THE issues before the Bench are - Whether provisions of Sec 14A do not apply to deductions admissible to the assessee as per Chapter VIA; Whether scissors of Sec 14A come into play only when an income is not included in the total income as per the provisions of Chapter III and Whether no disallowance can be made against income which is not specifically exempt under the Income Tax Act. And the verdict goes in favour of the assessee.
Facts of the case
The assessee is a cooperative society and comes within the administrative control of the Department of Fertilizers,
The assessee is a cooperative society and comes within the administrative control of the Department of Fertilizers,
Ministry of Agriculture and Co-operation, Government of India. For the assessment year 2006-07, as per the return filed, the assessee had claimed deduction under Section 80P(2)(d) on dividend of Rs.2,00,006/- received from Nafed and Karnataka State Cooperative Apex Bank Limited and interest of Rs.10,20,75,013/- on deposits made with cooperative banks. The AO did not disturb the said claim/deduction under Section 80P(2)(d) but relying on Section 14A held that the aforesaid incomes were not included in the total income of the assessee and, therefore, expenditure under the head “interest” amounting to Rs.1,15,45,579 and 1/8 of the employee benefits and remuneration should be disallowed. He observed that the aforesaid expenditure had been incurred for earning of income under Section 80P(2)(d) of the Act and, therefore, had to be disallowed under Section 14A. Both the CIT(A) and the ITAT ruled in favour of assessee.
The contention of the Revenue was that deductions, which are made under Chapter VIA, results in exclusion of the said income from the total income and, therefore, expenditure incurred for earning the said income had to be disallowed in view of the express provisions of Section 14A. It was submitted by the Revenue that the deduction when allowed under Chapter VIA results in exclusion of the said income from the total income, which was taxable. Therefore, in fairness the expenses incurred by the assessee to earn the said income should be excluded and not allowed. The contention of the assessee, on the other hand, was that Section 14A was not applicable as far as deductions, which are permissible and allowed under Chapter VIA are concerned. Section 14A was applicable only if an income was not included in the total income as per the provisions of Chapter III of the Act.
On further appeal by the Revenue, the High Court held that,
++ there is a merit in the contention raised by the assessee that Section 14A is not applicable as far as deductions, which are permissible and allowed under Chapter VIA are concerned. Section 14A is applicable only if an income is not included in the total income as per the provisions of Chapter III of the Act;
++ there are several reasons and grounds for the same apart from the placement of Section 14A in Chapter IV of the Act. Chapter VIA as noticed above does not consist of one section but there are numerous sections under which deductions are allowed. Some of the sections relate to deductions in case of priority industries or industries/units set up in the specified area or export earnings etc. In these provisions/sections, it is not the gross income or entire receipt on which deduction is allowed. The deduction in several sections like Section 80I, 80HHC is allowed on the net amount of income, i.e., gross income less the expenditure incurred to earn the said income;
++ Section 80A(1) states that in computing total income an assessee will be allowed on the gross total income in accordance and subject to the provisions of the Chapter, deductions specified in Section 80C to 80U. The language of the section itself postulates and mandates that it is a deduction which is allowed from the gross total income. Thus, from the amounts included in the gross total income, deductions are to be allowed in respect of the incomes mentioned and specified in Sections 80C to 80U. In other words, the incomes specified in Sections 80C to 80U are chargeable to tax under Section 4 but have to be reduced/deducted as so stipulated and required by a particular section and on conditions stated therein being satisfied. Sub-section 2 to Section 80A states that the total amount of deduction shall not exceed the gross total income of an assessee. In other words, deduction cannot exceed the total income, i.e., the “gross total income” earned by the assessee in the year. The term “gross total income” has been defined in Section 80B(5) to mean total income computed in accordance with the provisions of this Act, before making any deduction under Chapter VIA. In other words, before computing the deduction under Chapter VIA, the requirement is that total income should be computed in accordance with the Act, but without making any deduction under the Chapter. It means that the income which qualifies for deduction under Chapter VIA has to be included in the gross total income. The income which is included has to be computed in accordance with the provisions of the Act, i.e., in accordance with Chapter IV, Chapter VI etc. As observed above, Section 80AB stipulates that while computing deduction under any Section in Chapter VIA, under the heading “C- Deductions in respect of certain incomes”, we have to first compute amount of income of that nature in accordance with the provisions of the Act but without making any deduction under Chapter VIA. It is this income/receipt alone which qualifies and is taken into consideration for the purpose of deduction under Chapter VIA;
