ORDER
M.A. Bakhshi, Vice President
1. This appeal of the assessee for the assessment year 1996-97 is directed against the order dated 22-3-2001 of Commissioner of Income-tax, W.B.-II, Kolkata passed under Section 263 of the I.T. Act, 1961.
2. The appellant is a company engaged in growing, manufacturing and sale of tea and manufacturing of fertilizers, tobacco trading, rice export, export of purchased tea and purchased packet tea operations. For assessment year 1996-97, the assessee had filed a return of income on 2-12-1996 declaring income of Rs. 7,49,86,590. The return was originally processed under Section 143(1)(a) and intimation issued on 7-10-1996. On 31-3-1998 the appellant had filed a revised return declaring income of Rs. 6,78,35,700. This return was also processed under Section 143(1B) on 24-8-1998. Subsequently, the assessee’s case was selected for scrutiny for the purposes of assessment under Section 143(3). Assessment under Section 143(3) was made by the Assessing Officer after scrutiny vide order dated 31-3-1999. The income from growing, manufacturing and sale of tea was determined at (loss of Rs. 36,23,97,455). 40% of the same (i.e. loss Rs. 14,49,58,982) was apportioned and assessed as income from tea business under Rule 8 of the I.T. Rules, 1962. Subsequently on examination of the assessment records, the CIT, W.B.-II was of the view that the cess paid by the assessee on green leaves was allowed by the Assessing Officer as an expenditure for the purpose of computing the gross income from growing and manufacturing of tea when as per the decision of the Guwahati High Court in the case of Jorehaut Group Ltd. v. Agricultural ITO [1997] 226 ITR 622, the cess was deductible only against agricultural income under the Agricultural Income-tax Act. The CIT was thus of the view that the order passed by the Assessing Officer under Section 143(3) was erroneous insofar as it is prejudicial to the interests of Revenue.
3. The CIT had issued a show-cause notice to the assessee, in response to which written submissions were filed by the appellant. Not being satisfied with the explanation of the assessee, the CIT held that the cess levied by the State Government was allowable as a deduction only against the agricultural income under the Agricultural Income-tax Act. He, accordingly, vide order dated 22-3-2001 directed the Assessing Officer to add back the whole of the cess on green leaves earlier allowed as deduction. Being aggrieved the assessee is in appeal before us.
4. Parties have been heard and records perused. Sum and substance of the arguments advanced by the learned counsel for the assessee is as under:-
That the appellant derived income from sale of tea grown and manufactured by it in its own garden. Therefore, the income derived from the sale of tea grown and manufactured is a composite income, part of which is agricultural and part non-agricultural. That Rule 8 of the I.T. Rules, 1962 provides the procedure for apportionment of the income derived from sale of tea grown and manufactured as agricultural and non-agricultural income. The said Rule provides that income from sale of tea grown and manufactured by the seller in India shall be computed as if it were income derived from business and 40% of such income shall be deemed to be the income liable to tax. Therefore, the first step to be taken by the Assessing Officer in the process of assessment is to determine the entire income derived by the assessee from the sale of tea grown and manufactured by the assessee. In that process the entire expenses, be it expenses related to agricultural operations or trading operations, are to be taken into account for determination of the income. Any tax including cess levied by any authority relating to the sale of tea grown and manufactured by the seller in India is also be taken into account for determination of the income. That the Supreme Court in the case of Tata Tea Ltd. v. State of W.B. [1988] 173 ITR 18 : 39 Taxman 76 held that the State Government can levy tax on the agricultural income relating to the tea grown and manufactured by the assessee on the basis of determination of income under Rule 8 of the I.T. Rules, 1962. After determination of the agricultural income, any deductions permissible under the Agricultural Income-tax Act are further to be allowed. That this principle was reiterated by the Calcutta High Court in the case of Warren Tea Ltd. v. Union of India [1999] 236 ITR 492 : 102 Taxman 501. That cess is a duty or levy which is imposed under the special provision of the Cess Act. In this case the cess has been levied under the West Bengal Rural Employment Production Act, 1976 and the West Bengal Primary Education Act, 1973. That the payment of cess is incidental and ancillary to the carrying on of the business (of tea grown and manufactured) by the assessee. That Supreme Court in the case of CIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140 held that the expression “for the purpose of the business” in Section 10(2)(xv) [corresponding to Section 37 of the I.T. Act, 1961] is wider in scope than the expression “for the purpose of earning profit”. The payment of statutory dues and taxes imposed as a precondition to commence or for carrying on of a business is thus allowable deduction. That the payment of cess does not create any asset or advantage of an enduring nature but enables the assessee to carry on its business more efficiently by making due