D.K Seth, J.:— The respondents had filed W.P No. 1232(W) of 1997 challenging the vires of Circular No. 600 (see [1991] 189 ITR (St.) 126), dated May 23, 1991, issued by the Central Board of Direct Taxes (“the CBDT”) so far as it was inconsistent with and repugnant to rule 8 of the Income-tax Rules, 1962 (“the Rules), read with section 2(1A) of the Income-tax Act, 1961 (“the Act”), in relation to deduction under section 80HHC of the Act. By a judgment and order dated September 24, 1998 (Warren Tea Ltd. v. Union of India [1999] 236 ITR 492), the learned single judge was pleased to hold that the interpretation of the Central Board of Direct Taxes in construing the provisions of section 80HHC and rule 8 through Circular No. 600 (see [1991] 189 ITR (St.) 126), dated May 23, 1991, was incorrect and accordingly a declaration was issued that the said circular was not attracted in the case of the petitioners.

2. The Department had preferred APO No. 792 of 1999 and the State of West Bengal, which was not a party to the proceeding, sought leave to and preferred APOT No. 229 of 1999 against the said judgment. During the pendency of these appeals, sub-section (4B) was inserted in section 80HHC through the Finance Act, 1999, with effect from April 1, 1992. Mr. P.K Mullick, learned senior counsel, appearing on behalf of the Department-appellant in APO No. 792 of 1999, had pointed out that the appeal has since become infructuous by reason of the amendment inserting sub-section (4B) in section 80HHC. This contention is supported by Mr. Anindya Mitra, learned senior counsel, appearing with Mr. Dipak Shorn on behalf of the appellant-State in APOT No. 229 of 1999. However, Dr. Debiprosad Pal, learned senior counsel appearing with Mr. Pranab Kumar Pal and Mr. Chandranath Mukherjee opposed the said contention and pointed out that the amendment has not affected the effect of the decision of the learned single judge under appeal. He had also sought for leave to challenge the vires of sub-section (4B) in relation to its retrospectivity. Upon leave being granted by this court, the writ petition was amended and the vires of the amendment was allowed to be argued in these appeals though objected to by Mr. S.K Kapoor, learned Additional Solicitor General, appearing with Mr. Mullick. The question seems to by very interesting. This has been argued ably by the respective counsel for the respective parties. We seem to be benefited by the erudite arguments and counter arguments spread over various branches of the Act, citing various decisions by Dr. Pal and Mr. Kapoor, respectively. We, however, are not called upon to answer all the arguments made. We shall confine ourselves only to the principal issues relevant for the purpose of determining the question put forth before us. Since the vires of the amended sub-section (4B) have been challenged and the question of ultra vires having been opposed on the ground that the amendment was clarificatory in nature and, therefore, retrospectivity of the amendment is intra vires, in our view, the appeal has not become infructuous and requires determination, which we attempt to do as hereafter.

3. In the course of his argument, Dr. Pal, had raised three points, namely, (i) Whether in the computation of mixed 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, read with rule 8 of the Income-tax Rules, 1962, the deduction under section 80HHC in respect of profits derived from export of tea out of India should be allowed as a permissible deduction before apportionment of non-agricultural income and agricultural income under rule 8 of the Income-tax Rules, 1962? (ii) Whether on the introduction of sub-section (4B) in section 80HHC by the Finance Act of 1999, with retrospective effect from April 1, 1992, the law laid down by the High Court in Warren Tea Ltd. v. Union of India [1999] 236 ITR 492 is in any way affected or altered? and (iii) Whether the retrospective operation of sub-section (4B) of section 80HHC introduced by the Finance Act of 1999 with retrospective effect from April 1, 1992, is violative of article 14 and article 19(1)(g) of the Constitution and is therefore ultra vires?

4. We may, however, note that the question of vires agitated by Dr. Pal is confined only to the retrospectivity of the amendment brought about in 1999 with effect from April 1, 1992. This contention is resisted on account of its being clarificatory in nature. It is presumed that the position in law was the same as has been sought to be clarified by insertion of sub-section (4B), therefore, in order to determine the vires of the amendment, it is necessary to examine the impact of rule 8 read with section 2(1A) of the Act. Inasmuch as the retrospectivity can be saved if the amendment is clarificatory, seeking to clarify the intent of the Legislature already expressed in the statute as it was held in Channan Singh v. Smt. Jai Kaur, (1969) 2 SCC 429 : AIR 1970 SC 349 (paras 4 and 5); Allied Motors (P) Ltd. v. Commissioner Of Income Tax, Delhi [1997] 224 ITR 677 (SC) : (1997) 3 SCC 472 : AIR 1997 SC 1361 (para. 13) and for the purpose of removing misunderstanding of the legislative intent behind the law or mistaken interpretation of law on the basis of misapprecia-tion of the legislative intent, since held in Faridabad Ct. Scan Centre v. D.G Health Services, (1997) 7 SCC 752 : AIR 1997 SC 3801 (para. 3) or if it is a contemporaneous exposition of law relevant to the interpretation of the statutory provision put forth in Lohia Machines Ltd. v. Union of India [1985] 152 ITR 308 (SC). This also seems to be supported by the Notes on Clauses of the Finance Bill, 1999, coined in the following expression (see [1999] 236 ITR (St.) 155, 178):

