OF INCOME TAX v. WILLAMSON
377
FINANCIAL SERVICES
whether Assessing Officer was right in holding that deduction under
s.80HHC can be allowed only against part of the income from tea which
was taxable under the Income Tax Act, 1961, namely, 40% of the
income.
'
Disposing of the appeals, the Court
HELD: 1.1. The tea income consists of two parts: (i) "agricultural
income' upto the stage of growing the tea; and (ii) "business income"
from the manufacture and sale of tea grown by the assessee. Under
the Constitution, "agricultural income" can be taxed only by the State
Governments. Rule 8(1) oflncome Tax Rules, 1962, provides that only
40% of the composite income can be taxed under the Income Tax Act,
1961. Power of the State Governments to levy tax extends to the balance,
namely, 60% of the composite income. Rule 8(1) provides for the method
in which composite income is to be computed. It says that income shall
be computed as if it were income derived from business. Rule 8(1) uses
the word "income" and not "total income". The 1961 Act contains
provisions for computation of income under the head "Business". The
computation in Rule 8(1) in respect of composite income, by reason of
legal fiction in-built in Rule 8, cannot be read in entirety into computation
ofincomeunderthehead "Business". [Para41) [400-E-G)
Cambay Electric Supply Industrial Company Ltd (1978) 113 ITR
84 SC; The Karim Tharuvi Tea Estates Ltd, Kottayam and Anr. v. State
of Ker ala and Ors., (1963) 48 ITR 83 SC and Distributors (Baroda) Pvt .
Ltd v. Union of India and Ors., (1985) 155ITR120 SC, held inapplicable.
Tea Ltd. v. State of West Bengal, (1988) 173 ITR 18 SC,
Distinguished.
1.2. Deductions under Chapter VIA are deductions not from a
particular head of income but from gross total income. Therefore,
s.80HHC is not part of the computation of income under the head
"Business". S.80HHC Deduction is required to be allowed after
apportionment ofincome under Rule 8(1) of the 1962 Rule.
[Paras44and45) [402-D-E)
A
B
c
D
E
F
G
H
378 SUPREME COURT REPORTS
[2007] 13 (Addi.) S.C.R.
A
2. S.10(1) exempts "agricultural income" not only from taxable
income but also from the "total income" of the assessee. These incomes
are different from tax-free incomes under Chapter VIA. The exemption
of agricultural income from central taxation is based on the provisions
in the Constitution according to which Parliament has exclusive power
B to make laws with respect to taxes on income other than agricultural
income, whereas St

## Text

_Characters 0–39,762 of 59,302. This is a partial read: ask again with offset=39762 for what follows._

A
COMMISSIONER OF INCOME TAX
_,
v.
..
WILLAMSON FINANCIAL SERVICES AND ORS.
DECEMBER 12, 2007
B
[S.H. KAPADIA AND B. SUDERSHAN REDDY, JJ.]
-+
Income Tax Act, 1961:
c
s. 80HHC-Composite income from sale of tea, grown and
manufactured-Export of tea-Deduction under s. 80HHC-Held:
Allowable after 60: 40 apportionment of income under Rule 8(1)-The
said rule segregates agricultural income which is ~xempted income,
from business income which is chargeable to tax-For that purpose,
D the ratio of 60 : 40 is applied-Therefore chargeability and
computability is confined to only 40% of the income from tea which is
taxable under Income Tax Act, 1961-In view of this, assessee cannot
claim s.80HHC(3)(a) deduction against the entire tea composite
income-Moreover Deductions under Chapter VL4 are deductions not
E from a particular head of income but from gross total incomeTherefore, s. 80HHC is not part of provisions for computation of
business income-Income Tax Rules, 1962-r.8(1).
s.10(1)-"agricultural income "-Power to make laws with
F
respect to taxes on agricultural income-Held: Is on State Legislature
under Article 246(1) of Constitution r. w. Entry 82 of List 1 in Seventh
)'
~
Schedule and Article 246(3) r. w. Entry 46 of List II in Seventh
Schedule-Expression "agricultural income", means agricultural
income as defined in Article 366(1) of Constitution for purpose of
G
enactments relating to Indian Income-tax-Constitution of India,
1950-Articles 246(1), (3), 366(1), Seventh Schedule List I Entry 82
and List II Entry 46.
r~
The question which arose for consideration in these appeals is
H
376
·-
~
.... y
COMMISSIONER OF INCOME TAX v. WILLAMSON
377
FINANCIAL SERVICES
whether Assessing Officer was right in holding that deduction under
s.80HHC can be allowed only against part of the income from tea which
was taxable under the Income Tax Act, 1961, namely, 40% of the
income.