compliance with the statutory levies which are imposed annually. Such expenditure is allowable as a revenue expenditure. Reliance has been placed on the ratio of the decision of the Supreme Court in the case of Empire Jute Co. Ltd v. CIT [1980] 124 ITR 1 : 3 Taxman 69. That the Supreme Court in the case of Jaipuria Samla Amalgamated Collieries Ltd. v. CIT [1971] 82 ITR 580 held that the cess levied under the West Bengal Rural Employment Production Act, 1976 and under the West Bengal Primary Education Act, 1973 on the overall profit of last three years is allowable as a permissible deduction in computing the business income and that it does not come within the restriction of the provisions of Section 10(4) of the I.T. Act, 1922 [corresponding to Section 40(a)(ii) of the I.T. Act, 1961]. Reference has also been made to the C.B.D.T. Circular No. 91/158/66-ITJ(19) dated 18-5-1967, where it has been explained that by omission of the word “cess” from the proposed Section 40(a)(ii), the restriction for allowance placed under such Section is inapplicable. That the Supreme Court in the case of Mahalakshmi Sugar Mills Co. v. CIT [1980] 123 ITR 429 held that the interest paid by the assessee engaged in the business of manufacture or sale of sugarcane for the delayed payment of the cess is nothing but additional cess and is to be allowed as a permissible deduction in computing the business income. That Section 43B of the I.T. Act, 1961 permits deduction in respect of an expenditure by way of tax, duty, cess or fees by whatever name called only in the year of payment. It is the claim of the assessee that by implication, Section 43 B recognizes the fact that cess is permissible as a deduction in computing the profits and gains of business. That in the case of Assam Co. Ltd. v. State of Assam [2001] 248 ITR 567 (SC) before the Supreme Court the common case of all the parties concerned was that the income from cultivation, manufacture and sale of tea comes within the definition of Rule 8 of the I.T. Rules, 1962 which provides for computation of income derived from sale of tea grown and manufactured by sellers in India. That in that case the Hon’ble Supreme Court has reiterated that as per Rule 8, 40% of the income is deemed to be the income liable to income-tax under the Central Act and the balance 60% of the income would be agricultural income for purposes of the State laws. That the cess which is relatable to the growing of tea in the tea gardens is allowable as a deduction as all other expenses, such as wages paid to the workers for plucking tea leaves or cultivating the fields or the depreciation on the agricultural implements used in the cultivation of tea and various other expenses which are basically connected with the cultivation of tea are to be allowed as deduction in computing the entire income derived from growing and manufacturing of tea. That the decision of the Gauhati High Court in the case of Jorehaut Group Ltd. (supra), referred to by the CIT in his order under Section 263 has been invoked without considering the context in which the said decision was rendered. It has been claimed that the decision of the Gauhati High Court is with reference to Section 8(2)(e) of the Assam Agricultural Income-tax Act by virtue of which cess paid is allowed as a deduction in computing the agricultural income. Attention has been invited to the Section 8(2)(e) of the Assam Agricultural Income-tax Act which provides for deduction of any tax or rate paid under any enactment in force in Assam on the cultivation or sale of the crop from which agricultural income is derived. That though deduction is permissible in respect of any tax or rate paid, yet proviso of the same rule prohibits the allowance of any deduction if it has already been allowed in the assessment under the Income-tax Act. Therefore, the question before the Gauhati High Court was limited to the issue as to whether assessee was entitled to deduction in respect of cess out of the 60% of the agricultural income computed under the provisions of the I.T. Act, 1961 read with Rule 8 of the I.T. Rules, 1962. The issue before Their Lordships was not as to whether the cess paid by the assessee was allowable in computation of the composite income from sale of tea grown and manufactured by the assessee. According to the learned counsel, the issue regarding the admissibility of cess is covered in favour of the assessee by various decisions of the Supreme Court and, therefore, the decision relating to the admissibility of deduction under the Assam Agricultural Income-tax Act decided by the Gauhati High Court in the aforementioned case is not applicable to the issue in hand. That the power of the Commissioner under Section 263 is limited to revise the orders as are erroneous insofar as prejudicial to the interests of Revenue. The Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 : 109 Taxman 66 observed that where two views are possible and the ITO has taken one view with which the Commissioner does not agree, the order cannot be treated as erroneous or prejudicial to the interests of Revenue. According to the learned counsel, the view relating to the admissibility of deduction on account of cess is supported by various decisions and, therefore, allowance of same cannot be said to be erroneous insofar as prejudicial to the interests of Revenue. It has, accordingly, been pleaded that the order under Section 263 of the CIT may be cancelled.