“Amendment of section 80HHC:

40 per cent, of income derived from the sale of tea grown and manufactured by the sellers in India is chargeable to tax as the rest is regarded as agricultural income. In some cases where the tea is being exported, the deductions under section 80HHC are being computed with reference to the composite income, including the income not chargeable to income-tax. To clarify doubts, it is proposed to provide that for the purposes of computing deduction under section 80HHC, the amount of income not being charged to tax under the Act shall in no case be eligible for deduction under the section.

This amendment shall be effective retrospectively from the 1st day of April, 1992.”

5. Whether the amendment is clarificatory in nature, whether the intent of the Legislature expressed in the statute before the Finance Act, 1999, is in consonance with the clarification, is required to be gone into. Therefore, we propose to examine the scope and ambit of the statute and the legislative intent behind it with reference to the scheme of the Act itself in order to answer the question of vires on account of its retrospectivity as contended by Dr. Pal. In case we find that the amendment was/is clarificatory in nature clarifying the legislative intent expressed by the Legislature before the amendment, then the retrospectivity would not affect the vires of the amendment.

6. All these contentions with which now we are involved are created by a legal fiction brought about by rule 8 of the Rules. Under rule 8, income derived from sale of tea grown and manufactured by the seller in India is to 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 the Act. Income derived from tea grown is admittedly an agricultural income. Income derived from tea manufactured is a business income. If the assessee sells tea grown and manufactured by it, then the income derived out of growth and manufacture of tea is a mixed income consisting of both agricultural and business income. By reason of rule 8, a legal fiction is being created for the purpose of computation of the income under the Act, but for the chargeability the 40 per cent, of the income so computed would be liable to tax under the Act. Section 80HHC allows a deduction of the profits derived by the assessee from the business of export of such goods or merchandise covered under section 80HHC in computing the total income of the assessee. The assessee claimed that such deduction of profit under section 80HHC is to be made out of the total income derived from the profit out of sale of tea grown and manufactured by it, computed under the Act in terms of rule 8 before apportionment, i.e, composite income. In other words, the assessee claimed that the apportionment of 40:60 of the total income, i.e, composite income computed under the Act in terms of rule 8 is to be made after allowing deduction of the profits earned on export of tea grown and manufactured by the assessee.

7. The Central Board of Direct Taxes in its Circular No. 600, dated 23rd May, 1991 (see [1991] 189 ITR (St.) 126), had clarified the position that the deduction would be made after apportionment and not before. In the judgment under appeal, this was held by the learned single judge to be incorrect. This is sought to be overcome through the amendment by inserting sub-section (4B) in section 80HHC with retrospective effect from April 1, 1992, namely, the date since when the Central Board of Direct Taxes Circular dated May 23, 1991, was made effective.

8. The answer could be very simple. We could have buried the question under section 10(1) which excludes agricultural income altogether from the purview of the Act. Rule 8 cannot be read in a manner inconsistent with the provisions contained in the Act. When a fiction is created for a particular purpose, the extent of fiction is limited only to the purpose. The fiction cannot overstep the purpose nor can it render a particular provision contained in the statute inconsistent with the rest of the provision of the statute. Neither can a fiction render a provision of the statute ineffective. Therefore, even though in the case of tea, agricultural income is computed in the manner as if it were an income from business, but as soon the question of chargeability under the Act comes in, the question is confined to the income from business, which excludes agricultural income and as such after computation 40 per cent, of such computed income is business income in terms of rule 8. Such 40 per cent, is only exposed to the chargeability under the Act over which exemption from chargeability can be envisaged.

9. The total income computed under the fiction created by rule 8 is a composite income consisting of agricultural income not chargeable under the Act and business income chargeable under the Act. This composite income cannot be treated to be the total income envisaged under the Act as defined in section 2(45) of the Act. Unless an income is chargeable, there is no question of exemption of such income from chargeability. There is a distinction between “total income” for the purpose of computation under rule 8 for apportionment of business income and agricultural income and computation of total income for chargeability under the Act, namely, total income for computation of the tax payable. But in view of the argument advanced and the confusing situation created by the fiction, we believe that we are supposed to answer the question on all its fronts in order to leave nothing unambiguous and opaque.

