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The Tax Publishers2005 TaxPub(DT) 0518 (Gau-HC) : (2005) 002 (I) ITCL 0151 : (2005) 272 ITR 0011 : (2005) 193 CTR 0709 : (2005) 143 TAXMAN 0236 Bazaloni Group Ltd. George Williamson (Assam) Ltd. & Anr. v. CIT () INCOME TAX --Deduction under s. 80HHC----COMPUTATIONApplication of rule 8-- Catch Note: Assessee was engaged in business of cultivation, manufacture and sale of tea. The assessee exported tea and claimed deduction under section 80HHC in respect of profits from export before application of rule 8 of Income Tax Rules, 1962. The AO and Tribunal held that deduction under section 80HHC would be computed after applying rule 8. Held: Were not justified. Deduction under section 80HHC would be computed before applying rule 8 of Income Tax Rules, 1962, i.e., before apportionment of agricultural income and non agricultural income. Ratio: Deduction under section 80HHC is allowable before application of rule 8 of Income Tax Act, 1962 where assessee is engaged in exporting tea. Held: For computation of the composite income derived from sale of tea grown and manufactured by the seller and exported out of India under section 2(1A) read with rule 8 of the Rules of 1962, the deduction under section 80HHC in respect of profits derived from export of tea out of India would be allowed as permissible deduction before apportionment of non-agricultural income and agricultural income under rule 8 of the Rules of 1962 and thereafter, the income so computed, as if it is a business income, is to be apportioned on the basis of 40 per cent being non-agricultural income and 60 per cent being the agricultural income. Accordingly, the appeals are allowed and the judgments and orders of the Tribunal are set aside. Case Law Analysis: Applied :Karimtharuvi Tea Estates Ltd. v. State of Kerala (1963) 48 ITR 83 (SC), Tato Tea Limited v. State of West Bengal (1958) 173 ITR 18 (SC), CIT v. CWS (India) Ltd. (2000) 156 Taxation 249, 246 ITR 278 (Ker). Decision: In assessee's favour. Date of Judgment: 24 August 2004 Assessment Year: 1989-90, 1990-91 & 1992-93 to 1994-95 Cases Referred: . Kunhayahmed & Ors. v. State of Kerala & Anr. (2000) 6 SCC 359, CIT v. Chitnavis, 6 ITC 453. Income Tax Act, 1961 Section 80HHC Income Tax Rules, 1962 Rule 8 (1999) 157 CTR (Raj) 591 (2005) 272 ITR 0011 (Gau-HC) Bazaloni Group Ltd. George Williamson (Assam) Ltd. & Anr. v. CIT Income Tax Act, 1961, S. 80HHC, IT Rules, 1962, R. 8 In the Gauhati High Court P.P. Naolekar & Mr. Amitava Roy, JJ. ITA Nos. 25 & 26/2001, 23/2003, 24/2003, 46/2003 & 47/2003, 59/2003, 60/2003, 62/2003, 63/2003, 64/2003,65/2003, 82/2003 and 58/2003 q 24 August 2004 q A.Y. 1989-90, 1990-91 & 1992-93 to 1994-95 Counsel: Dr. D. Pal, Dr. A.K. Saraf, G.K. Joshi, R.P. Agarwal, R.L. Jain, Mr. Raj K. Agarwal, & Mr. M. Talukdar, for the Assessee q Mr. K.P. Sarma, Mr. K.P. Pathar Sr. Advocate, Ms. M. Choudhury, for the Revenue JUDGMENT P.P. Naolekar, CJ. The question for determination in these appeals lies in a narrow compass, but it involves a question of considerable nicety under the provisions of the Indian Income Tax laws. It is in effect, whether in computation of the composite income derived from sale of tea grown and manufactured by the seller and exported out of India under section 2(1A) of the Income Tax Act, 1961 (hereinafter referred to as the Act of 1961) read with rule 8 of the Income Tax Rules, 1962 (hereinafter referred to as the Rules of 1962), the deduction under section 80HHC in respect of profits derived from export of tea out of India should be allowed as per permissible deduction before apportionment of non-agricultural income and agricultural income under rule 8 of the Rules of 1962 and thereafter the income so computed, as if it is a business income, is to be apportioned on the basis of 40% being non-agricultural income and 60% being the agricultural income. 2. Facts necessary, in brief are M/s. George Williamson Assam Ltd. and the Williamson Financial Service Ltd. are the assessees under the Income Tax Act and are limited companies engaged in the business of cultivation, manufacture and sale of tea. The appeals covers the assessment years 1989-90, 1990-91, 1992-93, 1993-94, 1994-95 in respect of M/s. George Williamson Assam Ltd. and assessment years 1989-90, 1990-91, 1991-92, 1992-93, 1993-94, and 1994-95 in respect of M/s. George Williamson Financial Service Ltd. It will be sufficient to refer to the facts for the assessment year 1990-91 of the assessee namely, George. Williamson (Assam) Ltd. For the assessment year 1990-91 the appellant filed its return of income before the Deputy Commissioner, Income Tax (Assessment). In the said return the appellant claimed deduction under section 80HHC of the Act of 1961 before complying with rule 8 of the Rules of 1962. The assessment was completed by the Income Tax Officer vide order dated 31.03.2002 following deduction under section 80HHC of the Act only after applying rule 8 of the Rules of 1962. Being aggrieved by the said assessment order, the appellant preferred appeal before the CIT (A), contending therein, that the Assessing Authority was incorrect in first applying Rule 8 of the Rules of 1962 and then computing deduction under section 80HHC of the Act of 1961 on the income, for ascertaining the income of the tea business. It is contended that the provisions of the Income Tax Act do not provide computation of deduction under section 80HHC of the Act of 1961 after applying Rule 8 of the Rules of 1962. The appellants have placed reliance on the judgment of the Madras High Court in the case of Commissioner of Agricultural Income Tax, Madras v. Periakaramalai Tea & Products Co. Ltd. , reported in 84 ITR 634. The CIT (A) had allowed the appeal filed by the appellant and who directed computation of the business income permitting deduction under section 80HHC of the Act of 1961 before complying with Rule 8 of the Rules of 1962 for arriving at the business income of the appellant for the tax purpose. The Revenue preferred an appeal before the Tribunal. The appeal filed by the Revenue was allowed by the Tribunal holding that Section 80HHC of the Act of 1961 would apply only after application of Rule 8 of the Rules of 1962. The Tribunal has mainly placed reliance on the decision of the Gauhati High Court in Assam Company Ltd. v. State of Assam & Ors, reported in 219 ITR 59 and held that the application of Rule 8 of the Rules of 1962 would be prior to the permissible deduction under section 80HHC of the Act of 1961. Aggrieved by the said order, the appellants have preferred appeals before this Court. 3. Learned Senior counsel for the appellant, Mr. D.P. Paul, has urged before this Court that Rule 8 of the Rules of 1962 provides for computation of composite income return from the sale of tea manufactured by the seller. Such composite income is to be computed in the first instance as if, it were income derived from business. Income shall be computed in accordance with the provisions of the Income Tax Act, which deals with computation of business income and, thereafter, Rule 8 of the Rules of 1962 is to be applied to find out what the agricultural income is and what is the business income of the assessee. It is further urged that the decision rendered by the High Court as reported in 219 ITR 59 (supra) having been overruled by the Apex Court in Assam Company Ltd. v. State of Assam, (2001) 248 ITR 567 (SC), the Tribunal has committed an error in computing the business income of the assessee mainly based on the Division Bench Judgment of the Gauhati High Court reported in (1996) 219 ITR 59 (Gau) (Assam Company Ltd. v. State of Assam). The submission of the learned counsel is that the decision rendered by the High Court having been merged into decision of the Apex Court, the decision of the High Court loses its force. 4. It is the submission of the counsel for the Revenue Mr. U. Bhuyan, that the decision rendered by the Division Bench of the Gauhati High Court in Assam Company Ltd. (supra) on the issue of deduction under section 80HHC after application of Rule 8 of the Rules of 1962 having not been challenged before the Apex Court and the Apex Court having not given any finding on merits on this issue, the law)aid down by the Gauhati High Court on this issue remains intact and does not merge in the judgment delivered by the Apex Court nor lost the binding force on the Appellate Tribunal. It is further urged that unless this court does not agree with the decision on the issue and refers it to the Larger Bench for decision and the Larger Bench arrives at a different conclusion the decision remains binding on all Courts and the Tribunals within the territorial jurisdiction of Gauhati High Court. In other words, the submission of the learned counsel is that the present co-ordinate Bench may either follow the view of the earlier coordinate Bench on the application of the stage at which section 80HHC of the Act 1961 shall be applied for computing the business income of the assessee or alternatively, in case of disagreement, the present Division Bench may refer the decision of the earlier coordinate Bench of this court for determination of the question by a larger of this Court. It is submitted that the issue having not decided by the Apex Court, it cannot be held to have been merged in the decision of the Higher court and, therefore, on the principle, the decision of the Apex Court can only be an authority for the proposition of law it has decided therein and not otherwise, the decision of the Gauhati High Court does not totally merge into the decision of the Apex Court. It is further contended by the learned counsel for the revenue that on correct application of section 29 of the Income Tax Act for computing the business income of the assessee, rule 8 of Rules of 1962 shall be made applicable and thereafter the deduction shall be given from the business income so arrived at under section 80HHC of the Income Tax Act to the assessee. 5. Before we embark upon the rival contention of the parties, it would be apposite to note the relevant provisions of Sections 29, 80HHC of the Act of 1961 and the relevant clause of rule 8 of the Rules of 1962. 'Section 29 : The income referred to in section 28 shall be computed in accordance with the provisions contained in Sections 30 to 43D.' 'Section 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 profit derived by the assessee from the export of such goods or merchandise.' 