'
Disposing of the appeals, the Court
HELD: 1.1. The tea income consists of two parts: (i) "agricultural
income' upto the stage of growing the tea; and (ii) "business income"
from the manufacture and sale of tea grown by the assessee. Under
the Constitution, "agricultural income" can be taxed only by the State
Governments. Rule 8(1) oflncome Tax Rules, 1962, provides that only
40% of the composite income can be taxed under the Income Tax Act,
1961. Power of the State Governments to levy tax extends to the balance,
namely, 60% of the composite income. Rule 8(1) provides for the method
in which composite income is to be computed. It says that income shall
be computed as if it were income derived from business. Rule 8(1) uses
the word "income" and not "total income". The 1961 Act contains
provisions for computation of income under the head "Business". The
computation in Rule 8(1) in respect of composite income, by reason of
legal fiction in-built in Rule 8, cannot be read in entirety into computation
ofincomeunderthehead "Business". [Para41) [400-E-G)
Cambay Electric Supply Industrial Company Ltd (1978) 113 ITR
84 SC; The Karim Tharuvi Tea Estates Ltd, Kottayam and Anr. v. State
of Ker ala and Ors., (1963) 48 ITR 83 SC and Distributors (Baroda) Pvt .
Ltd v. Union of India and Ors., (1985) 155ITR120 SC, held inapplicable.
Tea Ltd. v. State of West Bengal, (1988) 173 ITR 18 SC,
Distinguished.
1.2. Deductions under Chapter VIA are deductions not from a
particular head of income but from gross total income. Therefore,
s.80HHC is not part of the computation of income under the head
"Business". S.80HHC Deduction is required to be allowed after
apportionment ofincome under Rule 8(1) of the 1962 Rule.
[Paras44and45) [402-D-E)
A
B
c
D
E
F
G
H
378 SUPREME COURT REPORTS
[2007] 13 (Addi.) S.C.R.
A
2. S.10(1) exempts "agricultural income" not only from taxable
income but also from the "total income" of the assessee. These incomes
are different from tax-free incomes under Chapter VIA. The exemption
of agricultural income from central taxation is based on the provisions
in the Constitution according to which Parliament has exclusive power
B to make laws with respect to taxes on income other than agricultural
income, whereas State Legislature has exclusive power to make laws
with respect to taxes on agricultural income, under Article 246(1) of the
Constitution read with Entry 82 of List I in the Seventh Schedule and
Article 246(3) read with Entry 46 of List II in the Seventh Schedule.
C The expression "agricultural income", for the purpose of these entries,
means agricultural income as defmed for the purpose of the enactments
relating to Indian Income-tax vide Article 366(1) of the Constitution.
From the definition of"agricultural income" in Article 366(1) it becomes
clear that Rule 8 of 1962 Rule (corresponding to Rule 24 framed under
D I.T. Act, 1922) pertains to and is integrated with the definition of the
expression "agricultural income" for the purposes oflaws pertaining
to Indian Income-tax and, therefore, the said rule has to be taken into
account in considering the meaning of the expression "agricultural
income" in Artide 366(1) of the Constitution. The words used in Article
E 366(1) of the Constitution are not "as defined by the enactments relating
to Indian Income-tax" but "as defined for the purposes of the
enactments relating to Indian Income-tax".
F on.
[Paras 21 and 23] [390-G-H; 391-A-E]
Tata Tea Ltd: v. State of West Bengal, (1988) 173ITR18 SC, relied
3.1. Rule 8 refers to cases of integrated income. Where the income
of the assessee is partly from agriculture and partly from manufacture
- the profits on the sales have to be apportioned, and the elements in
the profits referable to agricultural activities may be exempted as being
G agricultural income. In such cases, the task of apportionment is
simplified by Rules 7 and 8 framed in exercise of powers conferred by
s.295(2)(b ). Under Rule 8, which applies only in cases where the assessee
himself grows tea-leaves and manufactures tea in India, 40% of the
profits on sales is taxable as business income. Only the balance 60%
H of such income would be deemed to be agricultural income on which the
...
.... _
... -
1
--... -1
COMMISSIONER OF INCOME TAX v. WILLAMSON
379
FINANCIAL SERVICES
State Legislature would have the power to levy agricultural income-tax.