10. In order to appreciate the situation, we may now examine the scheme of the Act and the scope and ambit of the relevant provisions vis-a-vis rule 8 and section 80HHC relating to mixed or composite income chargeable under two different Acts. Article 246 of the Constitution of India lays down the exclusive power to make laws in clauses (1) and (3) of Parliament and the Legislature of the State in respect of matters enumerated in Lists I and II in the Seventh Schedule, respectively, of the Constitution of India. List I, Union List, in entry 82, recites the exclusive power of Parliament in the field of taxes on income other than agricultural income. Whereas entry 46 of List II, the State List, enumerates the exclusive power of the Legislature in the field of taxes on agricultural income. Therefore, Parliament cannot levy tax on agricultural income and similarly the State cannot levy tax on income other than agricultural income. Article 366 in clause (1) defines “agricultural income” to mean “agricultural income as defined for the purposes of the enactments relating to Indian income-tax”. Admittedly, agricultural income is not chargeable to tax under the Act. By reason of the fiction created under rule 8 of the Rules, income derived from sale of tea grown and manufactured is liable to be computed under the Act. But out of the total income so computed, the part of the agricultural income (i.e, 60 per cent.) cannot be treated to be income under the Act.

11. Section 2(1A) of the Act defines “agricultural income” to mean… (b) any income derived from land used for the agricultural purposes 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 (ii) of sub-clause (b). An income derived from growth of tea before it is manufactured is an income in the nature of agricultural income.

12. The Act has defined “income” in section 2(24) to include (i) profits and gains and such other sums chargeable to tax under clauses (ii) to (v) of section 28 of the Act. Rule 8 prescribes computation of income derived from the sale of tea grown and manufactured as if it were income derived from business. We may, however, note that rule 8 does not use the expression “total income”. It simply uses the expression “income”. Therefore, this income is to be construed as “income” defined in section 2(24) of the Act as income from profits and gains. This income is to be computed in the manner laid down in the Act. The expression “total income” defined in section 2(45) means “the total amount of income referred to in section 5, computed in the manner laid down in the Act”. The Act in section 4 provides for charge of income-tax in respect of the total income of the previous year of a person. The scope of this total income is explained in section 5. Section 5 includes all income from whatever source derived (a) is received or deemed to be received by or on behalf of the assessee in India; or (b) accrues or arises or is deemed to accrue or arise to him in India; or (c) accrues or arises to him outside India during such year, if he is a resident of India. “Income” defined in section 2(24)(i), namely, profits and gains is the income referred to in section 28(i), namely, profits and gains of any business or profession. When defining “total income”, section 2(45) referred to the total amount of income referred to in section 5 computed in the manner laid down in this Act. The computation under the Act is made under section 28 read with section 29 in respect of income related to profits and gains of business or profession.

13. Rule 8 had never contemplated exigibility of agricultural income under the Act in the process of computation. The fiction created is limited only to the computation in accordance with the Act as if it were business income up to the stage of computing total income, i.e, composite income and not beyond.

14. For the purpose of deductions mentioned in section 29, deductions are allowed from the income in order to arrive at the total income. The expression “gross total income” has neither been defined nor has been used in section 29 or anywhere in the provisions of sections 30 to 43D of the Act. The expression “gross total income” is being used in Chapter VI-A. The expression “gross total income” defined in section 80B(5), therefore, refers to the total income computed in accordance with the provisions of the Act before making any deduction under Chapter VI-A. This definition creates a fiction under which the total income computed in the manner laid down in the Act becomes gross total income from which again total income is computed after allowing deductions under the provisions of Chapter VI-A.

15. Chapter VI-A provides for certain special deduction from the gross total income. After the total income is calculated in terms of section 28 read with section 29. allowing deductions provided in sections 30 to 43D. The total income derived after these deductions provided in Chapter IV is treated as gross total income for the purpose of allowing special deductions included in Chapter VI-A. But for Chapter VI-A, these amounts, which are allowed as deductions would have been chargeable to tax under the Act; whereas the deductions allowed under Chapter IV (sections 30 to 43D) are components of the income, which are otherwise not chargeable to tax under the Act and as such allowed as deduction. Thus, there is a distinction between the two kinds of deductions when it relates to or is applied or attracted to a component of the income, which is otherwise outside the purview of the Act, but for the fiction created by rule 8. Chapter III in section 10 excludes agricultural income in computing the total income. Chapter VI-A is admissible on the income chargeable to tax. It cannot be extended to agricultural income. The total income exposed to Chapter VI-A cannot include the agricultural component included in the composite income by reason of the fiction created by rule 8 in view of section 10(1). Rule 8 is confined only to computation. It does not extend to chargeability. The difference between “total income” and “gross total income” is that this gross total income is chargeable to tax and this chargeability is reduced on account of the deductions available under Chapter VI-A. Benefit of Chapter VI-A is available to income chargeable to tax. This cannot be extended to income not chargeable under the Act.