'Rule 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 percent of such income shall be deemed to be income liable to tax. (2) In computing such income and 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, if such area has not previously been abandoned, and for the purpose of determining such cost, no deduction shall be made in respect of the amount of any subsidy which, under the provision of clause (30) of section 10, is not includible in the total income.' 6. We shall first take up the question, whether the decision of the Gauhati High Court in (1996) 219 ITR 59 (Gau) Assam Tea Company (supra) is merged into the decision of the Apex Court in toto or whether the decision rendered by the Gauhati High Court on the question, at the stage at which section 80HHC would apply has binding force and applicable. 7. Brief relevant facts are the Assam Company Ltd. was the assessee for the assessment year 1985-86 pertaining to the accounting period ending 30-6-1984 and was carrying on business of growing manufacture and sale of tea in India and abroad. The assessee was assessed under the Income Tax Act by the Inspecting Assistant Commissioner of Assam, Gauhati. The Assessing Authority has allowed deduction of the profit derived by the assessee from the export of goods or merchandise under section 80HHC of the Act of 1961 and thereafter, applied rule 8 of the Rules of 1962 and determined 40% of the income so computed as business income liable to be assessed by the Income Tax Officer and 60% as income so computed as agricultural income, which is liable to be taxed by the State Legislature. For the assessment year 1986-87, pertaining to accounting period ending 30-6-1985, the Deputy CIT (Assessment), Special Range-11, Gauhati, assessed the Assessee-company under the Income Tax Act first applied rule 8 of the Income Tax Rules and determined 40% of the income from tea as income from business and thereafter allowed deduction under section 80HHC and computed business income. Aggrieved by these assessments, the assessee preferred appeals before the CIT (A) and the CIT following the decision of the Madras High Court in the case of Commissioner of Agricultural Income Tax v. Periakaramalai Tea and Produce Co. Ltd. (supra) allowed deduction under section 80HHC in computation of the composite income under rule 8, before apportionment of 40 and 60 percent under rule 8 of the Income Tax Rules. For the assessment year 1987-88 also the appellant-assessee got similar relief and deduction under section 80HHC was allowed before apportionment of 40 and 60 per cent under rule 8 of the Income Tax Act. 8. Thereafter, the Assam Agricultural Income Tax Officer issued notice under section 30 of the Assam Agricultural Income Tax Act, 1939 to the assessee for assessment under the Act, on the ground that the deduction allowed under section 80HHC before computation of the composite income under rule 8 of the Income Tax Rules by the Income Tax Officer, was detrimental to the revenues interest and, therefore, it is necessary to re-determine the income under the proviso to section 49 of the Agricultural Income Tax Act, 1939 of the assessee for computation of the agricultural income. By virtue of proviso to rule 5 of the Assam Agricultural Income Tax Rules, 1939 the Agricultural Income Tax Officer, Assam was empowered to refuse to accept the computation of agricultural income made by the Central Income Tax Officer. Feeling aggrieved, the assessee has challenged the issuance of notices and the Constitutional validity of the proviso to rule 5 of the Assam Agricultural Income Tax Rules, 1939 in the High Court. 9. Two issues came up for consideration before the Division of the High Court, viz. (1) Whether proviso to rule 5 of the Assam Agricultural Income Tax Rules, 1939 empowering the Agricultural Income Tax Officer to refuse to accept the computation made by the Central Income Tax Authority is contrary to article 246 read with article 366(1) of the Constitution as well as Explanation to section 2(a) and the last proviso to section 8(2) of the Assam Agricultural Income Tax Act; and (2) Whether while computing the business income of the assessee it is permissible to allow deduction under section 80HHC before the business income is found, applying rule 8 of the Income Tax Rules. In regard to the first issue, the Division Bench upheld the constitutional validity of the proviso to rule 5 of the Agricultural Income Tax Rules, 1939 and on the second issue, it is said by the court that a bare reading of section 80HHC shows that it is not an item of expense incurred for earning profit from the sale of tea grown and manufactured by a seller but is a deduction of profits derived by the assessee from export of goods or merchandise from India. The allowance under section 80HHC cannot be allowed as deduction for computing income derived from the sale of tea grown and manufactured by the seller before application of rule 8 of the Income Tax Rules, 1962, and that out of the income computed without deducting the allowance under the said section 80HHC can be allowed only out of such profits and gains of business constituting the 40 per cents of the income. The balance 60 per cent of the income is to be deemed as agricultural income and out of such agricultural income only such allowances as are permissible under the Agricultural Income Tax Act can be made. This is because, the said 60 per cent of the income deemed as agricultural income falls within the domain of the State Legislature out of which no further allowances not of the nature of expenses can be allowed except those which are permissible under the Agricultural Income Tax Act. On the basis of the aforesaid decision, the appeals preferred by the assessee challenging the notices issued by the Agricultural Income Tax Officer, are dismissed. 10. Aggrieved by the judgment delivered by the Division Bench of the Gauhati High Court the assessee preferred appeals and petitions before the Supreme Court, which has been heard together. The Supreme Court has only considered the validity of rule 5 of the State Rules and said that the rule 5 of the State Rules with its proviso, has in unequivocal terms empowered the State Authorities, in given cases, to refuse to accept the computation of agricultural income made by the Central Officers, after examining the books already examined by such Central Officers. Perusal of section 50 of the Agricultural Income Tax Act shows that the State Government has been empowered to make such rules as may be necessary for the purpose of carrying out the purposes of the Act. The object and the scheme of the Act do not contemplate the State authorities being empowered to re-compute the agricultural income contrary to the computation made by the Central Officers, nor do the subjects specified in sub-sections (2)(a) to (m) of section 50 provide for making such rules empowering the State Officers to make computation of agricultural income contrary to what is computed by the Central Officers under the Central Act. By virtue of the provisions made by the Legislature in the Explanation to section 2(a)(2), the second proviso to section 8 and section 20D, it is clear that the State Legislature intended to adopt the computation of agricultural income made under the provisions of the Central Act. Under section 50, we do not see any provision which specifically authorizes the State Government to make any such rules in the nature of the proviso to rule 5 of the State Rules. None of the provisions of the Act has contemplated any power to be vested in the State Officers to re-compute the agricultural income from tea while the proviso to rule 5 of the Rules in specific terms empowers the State Officers to recomputed the agricultural income from tea different from that which is computed by the Central officers under the Central Act. Thus, it is seen that this rule is not only made beyond the rule making power of the State under section 50 of the Act, but also runs counter to the object of the Act itself and enlarges the scope of the Act. The rule also suffers from the other vices, hence, such Rule, in the view of the Apex Court, is ultra vires the Act. Therefore, the-proviso to rule 5 of the State Rules to the extent it empowers the State Officers to re-compute the agricultural income already computed by the Central Officers is ultra vires the State Act. The court has specifically mentioned that the court having come to the conclusion that the proviso to rule 5 of the State Rules to the extent it empowers the State Officers to re-compute the agricultural income is ultra vires the State Act, the Apex Court did not find it necessary to go into the larger question of the Constitutional validity of the State Act or the question of repugnancy, which was argued on the basis of the presumption that the State Act has made provisions, which run counter to the constitutional provisions and the provisions of the Central Act. 11. From the aforesaid decision, it is clear that the Apex Court has only considered the question of validity of proviso to rule 5 of the Assam Agricultural Income Tax Rules, 1939 and the questions as regard to the stage at which section 80HHC shall be given effect to while computing the business income of the assessee in consideration of rule 8 of the Income Tax Rules, 1962 was not considered by the Court. On this premises, it is submitted by the learned counsel for the revenue that the judgment so far as the question of stage at which rule 80HHC and rule 8 shall apply was neither argued nor considered by the court and, therefore, the decision of the High Court to that extent does not merge in the decision of the Apex Court and the decision of the Supreme Court do not have binding force so far that question is concerned on this Court. 