5. The Ld. Departmental Representative relied upon the order of the CIT passed under Section 263 and the decision of the Gauhati High Court in the case of Jorehant Group Ltd. (supra) and pleaded that the appeal of the assessee may be dismissed.
6. In order to appreciate the arguments addressed on behalf of the parties before us, it would be useful to refer to the relevant provisions of the Act and Rules thereunder.
7. Article 246(3) of the Constitution of India empowers the State Legislature to levy tax on agricultural income. Entry 46 of List II of the 7th Schedule to the Constitution of India relates to tax on agricultural income. Article 366(1) provides that the expression ‘agricultural income’ in the Constitution of India means agricultural income as defined for the purpose of the enactments relating to the Income-tax Act. It is thus clear that the power of the State Legislature for enacting laws under Entry 46, List II would extend to the agricultural income as defined in the Income-tax Act and laws relevant to the said Act.
8. Section 2(1A) of the I.T. Act, 1961 defines agricultural income as under:-
(1A) agricultural income” means
(a) any rent or revenue derived from land which is situated in India and is used for agricultural purposes;
(b) any income derived from such land by-
(i) agriculture; or
(ii) the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render the produce raised or received by him fit to be taken to market; or
(iii) the sale by a cultivator or receiver of rent-in-kind of the produce raised or received by him, in respect of which no process has been performed other than a process of the nature described in paragraph (it) of this sub-clause;
(c) any income derived from any building owned and occupied by the receiver of the rent or revenue of any such land, or occupied by the cultivator or the receiver of rent-in-kind, or any land with respect to which, or the produce of which, any process mentioned in paragraphs (ii) and (iii) of Sub-clauses (b) is carried on.
9. Rule 7 and Rule 8 of the IT Rules, 1962 provided for determination of agricultural income in such cases where the income is partially agricultural and partially from business. Rule 7 reads as under:-
7. (1) In the case of income which is partially agricultural income as defined in Section 2 and partially income chargeable to income-tax under the head “Profits and gains of business”, in determining that part which is chargeable to income-tax the market value of any agricultural produce which has been raised by the assessee or received by him as rent-in-kind and which has been utilized as a raw material in such business or the sale receipts of which are included in the accounts of the business shall be deducted and no further deduction shall be made in respect of any expenditure incurred by the assessee as a cultivator or receiver of rent-in-kind.
(2) for the purposes of Sub-rule (1) “market value” shall be deemed to be:-
(a) where agricultural produce is ordinarily sold in the market in its raw state, or after application to it of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render it fit to be taken to market, the value calculated according to the average price at which it has been so sold during the relevant previous year;
(b) where agricultural produce is not ordinarily sold in the market in its raw state or after application to it of any process aforesaid, the aggregate of-
(i) the expenses of cultivation;
(ii) the land revenue or rent paid for the area in which it was grown; and
(iii) such amount as the Assessing Officer finds, having regard to all the circumstances in each case, to represent a reasonable profit.
10. Rule 7 is a general rule applicable in respect of such cases where the income is partially derived from agriculture and partially from business. Rule 7A & Rule 7B refer to the income from manufacture of rubber and income from manufacture of coffee respectively with which we are not concerned. However, Rule 8 is specifically applicable with reference to income derived from sale of tea grown and manufactured, which reads as under:-
8 – Income from the manufacture of tea.-(1) Income derived from the sale of tea grown and manufactured by the seller in India shall be computed as if it were income derived from business and forty per cent of such income shall be deemed to be income liable to tax.
(2) In computing such income an allowance shall be made in respect of the cost of planting bushes in replacement of bushes that have died or become permanently useless in an area already planted, 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 provisions of Clause (30) of Section 10, is not includible in the total income.