16. It is only the procedure that has been adopted under rule 8 for the sake of convenience of assessment without intending to subject the agricultural income to taxation or impose a burden on him or enable the assessee to avail of the tax benefit or seek exemption of tax on income not exigible to tax under the Act. The imposition of tax or allowance of tax benefit or exemption of tax from income exigible to tax under the Act stands on the same footing. Therefore, when by fiction created under rule 8, agricultural income is computed in the manner provided in the Act, it had never meant for being taxed or being subjected to tax benefit under the Act. If the whole of the income out of the tea grown is included for the purpose of exemption as profit derived from the business of export of tea grown and manufactured under section 80HHC then the agricultural income would be subjected to taxation under the Act and the deduction may be hit by the prohibition contained in sections 10(1) and 80A(2). The deduction under Chapter VI-A is allowed only on income exigible to tax under the Act. By reason of the fiction, the exibility to tax of the agricultural income under the State Act cannot be reduced or affected. If the proposition of Dr. Pal is accepted, then it would be allowing deduction on something which is not exigible to tax under the Act and which is otherwise not taxable under the Act would be allowed to be utilised for allowing higher deduction under the Act, encroaching upon the domain of the State Legislature, reducing the exigibility of agricultural income. There is a distinction between tax relief on account of specified expenditure and payment and income of specified categories qualifying for tax relief. This we will discuss in detail with regard to the various provisions of the Act hereafter.

17. Section 80A in sub-section (1) allows deductions specified in sections 80C to 80U from the gross total income in accordance with and subject to the provisions of Chapter VI-A. Sub-section (2) thereof restricts the deduction under Chapter VI-A in aggregate not exceeding the gross total income of the assessee. Section 80B(5) defines “gross total income” to mean “the total income computed in accordance with the provisions of the Act before making any deduction under Chapter VI-A”. The Legislature neither could have intended nor was competent to include the agricultural component in the composite income computed by fiction of rule 8 under the Act. A distinction has been sought to be made between the total income before deduction under Chapter VI-A is allowed and the total income after deductions under Chapter VI-A are allowed by using the nomenclature “gross total income” and “total income” in Chapter VI-A. The expression “total income” defined in section 2(45) has a different connotation than the total income referred to in Chapter VI-A. For the purpose of computation of income in respect of tea grown and manufactured under rule 8 treating the entire income as income from business is to be construed to mean the computation available under Chapter IV. The Legislature had never intended and could not have intended to include agricultural income even though computed by fiction in view of rule 8 under the Act for being chargeable to tax under the Act. The deductions available under Chapter VI-A are income deductible from the total income chargeable under the Act. There cannot be any deduction of an income from the total income not chargeable to tax. After computation of income derived from sale of tea grown and manufactured, the agricultural income is to be apportioned and the income chargeable to tax, namely, 40 per cent, under the Act becomes the total income subject to deductions under Chapter VI-A as gross total income. The Legislature could not have intended otherwise since 60 per cent, of the income after such computation is agricultural income in respect of which Parliament has no power to enact any law. It is not a question of legislative intent but of competence. Therefore, the deductions permitted under Chapter VI-A out of the gross total income must be the total income chargeable to tax under the Act without the agricultural income though computed under the Act in view of rule 8. In as much as by reason of section 10(1) agricultural income cannot be exposed to chargeability under the Act.

18. This is apparent from section 80AB. This section makes it clear that the nature of the income specified in the section under which deduction is allowed under Chapter VI-A, if included in the gross total income, notwithstanding anything contained in that section, the amount of that nature as computed in accordance with the provisions of this Act before making deduction under Chapter VI-A shall alone be deemed to be the amount of income of that nature which is derived or received by the assessee and included in his gross total income. In the present case, section 80HHC allows deduction of the profits derived by the assessee from the export of goods or merchandise out of the business of export. Thus, section 80HHC deals with business income not with agricultural income. If any deduction is allowed against the agricultural income, in that event, section 80HHC will be hit by the provisions of article 254 of the Constitution of India so far as it would encroach on the field of legislation in relation to entry 46 List II in clause (3) of article 246. In case this deduction is allowed before apportionment, in that event, it would intrude upon the domain of the State List by reducing the amount of tax chargeable to agricultural income-tax in respect of which the competence of Parliament is exclusively excluded. Therefore, the apportionment within the meaning of rule 8 is to be made after the total income is computed under Chapter IV and after which the deduction under Chapter VI-A would be available on the 40 per cent, of the apportioned income chargeable to tax under this Act.

19. Rule 8 of the 1962 rules creates a fiction in the matter of assessment of income derived from sale of tea grown and manufactured for the purpose of computation as income derived from business for the purpose of apportionment of the income of the agricultural part and the business part. By reason of this fiction the income derived from tea grown and manufactured by the seller though an agricultural income is computed under the Act not under the provisions of the Agricultural Income-tax Act assessable by the State. The extent of this apportionment has already been specified. The question we are to determine is as to what extent this fiction will continue. In order to arrive at the stage of apportionment, the total income derived from sale of tea grown and manufactured including the part of the agricultural income is required to be computed. As already observed the total income is arrived at in accordance with the provisions contained in the Act and allowing all deductions admissible under the Act, further deduction is available under Chapter VI-A. Whether this deduction under Chapter VI-A is to be made before or after apportionment under rule 8 before sub-section (4B) was introduced is the question, we are supposed to answer.

