Commissioner of Income Tax vs Dat Pathe

The Income Tax Appellate Tribunal, Cochin Bench, has stated a case and referred the following question for our decision.

"Whether the assessee was entitled to the export profit rebate on a sum of Rs. 2,01,107 or the sum of Rs. 96,690 only under Rule 2(3) of the Income Tax (Determination of Export Profits) Rules, 1962 ?"

The year of assessment is 1962-63, the corresponding accounting period being that which ended On March 31, 1962. The assessee was carrying on business in timber as well as in processing cashewnuts and coffee seeds. His timber business was largely export business whereas cashew business appears to be largely internal business. He suffered a loss of Rs. 1,04,417 as far as the cashew business is concerned as computed by the assessing authority whereas in the timber business there was a profit to the extent of Rs. 2,01,107 as computed by the assessing authority. The assessee has kept separate accounts in relation to his cashew and coffee business. The sum of Rs. 96,690 mentioned in the question referred to us is the difference between the sum of Rs. 2,01,107 (profits and gains of timber business) and the sum of Rs. 1,04,417 (loss in relation to the cashew and coffee business).

The question referred to arises in view of Section 2(5) of the Finance (No. 2) Act, 1962 (hereinafter referred to as "the Act"), which is in these terms:

"2. (5)(i) An assessee being an Indian company or any other company which has made the prescribed arrangements for the declaration and payment of dividends within India or an assessee other than a company, whose total income includes any profits and gains derived from the export of any goods or merchandise out of India, shall be entitled to a deduction, from the amount of Income Tax and super-tax with which he is chargeable for the assessment year commencing on the 1st day of April, 1962, of an amount equal to the Income Tax and super-tax calculated respectively at one-tenth of the average rate of Income Tax and of the average rate of super-tax on the amount of such profits and gains included in the total income.

(ii) The Central Board of Revenue may make rules for computing the amount of such profits and gains."

The Central Board of Revenue has made Rules and we are admittedly concerned here with Sub-rule (3) of Rule 2. But in order to understand the sub-rule which has to be interpreted by us in answering the question, it will be useful to refer to Sub-rules (1) and (2) as well. We shall extract Sub-rules (1), (2) and (3) of Rule 2 of the Income Tax (Determination of Export Profits) Rules, 1962 (hereinafter referred to as "the Rules").

"2. Computation of qualifying income.--(1) Where an assessee referred to in Clause (i) of Sub-section (5) of Section 2 of the Finance (No. 2) Act, 1962 (XX of 1962), carries on any business of exporting goods or merchandise out of India, the amount of the profits and gains of such business with reference to which deduction of tax is admissible under that sub-section (hereinafter referred to as the ''qualifying income'') shall be computed in accordance with the provisions of Sub-rule (2), or Sub-rule (3), or Sub-rule (4) of this rule, as the case may be.

(2) Where in the opinion of the Income Tax Officer it is possible to ascertain the profits and gains on such exports, the amount of qualifying income shall be taken as the excess of the amount of the profits and gains so ascertained in accordance with the provisions of the Income Tax Act, 1961 (XLIII of 1961) (hereinafter referred to as "the Act"), and included in the total income over the aggregate of the amount or any portion, thereof on which Income Tax or super-tax is not payable and the amount in respect of which a deduction of Income Tax or super-tax has been granted under any provision of the Act.

(3) Where in the opinion of the Income Tax Officer the profits and gains on such exports cannot be ascertained, the amount of qualifying income shall be taken as a fraction of the profits and gains of the whole business of which such exports form a part and included in the total income (as reduced by the aggregate of the amount or any portion thereof on which Income Tax or super-tax is not payable and the amount in respect of which a deduction of Income Tax or super-tax has been granted under any provision of the Act), the fraction being proportional to the value of the turnover of such exports in relation to the total turnover of the business of which such exports form a part."

From Section 2(5) of the Act which we have already read, it is clear that what is contemplated by the section is a deduction from the amount of Income Tax and super-tax with which an assesses is chargeable.

The Income Tax Appellate Tribunal took the view that the expression "total income" occurring in Sub-rule (3) of Rule 2 of the Rules cannot be taken to mean assessable income as computed under the provisions of the Income Tax Act, 1961. They also took the view that Sub-rule (3) of Rule 2 of the Rules can only refer to the income from the timber business in the case of the assessee before us as he was treating his timber business as separate from other business in cashew and coffee. We are unable to agree with these views expressed by the Income Tax Appellate Tribunal. The total income must refer to what has been defined in Section 2(7) of the Act. Section 2(7) of the Act is in these terms ;

"2. (7) For the purpose of this section, and of the rates of tax imposed thereby ....