However, the State Legislature would have no power to make any law
which would have the effect oflevying tax on the aforestated 40% of
such income on which tax is payable under the I. T. Act by virtue of the
provisions of the I.T. Act. The computation of income from tea has to
be in accordance with the relevant provisions of the enactments relating
to the Indian Income-tax and the deductions towards various expenses
incurred for earning the income shall be liable under the said enactments
relating to Indian Income-tax. Thus, where computation of income from
cultivation, manufacture and sale of tea is made in accordance with the
provisions of the I.T. Act, the Agricultural Income-tax Officer would
have no option but to accept the computation by the A.O. under 1961
Act and treat 40% of such income, as business income and the balance
60%, as agricultural income. [Para 24) [391-H; 392-A-C, E-H; 393-A)
3.2. The term "agricultural income" has been defined under s.2(1A)
of tlie 1961 Act. It is exempted from tax under 1961 Act because
Parliament has no power under the Constitution to levy tax on
agricultural income. The word "income" has been defined in s. 2(24) of
the said Act to include profits and gains. The term "total income" is
defined in s.2( 45) of the said Act. The definition of the term "total
Income" involves two ingredients-firstly, that the income must consist
of the total amount of income referred to in s.5 and secondly, it must be
computed in the manner laid down in the Income-tax Act. Therefore,
the manner of computation laid down by the I. T. Act forms an integral
part of the definition "total income". The correct method of approach
is to treat nothing as being charged to tax until by the process of
computation laid down by the said Act, the status of income, profits and
gains, emerges. [Para 26) [393-C-E)
3.3. S.80HHC states that in computing the "total income" a
deduction, to the extent of profits derived by the assessee from exports
has to be taken into account. The important words are "profits derived
from the export". The word "derived" would mean "derived from the
source". That source has to be in s.14. Income covered by s.10(1) i.e.
agricultural income, which is not chargeable to tax, does not fall in s.14
and, therefore, it will not fall under various computation sections
A
B
c
D
E
F
G
H
380 SUPREME COURT REPORTS
[2007] 13 (Addl.) S.C.R.
A commencing from s.15 to s.59. S.14 classifies "all income" into five
.J
enumerated heads for the purpose of charge of income-tax and
~
computation of total income. "Exempted income" is different from ''taxfree income". "Agricultural income" falls in the category of exempted
income. It is neither chargeable nor includible in the total income. On
B the other hand, deduction under Chapter VIA is for "income" which
forms part of total income but which is tax-free. Both these types of
income are to be balanced, namely, exempted income vis-a-vis tax-free
income. Thus, it is clear that"income", covered under s.10 and s.11 which
is not chargeable to tax, does not fall under s.14 and under various
c computation sections from s.15 to s.59. However, on account oflegal
fiction builtinto Rule 8(1 ), which applies to composite income, a part of
the composite income/integrated income is agricultural income and the
balance is the business income. The object of Rule 8(1) is to disintegrate
the two. [Para37] (397-E-H; 398-A-B]
D
3.4. Rule 8(1) uses the word "income". In the entire rule the word
'total income' is not mentioned. Further, Rule 8(1) refers to income
derived from the sale of tea cultivated and manufactured. In the case
of an assessee deriving income, not from composite activity, one has to
calculate agricultural income in the commercial sense. However, in
E composite income under Rule 8(1) a part of the composite income is
business profit, which is one of the source/head of income under s.14,
and therefore to that extent alone chargeability and computation would
arise and that too only to the extent of computation of income under
the head "profits and gains from business". Rule 8(1), therefore, states
' --
F that composite/integrated income shall be computed as if it was income
derived from business. The words "as if' stand for legal fiction. Rule
8(1) segregates agricultural income which is exempted income from
business income which is chargeable to tax. For that purpose the ratio
G
of 60 : 40 is applied. Therefore, to the extent of 40% only there is
chargeability and computability to the extent of 40% only. If this
distinction is kept in mind, the assessee cannot claim s.80HHC(3)(a)
~-
Deduction against the entire tea composite income. It can be claimed
only against proportionate income.
[Paras 38 and 40] (398-D-F, G; 400-A-B]
H
COMMISSIONER OF INCOME TAX v. WILLAMSON
381
FINANCIAL SERVICES [KAPADIA, J.]
·~ i
CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 3803- A
3808 of 2005.
From the Judgment and final Order dated 24.8.2004 of the Gauhati
High Court at Gauhati in LT.A. Nos. 59, 60, 62, 63, 64 and 65/2003.