20. Section 80AB provides for calculation of the amount admissible for deduction under sections 80C to 80U of Chapter VI-A. This section has been interpreted to mean that deduction under Chapter VI-A is admissible only on the net income of the amount on which deduction is allowed. Such deduction under a particular section would not be available on an income other than the nature of the income admissible under that particular section. It is only that particular nature of the income alone as included in the gross total income chargeable under the Act would be available for deduction. Section 80A, subsection (2), prohibits deduction under Chapter VI-A exceeding gross total income of the assessee. Section 10(1) excludes agricultural income from total income. If apportionment is not made before deduction then there may be a likelihood that the amount of deduction may exceed the gross total income exigible to tax under the Act since the deduction available on the agricultural income, which is 60 per cent, of the component, might result into an excess of the business income. Since section 80AB confines the deduction only on the nature of the income permissible under the particular section alone, the question has to be looked into on the basis of the construction of that particular section under which the deduction is allowed.

21. The question of the admissibility of the deduction under different sections has been the subject matter of consideration before different High Courts and the Supreme Court from time to time. All these questions were attempted to be answered with reference to the provisions contained in section 80AB. The ratio deciphered from these decisions seems to be now a settled proposition of law: (1) that such deduction is available on net income, (2) of the particular nature specified in the particular section alone, (3) computed in accordance with the provisions of the Act, (4) on the particular component of the income derived from the income referred to in the particular section, (5) depending on the construction of the scheme of the particular section, and (6) the manner in which the computation is to be made under that particular section. We, therefore, are, here, required to construe the scheme of section 80HHC in order to ascertain the extent of deduction available in respect of the profit derived from the business of export of tea grown and manufactured by the assessee.

22. Dealing with section 80M (Cloth Traders (P) Ltd. v. Additional Cit, Gujarat-I [1979] 118 ITR 243 (SC)), the apex court had interpreted section 80M in a manner different in which the principle was decided in Cambay Electric Supply Industrial Co. Ltd. v. Cit [1978] 113 ITR 84 (SC) dealing with the question of deduction under section 80E. The decision in Cloth Traders P. Ltd. [1979] 118 ITR 243 (SC) was rendered without noticing Cambay Electric Supply Industrial Co. Ltd. [1978] 113 ITR 84 (SC). The decision in Cloth Traders P. Ltd. [1979] 118 ITR 243 (SC), therefore, necessitated the Legislature to introduce section 80AA and section 80AB to express its intention in respect of the different provisions contained in Chapter VI-A relating to its availability, on the nature of the particular component of the income in the gross total income envisaged under Chapter VI-A. In Distributors (Baroda) P. Ltd. v. Union of India [1985] 155 ITR 120, the Constitution Bench of the Supreme Court while interpreting the provision of section 80M had approved the decision in Cambay Electric Supply Industrial Co. Ltd. [1978] 113 ITR 84 (SC) overruling that in Cloth Traders P. Ltd. [1979] 118 ITR 243 (SC). This has since been reiterated in H.H Sir Rama Varma v. CIT [1994] 205 ITR 433 (SC) dealing with section 80T, and in CIT v. Kotagiri Industrial Co-operative Tea Factory Ltd. [1997] 224 ITR 604 (SC) dealing with section 80P. The controversy in some decisions of different High Courts has since been resolved in the decision in Distributors (Baroda) P. Ltd. [1985] 155 ITR 120 (SC). The ratio decided therein leads us to ascertain the situation on the strength of sections 80AB and 80A(2) depending on the construction of the particular section and its scheme with an attempt to find out the intention of the Legislature, in this case in section 80HHC. Sections 80AA and 80AB were introduced in 1992 giving retrospective effect since 1981 (sic), namely, with the introduction of Chapter VI-A. This retrospectivity of sections 80AA and 80AB were held to be clarificatory in nature and as such though impose additional burden of tax, yet were held to be intra vires and valid pieces of legislation.

23. In the present case, if we hold that amended sub-section (4B) introduced in section 80HHC is clarificatory in nature, in that event, its retrospectivity is bound to be held intra vires and a valid piece of legislation. In order to arrive at such a conclusion that sub-section (4B) of section 80HHC is clarificatory in nature, we are to examine the intent vis-a-vis the competence of the Legislature from the scheme of section 80HHC itself having regard to sections 80AB and 80A(2) in relation to matters coming under rule 8 involving profit out of business of export of tea grown and manufactured by the assessee involving agricultural income in the course of assessment of total income under the Act which otherwise does not apply to agricultural income but for the fiction. But then even if agricultural income is computed under the provisions of this Act by reason of the fiction created under rule 8, there is nothing to permit the authorities under the Act to levy tax on agricultural income since excluded under section 10(1). The computation is to be made under the Act in respect of both agricultural and business income out of sale of tea grown and manufactured by the assessee but not for the purpose of levying or imposing tax on that part of the income which is agricultural and outside the scope and purview of the Act. We must bear in mind that Parliament cannot legislate in respect of agricultural income which is in List II, exclusive jurisdiction of the State Legislature and that the income derived from agriculture cannot be taxed under the Act collected by the Union of India, in view of the fact that agricultural income can be taxed only by the State Government.