12. In a recent decision the effect, operation and the extent of the doctrine of merger came for consideration before the Apex Court in the matter of Kunhayahmed and Others v. State of Kerala and Anr, (2000) 6 SCC 359. In the factual scenario that a family consisting of 71 members raised a dispute before the Forest. Tribunal, Kozhikode, that the land to the tune of 1020 acres did not vest in the State Government. The Tribunal held in favour of the applicants that the land did not vest in the State Government Appeal was preferred by the State before the High Court and the Kerala High Court dismissed the appeal. The State of Kerala filed a petition for special leave to appeal under article 136 of the Constitution however, the petition was dismissed by an order dated 18.7.1983 stating that-'Special leave petition is dismissed on merits.' By Act 36 of 1986, the Kerala Private Forests (Vesting and Assignment) Act, 1971 was amended. Section 8-C amongst others was enacted into the body of the Act giving it a retrospective effect. In pursuance of the amendment, the State of Kerala filed application for review of the order passed by the Kerala High Court. Preliminary objection was raised as to the maintainability of the review petition. The High Court overruled the preliminary objection and directed the review petition to be posted for hearing on merits. Being aggrieved, the petitioners approached the Apex Court and the matter was listed before a Bench of three Judges having regard to the importance of the question involved. It has been contended before the Apex Court that the order dated 17.12.82 of the High Court have been merged into the order of the Supreme Court dated 18.7.83 and, therefore, the order of the High Court was ceased to exist in the eye of law, thus, the application seeking review of the order dated 12.12.82 passed by the High Court is entirely misconceived action. Secondly, the order dated 18.7.83 passed by the Supreme Court amounts to affirmation of the order dated 17.12.82 passed by the Kerala High Court and , therefore, the High Court cannot entertain the prayer for review of its order. The Supreme Court in para 7 of the said judgment observed that 'the doctrine of merger is neither a doctrine of constitutional law nor a doctrine statutorily recognized. It is a common low doctrine founded on principles of propriety in the hierarchy of justice delivery system.' The Apex Court in para 12 of the judgment held thus 'the logic underlying the doctrine of merger is that there cannot be more than one decree or operative orders governing the same subject-matter at a given point of time. When a decree or order passed by an inferior Court, Tribunal or Authority was subjected to a remedy available under the law before a Superior Forum then, though the decree or order under challenge continues to be effective and binding, nevertheless its finality is put in jeopardy. Once the superior court has, disposed of the has before it either way-whether the decree or order under appeal is set aside or modified or simply confirmed, it is the decree or order of the Superior Court, Tribunal or Authority which is the final, binding and operative decree or order wherein merges the decree or order passed by the Court, Tribunal or the Authority below. However, the doctrine is not of universal or unlimited application. The nature of jurisdiction exercised by the superior forum and the content or subject-matter of challenge laid or which could have been laid shall to be kept in view.' 13. After consideration of various judgments the Apex Court laid down broad guidelines for application of the principles of doctrine of merger and they are summed up in paragraph 44 of the judgment, which reads : '44, To sum up, our conclusions are : (i) Where an appeal or revision is provided against an order passed by a Court, Tribunal or any other authority before superior forum and such superior forum modifies, reverses or affirms the decision put in issue before it, the decision by the subordinate forum merges in the decision by the superior forum and it is latter which subsists, remains operative and is capable of enforcement in the eye of law. (ii) The jurisdiction conferred by article 136 of the Constitution is divisible into two stages. The first stage is upto the disposal of prayer for special leave to file an appeal. The second stage commences if and when the leave to appeal is granted and the special leave petition is converted into an appeal. (iii) The doctrine of merger is not a doctrine of universal or unlimited application. It will depend on the nature of jurisdiction exercised by the superior forum and the content or subject-matter of challenge laid or capable of being laid shall be determinative of the applicability of merger. The superior jurisdiction should be capable of reversing, modifying or affirming the order put in issue before it. Under article 136 of the Constitution the Supreme Court may reverse, modify or affirm the judgment-decree or order appealed against while exercising its appellate jurisdiction and not while exercising the discretionary jurisdiction disposing of petition for special leave to appeal. The doctrine of merger can therefore be applied to the former and not to the latter. (iv) An order refusing special leave to appeal may be a non-speaking order or a speaking one. In either case it does not attract the doctrine of merger. An order refusing special leave to appeal does not stand substituted in place of the order under challenge. All that it means is that the court was not inclined to exercise its discretion so as to allow the appeal being filed. (v) If the order refusing leave to appeal is a speaking order, i.e., gives reasons for refusing the grant of leave, then the order has two implications. Firstly, the statement of law contained in the order is a declaration of law by the Supreme Court within the meaning of article 141 of the Constitution. Secondly, other than the declaration of law, whatever is stated in the order are the findings recorded by the Supreme Court which would bind the parties thereto and also the Court, Tribunal or authority in any proceedings subsequent thereto by way of judicial discipline, the Supreme Court being the Apex Court of the country. But, this does not amount to saying that the order of the Court, Tribunal or authority below has stood merged in the order of the Supreme Court rejecting the special leave petition or that the order of the Supreme Court is the only order binding as res judicata in subsequent proceedings between the parties. (vi) Once leave to appeal has been granted and appellate jurisdiction of Supreme Court has been invoked the order passed in appeal would attract the doctrine of merger; the order may be of reversal, modification or merely affirmation. (vii) On an appeal having been preferred or a petition seeking leave to appeal having been converted into an appeal before the Supreme Court the jurisdiction of High Court to entertain a review petition is lost thereafter as provided by sub-rule (1) of rule 1 of order 47 CPC. 14. Applying the aforesaid principles, we have to find out, in the facts and circumstances of the present case, whether the doctrine of merger has any application and to the extent the doctrine of merger shall apply. In the case in hand, admittedly, the High Court has decided two issues, viz. first, the validity of proviso to rule 5 of the Assam Agricultural Income Tax Rules, 1939 : secondly, the manner of computation of agricultural and business income of the assessee on application of section 80HHC and rule 8 of the Rules 1962. The first question has been specifically dealt with, whereas, no decision was rendered by the Apex Court in appeals so far the second question is concerned. We have also to note that the Apex Court after entertaining the petitions and appeals, after issuing notice to the other side, has decided the issues on merits and the appeals and petitions are allowed. Thus we can safely draw inferences that the judgment of the High Court has been set aside on merits. 15. Now the question is whether the point which has not been decided by the court can also be said to have been set aside, because of the doctrine of merger, inasmuch as, the judgment of the High Court being merged in the judgment of the Apex Court. In the matter of Kunhayammed and Others (supra) the Apex Court has specifically said that once the appeal or the petition is admitted and the superior jurisdiction of the court is capable of reversing or modifying or affirming of an order under challenge. The decision so rendered in exercise of the power would be covered under the doctrine of merger. Once the appellate jurisdiction of the Supreme Court has been invoked, the order passed in the appeal would attract the doctrine of merger, the order may be reversal or modification or an order of confirmation. When the doctrine of merger applies, the decision rendered by the Supreme Court is a final judgment and is binding and operative, wherein the order passed by the High Court merges in the order of the Supreme Court. Once the order of the High Court is merged into the Superior Court, it cannot be said that out of several issues decided by the High Court, one issue had not been decided by the Supreme Court and will remain unmerged and it will have a binding force. Once the Supreme Court exercises its appellate jurisdiction and on order is passed on merit, it alone will have the binding force and the entire judgment of the inferior court will merge into the decision rendered by the Superior Court. 16. There is another way to look at the case in hand. The decision given by the Gauhati High Court on the merits of the question of applicability of the stag, at which, section 80HHC of the Act of 1961 and rule 8 of the Rules 1962, will apply while computing the business income of the assessee was rendered only on application of the proviso the rule 5 of the Assam Agricultural Income Tax Rules, which held to be by the High Court, intra vires, and within the powers of the Agricultural Income Tax Officer to re-determine the composite income, The question of deciding the applicability of section 80HHC of the Act of 1961 and rule 8 of the Rules, 1962 was considered by the High Court only because it has held that the Agricultural Income Tax Authority has power to reopen the assessment made by the Income Tax Authority by virtue of proviso to rule 5 of the Assam Agricultural Income Tax Rules, which is a valid piece of legislation. The High Court decided that under proviso to rule 5 of the Assam Agricultural Income Tax Rules, the Agricultural Income Tax Authority has jurisdiction to reopen the assessment of the business income made by the Central Income Tax Authority and therefore, has an authority to re-determine the stage of applicability of the provisions of section 80HHC and rule 8 of the Rules of 1962. Therefore, the decision on the interpretation of application of section 80HHC and rule 8 of the Rules of 1962 was dependent on the question of validity of proviso to rule 5 of the Assam Agricultural Income Tax Rules. When the Apex Court has declared the rule not to be valid, there was no occasion for consideration of the second question of application of section 80HHC and rule 8 of the Rules of 1962 by the High Court nor it was necessary for the Apex Court to adjudicate on that question which becomes non-considerable, the moment the Supreme Court decision validity of proviso to rule 5 of the Rules. The decision of the Gauhati High Court on the merits, of the question, was mainly