WITH
B
C.A. Nos. 1021/2006, 6719-6720/2004, 1825, 1827 and 5827/
2007.
Vikas Singh, A.S.G., Dr. R.G. Padia, H.N. Salve, Shyam Diwan,
Dr. D.P. Pal, S. Ganesh, Arijit Prasad, A. Deb Kumar, Alka Sharma, c
Lalit Srivastava, B.V. Bairam Das, Prateek Jalan, Meenakshi Grover,
Ruby Singh Ahuja, Manu Aggarwal, Christie Jain, Kamaldeep Dayal,
Abhratosh Majumdar, S. Sukumaran, Alok Rai, Rajesh, K. Rajeev,
Suruchi Aggarwal, V.K. Sidharthan and A. Bhattacharjee for the
Appearing parties.
D
The Judgment of the Court was delivered by
KAPADIA, J. 1. Leave granted in S.L.P. (C) No.2275 of2007.
2. The intricate question which arises for determination in this batch E
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.
-
/
1
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 F
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 oflncome-tax Act, 1961 (for short,
'1961 Act") in respect of the export. They were in the business of growing G
r--1
and manufacturing tea. Since they earned Composite Income, their case
stood covered by Rule 8(1) oflncome-tax Rules, 1962 ("1962 Rule"
for short).
5. For the sake of convenience we state the facts occurring in Civil H
382 SUPREME COURT REPORTS
[2007] 13 (Addl.) S.C.R.
A 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 ).
B
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
c 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
D 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
E judgment of the Division Bench of the Guahati High Court.
SUBMISSIONS
9. On behalf of the assessees learned senior counsel submitted that
Rule 8of1962 Rule which provides for computation of composite income
--
is made under the power conferred by section 295 of the 1961 Act and
'
~
F
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
G 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
H on the basis of the proportion which the export turnover bears to the total
COMMISSIONER OF INCOME TAX v. WILLAMSON
383
FINANCIAL SERVICES [KAPADIA, J.]
·-
turnover, which proportion is to be applied to the business profits to find A
)
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 B
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 business".
According to the learned counsel, if total profits from the sale of tea c
cultivated and manufactured by the seller are to be included in the
computation of business profits, then, necessarily, any deduction allowed
in respect of the profits from tea export has also to be allowed in
computing the business income. In this connection, learned counsel placed
reliance on the definition of"total income" in section 2(45) and section 5 D
of the 1961 Act which defines the scope of total income. According to
learned counsel, "business income" is one of the Heads of Income under
Section 14 and such income is included in the total income of an assessee.
According to assessees, Section 80A, which is in Chapter VI-A, provides
that in computing the total income, there shall be allowed from gross total E
income, deductions specified in sections 80C to 80U of the Act and,
therefore, there is no difference between deductions under Chapter IV
and the deductions under Chapter VI-A. Therefore, according to the
,
)
learned counsel, in computing the total income, it is not permissible to
restrict the deduction under Chapter IV and not to allow deduction under F
Chapter VI-A. In this connection reliance was placed by the learned
counsel on the judgment of this Court in the case of Cambay Electric
Supply Industrial Company Ltd. v. Commissioner of Income Tax,
(1978) 113 ITR 84 (SC) which had been approved by the Constitution
Bench later on in the case ofDistributors (Baroda) Pvt. Ltd. v. Union G
~"
of India and Ors. (1985) 155 ITR 120 (SC) in which it has been held
that though a deduction does not appear in Chapter IV, it has a direct
impact upon the computation of income under the head "business profit"
and, therefore, even if the deduction does not fall within the ambit of
Sections 29 to 43A, still ifthe deduction directly affects the computation H
384 SUPREME COURT REPORTS
[2007] 13 (Addi.) S.C.R.
A of income under the head business profits then such deduction has got to
,J
be taken into account. Placing reliance on the said judgments, learned
counsel submitted that the deduction admissible under section 80HHC is
one of the items of deduction appearing in Chapter VI-A which has to
be taken into account in computing the business income and, therefore,
..
B section 80HHC is a part of the provisions relating to the computation of
business income under the 1961 Act. Before us, it was further submitted
that the legal fiction under Rule 8 became necessary because it was not
*
possible for the ITO to assess an assessee, who not only carries on
business in selling tea but also grows green tea leaves by agricultural
c process and manufactures black tea from the same. Because of the said
legal fiction, the entire sale proceeds is treated as business income and is
computed as such after giving all allowances and deductions admissible
in computation of business income and, therefore, according to the learned
counsel, while computing business income, the legal fiction under Rule 8
D must be given effect by computing the business income after taking into
account the deduction under section 80HHC. Learned counsel for the
assessee further submitted that Chapter VI-A has several headings. Under
heading 'C' we have "deductions in respect of certain incomes". That
heading would cover "incomes" which are includible in the gross total
E income of the assessee and, therefore, section 80AB which also falls in
Chapter VI-A will apply only to incomes which fall under heading 'C'.
