TaxTMI 
TaxTMI 
2001 (10) TMI 259
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....he quality assurance mark of ISO 9002. 3. As the assessee is an exporter of spices products as stated above, it has been claiming the benefits available under section 80HHC of the Act on a regular basis from year to year. The claim of the assessee has been consistently accepted and allowed by the Department. For the impugned assessment year 1993-94, the assessee has claimed a deduction of Rs. 5,83,375 by way of such benefits available under section 80HHC of the Act. The profit of the business carried on by the assessee was Rs. 10,22,835 as per its profits and loss account. The adjusted profit worked out by the assessee for income-tax purpose was Rs. 10,70,012. In the course of carrying on of the business, the assessee also received a sum of Rs. 19,90,260.40 in the nature of drying/grinding/distillation charges collected from other companies for undertaking job work production. While examining the claim of the assessee towards the deduction of benefit available under section 80HHC, the Assessing Officer made a reference to clause (baa) of Explanation given to section 80HHC. Particularly referring to sub-clause (i) of the above clause (baa), the Assessing Officer observed that the....
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....i) of clause (baa), 90 per cent of the said sum has to be deducted from the profits of the business as worked out by the assessee. The profits of the business was worked out by the assessee at Rs. 10,70,012 as already noted above. The 90 per cent deductible amount of Rs. 19,90,260.40 is worked out at Rs. 17,91,234. When the deduction is made, the net result was a negative figure of Rs. 7,21,222. As "the profits of business" as explained in clause (baa) has been worked out at a negative figure, the Assessing Officer held that there was no profit in the hands of the assessee-company where from deduction under section 80HHC could be given. Accordingly, he negatived the contention of the assessee towards the claim of deduction of Rs. 5,83,375 made under section 80HHC of the Act. 7. This issue was taken in first appeal before the CIT(Appeals). The assessee-company raised detailed contentions before the CIT(Appeals) (a) Section 80HHC provides for "deduction in respect of the profits retained for export" vide the handnote. (b) Section 80HHC(i) allows deduction of "the profits derived by the assessee from the export of goods or merchandise" where the assessee is engaged in the bus....
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....e amount arrived at on application of the formula provided in subsection (3) would amount to double disallowance. The CIT(A) held that the drying/grinding/distillation charges received by the assessee represented its domestic business and while the profit is arrived at as per section 80HHC(3)(c) by apportioning the total profit in proportion to the export turnover and total turnover, the profit element embedded in the domestic business gets excluded from the export profit and there is no justification in further making a deduction of 90 per cent of those receipts from such export profit already arrived at by applying the turnover formula. The CIT(Appeals) pointed out that the Board Circular No. 621 dated 19-12-1991 made this position clear by explaining that explanation (baa) was inserted only to check the distortion of export profit by including receipts like interest, commission, etc., which do not have any element of turnover. The CIT(Appeals) held that the drying/grinding/distillation charges accounted by the assessee were purely business turnover and they were directly taken into the trading account of the assessee-company. The CIT(Appeals) pointed out that the word "charges" ....
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....es that 90 per cent of any receipts in the nature of 'charges' received has to be excluded for the purpose of computation of deduction under section 80HHC." 10. We heard Shri P.I. John, the learned Senior Departmental Representative appearing for the Revenue. The learned departmental representative submitted that one should apply the provisions of law as it emerges out of a plain reading. The deduction available under section 80HHC is to be worked out on the basis of this formula: Profits of business X Export turnover --------------- Tot....
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.... Accountant appearing for the assessee-company summarised his arguments in the following lines: (1) The company received Rs. 19,90,260 as processing charges from another company and credited in the profit and loss account. The company is engaged in the manufacture of oleoresins and extracts from various spices, chillies etc. and exporting the products. The job work for the receipt of Rs. 19,90,260 is also received for doing the same manufacturing job for another party. The processing charges of Rs. 19,90,260 is earned for the manufacturing and processing using the entire undertaking of the company and by incurring all the expenditure of the factory like wages, electricity charges, depreciation and all the other items of expenditure debited in the profit and loss account. For processing under job work all expenditure incurred for manufacturing is involved other than the cost of the raw materials. (2) The income of Rs. 19,90,260 is only an income from business of the company. The expenditure for earning this amount is included in the several items of expenditure debited in profit and loss account since all the expenditure for running the company are totally reflected in profit ....
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....thin the meaning of "charges" as mentioned in the section. (8) Charges is mentioned along with interest and immediately after rent, in the sub-section. The items mentioned are various types of income credited in profit and loss account, which are not having any nexus with business income. The word "charges" is appearing in section 24(1)(iv) of the Act in the computation of income from house property. Similar to this, in the Companies Act also under section 124 the word "charge" is applied in regard to immovable property. Charge includes a lien and an equitable charge whether created or evidenced by an instrument in writing or by deposit of title deed or by an agreement to deposit. (9) In view of the above, the usage "charge" should definitely mean some income relatable to an immovable property or some charges received by the company which is not a business income. (10) The exempted income under section 80HHC is calculated by the following formula: Profits of business X Export turnover &....