11. It is observed from Rule 8 reproduced above that the income from tea grown and manufactured by the seller is to be computed as if it were income derived from business. Thus, the fiction is created under Rule 8 for treating the entire activity of growing, manufacturing and sale of tea as an activity of business.
12. In this connection is would be relevant to refer to the decision of the Supreme Court in the case of Tata Tea Ltd. (supra). In this case, Their Lordships of the Supreme Court held as under :-
In the case of income from sale of tea grown and manufactured by an assessee, Rule 24 of the Indian Income-tax Rules, 1922 and Rule 8 of the Income-tax Rules, 1962, although at first glance they appear to be rules of apportionment and computation, must be treated as incorporated in the definition of the term “agricultural income” in the Act of 1922 and the Act of 1961, respectively. The term “agricultural income” used in entry 46 of List II of Schedule VII to the Constitution of India has to be construed in accordance with the definition of the said term in Article 366(1) and that definition states that agricultural income means “agricultural income as defined for the purposes of the enactments relating to Indian Income-tax”. Rule 8 of the Income-tax Rules, 1962, as well as Rule 24 of the Indian Income-tax Rules, 1922, pertain to and are bound up with the definition of the term “agricultural income” for the purposes of laws or enactments pertaining to the Indian Income-tax and hence the provisions of those rules have to be taken into account in considering the meaning of the term “agricultural income” under Article 366(1).
The State Legislature can impose a tax only in respect of 60 per cent of the income derived by an assessee who sells tea grown and manufactured by him in India and such income has to be computed in the manner laid down in the Act of 1922 and thereafter in the Act of 1961 for the computation of business income. The State Legislature is perfectly competent to omit any provision which it had earlier enacted to confine the “agricultural income” in the State Act to that portion of the income as would be agricultural income for the purposes of the Central income-tax. However, it cannot thereby widen the ambit of the State Act so as to bring to tax the entire income derived from the sale of tea grown and manufactured by an assessee.
Recently Hon’ble Supreme Court in the case of Assam Co. Ltd. (supra) held that the income from cultivation, manufacture and sale of tea comes within the definition of Rule 8 of the IT. Rules, 1962, which provides for computation of income derived from sale of tea grown and manufactured by the sellers in India. It was further observed that 4096 of such income would be deemed to be the income liable to income-tax under the Central Act and the balance 60% would be the agricultural income under the State Laws.
13. Thus, it is evident that for purpose of assessment of non-agricultural income under the Income-tax Act, 1961 as also for purposes of assessment of agricultural income under the State Agricultural Act, first it is necessary to determine the entire income of the assessee derived from growing, manufacturing and sale of tea. As per Rule 8, 40% of such income is deemed to be the income liable to income-tax under the IT. Act, 1961 and the balance 60% of the income to be agricultural income for the purpose of levying agricultural income-tax under the State laws. The scheme of taxation under the Income-tax Act requires determination of the income in accordance with the provisions of the Act. It would thus be necessary to refer to other provisions of the I.T. Act, 1961 relevant for determination of income from business. The Act recognizes the distinction between the gross total income and the net income. “Gross total income” is defined under Section 80B(5) of Chapter VIA of the Act to mean as under:-
80B. (5) “gross total income” means the total income computed in accordance with the provisions of this Act, before making any deduction under this Chapter, i.e. Chapter VIA.
Rule 8 of the Income-tax Rules, 1962, reproduced in para 10 above, creates a fiction for treating the entire activity of growing, manufacturing and sale as an activity of business. Section 28 of the I.T. Act provides for assessment of income chargeable to income-tax under the head “Profits and gains of business or profession”.
14. Section 29 provides that the income referred to in Section 28 shall be computed in accordance with the provisions contained in Sections 30 to 43D. Section 29 reads as under:-
29. The income referred to in Section 28 shall be computed in accordance with the provisions contained in Sections 30 to 43D.
Section 30 provides for deduction in respect of rent, rates, taxes, repairs and insurance for buildings. Section 31 provides for deduction in respect of repairs and insurance of machinery, plant and furniture. Section 32 provides for deduction on account of depreciation. Section 32A to Section 36 provide for other deductions with which we are not concerned. Section 37 is relevant and is therefore, reproduced hereunder :-
37. (1) Any expenditure not being expenditure of the nature described in Sections 30 to 36 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 the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession
15. The words “for the purposes of business “have been explained by Their Lordships of the Supreme Court in the case of Malay alam Plantations Ltd. (supra) as under:-
‘The expression “for the purpose of the business” is wider in scope than the expression “for the purpose of earning profits”. Its range is wide : it may take in not only the day to day running of a business but also the rationalization of its administration and modernization of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as a pre-condition to commence or for carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business. However wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business.