24. Whether under the scheme of section 80HHC the agricultural income can be brought within the nature of the income envisaged under section 80HHC. Section 80HHC allows an assessee engaged in the business of export out of India of any goods or merchandise, a deduction out of the profits derived by the assessee from the export of such goods or merchandise. Therefore, it is not the income, which is the base for assessment of the deduction. It is the profit derived from the export of the goods or merchandise in the course of business of export. Admittedly, growing of tea is not a business but an agricultural process. Manufacturing of tea is business. Therefore, when the section refers to the profit derived out of business of export, we are to consider whether growing of tea is part of the business of export of the assessee. It is only that nature of income, which alone under section 80AB is assessable for deduction. Whether this profit out of the business would also include the income in the nature of agriculture outside the scope of business could be included for being exigible for deduction for computing total income. Admittedly, before making deduction under Chapter VI-A the total income has to be computed. This total income so computed is the gross total income on which deduction under Chapter VI-A is available. But Chapter VI-A under section 80AB makes it clear that it is only that component of income the nature whereof is indicated in the particular section under which deduction is claimed and included in the gross total income, that is eligible for deduction. The component included in the gross total income, which is different in nature than that eligible under a particular section of Chapter VI-A for deduction cannot form the basis for the eligibility to deduction. It is only the profit derived from the business of export of tea which is eligible for deduction under section 80HHC. Therefore, the nature of the income is an income from business not from agriculture. Therefore, the first step is to determine what is the business from which the profit is being earned and then to ascertain the profit out of such business. In the process if it appears that the profit would also include a component, which is not in the nature of an income derived from business of export of tea then that part of the income the nature whereof is different from the profit out of business cannot be included for being eligible to deduction.

25. The scheme of section 80HHC provides for computation of the quantum exigible for deduction by a system of assessing the proportion of the amount of profit over the total export turnover as we find from sub-section (3). Subsection (3) provides that where the assessee exports goods or merchandise manufactured or processed, the profit derived from such export shall be the proportion of the profits of the business in relation to the export turnover visa-vis the total turnover of the business carried on by the assessee. Whether this total turnover of the business would also include the agricultural income, which is otherwise not taxable under the Act? Whether by reason of the fiction created under rule 8, the agricultural income would also be treated to be included in the total turnover of the business? The answer Will be simply in the negative. The income derived from agriculture cannot be included within business turnover though by reason of fiction the computation is made under the Act. The business turnover would be the amount, which would be in the proportion of this 40 per cent, of the total income, i.e, composite income related to the turnover to be considered as business turnover while leaving the 60 per cent, of the total turnover in proportion to the 60 per cent, of the total income apportioned as agricultural income.

26. Sub-section (3) of section 80HHC makes a distinction between profits out of export of goods or merchandise manufactured or processed and export of trading goods. Different kinds of computation are provided for in sub-section (3) in respect of these two kinds of goods. Thus, there is a sub-division in section 80HHC in relation to goods or merchandise manufactured or processed by the assessee and of trading goods, which are to be computed differently. The expression “goods or merchandise manufactured or processed” cannot include goods or merchandise grown through agricultural process by the assessee. Manufacturing and processing is business while growing is agriculture. Therefore, only that part of the profit derived out of manufacture and process would be exigible to deduction. The profit derived from growing of tea cannot form a component of the nature of the income eligible for deduction under section 80HHC.

27. The expressions “adjusted profits of the business”, “adjusted export turnover” and “adjusted total turnover” have been defined in the Explanation. These “adjusted profits of the business”, “adjusted export turnover” and “adjusted total turnover” have been used for the purpose of making distinction between the export of goods or merchandise manufactured and processed by the assessee on the one hand and the export of trading goods by the assessee on the other. The “trading goods” have been defined as goods, which are not manufactured or processed by the assessee. Therefore, the goods, which are not manufactured, stand distinct and different from the goods manufactured and processed. When the Legislature had intended through particular expression to make a distinction between the goods manufactured and processed and trading goods, then we cannot overlook the greater distinction when the same goods which are manufactured and processed include goods or merchandise not manufactured and processed, as in the case of tea, comprising two components, i.e, one is tea grown and the other is tea manufactured and processed. Inasmuch as if the tea is not grown by the assessee, then the cost of purchasing raw tea would have been excluded from the total income and it would not have formed a component of the gross total income and it would not have been exigible to deduction. If the cost of tea when not grown by the assessee does not form a component of the gross total income exigible for deduction under Chapter VI-A, then it would be very difficult to include that component within the gross total income for being exigible for deduction under Chapter VI-A since the assessee itself has grown the tea which it has manufactured and processed and thereby claiming deduction on a component included in the gross total income, which is otherwise not eligible to tax under the Act and on which neither any legislation can be enacted by Parliament nor any tax can be levied by the Union of India under the Act, which expressly excludes agricultural income by reason of the constitutional provision relating to legislation as provided in the Seventh Schedule, List I, entry 82, and List II, entry 46.

