TaxTMI 
TaxTMI 
2004 (2) TMI 294
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....ther the said negative profit (loss) has to be adjusted/setoff against the amount of deduction allowable under the proviso to section 80HHC(3) or the loss computed under all or any of the clause (a), (b) or (c) of section 80HHC(3) has to be ignored and deduction under section 80HHC is required to be allowed on the amounts computed under proviso to section 80HHC(3) of the Income-tax Act? (iii) Whether 90 per cent of the gross interest received by the assessee shall be reduced from the profit and gains of the business or profession to determine profits of the business as given in Explanation (baa) below sub-section 4(b) of section 80HHC of the Income-tax Act in order to compute the deduction under section 80HHC of the Income-tax Act or only 90 per cent of net receipt of the interest after allowing a set off of interest paid against the interest receipt?" 2. All the three questions involve the interpretation of section 80HHC, which has become perhaps the most debated section of the Act lately. The section has been amended many times and some of the amendments were purportedly made to clarify or rationalise or streamline the provisions but that has not stopped the rival parties -....
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....goods as reduced by the direct and indirect costs attributable to export of such trading goods: Provided that the profits computed under clause (a) or clause (b) or clause (e) of this sub-section shall be further increased by the amount which bears to ninety per cent of any sum referred to in clause (iiia) (not being profits on sale of a licence acquired from any other person), and clauses (iiib) and (iiie) of section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee. Explanation (baa). -"Profits of the business" means the profits of the business as computed under the head 'Profits and gains of business or profession' as reduced by- (1) ninety per cent of any sum referred to in clauses (iiia), (iiib) and (iiic) of section 28 or of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits; and (2) the profits of any branch, office, warehouse or any other establishment of the assessee situate outsideIndia;" 5. We may now take up the questions referred to us for decision, seriatim. As regards the first question, it was agreed ....
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....rt judgment, the assessee earned profits in the export of manufactured goods but suffered losses in the export of trading goods. It appears from paragraph 3 in Smt. T.C. Usha's case that the judgment of the Bombay High Court in IPCA Laboratories Ltd.'s case was cited before the Kerala High Court on behalf of the Department. There does not appear to be any discussion of the judgment. But after discussing the issue elaborately, the Kerala High Court held the view that the words 'profits of the business' or 'adjusted profits of the business' occurring in sub-section (3) must be read with Explanation (baa) below the section which defines the words 'profits of the business' for the purposes of the section to mean profits and gains computed under the head 'profits and gains of the business or profession' and so read they have to be computed only in accordance with the provisions of sections 28 to 43D of the Act which fall under Chapter IV-D of the Act, and that sections 70 and 71, which provide for adjustment of the loss under one source or head against the profits from another source or head respectively, do not fall under the computation provisions relating to business income and there....
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.... (5th Edition revised by Hon'ble Justice S. Ranganathan): "3. Intra-head adjustments.-This section deals with intra-head adjustments, i.e., adjustments as between several sources of income under one and the same head of income in respect of the same previous year. Under the 1922 Act, there was no corresponding provision, though the principle underlying this set-off was held to be implicit in the manner of computation of the income under a head and of the total income. In Rajapalayam Mills Ltd. v. CIT [1978] 115 ITR 777, the Supreme Court reiterated this position and held that though the profits of each distinct business carried on by the assessee have to be computed separately in accordance with the provisions of section 10 of the 1922 Act, the tax is chargeable under that section not separately on the profits of each business but on the aggregate of the profits of all the businesses carried on by the assessee. For instance, where the assessee carries on several businesses, he was held entitled to set-off losses incurred in one business against profits in another. The resultant negative figure may be due to the allowances permitted under a particular head in the computation of i....
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....earned representative for Exide Industries (intervener fromCalcutta), put forth a forceful contention. He cited the circular of the Board reported in 190 ITR (St.) 270 @ 299, which explains the provisions of Finance (No.2) Bill, 1991 by which the present subsection (3) was introduced into section 80HHC with effect from1-4-1992. The circular, in paragraph 48, explains the object behind the new subsection in the following words: "Under the existing provisions of sub-section (3) of section 80HHC of the Income-tax Act, profit derived from the export of goods is computed in the following manner: Export turnover Profit of the business x --------------- Total turnover The application of this formula has given rise to some misuse. Many cases have come to notice where persons, who are not chargeable to income-tax, ....