dependent upon its conclusion that the proviso to rule 5 of the Assam Agricultural Income Tax Rules was intra vires and-within the power of the State Income Tax Officer to re-determine the composite income. On that basis, the proceedings were reopened for assessment under section 30 of the Assam Agricultural Income Tax Act. If the basis on which the proceedings were reopened is without jurisdiction then any decision on the merits of the claim, necessarily, do not stand, as a valid and operative decision. When the matter came up before the Supreme Court, the Supreme Court considered the principal question, viz., whether such power of re-determination of the composite income as envisaged in the proviso to rule 5 is valid or not and declared that the said proviso to rule 5 is ultra vires the Act. When the said proviso to rule 5 of the Assam Agricultural Income Tax Rules is declared as ultra vires the decision on the merits, which proceeded on the footing that the said rule is intra vires and does not stand. The power to predetermine the question as to whether deduction under section 80HHC is to be allowed before the apportionment of 40 and 60 per cent under rule 8 is to be made, was decided only on the footing that such p6wer of re-determination is fully conferred under the proviso to rule 5 of the Assam Agricultural Income Tax Rules. When the said proviso to rule 5 has been declared by the Supreme Court as ultra vires the Act, there was no occasion for the Supreme Court to consider the merits of the claim because such merits of the claim could be considered only if the proviso is declared to be intra vires and not ultra vires. In view of the aforesaid, we are of the opinion that the decision of the High Court in Assam Company Ltd. (supra) merges into the decision of the Apex Court and cannot be enforced as a binding precedent. 17. The case of the Appellants is that the income derived from the sale of tea grown and manufactured is derived partly from agriculture and partly from manufacture. Under the Indian Income Tax Act, 1961 and the Rules framed thereunder the income derived from the sale of tea grown and manufactured by a seller, has to be computed in the manner laid down in rule 8 of the Rules of 1962 and 10 per cent of the income so computed is treated as income other than agricultural income and the remaining 60 per cent is treated as agricultural income. The definition of agricultural income in the Act of 1961 is contained in sub-section (1) of section 2 of the Act. Section 296 provides, inter alia, that a rule framed under section 295 shall be laid, as soon as may be after the rule is made or the notification is issued before each House of Parliament and shall have effect subject to any modification or deletion made by both Houses of Parliament. Rule 7 of the Rules 1962 made under section 295 of the Act of 1961 deals with the computation of income which is partially agricultural and partially from business. Rule 8 deals with income derived from the sale of tea grown and manufactured by the seller in India and 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. 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. Rule 8 of the Rules of 1962 is incorporated in the definition of term agricultural income in the Act of 1961. 18. Under section 80HHC, 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, he shall be allowed in accordance with and subject to the provisions of the section 80HHC and deduct the profit referred to in sub-section 1B from the export of such goods or merchandise, while computing the total income of the assessee. Section 80HHC permits the allowable profit to be deducted from the export income of the goods or merchandise, while computing the total income of the assessee. Section 28 of the Act of 1961 enumerates the income, which shall be chargeable to Income Tax under the head profits and gains of any business or profession. By virtue of section 29 of the Act, deduction as per provisions contained in Sections 30 to 43D is permissible while computing the profits and gains of business or profession. The list of allowances enumerated in Sections 32 to 37 is not exhaustive. While computing the income, the assessee is entitled to take deductions even if it does not fall within any of these sections if otherwise allowable under the provisions of Income Tax Act. 19. In a decision CIT v. Chitnavis, 6 ITC 453, the Privy Council permitted bad debts to be an admissible deduction, though there was no special allowance forbad debts in the 1922 Act as it then stood. Lord Russell, delivering the judgment of the board, said : 'Although the Act nowhere in terms authorizes the deduction of bad debts of a business, such a deduction is necessarily allowable. What are chargeable to Income Tax in respect of a business are the profits and gains of a year; and in assessing the amount of the profits and gains of a year account must necessarily be taken of all losses incurred, otherwise you would not arrive at the true profits and gains.' Thus, there is no manner of doubt while computing the business income, the assessee is entitled for deduction of the profit earned from the export of goods or merchandise as provided under section 80HHC and it could not be restricted to the deductions provided under section 32 to 43D of the Act of 1961. 20. The question now falls for consideration before this court is at what stage such deduction is permissible. In the matter of Karimtharuvi Tea Estates Ltd. v. State of Kerala (1963) 48 ITR 83, a Constitution Bench of the Apex Court was called upon to consider the question of the power of State Legislature to make a law in respect of taxes on agricultural income arising from tea plantations. The court held that the power of the State Legislatures for allowing the agricultural income, which is determined in accordance with rule 24 of the Indian Income Tax Rules, 1922 is limited and the income derived from the sale of tea grown and manufactured by the seller is first to be computed under section 10 of the Act of 1922, as if it were income derived from business. Any expenditure by the assessee, not being an allowance described in clauses (i) to (xiv) of section 10(2) of the Act of 1922 and not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly and exclusively for the purposes of such business would be deductible. Of the income so computed, 40 per cent being under rule 24 of the Indian Income Tax Rules, 1922, treated as income liable to Income Tax the other 60 per cent alone will be 'agricultural income'. The aforesaid decision clearly lays down that while computing agricultural income and business income in accordance with the rule 24 of the Indian Income Tax Rules, 1922, deduction is permissible for arriving at the business income, so as to compute 40 per cent for business and 60 per cent for agricultural income. 21. Another Constitution Bench of the Apex Court in Tata Tea Limited v. State of West Bengal, reported in (1958) 173 ITR 18, while considering the applicability of rule 8 of Rules of 1962 has said : '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 1961 in 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.' This decision clearly lays down that rule 8 of the Rules of 1962 would apply after the business income is arrived at permitting the deduction allowable under the Act of 1961. 22. In the matter of CIT v. CWS (India) Ltd. (2000) 246 ITR 278 (Ker), a Division Bench of the Kerala High Court has considered the rule 8 for the purpose of computation of business income liable to Income Tax and held that rule 8 of the Rules of 1962 refers to computation of income derived form the sale of tea grown and manufactured by a seller in India as if it were income derived from business and 40 per cent of such income is to be deemed to be income liable to tax. In other words, there has to be computation of income in accordance with the provisions of the Act. As a necessary corollary, deduction is allowance including what is covered under Chapter VI-A (deductions to be made in computing total income) of the Income Tax Act, 1961. It is to be noted that Chapter VI-A was inserted by the Finance Act, 1965, with effect from 1-4-1965. Deduction from income for the purpose of computing taxability of income has to be done not only taking into account the provisions of section 30 to 43D, but also taking into consideration deductions permissible under Chapter VI-A of the Act. Section 80HHC is part of Chapter VI-A. Section 80HHC refers to computation of the total income of an assessee. Rule 8 creates a legal fiction. 40 per cent deemed to be income liable to tax under rule 8 is chargeable income. The inevitable conclusion, therefore, is that before applying the 40 per cent rule, income should be first computed in accordance with the provisions of the Act, i.e., after allowing deductions including those encompassed by Chapter VI-A. A legal fiction is to be limited to purposes for which it was created and should not be extended beyond the language of the section by which it is created. It is to be noted that rule 8 deals with two types of income, i.e., agricultural income and non-agricultural income at the ratio of 60 : 40 of the total income. After computing the total income, the same has to be bifurcated in the above manner. Therefore, the total income would necessarily mean the net income and not gross income. Before the charging section is given effect, taxable income must accrue and while computing the total income, all expenditure and other deductions and allowances must be taken into account. 23. From the aforesaid decisions, we are of the considered view that for computation of the composite income derived from sale of tea grown and manufactured by the seller and exported out of India under section 2(1A) of the Act of 1961 read with rule 8 of the Rules of 1962, the deduction under section 80HHC in respect of profits derived from export of tea out of India would be allowed as permissible deduction before apportionment of non-agricultural income and agricultural income under rule 8 of the Rules of 1962 and thereafter, the income so computed, as if it is a business income, is to be apportioned on the basis of 40 per cent being non-agricultural income and 60 per cent being the agricultural income. Accordingly, the appeals are allowed and the judgments and orders of the Tribunal are set aside. In the facts and circumstances there will be no order as to costs. SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2005 TaxPub(DT) 0518 (Gau-HC) : (2005) 002 (I) ITCL 0151 : (2005) 272 ITR 0011 : (2005) 193 CTR 0709 : (2005) 143 TAXMAN 0236