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....above formula provided in section 80HHC(3) is meant for the profits from export business, the quantum of deduction is not strictly confined to the profits derived from the export of goods or merchandise. This is because of the mathematics of this formula. The export profit is worked out as a part of the composite profits of the business. The profits of the business is the profits computed under the head "profits and gains of business or profession". The profits and gains of business or profession of an assessee may be derived from various businesses carried on by the assessee including export business as well as domestic business. But while working out the export profit on the basis of the above formula, the export profit is not singled out from the total profit of the business of the assessee by deducting proportionate business expenditure from the export receipts derived by the assessee-company. Instead of that, the export profit is worked out as a portion of the overall business profits of the assessee in proportion of the export turnover to the total turnover. In other words, there is no occasion to examine the result of export business and domestic business independently so as....
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....ituation that clause (baa) of Explanation to section 80HHC has been inserted in the Act by Finance (No. 2) Act, 1991 with effect from 1-4-1992. The object of inserting clause (baa) has been stated in the circular No. 621 dated 19-12-1991 issued by the C.B.D.T. The relevant portion of the said circular in paragraphs 32.10 and 32.11 read as follows "32.10 The existing formula Often gives a distorted figure of export profits when receipts like interest, commission, etc. which do not have element of turnover are included in the profit and loss account. 32.11 It has, therefore, been clarified that "profits of the business" for the purpose of section 80HHC will not include receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature. As some expenditure might be incurred in earning these incomes, which in the generality of cases is part of common expenses, ad hoc 10 per cent deduction from such income is provided to account for these expenses." 15. It is in the above overall scheme of deduction provided in section 80HHC that we have to examine the case of the assessee. The claim of the assessee is negatived by the Assessing Office....
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....turing process carried on by the assessee-company to execute the job works undertaken by it forms part of the core business of the assessee, then the corresponding receipts obtained by the assessee-company against such processing are in the nature of business receipts of the assessee-company. They form part of the business turnover of the assessee-company. 17. As explained in the Circular of the C.B.D.T. cited the purpose of excluding receipts like interest, Commission, etc. from the ambit of the profits of the business is to exclude such receipts which do not have an element of turnover. If we examine the genesis of the job works undertaken by the assessee-company, it could be seen that the activities of drying/grinding/distilling are essentially an integral part of the manufacturing or processing activities regularly carried on by the assessee, but for the contribution of raw materials. The factory and the manufacturing system installed by the assessee-company is a common platform for carrying on of the manufacturing and processing activities of the assessee-company, culminating in export as well as in job works. Therefore, it cannot be said that the profits reported by the as....
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....term "charges" has to be read in the company of the preceding words, such as brokerage, commission, interest, rent, etc. The brokerage or commission or interest, or rent does not have any nexus with any manufacturing or processing or the core business activity that could be carried on by the assessee. Similarly, the word "charges" appearing in the company of those words also will not have any nexus with manufacturing or processing or core business activity of an assessee. The word "charges" appearing in the company of brokerage, commission, interest, rent etc. cannot be singled out and imputed with a different meaning alleging a nexus with manufacturing or processing or core business activities. Ejusdem generis rule is the rule of generic words following more specific ones. The rule is that when general words follow specific words of the same nature, the general words must be confined to the things of the same kind as those specified. The specified words must form a distinct genesis or category. This rule reflects an attempt to reconcile incompatibility between specific and general words. In sub-clause (i) of clause (baa), the word "charges" are preceded by words of specific nature....
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.... statute in computing the deduction available under section 80HHC provides for an eligible deduction if the assessee has derived profit from the business carried on by it which included export turnover also. The nexus of the export turnover for the purpose of computing the deduction is directly with the composite profit of the business carried on by the assessee. In the present case, the result of the business carried on by the assessee is a positive income. The assessee has carried on export business. All the three factors necessary to fill up the formula, such as profit of the business, export turnover and total turnover are present in the case of the assessee. Inspite of the fact that the result of the business carried on by the assessee was profit, and the assessee was also having export turnover, the assessee did not get the deduction provided under section 80HHC by virtue of the anomaly created by the interpretation given by the Assessing Officer to the word "charges" appearing in clause (baa) of Explanation given under section 80HHC of the Act. 22. The Supreme Court has held in Gwalior Rayon Silk Mfg. Co. Ltd.'s case that the tax laws have to be interpreted reasonably and....