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...., though the trading exports actually resulted in a loss. Had the assessee been allowed deduction only with respect to the export of the products actually manufactured by it, without taking into account the results, namely both the profits and the turnover, of the trading business, then, the quantum of deduction under section 80HHC of the Act would have been computed as follows [(Profits from manufacturing business) X (Export turnover of manufacturing business)/(Total turnover of manufacturing business)] = [1050 X 200/2900] = Rs. 72.41. [Rs. 3000 - Rs. 100] Thus, the assessee got an advantage to the tune of Rs. 27.59 [Rs. 100 - Rs.72.41] under section 80HHC of the Act, on the strength of exporting trading goods worth Rs. 300, even though the assessee had actually incurred a loss of Rs. 50 on account of its trading business. In other words, the assessee was able to claim benefits of deduction under section 80HHC of the Act merely by buying in trading loss, which was conceived of by the Legislature as a misuse of the incentives granted by the said section. With a view to stop the said misuse, the formula was amended with effect from the assessment year 1992-93 by segregating tradi....
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....h an attempt would not subserve the legislative intent or object in introducing the amendments to section 80HHC(3) of the Act, as discussed above." Mr. Mitra further contended that the memorandum explaining the provisions of the amending Act can be looked into as "contemporanea exposito" as held by the Supreme Court in K.P. Varghese v. ITO [1981] 131 ITR 597. As further held in this judgment, the new provisions should be so interpreted as to suppress the mischief and advance the remedy. With regard to the use of the conjunction 'and' between sub-clauses (i) and (ii) of clause (c) of the sub-section Mr. Mitra submitted that it is permissible, in certain circumstances, to read the provisions disjunctively despite the use of the conjunction and invited our attention in this regard to the judgment of the Supreme Court in Municipal Corpn. ofDelhiv. Tek Chand Bhatia AIR 1980 SC 360. These contentions were controverted on behalf of the Department, especially the applicability of the Heydon's rule, and it was contended, relying on the observations at page 348 of Vol. 1 of Chaturvedi and Pithisaria's Income-tax Law that the rule is not applicable where the statute is unambiguous, which i....
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....r, as already pointed out, no lower tribunal can afford to take the weight of the judgments of High Courts, though of different States, lightly and proceed to consider the entire issue afresh, as if for the first time, in a spirit of judicial adventurism. Perforce, the enquiry into the problem will have to be circumscribed by the parameters of judicial decorum, discipline and propriety. But the problem gets compounded because any attempt at a solution to the questions posed before the Special Bench, which are concluded one way or the other by judgments of High Courts of other States (States other than the State where the Special Bench is sitting), would necessarily involve the making of a conscious choice to follow one view or the other which in turn involves the giving of reasons for the choice. The Special Bench is thus placed in a somewhat tricky position where it must act with great circumspection and responsibility. The reasons given for making the choice and the language used should not be adventurstic or attempt to cross the frontiers that are never to be crossed. The Special Bench has to guard against any such tendency. However, having been constituted it has to decide the ....
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.... section 28(iiia), (iiib) and (iiic), whereas the Explanation (baa) defines 'profits of the business' as a whole; (b) if the loss arising under any of the clauses of sub-section (3) is adjusted against the incentives, the whole object of the section, which is to encourage exporters, will be defeated; (c) section 80HHC is a beneficial provision and should be liberally interpreted; (d) at any rate, if two interpretations are reasonably possible, the one in favour of the assessee should be adopted; and (e) the assessee's own case for the assessment year 1992-93 having been decided by the Tribunal in its favour, the rule of consistency demands that it should not be departed from. 17. In support of the above contentions, Mr. Sapra invited our attention to the following judgments/orders: (i) A.M. Moosa v. Asstt. CIT [1996] 54 TTJ (Cochin) 193 (ii) Pratibha Syntex Ltd. v. It. CIT [2002] 81 ITD 118 (Ahd.) (iii) Smt. T.C. Usha's case (iv) Indian Sugars & General Industry Export Import Corpn. Ltd. v. Dy. CIT [2002] 121 Taxman 305 (Delhi) (Mag.) (v) Vishal Exports Overseas Ltd. v. ITO [IT Appeal No. 1248 (Mum.) of 2002, dated20-1-2003] (vi) Asstt CIT v. Avon Cycles Ltd. [....