++ a reading of the aforesaid provisions elucidates that deduction, which are permissible and allowed under Chapter VIA, do not result in exclusion of the income from the charging section. Chapter VIA is different from the exclusions/exemptions granted/stated in Chapter III. Incomes in Chapter III are not chargeable to tax and, therefore, fall outside the ambit of Sections 4 and 5 of the Act. Such incomes do not form part of the total income and are, therefore, not subjected to tax. However, there are other income/receipts, which are subjected to and chargeable to tax but under specific provisions under Chapter VIA, an assessee is entitled to deductions. Thus, such incomes do form part of the income stated in Section 4 read with Section 5 but while computing the taxable income, deductions are allowed to the extent stipulated in Sections 80C to 80U of the Act. The distinction between the two, has been accepted and recognized by the Supreme Court in Second Income Tax Officer and Another versus Stumpp Schuele and Somappa Private Limited, (1991) 187 ITR 108 (SC). It was held approving several decisions that the deductions under Chapter VIA cannot be equated with incomes not included in the total income or which are not chargeable to tax. Chapter VIA in several provisions makes reference to net income as computed in accordance with the provisions of the Act and not with reference to gross amount/entire receipt. For the purpose of computing the said deductions, profits/income is not computed as commercial profits but with reference to the provisions of the Act. In some cases, the qualifying units have to be treated as a separate entity for the purpose of computing the deduction and thereafter the net income is computed. Section 80AB begins with a non-obstante clause and has to be given full effect to;
++ it can be urged (though it was not specifically argued by the Revenue) that in case of complete or entire deduction of the gross amount, Section 14A will be applicable, and Section 14A will not apply in case only the net amount (as stipulated in several Sections in Chapter VIA of the Act) is allowable as a deduction. There will be a fallacy in this argument. Even were partial or net amount is to be allowed as a deduction, the figure can be minus or in a loss. Logically, as a squiter, it will follow that in case the assessee has a negative/minus figure as per the computation made any of the provisions of Chapter VIA, the expenditure incurred cannot allowable under Section 37 of the Act, in view of Section 14A. The said position cannot be accepted. Income will include negative income or a loss. The corollary is that the entire income is included under the provisions of the Act by firstly including the entire receipts or incomes as stipulated in the charging section but after excluding the income stipulated in Chapter III. Thereafter, total income is computed under the Act by applying provisions of Chapter IV, V and VI. From this income, deductions are permitted and allowed in terms of Chapter VIA. Deductions do not mean that deduction allowed has the effect that the income, on which deduction is allowed, ceases to be part of the total income. This is not the scheme, effect and purport of the Act. The expression “income which does not form part of the total income” refers to the nature, character or type of income and not the quantum;
++ Section 14A states that for the purpose of computing total income under Chapter IV, no deduction shall be allowed in respect of expenditure incurred in relation to the income which does not form part of the total income under this Act. It does not state that income which is entitled to deduction under Chapter VIA has to be excluded for the purpose of the said Section. The words “do not form part of the total income under this Act” is significant and important. As noticed above, before allowing deduction under Chapter VIA we have to compute the income and include the same in the total income. In this manner, the income which qualifies for deductions under Sections 80C to 80U has to be first included in the total income of the assessee. It, therefore, becomes part of the income, which is subjected to tax. Thereafter, deduction is to be allowed in accordance with and subject to the fulfillment of the conditions of the respective provisions. This is also subject to Section 80AB and 80A(1) and (2). Chapter VIA does not postulate or state that the incomes which qualify for the said deduction will be excluded and not form part of the total income. They form part of the total income but are allowed as a deduction and reduced;
++ it has been uniformly and consistently held that in the absence of express language to the contrary, deduction if allowed does not mean that the said income ceases to be part of the total income;
++ in view of the aforesaid position, we answer the questions of law mentioned above in affirmative, i.e., against the appellant-Revenue and in favour of the respondent-assessee.
The contention of the Revenue was that deductions, which are made under Chapter VIA, results in exclusion of the said income from the total income and, therefore, expenditure incurred for earning the said income had to be disallowed in view of the express provisions of Section 14A. It was submitted by the Revenue that the deduction when allowed under Chapter VIA results in exclusion of the said income from the total income, which was taxable. Therefore, in fairness the expenses incurred by the assessee to earn the said income should be excluded and not allowed. The contention of the assessee, on the other hand, was that Section 14A was not applicable as far as deductions, which are permissible and allowed under Chapter VIA are concerned. Section 14A was applicable only if an income was not included in the total income as per the provisions of Chapter III of the Act.