Bazaloni Group Ltd. George Williamson (Assam) Ltd. & Anr. v. CIT ()

INCOME TAX

--Deduction under s. 80HHC----COMPUTATIONApplication of rule 8--

Catch Note:

Assessee was engaged in business of cultivation, manufacture and sale of tea. The assessee exported tea and claimed deduction under section 80HHC in respect of profits from export before application of rule 8 of Income Tax Rules, 1962. The AO and Tribunal held that deduction under section 80HHC would be computed after applying rule 8. Held: Were not justified. Deduction under section 80HHC would be computed before applying rule 8 of Income Tax Rules, 1962, i.e., before apportionment of agricultural income and non agricultural income.

Ratio:

Deduction under section 80HHC is allowable before application of rule 8 of Income Tax Act, 1962 where assessee is engaged in exporting tea.

Held:

For computation of the composite income derived from sale of tea grown and manufactured by the seller and exported out of India under section 2(1A) read with rule 8 of the Rules of 1962, the deduction under section 80HHC in respect of profits derived from export of tea out of India would be allowed as permissible deduction before apportionment of non-agricultural income and agricultural income under rule 8 of the Rules of 1962 and thereafter, the income so computed, as if it is a business income, is to be apportioned on the basis of 40 per cent being non-agricultural income and 60 per cent being the agricultural income. Accordingly, the appeals are allowed and the judgments and orders of the Tribunal are set aside.

Case Law Analysis:

Applied :Karimtharuvi Tea Estates Ltd. v. State of Kerala (1963) 48 ITR 83 (SC), Tato Tea Limited v. State of West Bengal (1958) 173 ITR 18 (SC), CIT v. CWS (India) Ltd. (2000) 156 Taxation 249, 246 ITR 278 (Ker).

Decision:

In assessee's favour.

Date of Judgment:

24 August 2004

Assessment Year:

1989-90, 1990-91 & 1992-93 to 1994-95

Cases Referred:

. Kunhayahmed & Ors. v. State of Kerala & Anr. (2000) 6 SCC 359, CIT v. Chitnavis, 6 ITC 453.

Income Tax Act, 1961 Section 80HHC

Income Tax Rules, 1962 Rule 8

(1999) 157 CTR (Raj) 591

(2005) 272 ITR 0011 (Gau-HC)

Bazaloni Group Ltd. George Williamson (Assam) Ltd. & Anr. v. CIT

Income Tax Act, 1961, S. 80HHC, IT Rules, 1962, R. 8

In the Gauhati High Court

P.P. Naolekar & Mr. Amitava Roy, JJ.

ITA Nos. 25 & 26/2001, 23/2003, 24/2003, 46/2003 & 47/2003, 59/2003, 60/2003, 62/2003, 63/2003, 64/2003,65/2003, 82/2003 and 58/2003 q 24 August 2004 q A.Y. 1989-90, 1990-91 & 1992-93 to 1994-95

Counsel: Dr. D. Pal, Dr. A.K. Saraf, G.K. Joshi, R.P. Agarwal, R.L. Jain, Mr. Raj K. Agarwal, & Mr. M. Talukdar, for the Assessee q Mr. K.P. Sarma, Mr. K.P. Pathar Sr. Advocate, Ms. M. Choudhury, for the Revenue

JUDGMENT

P.P. Naolekar, CJ.

The question for determination in these appeals lies in a narrow compass, but it involves a question of considerable nicety under the provisions of the Indian Income Tax laws. It is in effect, whether in computation of the composite income derived from sale of tea grown and manufactured by the seller and exported out of India under section 2(1A) of the Income Tax Act, 1961 (hereinafter referred to as the Act of 1961) read with rule 8 of the Income Tax Rules, 1962 (hereinafter referred to as the Rules of 1962), the deduction under section 80HHC in respect of profits derived from export of tea out of India should be allowed as per permissible deduction before apportionment of non-agricultural income and agricultural income under rule 8 of the Rules of 1962 and thereafter the income so computed, as if it is a business income, is to be apportioned on the basis of 40% being non-agricultural income and 60% being the agricultural income.

2. Facts necessary, in brief are M/s. George Williamson Assam Ltd. and the Williamson Financial Service Ltd. are the assessees under the Income Tax Act and are limited companies engaged in the business of cultivation, manufacture and sale of tea. The appeals covers the assessment years 1989-90, 1990-91, 1992-93, 1993-94, 1994-95 in respect of M/s. George Williamson Assam Ltd. and assessment years 1989-90, 1990-91, 1991-92, 1992-93, 1993-94, and 1994-95 in respect of M/s. George Williamson Financial Service Ltd. It will be sufficient to refer to the facts for the assessment year 1990-91 of the assessee namely, George. Williamson (Assam) Ltd. For the assessment year 1990-91 the appellant filed its return of income before the Deputy Commissioner, Income Tax (Assessment). In the said return the appellant claimed deduction under section 80HHC of the Act of 1961 before complying with rule 8 of the Rules of 1962. The assessment was completed by the Income Tax Officer vide order dated 31.03.2002 following deduction under section 80HHC of the Act only after applying rule 8 of the Rules of 1962. Being aggrieved by the said assessment order, the appellant preferred appeal before the CIT (A), contending therein, that the Assessing Authority was incorrect in first applying Rule 8 of the Rules of 1962 and then computing deduction under section 80HHC of the Act of 1961 on the income, for ascertaining the income of the tea business. It is contended that the provisions of the Income Tax Act do not provide computation of deduction under section 80HHC of the Act of 1961 after applying Rule 8 of the Rules of 1962. The appellants have placed reliance on the judgment of the Madras High Court in the case of Commissioner of Agricultural Income Tax, Madras v. Periakaramalai Tea & Products Co. Ltd. , reported in 84 ITR 634. The CIT (A) had allowed the appeal filed by the appellant and who directed computation of the business income permitting deduction under section 80HHC of the Act of 1961 before complying with Rule 8 of the Rules of 1962 for arriving at the business income of the appellant for the tax purpose. The Revenue preferred an appeal before the Tribunal. The appeal filed by the Revenue was allowed by the Tribunal holding that Section 80HHC of the Act of 1961 would apply only after application of Rule 8 of the Rules of 1962. The Tribunal has mainly placed reliance on the decision of the Gauhati High Court in Assam Company Ltd. v. State of Assam & Ors, reported in 219 ITR 59 and held that the application of Rule 8 of the Rules of 1962 would be prior to the permissible deduction under section 80HHC of the Act of 1961. Aggrieved by the said order, the appellants have preferred appeals before this Court.

3. Learned Senior counsel for the appellant, Mr. D.P. Paul, has urged before this Court that Rule 8 of the Rules of 1962 provides for computation of composite income return from the sale of tea manufactured by the seller. Such composite income is to be computed in the first instance as if, it were income derived from business. Income shall be computed in accordance with the provisions of the Income Tax Act, which deals with computation of business income and, thereafter, Rule 8 of the Rules of 1962 is to be applied to find out what the agricultural income is and what is the business income of the assessee. It is further urged that the decision rendered by the High Court as reported in 219 ITR 59 (supra) having been overruled by the Apex Court in Assam Company Ltd. v. State of Assam, (2001) 248 ITR 567 (SC), the Tribunal has committed an error in computing the business income of the assessee mainly based on the Division Bench Judgment of the Gauhati High Court reported in (1996) 219 ITR 59 (Gau) (Assam Company Ltd. v. State of Assam). The submission of the learned counsel is that the decision rendered by the High Court having been merged into decision of the Apex Court, the decision of the High Court loses its force.

4. It is the submission of the counsel for the Revenue Mr. U. Bhuyan, that the decision rendered by the Division Bench of the Gauhati High Court in Assam Company Ltd. (supra) on the issue of deduction under section 80HHC after application of Rule 8 of the Rules of 1962 having not been challenged before the Apex Court and the Apex Court having not given any finding on merits on this issue, the law)aid down by the Gauhati High Court on this issue remains intact and does not merge in the judgment delivered by the Apex Court nor lost the binding force on the Appellate Tribunal. It is further urged that unless this court does not agree with the decision on the issue and refers it to the Larger Bench for decision and the Larger Bench arrives at a different conclusion the decision remains binding on all Courts and the Tribunals within the territorial jurisdiction of Gauhati High Court. In other words, the submission of the learned counsel is that the present co-ordinate Bench may either follow the view of the earlier coordinate Bench on the application of the stage at which section 80HHC of the Act 1961 shall be applied for computing the business income of the assessee or alternatively, in case of disagreement, the present Division Bench may refer the decision of the earlier coordinate Bench of this court for determination of the question by a larger of this Court. It is submitted that the issue having not decided by the Apex Court, it cannot be held to have been merged in the decision of the Higher court and, therefore, on the principle, the decision of the Apex Court can only be an authority for the proposition of law it has decided therein and not otherwise, the decision of the Gauhati High Court does not totally merge into the decision of the Apex Court. It is further contended by the learned counsel for the revenue that on correct application of section 29 of the Income Tax Act for computing the business income of the assessee, rule 8 of Rules of 1962 shall be made applicable and thereafter the deduction shall be given from the business income so arrived at under section 80HHC of the Income Tax Act to the assessee.