Thus the question arises as to whether the cess levied under the West Bengal Rural Employment Production Act, 1976 and the West Bengal Primary Education Act, 1973 can be said to be an expenditure laid out and expended wholly and exclusively for the purposes of business or profession.
16. In the case of Mahalakshmi Sugar Mills Co. (supra), the issue came up for consideration of the Supreme Court as to whether the interest paid by the assessee engaged in the business of manufacture or sale of sugarcane for the delayed payment of the cess is allowable as a deduction. It was held that cess is nothing but additional cess and is to be allowed as a permissible deduction in computing the business income. It becomes abundantly clear from the aforementioned decision of the Supreme Court that not only the cess but even the interest payment on the delayed payment of cess is allowable as a deduction in computing the business income.
17. The issue as to whether the tax is levied by the State Government in respect of the tea grown in the tea gardens is allowable as an expenditure for the purpose of computation of income under the provisions of the Income-tax Act, 1922 also came up for consideration of the Supreme Court in the case of Jaipuria Samla Amalgamated Collieries Ltd. (supra). In this case it was held that cess levied by the State Government in respect of the coal mines is allowable as a deduction, It was contended on behalf of the Revenue before the Supreme Court that in view of the provisions of Section 10(4) of the Income-tax Act, 1922, deduction on account of cess under the Bengal Cess Act, 1980 and the education cess under the West Bengal Primary Education Act, 1973 in relation to the coal mines which the assessee had taken on lease was not allowable as a deduction in view of the provisions of Section 10(4) of 1922 Act. Their Lordships repelling the contention held as under:-
‘That the profits arrived at according to the provisions of the two Cess Acts could not be equated to the profits which were determined under Section 10 of the Act and, therefore, Section 10(4) was not attracted; and the cesses paid by the assessee were allowable as deductions in computing its business profits.
The words “profits and gains of any business, profession or vocation” in Section 10(4) can, in the context, have reference only to profits or gains as determined under Section 10 and cannot cover the net profits or gains arrived at or determined in a manner other than that provided by Section 10. In other words, Section 10(4) excludes only a tax or cess or rate, the assessment of which would follow the determination or assessment of profits or gains of any business, profession or vocation in accordance with the provisions of Section 10 of the Act.
18. The aforementioned decision of the Supreme Court is based on provisions of Section 10 of 1922 Act. It will be useful to refer to Section 10 of 1922 Act. Section 10(1) of this Act provides that tax shall be payable by an assessee under the head “profits and gains of business, profession or vocation” in respect of the profits and gains of any business, profession or vocation carried on by him. Sub-section (2) says that such profits or gains shall be computed after making the allowances set out therein. Clauses (ix) and (xv) of this sub-section are as follows :
(ix) any sums paid on account of land revenue, local rates or municipal taxes in respect of such part of the premises as is used for the purposes of the business, profession or vocation.
(xv) any expenditure [not being an allowance of the nature described in any of the Clauses (i) to (xiv) inclusive 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, profession or vocation.
Sub-section (4) of Section 10, the extent it is material, is in the following
terms:-
(4) Nothing in Clause (ix) orClause (xv) of Sub-section (2) shall be deemed to authorise the allowance of any sum paid on account of any cess, rate of tax levied on the profits or gains of any business, profession or vocation or assessed at a proportion of or otherwise on the basis of any such profits or gains…
19. A provision analogous to Section 10(4) of the 1922 Act was proposed to be incorporated as Section 40(ii) of the Income-tax Act, 1961 as under:-
40(ii) any sum paid on account of any cess, rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains;
When the matter came up before the Select Committee, it was decided to omit the word “cess” from the proposed clause. The effect of the omission of the word “cess” is that only the taxes paid are to be disallowed in assessment years 1962-63 and onwards. For the sake of reference Section 40(a)(ii) as approved is reproduced hereunder:-
40(a)(ii) any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains;
20. The C.B.D.T. have also clarified the effect of omission of word ‘cess’ from Section 40(ii). Departmental circular being F. No. 91 /58/66/-ITJ(19), dated 18-5-1967 relating to applicability of provisions of Section 40(a)(n) of the I.T. Act, 1961 is reproduced hereunder:-
Interpretation of provision of Section 40(a)(ii) of the Income-tax Act, 1961 – Clarification regarding:-
Recently a case has come to the notice of the Board where the Income-tax Officer has disallowed the ‘cess’ paid by the assessee on the ground that there has been no material change in the provisions of Section 10(4) of the Old Act and Section 40(a)(ii) of the New Act.