On further appeal by the Revenue, the High Court held that,
++ there is a merit in the contention raised by the assessee that Section 14A is not applicable as far as deductions, which are permissible and allowed under Chapter VIA are concerned. Section 14A is applicable only if an income is not included in the total income as per the provisions of Chapter III of the Act;
++ there are several reasons and grounds for the same apart from the placement of Section 14A in Chapter IV of the Act. Chapter VIA as noticed above does not consist of one section but there are numerous sections under which deductions are allowed. Some of the sections relate to deductions in case of priority industries or industries/units set up in the specified area or export earnings etc. In these provisions/sections, it is not the gross income or entire receipt on which deduction is allowed. The deduction in several sections like Section 80I, 80HHC is allowed on the net amount of income, i.e., gross income less the expenditure incurred to earn the said income;
++ Section 80A(1) states that in computing total income an assessee will be allowed on the gross total income in accordance and subject to the provisions of the Chapter, deductions specified in Section 80C to 80U. The language of the section itself postulates and mandates that it is a deduction which is allowed from the gross total income. Thus, from the amounts included in the gross total income, deductions are to be allowed in respect of the incomes mentioned and specified in Sections 80C to 80U. In other words, the incomes specified in Sections 80C to 80U are chargeable to tax under Section 4 but have to be reduced/deducted as so stipulated and required by a particular section and on conditions stated therein being satisfied. Sub-section 2 to Section 80A states that the total amount of deduction shall not exceed the gross total income of an assessee. In other words, deduction cannot exceed the total income, i.e., the “gross total income” earned by the assessee in the year. The term “gross total income” has been defined in Section 80B(5) to mean total income computed in accordance with the provisions of this Act, before making any deduction under Chapter VIA. In other words, before computing the deduction under Chapter VIA, the requirement is that total income should be computed in accordance with the Act, but without making any deduction under the Chapter. It means that the income which qualifies for deduction under Chapter VIA has to be included in the gross total income. The income which is included has to be computed in accordance with the provisions of the Act, i.e., in accordance with Chapter IV, Chapter VI etc. As observed above, Section 80AB stipulates that while computing deduction under any Section in Chapter VIA, under the heading “C- Deductions in respect of certain incomes”, we have to first compute amount of income of that nature in accordance with the provisions of the Act but without making any deduction under Chapter VIA. It is this income/receipt alone which qualifies and is taken into consideration for the purpose of deduction under Chapter VIA;
++ a reading of the aforesaid provisions elucidates that deduction, which are permissible and allowed under Chapter VIA, do not result in exclusion of the income from the charging section. Chapter VIA is different from the exclusions/exemptions granted/stated in Chapter III. Incomes in Chapter III are not chargeable to tax and, therefore, fall outside the ambit of Sections 4 and 5 of the Act. Such incomes do not form part of the total income and are, therefore, not subjected to tax. However, there are other income/receipts, which are subjected to and chargeable to tax but under specific provisions under Chapter VIA, an assessee is entitled to deductions. Thus, such incomes do form part of the income stated in Section 4 read with Section 5 but while computing the taxable income, deductions are allowed to the extent stipulated in Sections 80C to 80U of the Act. The distinction between the two, has been accepted and recognized by the Supreme Court in Second Income Tax Officer and Another versus Stumpp Schuele and Somappa Private Limited, (1991) 187 ITR 108 (SC). It was held approving several decisions that the deductions under Chapter VIA cannot be equated with incomes not included in the total income or which are not chargeable to tax. Chapter VIA in several provisions makes reference to net income as computed in accordance with the provisions of the Act and not with reference to gross amount/entire receipt. For the purpose of computing the said deductions, profits/income is not computed as commercial profits but with reference to the provisions of the Act. In some cases, the qualifying units have to be treated as a separate entity for the purpose of computing the deduction and thereafter the net income is computed. Section 80AB begins with a non-obstante clause and has to be given full effect to;
++ it can be urged (though it was not specifically argued by the Revenue) that in case of complete or entire deduction of the gross amount, Section 14A will be applicable, and Section 14A will not apply in case only the net amount (as stipulated in several Sections in Chapter VIA of the Act) is allowable as a deduction. There will be a fallacy in this argument. Even were partial or net amount is to be allowed as a deduction, the figure can be minus or in a loss. Logically, as a squiter, it will follow that in case the assessee has a negative/minus figure as per the computation made any of the provisions of Chapter VIA, the expenditure incurred cannot allowable under Section 37 of the Act, in view of Section 14A. The said position cannot be accepted. Income will include negative income or a loss. The corollary is that the entire income is included under the provisions of the Act by firstly including the entire receipts or incomes as stipulated in the charging section but after excluding the income stipulated in Chapter III. Thereafter, total income is computed under the Act by applying provisions of Chapter IV, V and VI. From this income, deductions are permitted and allowed in terms of Chapter VIA. Deductions do not mean that deduction allowed has the effect that the income, on which deduction is allowed, ceases to be part of the total income. This is not the scheme, effect and purport of the Act. The expression “income which does not form part of the total income” refers to the nature, character or type of income and not the quantum;
++ Section 14A states that for the purpose of computing total income under Chapter IV, no deduction shall be allowed in respect of expenditure incurred in relation to the income which does not form part of the total income under this Act. It does not state that income which is entitled to deduction under Chapter VIA has to be excluded for the purpose of the said Section. The words “do not form part of the total income under this Act” is significant and important. As noticed above, before allowing deduction under Chapter VIA we have to compute the income and include the same in the total income. In this manner, the income which qualifies for deductions under Sections 80C to 80U has to be first included in the total income of the assessee. It, therefore, becomes part of the income, which is subjected to tax. Thereafter, deduction is to be allowed in accordance with and subject to the fulfillment of the conditions of the respective provisions. This is also subject to Section 80AB and 80A(1) and (2). Chapter VIA does not postulate or state that the incomes which qualify for the said deduction will be excluded and not form part of the total income. They form part of the total income but are allowed as a deduction and reduced;
++ it has been uniformly and consistently held that in the absence of express language to the contrary, deduction if allowed does not mean that the said income ceases to be part of the total income;
++ in view of the aforesaid position, we answer the questions of law mentioned above in affirmative, i.e., against the appellant-Revenue and in favour of the respondent-assessee.
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