5. Before we embark upon the rival contention of the parties, it would be apposite to note the relevant provisions of Sections 29, 80HHC of the Act of 1961 and the relevant clause of rule 8 of the Rules of 1962.

'Section 29 : The income referred to in section 28 shall be computed in accordance with the provisions contained in Sections 30 to 43D.'

'Section 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 profit derived by the assessee from the export of such goods or merchandise.'

'Rule 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 percent of such income shall be deemed to be income liable to tax.

(2) In computing such income and 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, if such area has not previously been abandoned, and for the purpose of determining such cost, no deduction shall be made in respect of the amount of any subsidy which, under the provision of clause (30) of section 10, is not includible in the total income.'

6. We shall first take up the question, whether the decision of the Gauhati High Court in (1996) 219 ITR 59 (Gau) Assam Tea Company (supra) is merged into the decision of the Apex Court in toto or whether the decision rendered by the Gauhati High Court on the question, at the stage at which section 80HHC would apply has binding force and applicable.

7. Brief relevant facts are the Assam Company Ltd. was the assessee for the assessment year 1985-86 pertaining to the accounting period ending 30-6-1984 and was carrying on business of growing manufacture and sale of tea in India and abroad. The assessee was assessed under the Income Tax Act by the Inspecting Assistant Commissioner of Assam, Gauhati. The Assessing Authority has allowed deduction of the profit derived by the assessee from the export of goods or merchandise under section 80HHC of the Act of 1961 and thereafter, applied rule 8 of the Rules of 1962 and determined 40% of the income so computed as business income liable to be assessed by the Income Tax Officer and 60% as income so computed as agricultural income, which is liable to be taxed by the State Legislature. For the assessment year 1986-87, pertaining to accounting period ending 30-6-1985, the Deputy CIT (Assessment), Special Range-11, Gauhati, assessed the Assessee-company under the Income Tax Act first applied rule 8 of the Income Tax Rules and determined 40% of the income from tea as income from business and thereafter allowed deduction under section 80HHC and computed business income. Aggrieved by these assessments, the assessee preferred appeals before the CIT (A) and the CIT following the decision of the Madras High Court in the case of Commissioner of Agricultural Income Tax v. Periakaramalai Tea and Produce Co. Ltd. (supra) allowed deduction under section 80HHC in computation of the composite income under rule 8, before apportionment of 40 and 60 percent under rule 8 of the Income Tax Rules. For the assessment year 1987-88 also the appellant-assessee got similar relief and deduction under section 80HHC was allowed before apportionment of 40 and 60 per cent under rule 8 of the Income Tax Act.

8. Thereafter, the Assam Agricultural Income Tax Officer issued notice under section 30 of the Assam Agricultural Income Tax Act, 1939 to the assessee for assessment under the Act, on the ground that the deduction allowed under section 80HHC before computation of the composite income under rule 8 of the Income Tax Rules by the Income Tax Officer, was detrimental to the revenues interest and, therefore, it is necessary to re-determine the income under the proviso to section 49 of the Agricultural Income Tax Act, 1939 of the assessee for computation of the agricultural income. By virtue of proviso to rule 5 of the Assam Agricultural Income Tax Rules, 1939 the Agricultural Income Tax Officer, Assam was empowered to refuse to accept the computation of agricultural income made by the Central Income Tax Officer. Feeling aggrieved, the assessee has challenged the issuance of notices and the Constitutional validity of the proviso to rule 5 of the Assam Agricultural Income Tax Rules, 1939 in the High Court.

9. Two issues came up for consideration before the Division of the High Court, viz. (1) Whether proviso to rule 5 of the Assam Agricultural Income Tax Rules, 1939 empowering the Agricultural Income Tax Officer to refuse to accept the computation made by the Central Income Tax Authority is contrary to article 246 read with article 366(1) of the Constitution as well as Explanation to section 2(a) and the last proviso to section 8(2) of the Assam Agricultural Income Tax Act; and (2) Whether while computing the business income of the assessee it is permissible to allow deduction under section 80HHC before the business income is found, applying rule 8 of the Income Tax Rules. In regard to the first issue, the Division Bench upheld the constitutional validity of the proviso to rule 5 of the Agricultural Income Tax Rules, 1939 and on the second issue, it is said by the court that a bare reading of section 80HHC shows that it is not an item of expense incurred for earning profit from the sale of tea grown and manufactured by a seller but is a deduction of profits derived by the assessee from export of goods or merchandise from India. The allowance under section 80HHC cannot be allowed as deduction for computing income derived from the sale of tea grown and manufactured by the seller before application of rule 8 of the Income Tax Rules, 1962, and that out of the income computed without deducting the allowance under the said section 80HHC can be allowed only out of such profits and gains of business constituting the 40 per cents of the income. The balance 60 per cent of the income is to be deemed as agricultural income and out of such agricultural income only such allowances as are permissible under the Agricultural Income Tax Act can be made. This is because, the said 60 per cent of the income deemed as agricultural income falls within the domain of the State Legislature out of which no further allowances not of the nature of expenses can be allowed except those which are permissible under the Agricultural Income Tax Act. On the basis of the aforesaid decision, the appeals preferred by the assessee challenging the notices issued by the Agricultural Income Tax Officer, are dismissed.

10. Aggrieved by the judgment delivered by the Division Bench of the Gauhati High Court the assessee preferred appeals and petitions before the Supreme Court, which has been heard together. The Supreme Court has only considered the validity of rule 5 of the State Rules and said that the rule 5 of the State Rules with its proviso, has in unequivocal terms empowered the State Authorities, in given cases, to refuse to accept the computation of agricultural income made by the Central Officers, after examining the books already examined by such Central Officers. Perusal of section 50 of the Agricultural Income Tax Act shows that the State Government has been empowered to make such rules as may be necessary for the purpose of carrying out the purposes of the Act. The object and the scheme of the Act do not contemplate the State authorities being empowered to re-compute the agricultural income contrary to the computation made by the Central Officers, nor do the subjects specified in sub-sections (2)(a) to (m) of section 50 provide for making such rules empowering the State Officers to make computation of agricultural income contrary to what is computed by the Central Officers under the Central Act. By virtue of the provisions made by the Legislature in the Explanation to section 2(a)(2), the second proviso to section 8 and section 20D, it is clear that the State Legislature intended to adopt the computation of agricultural income made under the provisions of the Central Act. Under section 50, we do not see any provision which specifically authorizes the State Government to make any such rules in the nature of the proviso to rule 5 of the State Rules. None of the provisions of the Act has contemplated any power to be vested in the State Officers to re-compute the agricultural income from tea while the proviso to rule 5 of the Rules in specific terms empowers the State Officers to recomputed the agricultural income from tea different from that which is computed by the Central officers under the Central Act. Thus, it is seen that this rule is not only made beyond the rule making power of the State under section 50 of the Act, but also runs counter to the object of the Act itself and enlarges the scope of the Act. The rule also suffers from the other vices, hence, such Rule, in the view of the Apex Court, is ultra vires the Act. Therefore, the-proviso to rule 5 of the State Rules to the extent it empowers the State Officers to re-compute the agricultural income already computed by the Central Officers is ultra vires the State Act. The court has specifically mentioned that the court having come to the conclusion that the proviso to rule 5 of the State Rules to the extent it empowers the State Officers to re-compute the agricultural income is ultra vires the State Act, the Apex Court did not find it necessary to go into the larger question of the Constitutional validity of the State Act or the question of repugnancy, which was argued on the basis of the presumption that the State Act has made provisions, which run counter to the constitutional provisions and the provisions of the Central Act.

11. From the aforesaid decision, it is clear that the Apex Court has only considered the question of validity of proviso to rule 5 of the Assam Agricultural Income Tax Rules, 1939 and the questions as regard to the stage at which section 80HHC shall be given effect to while computing the business income of the assessee in consideration of rule 8 of the Income Tax Rules, 1962 was not considered by the Court. On this premises, it is submitted by the learned counsel for the revenue that the judgment so far as the question of stage at which rule 80HHC and rule 8 shall apply was neither argued nor considered by the court and, therefore, the decision of the High Court to that extent does not merge in the decision of the Apex Court and the decision of the Supreme Court do not have binding force so far that question is concerned on this Court.