2. The view of Income-tax Officer is not correct. Clause 40(a)(ii) of the Income-tax Bill, 1961, as introduced in Parliament stood as under:-
(ii) any sum paid on account of any cess, rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, otherwise on the basis, of any such profits or gains.
When the matter came up before the Select Committee, it was decided to omit the word ‘cess’ from the clause. The effect of the omission of the word ‘cess’ is that only taxes paid are to be disallowed in the assessment for the years 1962-63 and onwards.
21. It is also pertinent to refer to Section 43B of the Income-tax Act, 1961. Section 43B provides mechanism for allowance of deduction in respect of payment of tax, duty, cess or fee by whatever name called. This Section reads as under:-
43B. Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of-
(a) any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force, or
(b) to(f)** ** **
shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in Section 28 of that previous year in which such sum is actually paid by him:
Since under Section 43B the payment of cess is also provided to be allowed as a deduction in the year of payment, by implication it becomes abundantly clear that cess is permissible as a deduction in computing the profits and gains of business of which deduction is regulated under Section 43B.
22. In the case of Warren Tea Ltd. (supra), Their Lordships of the Calcutta High Court held the stage for grant of deduction under Section 80HHC of the Income-tax Act, 1961 required to be given in the assessment of computation of income of an assessee growing, manufacturing and selling tea and also exporting tea out of India would be at the time before computing the net income, i.e. before applying Rule 8 of I.T. Rules, 1962 and not after apportionment is made between agricultural income and non-agricultural income.
23. On the analysis of various provisions of the Act and the decisions of the superior courts referred to above, the following position emerges :
(i) That the income in respect of tea grown, manufactured and sold is to be treated as an activity of business and the entire profits from such activity are first to be determined.
(ii) That the income from business is to be computed in accordance with the provisions of the Income-tax Act, 1961 and all the deductions permissible under the Statute are to be allowed before apportionment of the income.
(iii) That cess levied under the West Bengal Rural Employment Production Act, 1976 and the West Bengal Primary Education Act, 1973 is permissible as deduction in computing the income from business.
(iv) That the cess does not fall within the prohibitory items of deduction under Section 40(ii) of the Income-tax Act, 1961.
(v) That Section 43B is attracted in the case of cess payable and allowable as a deduction in computing the income from business.
(vi) That out of the income so determined, 60% of the same is treated as agricultural income and 40% is income liable to tax under the Income-tax Act, 1961.
24. The next question that arises for consideration is as to whether the decision of the Gauhati High Court in the caseJorehaut Group Ltd. (supra) is an authority for the proposition that the cess on green leaves is allowable as a deduction only against 60% of the income apportioned as agricultural income. For appreciating the decision of the Gauhati High Court in the case of Jorehaut Group Ltd. (supra), it will be necessary to refer to the relevant facts on the basis of which the decision has been rendered by the Hon’ble High Court. The petitioner-company was carrying on business of tea after cultivation and manufacture of the same. A sum of Rs. 17,17,096 for the assessment year 1993-94 was paid by the assessee on the green leaves under the Assam Taxation (on Specified Land) Act, 1990. The assessee had claimed deduction of the sum so paid from agricultural income, i e. 60% of the composite income. After paying the aforesaid amount as cess, the assessee had approached the Agricultural Income-tax Officer for a tax clearance certificate. However, the assessee was informed that they would not be entitled to get the tax clearance certificate as the deduction of cess from 60% of the composite income had not been approved. A petition under Article 226 of the Constitution of India was filed by the Jorehaut Group Ltd. in the Gauhati High Court raising a question as to whether cess to be paid by the assessee under the Assam Taxation (on Specified Land) Act, 1990 is allowable as a deduction from 60 per cent of the composite income of tea.