In other words, according to the learned counsel, section 80AB will not
have any application to incomes not falling under heading 'C'. Learned
F
counsel for the assessee has relied upon the above analyses of various
deductions allowed under heading 'C' to show that under certain
r
'
provisions, deductions are allowed where the gross total income includes
profits or gains in respect of which such deductions are admissible. For
example, section 80HH provides that where gross total income includes
G
any profits derived from an industrial undertaking, there shall be allowed,
in computing the total income, a deduction equal to twenty per cent from
such profits. Similar expression finds place in section 80HHB and section
80-IA. These illustrations have been given by the learned counsel in
'( -
support of his contention that where the gross total income includes any
H business profits referred to under the specific section, section 80AB would
apply and the amount of income specified in the given section as computed
-f
COMMISSIONER OF INCOME TAX v. WILLAMSON
385
FINANCIAL SERVICES [KAPADIA, J.]
in accordance with the provisions of the Act (before making any deduction A
under Chapter VI-A) shall alone be deemed to be the amount of income
of the said nature which is derived or received by the assessee and which
is included in his gross total income. However, the said scheme of sections
80HHB, 80-I and 80-IA etc. is not applicable to the scheme of section
80HHC. According to the learned counsel, section 80HHC is the separate B
code by itself. That the said section cannot be confused or put on par
with sections 80HHB, 80-I or 80-IA. According to the learned counsel,
section 80HHC is different from other sections under Chapter VI-A
because it provides that in computing the total income, the profits and
gains from export would be allowed a deduction of the profits derived C
by the assessee from the export of such goods. According to the learned
counsel, in section 80HHC, the following expression is not there, namely,
"where gross total income of an assessee includes the profits derived from
export business". According to the learned counsel, the said expression
is omitted from section 80HHC because the deduction under section D
80HHC is strictly not computed in accordance with the provisions of the
1961 Act, relating to the computation of business income. According to
the learned counsel, the deduction under section 80HHC is only in respect
of profit derived by the assessee from export, which has been defined
tinder section 80HHC(3). That sub-section lays down that the profits E
derived from export shall be the amount which bears to the profits of the
business, as computed under the head profits and gains of business, the
same proportion as the export turnover bears to the total turnover of the
business. Therefore, according to the learned counsel, the profits of the
export business which are allowed deduction under section 80HHC are F
not computed in accordance with the provisions of the Act relating to the
computation of business income but is statutorily fixed under section
80HHC(3) of the Act and that is the reason why section 80HHC does
not use the expression "where gross total income includes any profits and
gains derived from export business". Therefore, according to the learned G
counsel, section 80AB is not applicable to profits derived from export
business. Therefore, according to the learned counsel, section 80AB will
not govern section 80HHC. Consequently, according to the learned
counsel, the ITO should have first granted Section 80HHC Deduction
against the entire tea income, i.e., before applying Rule 8(1) and, H
386 SUPREME COURT REPORTS
[2007] 13 (Addi.) S.C.R.
A thereafter, the ITO should.have applied the said Rule and apportioned
the income in the ratio of 60:40.
Analysis of relevant provisions of the Constitution, Income-tax
Acts, 1922 and 1961.
B
10. For the sake of convenience we quote hereinbelow relevant
sections, rules, articles and entries:
11. Section 10 of IT Act, 1922 which reads as under:
10. (1) The tax shall be payable by an asses.see under the head
c
"Profits and gains of business, profession or vocation" in respect
of the profits and gains of any business, profession or vocation
carried by him.
(2) Such profits or gains shall be computed after making the
D
following allowances, namely:-
(i) Any rent paid for the premises in which such business,
profession or vocation is carried on, provided that when any
substantial part of the premises is used as a dwelling-house
by the assessee, the allowance under this clause shall be J)uch
E
sum as the Income-tax Officer may determine having regard
to the proportional annual value of the part so used;
(ii) in respect of repairs, where the assessee is the tenant only of
the premises, and has undertaken to bear the cost of such
repairs, the amount paid on account thereof, provided that, if
F
any substantial part of the premises is used by the assessee
as a dwelling-house, a proportional part only of such amount
shall be allowed;
(Iii) in respect of capital borrowed for the purposes of the business,
G
profession or vocation, the amount of the interest paid:
12. Rule 24 of the 1961 Act reads as under:
"24. Income derived from the sale of tea gro"'n and manufactured
by the seller in the taxable territories shall be computed as if it were
H
income derived from business, and 40 per cent. of such income
t
..
