TaxTMI 
TaxTMI 
2010 (3) TMI 455
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....case carries on the business of the export of cut and polished diamonds. A return of income for assessment year 2003-04 was filed on November 28, 2003, declaring a total income of Rs. 13.91 crores, after claiming a deduction of Rs. 13.22 crores under section 80HHC. The return was initially processed under section 143(1), after which the case was selected for scrutiny under section 143(2) by the issuance of a notice. The assessee had debited an amount of Rs. 21.46 crores as interest paid/payable to the profit and loss account. The assessee, however, stated that the interest charged to the profit and loss account was net of interest received in the amount of Rs. 3.25 crores. The assessee was called upon to explain as to why the deduction under section 80HHC should not be recomputed by excluding ninety per cent. of the interest received in the amount of Rs. 3.25 crores. By its explanation, the assessee submitted that during the year, it received interest on fixed deposits. The assessee stated that it had borrowed monies in order to fulfil its working capital requirements and the bank had called upon it to maintain a fixed deposit as margin money against the loans. The assessee consequ....
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.... for the purpose of earning the receipts. Section 80HHC : 6. Sub-section (1) of section 80HHC provides that where an assessee, being an Indian company or a person residing in India, is engaged in the business of export out of India of goods or merchandise to which the section applies, there shall be allowed in computing the total income of the assessee, a deduction to the extent of profit referred to in sub-section (1B) derived by the assessee from the export of such goods. Sub-section (1B) stipulates the extent of the permissible deduction and the period during which the deduction could be claimed. Sub-section (3) lays down a formula with reference to which the profits derived by the assessee from export have to be computed. In the present case, clause (a) of sub-section (3) is of relevance and it provides as follows : "(3) For the purposes of sub-section (1),- (a) where the export out of India is of goods or merchandise manufactured or processed by the assessee, the profits derived from such export shall be the amount which bears to the profits of the business, the same proportion as the export turnover in respect of such goods bears to the total turnover of the busin....
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....ts. As noticed earlier, it is the contention of the Revenue that the reduction factor of ninety per cent. must be applied to the gross receipts, independent of any expenditure that may be incurred in the earning of those receipts, while, according to the asses-see, the use of the words "included in such profits" must, in particular, result in the conclusion that the reduction factor cannot be applied in isolation only to the gross receipts without reference to the expenditure laid out directly for the purpose of earning those receipts. It is in this back-ground that it would be necessary now to advert to the rival submissions. Submissions : 9. Counsel appearing on behalf of the Revenue submitted firstly that Explanation (baa) seeks to exclude ninety per cent. of : (i) any sum by way of export incentives referred to in clauses (iiia) to (iiie) of section 28 ; (ii) receipts by way of brokerage, commission, interest, rent, charges or other similar receipts ; and the profits of any branch, office, or warehouse. The submission is that Parliament has used three different expressions, namely, "any sums", "receipts" and "profits". In so far as receipts are concerned, it has ....
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....titute profits ; (v) Explanation (baa) does not use the expression "gross or net". However, having regard to the purpose and object of the provision and the nature of the language used in the Explanation, ninety per cent. of the receipts that is required to be excluded would have to be computed with reference to the inclusion of such receipts in the profits and gains of business which in turn involves both the credit and the debit sides of the profit and loss account ; (vi) for the purposes of Explanation (baa), income from other sources would not come within the purview of the Explanation; Only business income would have to be considered and interest in the nature of business income would have to be taken into consideration ; (vii) receipts by way of interest in Explanation (baa) denotes the nature of the receipts and inclusion in "such profits" would denote the quantum of the receipts ; (viii) the words which have been used by the Legislature suggest what is included in the total income or what has gone into the computation of the total income. Consequently, both the debit and the credit sides of the profit and loss account would have to be considered; (ix) the words "such profit....