25. Their Lordships of the Gauhati High Court decided the issue in favour of the assessee. Their Lordships referred to Section 8(2)(e) of Assam Agricultural Income-tax Act and held that deduction was permissible. It would be relevant to reproduce Rule 8(2)(e) of the said Act. It reads as under:-
Rules prescribing the manner of determining the net amount of agricultural income for the purpose of this clause shall provide that the following deductions shall be made from the gross amount of such income, namely,….
(e) any tax or rate paid under any enactment in force in Assam on the cultivation or sale of the crop from which such agricultural income is derived.
26. It is evident from the decision of the Gauhati High Court that the issue decided by Their Lordships was with reference to the cess levied under the Assam Taxation (on Specified Land) Act, 1990, vis-a-vis Section 8(2)(e) of the Assam Agricultural Income-tax Act. The issue as to whether the cess paid under the West Bengal Rural Employment Production Act, 1976 and the West Bengal Primary Education Act, 1973 was allowable as a deduction in computing the composite income under Rule 8 of the IT. Rules, 1962 was not the subject-matter of consideration before the Hon’ble Gauhati High Court. The decision of the Gauhati High Court has to read in the context in which it was rendered.
27. At this stage the observations of Their Lordships of the Supreme Court in the case of CIT v. Sun Engineering Works (P.) Ltd. [1992] 198 ITR 297 : 64 Taxman 442 are relevant which are reproduced hereunder:-
‘It is neither desirable nor permissible to pick out a word or a sentence from the judgment of this court, divorced from the context of the question under consideration and treat it to be complete “law” declared by this court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before this court. A decision of this Court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, the courts must carefully try to ascertain the true principle laid down by the decision of this court and not to pick out words or sentences from the judgment, divorced from the context of the questions under consideration by this court, to support their reasonings. In Madhav Rao Jivaji Rao Scindia Bahadur v. Union of India [1971] 3 SCR 9; AIR 1971 SC 530, this court cautioned (at page 578 of AIR 1971 SC):
It is not proper to regard a word, a clause or a sentence occurring in a judgment of the Supreme Court, divorced from its context, as containing a full exposition of the law on a question when the question did not even fall to be answered in that judgment.
28. Keeping in view the aforementioned principles laid down by Their Lordships of the Supreme Court for interpretation of the decision of the High Court, we are of the view that the decision of the Gauhati High Court in the case of Jorehaut Group Ltd. (supra) is not an authority for the proposition that the cess under the West Bengal Rural Employment Production Act, 1976 and the West Bengal Primary Education Act, 1973 is not allowable as a deduction in computing the composite income under Rule 8 of the I.T. Rules, 1962. On the contrary, the decision of the Calcutta High Court in the case of Warren Tea Ltd. (supra) is an authority for the proposition that any deduction which is permissible as deduction in computing the income from business is to be allowed as deduction in determining the composite income before apportionment.
29. If we peep deep into the decision of the Gauhati High Court, it would appear that cess under the Assam Taxation (on Specified Land) Act, 1990 being a tax on specified land, may not be allowable as a deduction in computing the composite income. It may be necessary to clarify that all the taxes or cess may not qualify for deduction in computing the income from business. The claim shall have to be decided in the light of the basis of taxation. For example, the income-tax which is a tax on income is not allowable as a deduction out of the composite income before apportionment, because the income-tax is not a tax incidental and ancillary to the carrying on of the business (of tea grown, manufactured and sold by the assessee). Wealth-tax is also not allowable as a deduction in view of the specific prohibition. Similarly, any tax or cess which may not be incidental or ancillary to the carrying on of the business of tea grown, manufactured and sold by the assessee will not qualify for deduction out of the composite income. On the other hand, any such tax/cess levied which may not qualify for deduction in computing the composite income under Rule 8 may qualify for deduction under the provisions of Agricultural Income-tax Act of the relevant State. The issue raised before the Gauhati High Court was as to whether the cess levied under the Assam Taxation (on Specified Land) Act, 1990 qualifies for deduction out of the agricultural income computed @ 60% of the composite income. On consideration of the provisions of the Agricultural Income-tax Act of the relevant State, Their Lordships of the Gauhati High Court came to the conclusion that the same qualifies for deduction. Therefore, in our view, there is no conflict of opinion in regard to allowability of cess as a deduction in computing the composite income or in computing the agricultural income. The question may arise as to whether the position of law that we have analaysed above may result in double deduction – one at the time of computation of composite income and another at the time of assessment under the provisions of Agricultural Income-tax Act of the relevant State. It would thus be relevant to refer to the Bengal Agricultural Income-tax Act, 1944 which reads as under:-
8. Computation of tax on mixed incomes – (1) In the case of income which is partially agricultural income assessable under this Act and partially income chargeable under the [head of income “Business” or “Profits and gains of business or profession”, as the case may be, under the enactments relating to Indian Income Tax], agricultural income-tax shall be payable by an assessee in respect of the market value determined in the manner prescribed of any agricultural produce which has been raised by the assessee or received by him as rent-in-kind and which has been utilized as raw material in such business or the sale receipts of which are included in the accounts of the business, subject to any allowances which may be permissible under the provisions of this Act:
Provided that-
(a) where for the purposes of the assessment of income tax under [the enactments relating to Indian Income-tax] the market value as so determined shall be taken to be the market value for the purposes of this sub-section;
(b) where there is a common charge on both agricultural income assessable under this Act and income chargeable under [the enactments relating to Indian Income-tax] and such charge is an allowance permissible both under those enactments, then, if for the purposes of [the enactments relating to Indian Income-tax] the part of such charge which is to be deemed to be the allowance permissible under those enactments has been determined under those enactments the remaining part of such charge shall be deemed to be the allowance to which agricultural income assessable under this Act is subject.
