2005 (6) TMI 560 - AT - Income Tax

Tribunal Affirms Losses Must Offset Incentives for Deductions; Aligns with SC & Bombay HC on Section 80HHC Interpretation.

B. Sorabji Versus Income-Tax Officer, Ward 20 (1) (2)

The Tribunal ruled in favor of the Department, determining that losses under section 80HHC(3)(a), (b), or (c) must be considered and offset against ... Interpretation of the provisions in section 80HHC - Word 'Profit' in the proviso - Deduction under the proviso to sub-section (3) of section 80HHC in respect of export incentives - receipts in the form of duty draw back, cash incentives - profit from sale of special import licence - profit derived from the export of the goods and merchandise - doctrine of precedent - Whether in a case where the assessee has admittedly suffered a loss u/s 80HHC(1) - HELD THAT:- As we understand, the case of the assessee and the interveners is that the decision of the Hon’ble Supreme Court in IPCA’s case [2004 (3) TMI 9 - SUPREME COURT] is to be considered in the light of the question posed before the Hon’ble Supreme Court. There, the assessee had exported both self-manufactured as well as trading goods. There was a profit in the export of self-manufactured goods, whereas there was loss in the export of trading goods. The assessee pleaded that the loss should be ignored. It is in this context that it came to be held by the Supreme Court that the loss cannot be ignored and the profit and loss in the export of self-manufactured goods as well as in the export of trading goods needs to be considered. The decision of the Supreme Court does not hold that if there is a loss in sections 80HHC(3)(a), (b) and (c), then 90 per cent of the export incentives, as prescribed in the proviso, has to be ignored, which is the case of the Department. Rather, the Supreme Court has held that the loss cannot be ignored, but should be adjusted along with the profit. The decision of the Supreme Court was with regard to sub-clauses (i) and (ii) of section 80HHC(3)(c). It would apply on all fours. There is loss in section 80HHC(3)(a), (b) or (c) and a positive amount as per the proviso. When there is a loss in section 80HHC(3)(a), (b) and (c), it cannot be ignored. It has to be taken into account along with 90 per cent of the export incentives, as prescribed in the proviso. The intention of the Legislature is to give deduction for the profit earned by an assessee from the export of goods. So far as regards Rohan Dyes & Intermediates Ltd.’s case [2004 (8) TMI 93 - BOMBAY HIGH COURT], while holding that the loss in section 80HHC(3)(c) cannot be ignored or taken at nil, the Supreme Court decision in IPCA’s case (supra) was relied on. It was held that the profit from export of self-manufactured goods is to be adjusted against the loss from export of trading goods. Likewise, the loss in section 80HHC(3)(c) is to be adjusted against 90 per cent of the export incentives in the proviso and if after adjustment there is any positive profit, the assessee will get deduction u/s 80HHC. However, if after such adjustment the ultimate result is a loss, the assessee will not get any deduction u/s 80HHC. The department’s case, as we understand, is that the Supreme Court decision in IPCA’s case (supra) squarely covers the case at hand. This position has been clarified further by the subsequent decision of the Hon’ble Bombay High Court in the case of Rohan Dyes & Intermediates Ltd. (supra). As such, the proviso in question is not an independent provision. ‘Profit’ in the proviso to section 80HHC(3)(c) means the same as ‘profit’ in section 80HHC(1) and (3). This profit means a positive profit arrived at after taking into consideration, the losses incurred. Only profits derived from exports can be ‘further increased’. That which is absent cannot be increased. So, in the event of the resultant of figure u/s 80HHC(3)(c) being a negative figure, there cannot be anything that can be ‘further increased’. Therefore, the proviso cannot be invoked. In view of the Supreme Court decision in IPCA’s case (supra), section 80HHC is governed by section 80AB. We have given our thoughtful consideration to the matter. As per the doctrine of precedent, precedents not only have great authority, but must, where applicable, be allowed. The practice of treating precedents as absolutely binding is necessary to secure the certainty of the law, predictability of decisions being more important than approximation to an ideal. Authoritative decisions must be followed, whether they are approved of or not, they being legal sources of law. Here, it becomes necessary to examine as to what part of a decision it is that is actually binding on lower courts. The final and decisive