(ii) The expression ''total income'' means total income as determined for the purposes of Income Tax or super-tax, as the case may be, in accordance with the provisions of the said Act . . . ."

We may in this connection also refer to the definition of the term "total income" in Section 2(45) of the Income Tax Act, 1961, which reads as follows:

"2. (45) ''total income'' means the total amount of income referred to in Section 5, computed in the manner laid down in this Act."

A reference to Sections 66 and 110 of the Income Tax Act, 1961, will further make it clear that what is meant by "total income" in Sub-rule (3) of Rule 2 of the Rules is the total income computed as envisaged by Section 66 and in accordance with the other provisions of the Act, that is, including income on which no Income Tax is payable because of the provisions in Chapter VII of the Income Tax Act, 1961, and any amount in respect of which the assessee is entitled to a deduction from the amount of Income Tax on his total income with which he is chargeable for any assessment year in accordance with, and to the extent provided in Sections 87 87A and 88 of the Income Tax Act, 1961. Tax will not be payable on the total income as determined because, by virtue of the provisions in Section 110 of the Income Tax Act, 1961, deductions will have to be granted in relation to the income included in the total income, but on which no Income Tax is payable under the provisions of the Act. The portion in Sub-rule (3) of Rule 2 of the Rules reading "as reduced by the aggregate of the amount or any portion thereof on which Income Tax or super-tax is not payable and the amount in respect of which a deduction of Income Tax or super-tax has been granted under any provision of the Act" must refer to the income which is included in the total income as envisaged by Section 66 of the Income Tax Act, 1961, but on which no Income Tax or super-tax is payable and in relation to which deductions were permitted u/s 110 of the same Act, as well as under any other provisions of the Income Tax Act, 1961. It is clear from these provisions in the Income Tax Act and particularly from the expression "total income" used in Sub-rule (3) of Rule 2 of the Rules that the total income must be the total income as computed under the provisions of the Income Tax Act. Such income will be only Rs. 96,690, as Section 70 of the Income Tax Act permits set off of loss from any other source under the same head. The head of income in this case is business income which had two sources, timber business and cashew and coffee business. The view taken by the Income Tax Appellate Tribunal that the qualifying income as envisaged by the Rules should be taken as Rs. 2,01,107 cannot be accepted. The qualifying income must be Rs. 96,690 as reduced by the aggregate of the amount or any portion thereof on which Income Tax or super-tax is not payable and the amount in respect of which a deduction of Income Tax or super-tax has been granted under any provision of the Act.

We are also unable to accept the view that the total income refers not to the total income of the assessee from the entirety of his business but only to the portion of the income accruing from the timber business. The view taken by the Income Tax Appellate Tribunal, it appears to us, is wholly opposed to the wording of Sub-rule (3) of Rule 2 of the Rules. That sub-rule speaks of the profits and gains of the whole business of which such exports form a part. The whole business in this case must certainly take in the activities of the assessee not only in relation to his timber business, but in relation to his business in cashew and coffee as well. There is no justification whatever for reading the whole business as meaning something less than the entirety of the business of the assessee. If, therefore, Sub-rule (3) is read as pertaining to the entire business of the assessee and the total income to mean the income as computed under the provisions of the Income Tax Act, 1961, as envisaged by Sections 2(45) and 66, there can be no doubt at all that the qualifying income must be Rs. 96,690. Further deductions, if necessary, will have to be made on this amount as envisaged by Sub-rule (3) of Rule 2 of the Rules. But this part of the case is unimportant because, apparently, there is no further deduction to be made and the question referred to us only poses as alternatives as to whether it should be Rs. 2,01,107 or Rs. 96,690. We are of the view that it must be Rs. 96,690. We, therefore, answer the question referred to us by stating that the deduction permissible u/s 2(5) of the Act must be calculated on the sum of Rs. 96,690 which will be the qualifying income for that purpose as envisaged by Sub-rule (1) of Rule 2 of the Rules.

This Income Tax referred case is answered as above. We direct the parties to bear their respective costs.

A copy of this judgment under the seal of the High Court and the signature of the Registrar will be sent to the Appellate Tribunal as required by Sub-section (1) of Section 260 of the Indian Income Tax Act, 1961.