28. We may also refer to the concept of reduction of the export turnover in respect of trading goods by the direct or indirect cost attributable to export of such trading goods as defined in the Explanation to sub-section (3). The direct cost, which is to be reduced is the purchase price of such goods and the indirect cost is the cost allocated in the ratio of turnover other than direct cost in respect of trading goods according to the ratio to the total turnover. Therefore, even if we accept the part of the income derived from grown tea to be treated as trading goods even then the cost of purchase of the trading goods are to be reduced. Instead of purchase, the trading goods are grown by the assessee, in that event, that cost of growing tea would be a direct cost which is liable to be reduced from the trading goods. Therefore, it is only that part of the income which forms a component of the business income would be eligible for deduction. The cost of growing tea would be a direct cost deductible from the business of export.

29. Sub-section (3)(a) refers to export of goods or merchandise manufactured or processed by the assessee, the profit whereof shall be the amount which bears to the profits of the business the same proportion as the export turnover bears to the total turnover of the business. The expression “business” is defined in section 2(13) to include any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. Therefore, the profit of the business and turnover of the business would relate to the trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture distinct from agriculture. Adventure in agriculture is not in the nature of trade, commerce or manufacture. The profits and gains of business are distinct from profits and gains from agriculture otherwise excluded under section 10(1). Therefore, the nature of the profit contemplated under section 80HHC(1) is the profit out of the business and the turnover from the business, which by no stretch of imagination could include the profit derived from agriculture.

30. The Explanation to section 80HHC at the end while defining “export turnover”, “total turnover” and “profits of the business” also expresses the legislative intent which leads us to hold that section 80HHC had never intended to include the component of the income derived from agriculture in relation to tea when grown and manufactured by the assessee. Inasmuch as “export turnover” and “total turnover” exclude freight, insurance, etc., attributable to the transport of goods or merchandise beyond the custom station. Thus, it confines only to the net profit derived out of the business profit, which cannot include the profit derived out of the growing of tea, which is agricultural profit. While defining “profits of the business” as computed under the head “Profits and gains of business or profession” reduced by the sums referred to in section 28 or receipts by way of brokerage, interest, rent, charges or any other receipt of a similar nature included in such profits and the profits of any branch, office, warehouse or any other establishment of the assessee situate outside India. Therefore, the intention was to exclude various components for the purpose of arriving at the net profit out of the export business. The profit was confined to the particular nature of business forming the component of the gross total income, which includes various other components outside the export business. When the Legislature had excluded even incomes forming part of the income under the Act and may also be exigible to tax, then it cannot be conceived that the Legislature had intended for the purpose of section 80HHC to include profits derived out of an income outside the scope and purview of the Act though by fiction such income may be computed under the provisions of the Act. The Legislature had never intended to include an income not chargeable to tax under the Act. It had expressly excluded various other incomes but for the exclusion which would have been exigible to tax under the Act. Therefore, the intention of the Legislature was clear and unambiguous that it had never intended to include incomes which are completely outside the scope and purview of the Act, while excluding incomes which are otherwise exigible to tax and could be included within the profit from export business but for the specific exclusion.

31. Thus the intention of the Legislature being clear as it appears from the scheme of section 80HHC, we cannot put a construction different than that which will come into conflict with the intention of the Legislature expressed as we find from our above discussion in relation to section 80HHC. A construction which is otherwise impermissible and would include part of the income derived from agriculture cannot be given to a legislative enactment which would otherwise come in conflict not only with the legislation itself but also with the constitutional provisions encroaching on the legislative domain of the two legislative mechanisms as well as the revenue to be collected by the Centre and the State and create a conflict in between the interest of the two different agencies.

32. In the result, in our view, having regard to the provisions of sections 80AB and 80A(2) read with section 80HHC, the fiction created by rule 8 would not permit us to extend the assessment under the Act for computing total income beyond the gross total income for the purpose of being eligible for deduction under section 80HHC in respect of profit out of business of export of tea grown and manufactured by the assessee. The apportionment postulated in rule 8 is to be made before deduction under section 80HHC is allowed. In other words, the benefit of deduction under section 80HHC would be available only on the income derived from the profit out of the business of export of tea processed and manufactured and not out of the profit of growing tea which is subject to the Agricultural Income-tax Act outside the scope and purview of the Act.