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....ular issued by the Board shows that even if there is a loss in the export business under the three clauses of the sub-section, the assessee would be entitled to get deduction in respect of the export incentives. (e) The judgment of the Bombay High Court in IPCA Laboratories Ltd s case, which is sought to be relied upon by the income tax authorities as authorising the adjustment of the losses against the export incentives does not deal with the precise controversy. In that case, the proviso was not considered. The aggregation was permitted because of the conjunction land occurring between sub-clauses (i) and (ii) of clause (3). The question whether the losses can be adjusted against the export incentives under the proviso was not before the High Court. The point of distinction has been noticed by the Mumbai Bench of the Tribunal in Vishal Exports Overseas Ltd.'s case, Chandigarh Bench in Avon Cycles Ltd.'s case and by the Ahmedabad Bench in Asstt. CIT v. Sumedh Synthetics (P.) Ltd. [2003] 81 TTJ (Ahd.) 804. At any rate, the judgment of the Bombay High Court in IPCA Laboratories Ltd.'s case cannot be considered to be binding on Special Bench sitting inDelhi, as held in the followi....
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....s that the profits computed under the various clauses of the sub-section 'shall be further increased'. The use of the word 'shall' shows that the proviso can operate only if there is a profit-base and it cannot act independently of the existence of the profit-base. (e) If the contention of the assessees is accepted, then even if the loss in the export activity is larger than the export incentives, they will be entitled to the deduction, a consequence which cannot be countenanced. (f) The question of applying the rule of liberal construction does not arise when the language of the provision is clear, and if the language is clear the rule of literal construction shall apply. Thus, the proviso will apply only where there is a profit under any of the clauses of the sub-section. The proviso does not refer to a situation where there is a loss. Literally construed, in such a case, the proviso simply does not apply. The ratio of the judgment of the Supreme Court in CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294 is attracted. 21. Mr. Jain, the learned senior DR, supporting the case of the department, submitted that there is no logic in allowing deduction even if there is a loss in ....
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....sub-section (3), what is dealt with is only the result of the export business or businesses. The proviso goes on to enlarge the scope of the deduction by including the export incentives. It seems to us therefore that the proviso stands on its own and has to be interpreted as if it is an independent provision. It cannot be understood in the same manner of understanding a proviso proper, in the conventional sense. The function of a proviso normally is to carve out an exception which, but for the proviso, would have fallen within the main provision. But "the insertion of a proviso by the draftsman is not always strictly adhered to its legitimate use and at times a section worded as a proviso may wholly or partly be in substance a fresh enactment adding to and not merely excepting something out of or qualifying what goes before". If this principle is applied, it will be seen the proviso is not one in the real and conventional sense. 24. Before 1-4-1992, the date on which the provisions of sub-section (3) were amended, the sub-section provided for a simpler form of deduction in the sense that the exporter was entitled to a deduction of the profits computed under the head 'Profits and....
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....its are derived can they be 'further increased' and if there is only a loss, there is no question of anything being 'further increased'. The contention on behalf of the assessees is that in the case of a loss, it has to be ignored since there can be no question of a loss being further increased'. It is common ground that the proviso does not expressly provide for the contingency of a loss arising in the exports. At best (or worst), it can only be said that it is silent on this aspect. The judgments of the Delhi High Court in Modi Cement Ltd's case and the Allahabad High Court in Indo-Gulf Fertilizers & Chemicals Corpn. Ltd.'s case cited on behalf of the assessees were rendered in the context of the levy of additional tax under section 143(1A) and the question arose whether, in a case where the loss returned by the assessee is increased as a result of the assessment, the Assessing Officer can treat it as a case of a 'further increase' of the tax payable. It was held that where no tax is payable as a result of the assessment there is no question of it being 'further increased' by an additional levy. It seems to us that it would not be apposite to draw support from these judgments for....
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....you earn profits from the export business, your entitlement to the deduction will be in respect of such profits plus the deduction in respect of the prescribed proportion of 90 per cent of the export incentives; on the other hand, if you suffer losses in the export business, your entitlement to the deduction will be restricted to the prescribed proportion of 90 per cent of the export incentives. It seems to us that the intention behind enacting the proviso is to reward profit-making exporters by a further deduction, but at the same time not to punish or discourage loss-making exporters by reducing the deduction in respect of the export incentives. This is so because the object behind enacting section 80HHC is "to compensate an exporter for the comparative disadvantage faced by him in the international market" and the reduction of the deduction given in respect of the export incentives (by the proviso) by the amount of loss suffered in the export business would, in our humble view, run counter to the object. 26. In IPCA Laboratories Ltd.'s case the Bombay High Court was not concerned with the proviso to sub-section (3) of section 80HHC. The question before the High Court was limi....
