2004 (3) TMI 9 - SC - Income Tax

Deduction under Section 80HHC allowed only if net export profit is positive after offsetting manufacturing and trading losses

Ipca Laboratory Ltd. Versus Deputy Commissioner of Income-Tax

SC held that for deduction under section 80HHC an export house's entitlement depends on net positive profit from exports after offsetting profits and ... Deduction under section 80HHC - export house - net loss from export of goods - words 'sale proceeds of such goods' - HELD THAT:- A plain reading of section 80HHC makes it clear that in arriving at the profits earned from export of both self manufactured goods and trading goods, the profits and losses in both the trades have to be taken into consideration. If after such adjustments there is a positive profit the assessee would be entitled to deduction under section 80HHC(1). If there is a loss he will not be entitled to any deduction. The meaning that the word 'profit' will depend on the context in which it is used. In section 80HHC(1) it is admittedly used to indicate positive 'profit' because the deduction will only be of a positive profit. Section 80HHC(3) is the sub-section which provides how profits are to be worked out in computing the total income. For purposes of such computation both profits and losses have to be taken into account. Thus the word 'profit' in section 80HHC(3) will mean profits after taking into account losses, if any. More importantly, in our view, the term 'profit' in section 80HHC both in sub-section (1) and in sub-section (3) means a positive profit worked out after taking into consideration the losses, if any. Thus the word 'profit' has the same meaning in section 80HHC(1) and (3). In arriving at the profits earned from export of both self manufactured goods and trading goods, the profits and losses in both the trades are required to be taken into consideration - If after such adjustments there is a positive profit the assessee would be entitled to deduction under section 80HHC(1) Issues Involved:1. Entitlement to deduction under section 80HHC of the Income-tax Act.2. Computation of profits and losses for the purpose of section 80HHC.3. Interpretation of section 80HHC(3)(c) and its sub-clauses.4. Applicability of section 80AB and section 80B(5) in the context of section 80HHC.5. Impact of disclaimer certificates on the computation of export turnover and profits.Detailed Analysis:1. Entitlement to Deduction under Section 80HHC:The primary issue was whether the appellants were entitled to a deduction under section 80HHC for Rs. 3.78 crores, ignoring a loss of Rs. 6.86 crores from trading goods. The appellants claimed deductions on profits from self-manufactured goods while ignoring the loss from trading goods exports.2. Computation of Profits and Losses for Section 80HHC:The court examined section 80HHC, which provides deductions for profits from exports. It was found that the appellants had a profit of Rs. 3.78 crores from self-manufactured goods but a loss of Rs. 6.86 crores from trading goods. The court held that for computing total income, both profits and losses must be considered. Thus, a net loss from exports disqualifies the appellant from claiming the deduction.3. Interpretation of Section 80HHC(3)(c) and its Sub-clauses:Section 80HHC(3)(c) was scrutinized, which deals with cases where exports include both self-manufactured and trading goods. The court explained that 'profits from such exports' must include both types of exports, and the word 'and' in the sub-section indicates that both profits and losses must be considered together. Therefore, a positive profit is required for deduction eligibility.4. Applicability of Section 80AB and Section 80B(5):Section 80AB, which has an overriding effect on all sections within Chapter VI-A, mandates that income computation must be in accordance with the Act's provisions, including both profits and losses. Section 80B(5) defines 'gross total income' as computed per the Act's provisions. The court concluded that section 80HHC is governed by section 80AB, thus requiring the consideration of both profits and losses.5. Impact of Disclaimer Certificates:The appellants issued disclaimer certificates to supporting manufacturers for trading goods. The court held that disclaimer certificates do not reduce the export house's turnover for computing profits under section 80HHC(3)(c)(ii). The entire turnover, including disclaimed turnover, must be considered for computing taxable income. The court rejected the argument that losses should be treated as negative profits and adjusted accordingly.Conclusion:The Supreme Court dismissed the appeal, holding that section 80HHC requires the consideration of both profits and losses from exports. As the appellants had a net loss, they were not entitled to the deduction under section 80HHC. The court emphasized that the interpretation of the section must align with its language and purpose, and benefits not available under the section cannot be conferred through misinterpretation.