33. Therefore, sub-section (4B) introduced through the amendment under the Finance Act, 1999, is clarificatory in nature. Therefore, its vires with regard to its retrospectivity would not be hit by the provision of the Constitution, we hold the same to be intra vires and constitutionally valid.

34. Dr. Pal relied on the decision in Lohia Machines Ltd. v. Union of India [1985] 152 ITR 308 (SC) : (1985) 2 SCC 197 in order to assail the retrospectivity of the amendment inserting sub-section (4B). According to him, the majority judgment of the five judges' Bench did not deal with the question of retrospectivity. Therefore, the minority decision by hon'ble A.N Sen J., dealing with the question of retrospectivity would be binding. We need not go into this question in view of the discussion we have made hereinbefore and the finding that the amendment has not introduced anything new but had clarified the situation already in existence. With regard to the question of the stage of apportionment of agricultural income under rule 8 after computation, Dr. Pal relied on the decision in Karimtharuvi Tea Estates Ltd. v. State of Kerala [1963] 48 ITR (SC) 83. This decision, was rendered in the context of determining the character of the amounts spent for the upkeep and maintenance of immature plants till they become mature for the purpose of allowing deduction in computing agricultural income from tea plantation computed under section 10 of the Indian Income-tax Act, 1922, in terms of rule 24, since held to be a running expenditure and not of the nature of capital expenditure. In this context, it was held that the definition “agricultural income” was incorporated in the Constitution by reference from the Income-tax Act at a point of time when rule 24 was in existence and, therefore, the definition of the term was bound up with the rules. Relying on this proposition, Dr. Pal contended that as soon as the rule is bound up with the definition given in the Act, the entire process has to be carried out according to the provision contained in the Act and the apportionment is to be made finally at the last stage of chargeability to tax under the Act. In our view, this decision is distinguishable on facts. Inasmuch as it was a question as to whether the computation is to be made in accordance with the provisions contained in the Act. The apex court had no occasion to deal with the question relating to the stage as to when the apportionment is to be made in relation to Chapter VI-A. This decision, therefore, does not seem to help us in the present context in view of the discussion we have made hereinbefore. Dr. Pal then relied on the decision in CAIT v. Peria-karamalai Tea and Produce Co. Ltd. [1972] 84 ITR 643 (Mad). In this decision, the Division Bench of the Madras High Court had held that such apportionment is to be made after allowing the deductions including those under Chapter VI-A of the Act. With due respect, we are unable to agree with the said proposition for the reason that this decision has not considered the impact of the various provisions of the Act as discussed hereinbefore. The decision in Cambay Electric Supply Industrial Co. Ltd. v. Cit [1978] 113 ITR 84 (SC) cited by Dr. Pal does not help us in view of the subsequent decisions in Distributors (Baroda) P. Ltd. [1985] 155 ITR 120 (SC); H.H Sir Rama Varma [1994] 205 ITR 433 (SC) and CIT v. Kotagiri Industrial Co-operative Tea Factory Ltd. [1997] 224 ITR 604 (SC). The apex court had no occasion to deal with the question of the stage of apportionment of agricultural income in respect of sale of tea, grown and manufactured by the assessee in relation to Chapter VI-A and as such the decision in Tata Tea Ltd. v. State of West Bengal [1988] 173 ITR 18 (SC) is distinguishable and cannot come in aid to support the contention of Dr. Pal on the issue involved in this case, as discussed hereinbefore. We are unable to agree with the ratio decided in the decision in Commissioner Of Income-Tax v. C.W.S (India) Ltd. [2000] 246 ITR 278 (Ker) relied upon by Dr. Pal for the reasons we have already given hereinbefore. This decision has also not taken into consideration the impact of various other provisions of the Act itself as discussed hereinbefore. The decision in Assam Co. Ltd. v. State of Assam [2001] 248 ITR 567 (SC) cited by Dr. Pal does not help us in the present context. Inasmuch as the apex court in this decision had no occasion to deal with the stage of apportionment contemplated under rule 8. In this decision, it was held that the computation is to be made under the Act when it relates to computation of agricultural income in respect of tea grown and manufactured by the assessee in relation to the validity of the proviso to rule 5 of the Assam Agricultural Income-tax Rules, 1939, to the extent it permitted recomputation of agricultural income by the state officers since declared ultra vires in that decision.

35. In the result, the appeal succeeds to the extent as indicated above and the vires of sub-section (4B) introduced through the Finance Act, 1999, is upheld and the writ petition to that extent stands dismissed. So far as the other part relating to the challenge thrown to the circular in the writ petition is concerned, the same requires no decision in view of the introduction of subsection (4B) by way of amendment through sub-section (4B) clarifying the law, as it existed. The deduction under section 80HHC is allowed after apportionment on the 40 per cent, component exigible under the Act.

36. The assessment may proceed accordingly.

37. There will, however, be no order as to costs. Urgent xerox certified copy of this judgment be made available to the parties, if applied for.

R.N Sinha, J.:— I agree.