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....deduction under section 80HHC would be substantially reduced and may even become a negative figure whereas if only the net receipts (gross receipts minus expenses incurred to earn them) are excluded from the profits of the business, as the assessee's claim, then, there would be substantially more profits of the export business left to enjoy the deduction. The following example may roughly explain the controversy: PROFIT & LOSS ACCOUNT OF THE ASSESSEE FOR THE YEAR ENDED... Expenditure Income Rs. Rs. To Salaries and wages&....
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....bsp; 200 ---------- Rs. 12,200 Less: Depreciation allowable Rs. 1,500  ....
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.... Less: Interest expenses Rs. 1,000 Rs.3,000 --------- Amount eligible for deduction Rs. 7,700 --------- 29. The issue arises in the case of Lalsons Enterprises, the appellant in ITA No.3990/Del/99. The arguments of Mr. Ajay Vohra, the learned counsel for the assessee, were heard along with the arg....
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....urt in Keshavji Ravji & Co. v. CIT [1990] 183 ITR 1 where it was held that while disallowing interest paid to partner, in the computation of the firm's income, the interest received from him shall be adjusted and only the net interest paid, if any, shall be disallowed. (e) The purposive rule of interpretation should be adopted in understanding Explanation (baa). (f) The Circular No. 621 explaining the provisions of Explanation (baa) recognizes that there may be some common expenses and estimates an ad hoc 10 per cent of such common expenses to be allowed as deduction against the receipts such as interest, brokerage, commission etc. but this deduction is only for common expenses. Deduction in respect of expenditure which has a nexus with the receipts of the nature referred to in the Explanation has to be allowed further, which is not prohibited. 31. Mr. Rajan Vohra, the learned representative for M/s. Swani Corporation, intervener, submitted as follows: (a) Under Explanation (baa) the computation of business income is to be made as per the computation provisions of sections 28 to 44D and not as per the Profit & Loss account. This means that the expenditure to earn the re....
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....xpenditure, though actually incurred. (f) The interpretation suggested by the assessees will result in the Explanation becoming unworkable in case the expenditure is equal to or more than the receipt. 34. Mr. Salil Gupta, the learned CIT (DR) submitted as follows: (a) In the case of interest, there can be three possible situations. First, the interest is not related to the business at all, in which case section 80HHC is not applicable. The second is that where interest is credited to the profit and loss account, the interest expenditure is connected purely with the exports, in which case it cannot be adjusted against the receipt. The third is that where the interest expenditure is directly connected to the earning of the interest income, it may be adjusted against the receipt. (b) If netting principle is accepted, it would mean that the Department would also be entitled to deduct the expenditure incurred to earn the export incentives referred to in section 28(iiia), (iiib) and (iiic). (c) Section 80M and section 80L refer to deduction from "income", in contrast to the word 'receipt' used in Explanation (baa) which shows that where the Legislature wanted to allow dedu....
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....ed in the place of 'receipt'. (b) Since the concept of 'income' is narrower than the concept of 'gross total income' embedded in sections 80L and 80M and therefore the reference to those sections is in apposite. Refer to the judgment of the Privy Council in Maharajkumar Gopal Saran Narain Singh v. CIT [1935] 3 ITR 227 and the judgment of the Full Bench of the Allahabad High Court in Rani Amrit Kunwar v. CIT [1946] 14 ITR 561 @ 570. (c) The principle of 'netting' is implicit in the words 'receipts . . . included in such profits' occurring in the Explanation. There is no attempt to introduce words into the Explanation, as alleged by the Department. (d) The Explanation is workable in all cases, even where the expenditure is equal to or more than the receipt. (e) The assessees are not relying on any principles of accounting in support of their contention. The principle of 'netting' is implicit in the language employed in the Explanation itself. (f) There is no difference in the ideas expressed by clauses (1) and (2) of the Explanation. Whereas the idea of netting is implicit in both, only the language employed is different. The words 'receipts...included in such profits'....