12. In a recent decision the effect, operation and the extent of the doctrine of merger came for consideration before the Apex Court in the matter of Kunhayahmed and Others v. State of Kerala and Anr, (2000) 6 SCC 359. In the factual scenario that a family consisting of 71 members raised a dispute before the Forest. Tribunal, Kozhikode, that the land to the tune of 1020 acres did not vest in the State Government. The Tribunal held in favour of the applicants that the land did not vest in the State Government Appeal was preferred by the State before the High Court and the Kerala High Court dismissed the appeal. The State of Kerala filed a petition for special leave to appeal under article 136 of the Constitution however, the petition was dismissed by an order dated 18.7.1983 stating that-'Special leave petition is dismissed on merits.' By Act 36 of 1986, the Kerala Private Forests (Vesting and Assignment) Act, 1971 was amended. Section 8-C amongst others was enacted into the body of the Act giving it a retrospective effect. In pursuance of the amendment, the State of Kerala filed application for review of the order passed by the Kerala High Court. Preliminary objection was raised as to the maintainability of the review petition. The High Court overruled the preliminary objection and directed the review petition to be posted for hearing on merits. Being aggrieved, the petitioners approached the Apex Court and the matter was listed before a Bench of three Judges having regard to the importance of the question involved. It has been contended before the Apex Court that the order dated 17.12.82 of the High Court have been merged into the order of the Supreme Court dated 18.7.83 and, therefore, the order of the High Court was ceased to exist in the eye of law, thus, the application seeking review of the order dated 12.12.82 passed by the High Court is entirely misconceived action. Secondly, the order dated 18.7.83 passed by the Supreme Court amounts to affirmation of the order dated 17.12.82 passed by the Kerala High Court and , therefore, the High Court cannot entertain the prayer for review of its order. The Supreme Court in para 7 of the said judgment observed that

'the doctrine of merger is neither a doctrine of constitutional law nor a doctrine statutorily recognized. It is a common low doctrine founded on principles of propriety in the hierarchy of justice delivery system.'

The Apex Court in para 12 of the judgment held thus

'the logic underlying the doctrine of merger is that there cannot be more than one decree or operative orders governing the same subject-matter at a given point of time. When a decree or order passed by an inferior Court, Tribunal or Authority was subjected to a remedy available under the law before a Superior Forum then, though the decree or order under challenge continues to be effective and binding, nevertheless its finality is put in jeopardy. Once the superior court has, disposed of the has before it either way-whether the decree or order under appeal is set aside or modified or simply confirmed, it is the decree or order of the Superior Court, Tribunal or Authority which is the final, binding and operative decree or order wherein merges the decree or order passed by the Court, Tribunal or the Authority below. However, the doctrine is not of universal or unlimited application. The nature of jurisdiction exercised by the superior forum and the content or subject-matter of challenge laid or which could have been laid shall to be kept in view.'

13. After consideration of various judgments the Apex Court laid down broad guidelines for application of the principles of doctrine of merger and they are summed up in paragraph 44 of the judgment, which reads :

'44, To sum up, our conclusions are :

(i) Where an appeal or revision is provided against an order passed by a Court, Tribunal or any other authority before superior forum and such superior forum modifies, reverses or affirms the decision put in issue before it, the decision by the subordinate forum merges in the decision by the superior forum and it is latter which subsists, remains operative and is capable of enforcement in the eye of law.

(ii) The jurisdiction conferred by article 136 of the Constitution is divisible into two stages. The first stage is upto the disposal of prayer for special leave to file an appeal. The second stage commences if and when the leave to appeal is granted and the special leave petition is converted into an appeal.

(iii) The doctrine of merger is not a doctrine of universal or unlimited application. It will depend on the nature of jurisdiction exercised by the superior forum and the content or subject-matter of challenge laid or capable of being laid shall be determinative of the applicability of merger. The superior jurisdiction should be capable of reversing, modifying or affirming the order put in issue before it. Under article 136 of the Constitution the Supreme Court may reverse, modify or affirm the judgment-decree or order appealed against while exercising its appellate jurisdiction and not while exercising the discretionary jurisdiction disposing of petition for special leave to appeal. The doctrine of merger can therefore be applied to the former and not to the latter.

(iv) An order refusing special leave to appeal may be a non-speaking order or a speaking one. In either case it does not attract the doctrine of merger. An order refusing special leave to appeal does not stand substituted in place of the order under challenge. All that it means is that the court was not inclined to exercise its discretion so as to allow the appeal being filed.

(v) If the order refusing leave to appeal is a speaking order, i.e., gives reasons for refusing the grant of leave, then the order has two implications. Firstly, the statement of law contained in the order is a declaration of law by the Supreme Court within the meaning of article 141 of the Constitution. Secondly, other than the declaration of law, whatever is stated in the order are the findings recorded by the Supreme Court which would bind the parties thereto and also the Court, Tribunal or authority in any proceedings subsequent thereto by way of judicial discipline, the Supreme Court being the Apex Court of the country. But, this does not amount to saying that the order of the Court, Tribunal or authority below has stood merged in the order of the Supreme Court rejecting the special leave petition or that the order of the Supreme Court is the only order binding as res judicata in subsequent proceedings between the parties.

(vi) Once leave to appeal has been granted and appellate jurisdiction of Supreme Court has been invoked the order passed in appeal would attract the doctrine of merger; the order may be of reversal, modification or merely affirmation.

(vii) On an appeal having been preferred or a petition seeking leave to appeal having been converted into an appeal before the Supreme Court the jurisdiction of High Court to entertain a review petition is lost thereafter as provided by sub-rule (1) of rule 1 of order 47 CPC.

14. Applying the aforesaid principles, we have to find out, in the facts and circumstances of the present case, whether the doctrine of merger has any application and to the extent the doctrine of merger shall apply. In the case in hand, admittedly, the High Court has decided two issues, viz. first, the validity of proviso to rule 5 of the Assam Agricultural Income Tax Rules, 1939 : secondly, the manner of computation of agricultural and business income of the assessee on application of section 80HHC and rule 8 of the Rules 1962. The first question has been specifically dealt with, whereas, no decision was rendered by the Apex Court in appeals so far the second question is concerned. We have also to note that the Apex Court after entertaining the petitions and appeals, after issuing notice to the other side, has decided the issues on merits and the appeals and petitions are allowed. Thus we can safely draw inferences that the judgment of the High Court has been set aside on merits.

15. Now the question is whether the point which has not been decided by the court can also be said to have been set aside, because of the doctrine of merger, inasmuch as, the judgment of the High Court being merged in the judgment of the Apex Court. In the matter of Kunhayammed and Others (supra) the Apex Court has specifically said that once the appeal or the petition is admitted and the superior jurisdiction of the court is capable of reversing or modifying or affirming of an order under challenge. The decision so rendered in exercise of the power would be covered under the doctrine of merger. Once the appellate jurisdiction of the Supreme Court has been invoked, the order passed in the appeal would attract the doctrine of merger, the order may be reversal or modification or an order of confirmation. When the doctrine of merger applies, the decision rendered by the Supreme Court is a final judgment and is binding and operative, wherein the order passed by the High Court merges in the order of the Supreme Court. Once the order of the High Court is merged into the Superior Court, it cannot be said that out of several issues decided by the High Court, one issue had not been decided by the Supreme Court and will remain unmerged and it will have a binding force. Once the Supreme Court exercises its appellate jurisdiction and on order is passed on merit, it alone will have the binding force and the entire judgment of the inferior court will merge into the decision rendered by the Superior Court.

