Export — Deduction u/s.80 HHC — Export profits in the business of growing, manufacturing and exporting of tea — Deduction u/s.80 HHC to be computed after apportionment, only against 40% of proportionate income

[CIT v. Williamson Financial Services & Ors., (2007)
297 ITR 17 (SC)]

Rule 8(1) of the Rules 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”.

The assessee exported tea in the accounting year. They were
entitled to deduction u/s.80HHC, 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). In the returns, the assessee claimed S.
80HHC deduction against the entire composite income before application of Rule
8(1). This working was rejected by the Assessing Officer who took the view that
the deduction u/s.80HHC can be allowed after the 60 : 40 apportionment as 40%
income was the gross total income. However, in appeal, the Commissioner of
Income-tax (Appeals) reversed the decision of the Assessing Officer by holding
that the Assessing Officer should have first granted the S. 80HHC deduction
against the entire tea income before applying Rule 8(1). Against the said
decision of the Commissioner of Income-tax (Appeals), the matter was carried in
appeal to the Tribunal who took the view that the Assessing Officer was right in
allowing S. 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 High Court. On appeal, the Supreme Court held that
‘Agricultural income’ falls in the category of exempted income. It is neither
chargeable nor includible in the total income. On the other hand, deduction
under Chapter VI-A is for ‘income’ which forms part of total income but which is
tax-free. Rule 8(1) segregates agricultural income which is exempted income from
business income which is chargeable to tax. Therefore, to the extent of 40% only
the income is chargeable and computable. In this view of the matter, the
assessee cannot claim S. 80HHC(3)(c) deduction u/s.80HHC(3)(a) against the
entire tea composite income and can claim only against proportionate income.