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....they form part of the profit and loss account. This aspect of the history underlying section 80HHC, has been elaborated upon in the judgment of the hon'ble Shri Justice S. H. Kapadia, speaking for the Supreme Court, in CIT v. Lakshmi Machine Works [2007] 290 ITR 667. 12. Explanation (baa) has to be read in the context of this background underlying the exclusion of certain constituent elements of the profit and loss account from the eligibility for deduction under section 80HHC. What Explanation (baa) postulates is that, in computing the profits of business for the purposes of section 80HHC, the profits of business have to be first computed under the head "Profits and gains of business or profession", in accordance with the provisions of sections 28 to 44D. Once that exercise is completed, those profits have to be reduced to the extent provided by clauses (1) and (2) of Explanation (baa). Clause (1) to the Explanation requires the application of the ninety per cent. deduction to two categories. The first category consists of export incentives which are referred to in clauses (iiia) to (iiie) of section 28. The second category consists of receipts by way of brokerage, ....
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.... the processing charges would have to be reduced from gross total income to arrive at business profits. As a result, the processing charges would be includible in total turnover in the formula under section 80HHC(3). For the purpose of this appeal, it would be appropriate to formulate the principles which emerge from the decision in Ravindranathan Nair. These may be summarized as follows: (i) Section 80HHC is not a charging section, but a provision by way of an incentive and its object is not to ascertain real income ; (ii) The expression "derived from" in sub-section (1) of section 80HHC is narrower than the expression "attributable to" and consequently, it is only profits derived from export which can become the basis for working out the formula in section 80HHC(3) ; (iii) As a result of the amendment brought about from April 1, 1992 by the Finance Act of 1991, the expression "profits of the business" stands defined to mean profits of the business as computed under the head "Pro-fits and gains of the business" under sections 28 to 44D ; (iv) Before allowing a deduction under sub-section (3) of section 80HHC, the gross total income of an assessee, being profits from bu....
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.... and receipts which result in "independent income" have to be excluded from the gross total income to the extent of ninety per cent. because such receipts have no nexus with the export turnover. 16. In Lakshmi Machine Works [2007] 290 ITR 667 the issue before the Supreme Court was whether excise duty and sales tax were to be included in the total turnover for the purpose of working out the formula contained in section 80HHC(3). The Supreme Court held that the object of the Legislature in enacting section 80HHC was to confer benefit on profits accruing with reference to export turnover. The Supreme Court observed that "commission, rent, interest, etc., did not involve any turnover" and "therefore, ninety per cent. of such commission, interest, etc., was excluded from the profits derived from the export." Just as interest, commission, etc., did not emanate from export turnover, so also excise duty and sales tax had to be excluded. The resultant position in law : 17. The deduction under section 80HHC is available to an assessee engaged in the export of goods or merchandise outside India to the extent of the profits specified in sub-section (1B) of the provision. Clause (a) of....
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....isions of the Finance (No. 2) Bill of 1991. In so far as it is relevant, the Memorandum states thus [1991] 191 ITR (St.) 270, 300) : "The existing formula may also give a distorted figure of export profits when receipts like interest, commission, etc., which do not have an element of turnover are included in the profit and loss account. It is, therefore, proposed to clarify 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, it is proposed to provide ad hoc 10 per cent. deduction from such incomes to account for these expenses." 19. Parliament, therefore, confined the reduction to the extent of ninety per cent. of the income earned through such receipts since it was cognizant of the fact that the assessee would have incurred some expenditure in earning those incomes. Parliament provided an ad hoc deduction of ten per cent. from such incomes to account for the expenses incurred in earning the receipts. The expl....
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.... cent. enacted by Parliament, but in order to simplify the application of the law, Parliament treated a uniform expenditure computed at ten per cent. to be applicable in order to ensure that there is no distortion of profits by exclusion of income which is not relatable to export profits. Distributors Baroda : 20. In Distributors (Baroda) P. Ltd. v. UOI [1985] 155 ITR 120 what was in issue before the Supreme Court was the deduction provided for in section 80M. Section 80M provided that where the gross total income of an assessee, being a company includes any income by way of dividends received from a domestic company, in computing the total income of the assessee, there shall be allowed a deduction from such income by way of dividends of a certain amount. The extent of the deduction varied between sixty to eighty per cent. The Supreme Court observed that 'income by way of dividend from a domestic company included in the gross total income' would be the income computed in accordance with the provisions of the Act, that is after deducting interest on monies borrowed for earning such income. While interpreting the words "included in the gross total income" and, emphasizing the w....