'
..........
COMMISSIONER OF INCOME TAX v. WILLAMSON 387
FINANCIAL SERVICES [KAPADIA, J.]
~
shall be deemed to be income, profits and gains liable to tax:
A
Provided that in computing such income an allowance shall be made
in respect of the cost of planting bushes in replacement of bushes
that have died or become permanently useless in an area already
planted, unless such area has previously been abandoned."
B
13. Section 2(1A) of the 1961 Act reads as under:
"Definitions.
2. In this Act, unless the context otherwise requires, -
c
(IA) "agricultural income" means
(a) any rent or revenue derived from land which is situated in India
and is used for agricultural purposes;
(b) any income derived from such land by
D
(i) agriculture; or
(Ii) the performance by a cultivator or receiver of rent-in-kind
of any process ordinarily employed by a cultivator or
receiver of rent-in-kind to render the produce raised or E
received by him fit to be taken to market; or
(ill) the sale by a cultivator or receiver ofrent-in-kind of the
produce raised or received by him, in respect of which
. 4
no process has been performed other than a process of
the nature described in paragraph (ii) ofthis sub-clause;
F
(c) any income derived from any building owned and occupied
by the receiver of the rent or revenue of any such land, or
occupied by the cultivator or the receiver of rent-in-kind, of
any land with respect to which, or the produce of which, any G
process mentioned in paragraphs (ii) and (iii) of sub-clause (b)
.. y
is carried on :
Provided that
(i) the building is on or in the immediate viciruty of the land, and H
388 SUPREME COURT REPORTS
[2007] 13 (Addi.) S.C.R.
A
is a building which the receiver of the rent or revenue or the
•
cultivator, or the receiver ofrent-in-kind, by reason of his
connection with the land, requires as a dwelling house, or as
a store-house, or other out-building, and
B
(Ii) the land is either assessed to land revenue in India or is subject
to a local rate assessed and collected by officers of the
Government as such or where the land is not so assessed to
land revenue or subject to a local rate, it is not situated -
(A) in any area which is comprised within the jurisdiction of a
c
municipality (whether known as a municipality, municipal
corporation, notified area committee, town area
committee, town committee or by any other name) or a
cantonment board and which has a population of not less
than ten thousand according to the last preceding census
D
of which the relevant figures have been published before
the first day of the previous year ; or
(B) in any area within such distance, not being more than eight
kilometres, from the local limits of any municipality or
E
cantonment board referred to in item (A), as the Central
Government may, having regard to the extent of, and
scope for, urbanisation of that area and other relevant
considerations, specify in this behalf by notification in the
Official Gaz.ette:
~ .
F
Explanation. - For the removal of doubts, it is hereby declared
that revenue derived from land shall not include and shall be
deemed never to have included any income arising from the transfer
of any land referred to in item (a) or item (b) of sub-clause (iii) of
clause (14) ofthis section;"
G
14. Section 10(1) of the 1961 Act reads as under:
' .
"CHAPTER JIJ
INCOMES WHICH DO NOT FORM PART OF TOTAL
H
INCOME
-f
~
f y
COMMISSIONER OF INCOME TAX v. WILLAMSON
389
FINANCIAL SERVICES [KAPADIA, J.]
Incomes not included in total income.
10. In computing the total income of a previous year of any person,
any income falling within any of the following clauses shall not be
included
(1) agricultural income;"
15. Sections 80HHC(l) and 80HHC(3)(a) of the 1961 Act read
as under:
"Deduction in respect of profits retained for export business
80HHC. (1) Where an assessee, being an Indian company or a
person (other than a company) resident in India, is engaged in the
business of export out of India of any goods or merchandise to
which this section applies, there shall, in accordance with and
subject to the provisions of this section, be allowed, in computing
the total income of the assessee, a deduction of the profits derived
by the assessee from the export of such goods or merchandise :
(lA) to (2A) xxx
xxx xxx
(3) For the purposes of sub-section (1 ),--
(a) where the export out of India is of goods or merchandise
manufactured or processed.by the assessee, the profits derived
from such export shall be the amount which bears to the profits of
the business, the same proportion as the export turnover in respect
of such goods bears to the total turnover of the business carried
on by the assessee;"
16. Rule 8(1) of the 1962 Rule reads as under:
Income from the manufacture of tea.