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.... 262 ITR 278 and the judgment of the Kerala High Court in the case of K. Ravindranathan Nair v. Dy. CIT [2003] 129 Taxman 811. 40. We have considered the issue carefully. According to Circular No.621 cited, explaining the introduction of Explanation (baa) w.e.f. 1-4-1992, the formula that existed before the date for computing the export profits on which deduction was to be allowed gave a distorted figure "when receipts like interest, commission, etc. which do not have element of turnover are included in the profit and loss account" and it was with a view to removing the distortion that it was clarified through the Explanation "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 incomes is provided to account for these expenses". Now when the Legislature has fixed an ad hoc percentage as expenditure incurred to earn the receipts, can it be further argued that only the net income, whi....
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....da) (P) Ltd.'s case was rightly relied on in this connection. In that judgment, in the context of allowing deductions for certain incomes from the gross total income, it was held that what was included as income in the gross total income is the net income, i.e., receipt minus the expenditure which has a nexus with such receipt. The assessee in that case contended what is now being contended before us by the Department, that is to say, that the deduction with reference to section 80M must be allowed with reference to the dividend 'receipt', on the ground that what was received was the gross amount of dividend without being reduced by any expenditure incurred in relation thereto. The Department's stand (similar to the one which is being contended before us by the assessees) was that the deduction could be allowed only with reference to the net income by way of dividend, i.e., gross amount of dividend reduced by the expenditure incurred in relation to it. The stand taken by the Department in that case was upheld by the Supreme Court. In doing so, it was held that what was included in the gross total income as income by way of dividend, on which deduction under section 80M was allowabl....
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....oyed to convey the concept of netting with the result that the Explanation clause (1) would have read " . . . income by way of brokerage, commission, interest . . ." that does not mean that the existing language can be overlooked. It would have been perhaps a more clear expression of the concept (if the word 'income' had been used) but we have to interpret the provision on the basis of the language employed. There is nothing, in our humble view, in the language of clause (1) of the Explanation which would militate against the principle of netting. 44. The case of the assessees was not put forward before us on the basis of the accounting principles, which do recognise the principle of netting. The Income-tax Act itself is concerned with the principle of netting, in the sense that it does not tax the gross receipts but taxes only the gross receipts minus the expenditure incurred in relation thereto. All the computation provisions of the Act, whatever be the head of income, are aimed at bringing only the net income to assessment. Even under the head 'capital gains' it is only the gains that are assessed and not the entire sale proceeds. Therefore there is no violence done to the la....
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....eipts by way of brokerage, interest, etc., which are treated as a separate category of exclusion. 46. We are however not inclined to accept the argument of Mr. Ajay Vohra, the learned counsel for Lalsons Enterprises, based on the use of the words 'gross receipts' in sections 44AA and 44AB. As rightly pointed out on behalf of the Department by Mr. Salil Gupta, those are provisions designed for a different situation and do not impinge on the determination of the eligibility for or the conditions of or the actual computation of any deduction. In our opinion, the Explanation (baa) has to be construed on its own terms, keeping in mind the general scheme of section 80RRC, which is perceived to be a self-contained provision. 47. What now remain for consideration are the judgments of the Supreme Court in Dr. V.P. Gopinathan's case and Karnal Co-operative Sugar Mills Ltd.'s case. In order to appreciate the relevance of these decisions to the issue under consideration, the facts in these cases have to be noted. In Dr. V.P. Gopinathan's case the facts as we find from the judgment of the Kerala High Court in CIT v. Dr. V.P. Gopinathan [1998] 229 ITR 801 the assessee received certain amou....
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....relating to the business income. If the interest received is found to have a nexus with the business, still it remains to be excluded from the profits of the business by virtue of Explanation (baa)(1), but the claim is that the quantum of such interest income to be excluded must be determined in accordance with the computation provisions relating to business by allowing expenditure by way of interest which bears a nexus with the interest receipt. The computation provisions include section 37(1) under which any expenditure incurred or laid wholly and exclusively for the purpose of the business is to be allowed as deduction. Therefore, any expenditure incurred which has a connection or nexus with the interest receipt has to be allowed as a deduction and only the balance can be excluded from the business profits. There may be other provisions in the computation sections permitting other allowances or deductions, provided a nexus is established between the expenditure and the interest receipt. Thus, there are statutory provisions which authorise the claim of the assessees in the case before us when they contend that the net income by way of interest be computed and excluded from busine....