30. It may also be relevant to refer to the provisions of Assam Agricultural Income-tax Act. Section 8 relates to determination of agricultural income. It provides the procedure for assessment of agricultural income and also provides for certain deductions including taxes etc. out of the agricultural income. There is a proviso to Section 8 which reads as under :
Provided always that no deduction shall be made under this clause, if it has already been made under Section 7 of this Act in the assessment under the Indian Income-tax Act:
Provided further that in cases of agricultural income from cultivation and manufacture of tea the agricultural income for the purposes of this Act shall be deemed to be that portion of the income from cultivation, manufacture and sale which is agricultural income within the meaning of the Indian Income-tax Act and shall be ascertained by computing the income from the cultivation, manufacture and sale of tea as computed for Indian Income-tax Act from which shall be deducted any allowances by this Act authorized insofar as the same shall not have been allowed in computation for the Indian Income-tax Act.
31. The aforementioned provisions thus make it abundantly clear that there is no scope for double deduction on account cess paid by the assessee. If cess has been allowed as a deduction in computing the composite income from growing, manufacture and sale of tea, no further deduction is permissible on account of the same in computing the agricultural income for the purposes of taxation under the State Acts.
32. Another pertinent question that may arise is as to why deduction is provided on account of taxes, cess etc. under the provisions of the Agricultural Income-tax Act when such a deduction is allowable from the gross total income before apportionment. As already pointed out, the answer to this proposition is that any tax or cess which is allowable as a deduction in determining the composite income under Rule 8 of the IT Rules, 1962 will not quality for deduction in computing the income under the State Agricultural Income-tax Act out of the 60% of apportioned income. However, any cess or tax that may not fall within the ambit of deduction in computing the income from business may qualify for deduction out of the agricultural income determined at 60% of the composite income.
33. Thus, the Assessing Officer in our view, was not in error to allow deduction on account of cess paid under the West Bengal Rural Employment Production Act, 1976 and the West Bengal Primary Education Act, 1973 while framing the original assessment.
34. In the light of the above position of law, the order of the Assessing Officer cannot be said to be erroneous insofar as prejudicial to the interests of the revenue.
35. Assuming for argument sake that the view expressed by the Ld. CIT is also a possible view, however, that by itself does not empower him to invoke Section 263 of the I.T. Act, 1961. Their Lordships of the Supreme Court in the case of Malabar Industrial Co. Ltd. (supra) has held that where two views are possible and the ITO has taken one view with which the Commission does not agree, the order cannot be said to be erroneous insofar as it is prejudicial to the interests of Revenue. Since the view expressed by us relating to the admissibility of deduction on account of cess is in conformity with the view taken by the Assessing Officer at best the view expressed by the Ld. Commissioner may be said to be another possible view. Applying the ratio of the decision of the Supreme Court in the case of Malabar Industrial Co. Ltd. (supra) to the facts of this case, we have no doubt that the order of the CIT does not fall within the ambit of his powers under Section 263 of the Act. The impugned order is, accordingly, set aside.
36. Appeal of the assessee is allowed.