portion of a judgment consists of two parts, the decision and the reason therefore, the decision in concrete or the res judicata, and the principii generalis or the general principles, on which that concrete decision of the case is founded. For the present purposes, we may also accept the proposition that an unreasoned order of even the Hon’ble Supreme Court may not be a binding precedent or a decision having force under Article 141 of the Constitution of India. But in our considered opinion, the decision of the Hon’ble Supreme Court in the case of IPCA (supra), regarding the issue at hand, is ratio and not obiter. It fully covers the controversy. This was specifically held by the Hon’ble Bombay High Court in Rohan Dyes & Intermediates Ltd.’s case (supra). Both IPCA’s case (supra) and Rohan Dyes & Intermediates Ltd.’s case (supra) are to be treated as binding, for disposing of the two questions referred to this Bench. As regards the first contention, their Lordships have already considered and rejected the same with cogent reasons which need not be repeated. Besides, export incentives, despite the purpose therefore, have been made taxable under the provisions of Section 28 of the Act. Therefore, there is no question of treating them as exempt from tax on equitable grounds. Hence, both these issues are decided in favour of the Department and against the assessee, in respectful consonance with the decision of the Hon'ble Supreme Court in the case of IPCA (supra) and the decision of the Hon'ble Bombay High Court in the case of Rohan Dyes (supra). The other issues raised in the respective appeals will also be duly considered and decided by the regular Division Benches. In the above manner, the reference stands disposed of. Issues Involved:1. Reconsideration of the decision in Lalsons Enterprises v. Dy. CIT regarding deduction under section 80HHC in light of the Supreme Court decision in IPCA Laboratory Ltd. v. Dy. CIT.2. Entitlement to deduction under section 80HHC when the computed figures under clause (a), (b), or (c) of sub-section (3) are negative.Detailed Analysis:Issue 1: Reconsideration of the Decision in Lalsons Enterprises v. Dy. CITThe Tribunal was asked to reconsider the decision of the Delhi Special Bench in Lalsons Enterprises v. Dy. CIT, which allowed deduction under section 80HHC for export incentives even if the assessee incurred a loss in export activities. This reconsideration was necessitated by the Supreme Court's ruling in IPCA Laboratory Ltd. v. Dy. CIT, which emphasized that the provisions of section 80HHC are governed by section 80AB. The Supreme Court held that 'the word 'profit' in section 80HHC(1) and sections 80HHC(3)(a) and 80HHC(3)(b) means a positive profit. In other words, if there is a loss, no deduction would be available under sections 80HHC(1) or 3(a) or 3(b).' This ruling necessitated the consideration of both profits and losses in computing the net figure for deduction eligibility.Issue 2: Entitlement to Deduction Under Section 80HHC with Negative FiguresThe Tribunal examined whether an assessee could claim a deduction under section 80HHC if the computed figures under clause (a), (b), or (c) of sub-section (3) resulted in a negative figure. The Tribunal noted that various Benches had conflicting views on this matter. Some held that the loss should be ignored, while others believed that the loss should be adjusted against incentive receipts, allowing deduction only if the resultant figure was positive.The Tribunal referred to the Supreme Court's decision in IPCA Laboratory Ltd., which clarified that both profits and losses must be considered in computing the net figure for deduction. The Bombay High Court in Rohan Dyes & Intermediates Ltd. v. CIT further reinforced this by stating that the word 'profit' in section 80HHC(3) means positive profit after accounting for losses. The Tribunal concluded that the loss arising under section 80HHC(3)(a), (b), or (c) cannot be ignored and must be adjusted against the incentive receipts. If the resultant figure is positive, the deduction is allowed; otherwise, it is not.Conclusion:The Tribunal ruled in favor of the Department, holding that the loss under section 80HHC(3)(a), (b), or (c) must be considered and adjusted against incentive receipts. The assessee is not entitled to any deduction under section 80HHC if the net figure after adjustment is negative. This decision aligns with the Supreme Court's ruling in IPCA Laboratory Ltd. and the Bombay High Court's decision in Rohan Dyes & Intermediates Ltd. The Tribunal emphasized that the interpretation of statutory provisions must be as per the clear wording of the section, irrespective of the resultant equity or absurdity.