16. There is another way to look at the case in hand. The decision given by the Gauhati High Court on the merits of the question of applicability of the stag, at which, section 80HHC of the Act of 1961 and rule 8 of the Rules 1962, will apply while computing the business income of the assessee was rendered only on application of the proviso the rule 5 of the Assam Agricultural Income Tax Rules, which held to be by the High Court, intra vires, and within the powers of the Agricultural Income Tax Officer to re-determine the composite income, The question of deciding the applicability of section 80HHC of the Act of 1961 and rule 8 of the Rules, 1962 was considered by the High Court only because it has held that the Agricultural Income Tax Authority has power to reopen the assessment made by the Income Tax Authority by virtue of proviso to rule 5 of the Assam Agricultural Income Tax Rules, which is a valid piece of legislation. The High Court decided that under proviso to rule 5 of the Assam Agricultural Income Tax Rules, the Agricultural Income Tax Authority has jurisdiction to reopen the assessment of the business income made by the Central Income Tax Authority and therefore, has an authority to re-determine the stage of applicability of the provisions of section 80HHC and rule 8 of the Rules of 1962. Therefore, the decision on the interpretation of application of section 80HHC and rule 8 of the Rules of 1962 was dependent on the question of validity of proviso to rule 5 of the Assam Agricultural Income Tax Rules. When the Apex Court has declared the rule not to be valid, there was no occasion for consideration of the second question of application of section 80HHC and rule 8 of the Rules of 1962 by the High Court nor it was necessary for the Apex Court to adjudicate on that question which becomes non-considerable, the moment the Supreme Court decision validity of proviso to rule 5 of the Rules. The decision of the Gauhati High Court on the merits, of the question, was mainly dependent upon its conclusion that the proviso to rule 5 of the Assam Agricultural Income Tax Rules was intra vires and-within the power of the State Income Tax Officer to re-determine the composite income. On that basis, the proceedings were reopened for assessment under section 30 of the Assam Agricultural Income Tax Act. If the basis on which the proceedings were reopened is without jurisdiction then any decision on the merits of the claim, necessarily, do not stand, as a valid and operative decision. When the matter came up before the Supreme Court, the Supreme Court considered the principal question, viz., whether such power of re-determination of the composite income as envisaged in the proviso to rule 5 is valid or not and declared that the said proviso to rule 5 is ultra vires the Act. When the said proviso to rule 5 of the Assam Agricultural Income Tax Rules is declared as ultra vires the decision on the merits, which proceeded on the footing that the said rule is intra vires and does not stand. The power to predetermine the question as to whether deduction under section 80HHC is to be allowed before the apportionment of 40 and 60 per cent under rule 8 is to be made, was decided only on the footing that such p6wer of re-determination is fully conferred under the proviso to rule 5 of the Assam Agricultural Income Tax Rules. When the said proviso to rule 5 has been declared by the Supreme Court as ultra vires the Act, there was no occasion for the Supreme Court to consider the merits of the claim because such merits of the claim could be considered only if the proviso is declared to be intra vires and not ultra vires. In view of the aforesaid, we are of the opinion that the decision of the High Court in Assam Company Ltd. (supra) merges into the decision of the Apex Court and cannot be enforced as a binding precedent.

17. The case of the Appellants is that the income derived from the sale of tea grown and manufactured is derived partly from agriculture and partly from manufacture. Under the Indian Income Tax Act, 1961 and the Rules framed thereunder the income derived from the sale of tea grown and manufactured by a seller, has to be computed in the manner laid down in rule 8 of the Rules of 1962 and 10 per cent of the income so computed is treated as income other than agricultural income and the remaining 60 per cent is treated as agricultural income. The definition of agricultural income in the Act of 1961 is contained in sub-section (1) of section 2 of the Act. Section 296 provides, inter alia, that a rule framed under section 295 shall be laid, as soon as may be after the rule is made or the notification is issued before each House of Parliament and shall have effect subject to any modification or deletion made by both Houses of Parliament. Rule 7 of the Rules 1962 made under section 295 of the Act of 1961 deals with the computation of income which is partially agricultural and partially from business. Rule 8 deals with income derived from the sale of tea grown and manufactured by the seller in India and 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. 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. Rule 8 of the Rules of 1962 is incorporated in the definition of term agricultural income in the Act of 1961.

18. Under section 80HHC, 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, he shall be allowed in accordance with and subject to the provisions of the section 80HHC and deduct the profit referred to in sub-section 1B from the export of such goods or merchandise, while computing the total income of the assessee. Section 80HHC permits the allowable profit to be deducted from the export income of the goods or merchandise, while computing the total income of the assessee. Section 28 of the Act of 1961 enumerates the income, which shall be chargeable to Income Tax under the head profits and gains of any business or profession. By virtue of section 29 of the Act, deduction as per provisions contained in Sections 30 to 43D is permissible while computing the profits and gains of business or profession. The list of allowances enumerated in Sections 32 to 37 is not exhaustive. While computing the income, the assessee is entitled to take deductions even if it does not fall within any of these sections if otherwise allowable under the provisions of Income Tax Act.

19. In a decision CIT v. Chitnavis, 6 ITC 453, the Privy Council permitted bad debts to be an admissible deduction, though there was no special allowance forbad debts in the 1922 Act as it then stood. Lord Russell, delivering the judgment of the board, said :

'Although the Act nowhere in terms authorizes the deduction of bad debts of a business, such a deduction is necessarily allowable. What are chargeable to Income Tax in respect of a business are the profits and gains of a year; and in assessing the amount of the profits and gains of a year account must necessarily be taken of all losses incurred, otherwise you would not arrive at the true profits and gains.'

Thus, there is no manner of doubt while computing the business income, the assessee is entitled for deduction of the profit earned from the export of goods or merchandise as provided under section 80HHC and it could not be restricted to the deductions provided under section 32 to 43D of the Act of 1961.

20. The question now falls for consideration before this court is at what stage such deduction is permissible. In the matter of Karimtharuvi Tea Estates Ltd. v. State of Kerala (1963) 48 ITR 83, a Constitution Bench of the Apex Court was called upon to consider the question of the power of State Legislature to make a law in respect of taxes on agricultural income arising from tea plantations. The court held that the power of the State Legislatures for allowing the agricultural income, which is determined in accordance with rule 24 of the Indian Income Tax Rules, 1922 is limited and the income derived from the sale of tea grown and manufactured by the seller is first to be computed under section 10 of the Act of 1922, as if it were income derived from business. Any expenditure by the assessee, not being an allowance described in clauses (i) to (xiv) of section 10(2) of the Act of 1922 and not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly and exclusively for the purposes of such business would be deductible. Of the income so computed, 40 per cent being under rule 24 of the Indian Income Tax Rules, 1922, treated as income liable to Income Tax the other 60 per cent alone will be 'agricultural income'. The aforesaid decision clearly lays down that while computing agricultural income and business income in accordance with the rule 24 of the Indian Income Tax Rules, 1922, deduction is permissible for arriving at the business income, so as to compute 40 per cent for business and 60 per cent for agricultural income.

21. Another Constitution Bench of the Apex Court in Tata Tea Limited v. State of West Bengal, reported in (1958) 173 ITR 18, while considering the applicability of rule 8 of Rules of 1962 has said :

'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 1961 in 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.'

This decision clearly lays down that rule 8 of the Rules of 1962 would apply after the business income is arrived at permitting the deduction allowable under the Act of 1961.

22. In the matter of CIT v. CWS (India) Ltd. (2000) 246 ITR 278 (Ker), a Division Bench of the Kerala High Court has considered the rule 8 for the purpose of computation of business income liable to Income Tax and held that rule 8 of the Rules of 1962 refers to computation of income derived form the sale of tea grown and manufactured by a seller in India as if it were income derived from business and 40 per cent of such income is to be deemed to be income liable to tax. In other words, there has to be computation of income in accordance with the provisions of the Act. As a necessary corollary, deduction is allowance including what is covered under Chapter VI-A (deductions to be made in computing total income) of the Income Tax Act, 1961. It is to be noted that Chapter VI-A was inserted by the Finance Act, 1965, with effect from 1-4-1965. Deduction from income for the purpose of computing taxability of income has to be done not only taking into account the provisions of section 30 to 43D, but also taking into consideration deductions permissible under Chapter VI-A of the Act. Section 80HHC is part of Chapter VI-A. Section 80HHC refers to computation of the total income of an assessee. Rule 8 creates a legal fiction. 40 per cent deemed to be income liable to tax under rule 8 is chargeable income. The inevitable conclusion, therefore, is that before applying the 40 per cent rule, income should be first computed in accordance with the provisions of the Act, i.e., after allowing deductions including those encompassed by Chapter VI-A. A legal fiction is to be limited to purposes for which it was created and should not be extended beyond the language of the section by which it is created. It is to be noted that rule 8 deals with two types of income, i.e., agricultural income and non-agricultural income at the ratio of 60 : 40 of the total income. After computing the total income, the same has to be bifurcated in the above manner. Therefore, the total income would necessarily mean the net income and not gross income. Before the charging section is given effect, taxable income must accrue and while computing the total income, all expenditure and other deductions and allowances must be taken into account.

23. From the aforesaid decisions, we are of the considered view that for computation of the composite income derived from sale of tea grown and manufactured by the seller and exported out of India under section 2(1A) of the Act of 1961 read with rule 8 of the Rules of 1962, the deduction under section 80HHC in respect of profits derived from export of tea out of India would be allowed as permissible deduction before apportionment of non-agricultural income and agricultural income under rule 8 of the Rules of 1962 and thereafter, the income so computed, as if it is a business income, is to be apportioned on the basis of 40 per cent being non-agricultural income and 60 per cent being the agricultural income. Accordingly, the appeals are allowed and the judgments and orders of the Tribunal are set aside. In the facts and circumstances there will be no order as to costs.