8. (1) 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 forty per cent of such income shall be deemed to be income
liable to tax.
A
B
c
D
E
F
G
H
390 SUPREME COURT REPORTS
[2007] 13 (Addi.) S.C.R.
A
17. Entry 46, List II (State List) of the Seventh Schedule to the
B
c
Constitution which reads as under:
"46. Taxes on agricultural income."
18. Article 245 of the Constitution reads as under:
"245. Extent of laws made by Parliament and by the
Legislatures of States. -
(1) Subject to the provisions of this Constitution, Parliament may
make laws for the whole or any part of the territory oflndia,
and the Legislature of a State may make laws for the whole
or any part of the State.
(2) No law made by Parliament shall be deemed to be invalid on
the ground that it would have extra-territorial operation."
D
19. Entry 82, List I (Union List) of the Seventh Schedule to the
E
F
Constitution reads as under:
"82. Taxes on income other than agricultural income."
20. Article 366(1) of the Constitution reads as under:
"366. Definitions.- In this Constitution, unless the context
otherwise requires, the following expressions have the meanings
hereby respectively assigned to them, that is to say-
(1) "agricultural income" means agricultural income as defined
for the purposes of the enactments relating to Indian income-tax;"
21. On analysis of the above provisions the position which emerges
is as follows. Section 10(1) of 1961 Act exempts "agricultural income"
not only from taxable income but also from the "total income" of the
G assessee. These incomes are different from tax-free incomes under
Chapter VIA. The exemption of agricultural income from central taxation
is based on the provisions in the Constitution according to which Parliament
has exclusive power to make laws with respect to taxes on income other
than agricultural income, whereas State Legislature has exclusive power
H to make laws with respect to taxes on agricultural income, under Alticle
COMMISSIONER OF INCOME TAX v. WILLAMSON
391
FINANCIAL SERVICES [KAPADIA, .J.]
246(1) of the Constitution read with Entry 82 of List I in the Seventh A
Schedule and Article 246(3) read with Entry 46 of List II in the Seventh
Schedule.
22. The expression "agricultural income", for the purpose of abovementioned entries, means agricultural income as defined for the purpose B
of the enactments relating to Indian Income-tax vide Article 366(1) of
~/
the Constitution. Therefore, the definition of"agricultural income" in Article
366(1) indicates that it is open to the income-tax enactments in force from
time to time to define "agricultural income" in any particular manner and
that would be the meaning not only for tax enactments but also for the c
Constitution. This mechanism has been devised to avoid a conflict with
the legislative power of States in respect of agricultural income. From the
said definition of"agricultural income" in Article 366(1) it becomes clear
that Rule 8of1962 Rule (corresponding to Rule 24 framed under LT.
Act, 1922) pertains to and is integrated with the definition of the expression D
"agricultural income" for the purposes oflaws pertaining to Indian Incometax and, therefore, the said rule has to be taken into account in considering
the meaning of the expression "agricultural income" in Article 366(1) of
the Constitution. It is significant to note that the words used in Article
366(1) of the Constitution are not "as defined by the enactments relating E
to Indian Income-tax" but "as defined for the purposes of the
enactments relating to Indian Income-tax". Therefore, it is clear from
the definition in Article 366(1 ), that Rule 8 of 1962 Rule (Rule 24 ofl. T.
Rules, 1922), defines the term "agricultural income" for the purposes of
·~
~
laws pertaining to Indian Income-tax and, therefore, the said rule has to
be taken into account in considering the meaning of the term "agricultural F
income" under Article 366(1) of the Constitution. [See: Tata Tea Ltd. v.
State of West Bengal, (1988) 173 ITR 18 SC].
23. In short, whatever definition is given in the LT. Act shall be
deemed to be adopted under the Constitution by virtue of Article 366(1) G
'
l
of the Constitution oflndia.
24. It is in the above context that one has to examine the scope of
Rule 8 of 1962 Rule. Rule 8 refers to cases of integrated income. Where
the income of the assessee is partly from agriculture and partly from H
392 SUPREME COURT REPORTS
(2007] 13 (Addi.) S.C.R.
A manufacture - example, where the assessee grows tea and subjects it to
a manufacturing process, and sells the manufactured product - the profits
on the sales have to be apportioned, and the elements in the profits
referable to agricultural activities may be exempted as being agricultural
income. In such cases, the task of apportionment is simplified by Rules 7
B and 8 framed in exercise of powers conferred by Section 295(2)(b).
Under Rule 7 the market value of the agricultural produce used as raw
material in the business is deductible from the business profits, as
representing agricultural income. Under Rule 8, which applies only in cases
where the assessee himself grows tea-leaves and manufactures tea in India,
C 40% of the profits on sales is taxable as business income, while the balance
is exempt as representing agricultural income. If an income receipt,
comprises of both agricultural and non-agricultural elements, it has to be
disintegrated - and that portion which represents agricultural income should
be exempted from tax. Thus, composite revenue derived from land may
D be apportioned. In cases where a person subjects agricultural produce
to a manufacturing process before selling it, the profits on the sale has to
be disintegrated and the portion representing agricultural income would
be exempt from tax but the portion attributable to the manufacturing
process would be taxable as business profits. This is the basic scheme
E of Rule 8. Therefore, the position which emerges is that income derived
from the sale of tea grown and manufactured by the seller in India shall
be computed as income derived from business and 40% of such income
shall be deemed to be liable to tax under the LT. Act. Only the balance
60% of such income would be deemed to be agricultural income on which
F the State Legislature would have the power to levy agricultural incometax under Article 246(3) r/w Entry 46, List II of the Seventh Schedule to
the Constitution. However, the State Legislature would have no power
to make any law which would have the effect of levying tax on the
aforestated 40% of such income on which tax is payable under the LT.
G Act by virtue of the provisions of the I. T. Act. The computation of income
from tea has to be in accordance with the relevant provisions of the
enactments relating to the Indian Income-tax and the deductions towards
various expenses incurred for earning the income shall be liable under the
said enactments relating to Indian Income-tax. Thus, where computation
H of income from cultivation, manufacture and sale of tea is made in
COMMISSIONER OF INCOME TAX v. WILLAMSON
393
FINANCIAL SERVICES [KAPADIA, J.]
accordance with the provisions of the I.T. Act, the Agricultural IncomeA
tax Officer would have no option but to accept the computation by the
A.O. under 1961 Act and treat40% of such income, as business income
and the balance 60%, as agricultural income.
25. To the above extent there is no dispute. The question before B
us is whether computation of Section 80HHC Deduction could be said
to be part of computation provision under the 1961 Act, particularly,
provisions dealing with computation of income under the head "Business
Income" and particularly when the said Deduction has to be made from
"gross total income" under Chapter VIA
c
26. The term "agricultural income" has been defined under Section
2(1A) of the 1961 Act. It is exempted from tax under 1961 Act because
Parliament has no power under the Constitution to levy tax on agricultural
income. The word "income" has been defined in Section 2(24) of the said
Act to include profits and gains. The term "total income" is defined in D
Section 2( 45) of the said Act. The definition of the term ''total income"
involves two ingredients-firstly, that the income must consist of the total
amount of income referred to in Section 5 and secondly, it must be
computed in the manner laid down in the Income-tax Act. Therefore,
the manner of computation laid down by the LT. Act forms an integral E
part of the definition ''total income". The correct method of approach is
to treat nothing as being charged to tax until by the process of computation
laid down by the said Act, the status of income, profits and gains, emerges.
This principle is very important for deciding the present case. We repeat
that computation laid down by the said Act forms an integral part of the F
definition of "total income". Section 4 charges the total income of an
assessee to income-tax. Section 5 of the I.T. Act defines "total income".
27. At this stage we have to analyse Chapter III which deals with
Incomes which do not form part of total income. Section 10 groups in G
one place various incomes which are exempt from tax. The incomes
enumerated in Section 10 are not only excluded from the taxable income
of the assessee but also from his total income. The exemption embodied
in Section 10 can be divided into two categories, namely, exemption to
which certain classes of income from their very nature are entitled to H
394 SUPREME COURT REPORTS
[2007] 13 (Addl.) S.C.R.
A exemption and the second category concerns exemption to which the
character of the assessee entitles him to claim exemption. In the first
category is agricultural income whereas in the second category of
exempted income is the income oflocal authorities and diplomatic officers.
e•
We are concerned with the first category.
B
28. In addition to the above two categories there is a third kind of
income. These incomes are wholly or partly tax-free incomes on account
of special deductions under Chapter VIA. We are essentially concerned
with these "tax-free incomes".
c
29.