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....is that items which are unrelated to export turnover have to be excluded in computing the profits of business. Including items which are unrelated to export turnover in computing the profits of business would result in a distortion of the formula which is to be applied in construing the provisions of section 80HHC. The reason for exclusion, therefore, is that in computing the profits of business items which are unrelated to export turnover must be excluded because the basis of section 80HHC is to provide an incentive for export. The extent of the exclusion which is statutorily mandated by Parliament is ninety per cent. of the total receipts. Though the entire quantum of receipts unrelated to export turnover would ordinarily have to be excluded, the extent of the exclusion has been confined to ninety per cent. This is because the expenditure which is incurred by the assessee in earning these receipts would have gone into the computation of the profits and gains of business or profession and a distortion would be caused if the entirety of the income generated from the receipts alone were to be excluded. It is in order to obviate such a distortion that Parliament mandated ....
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....e computation of profits and gains for business could not be set off against interest received and paid under income from other sources. The judgment in Subbiah Pillai was followed by another Division Bench in CIT v. V.Chinnapandi [2006] 282 ITR 389 (Mad) In the case before the Madras High Court, the assessee had paid interest of Rs. 9.24 lakhs and had received interest of Rs. 2.65 lakhs and the net interest of Rs. 6.59 lakhs came to be debited. The Assessing Officer held that under section 80HHC, ninety per cent. of the receipts had to be excluded and consequently the deduction was confined to ninety per cent. of the income of Rs.2.65 lakhs received on account of interest. The order of the Assessing Officer was con-firmed by the appellate authority. The Income-tax Tribunal, however, held that the net figure of interest was Rs. 6.59 lakhs which was not a receipt and hence, there was no question of removing any amount while computing the deduction under section 80HHC. The Division Bench of the Madras High Court held that "on a plain reading of the provision", it was clear that what the provision stipulates is that the profits of business would be the profits as computed under the he....
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....uctible for the claim under section 80HHC was from the gross interest received by the assessee and that the amount of the interest paid by the assessee could not be deducted therefrom. The Division Bench held that "a plain reading of clause (baa) of Explanation to section 80HHC . . . makes this aspect quite clear" and the Tribunal was right in disallowing the claim of the assessee. A subsequent decision of the Punjab and Haryana High Court in CIT v. Liberty Footwear Company [2006] 287 ITR 339 also adopts the same position. 26. Reliance is, however, sought to be placed on behalf of the assessee upon the judgment of a Division Bench of the Delhi High Court in CIT v. Shri Ram Honda Power Equip [2007] 289 ITR 475 (Delhi). One of the issues which came up for decision in the appeal was whether the expression "interest" in Explanation (baa) connotes net interest as gross income less expenditure incurred by the assessee for earning such income. The Delhi High Court held that the judgment of the Supreme Court in Distributors (Baroda) [1985] 155 ITR 120 would fully cover the question as to whether the deduction which is to be effected under Explanation (baa) was of the entire intere....
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.... at all. 28. Having given a careful consideration to the judgment of the Delhi High Court, we are not inclined to follow the view for a number of reasons. The substratum of the judgment of the Delhi High Court proceeds on the basis that the question as to whether netting should be permissible stands concluded by the judgment of the Supreme Court in Distributors (Baroda) [1985] 155 ITR 120. In Distributors (Baroda) [1985] 155 ITR 120, while considering the provisions of section 80M, the Supreme Court interpreted the words "where the gross total income of the assessee being a company included any income by way of dividend received" and the words which provided that in computing the total income of the assessee "a deduction from such income by way of dividend" shall be allowed to the extent specified in the provision. While applying the ratio of the judgment in Distributors (Baroda) [1985] 155 ITR 120, we have observed that the expression "receipts of a similar nature included in such profits" in Explanation (baa) to section 80HHC must refer to receipts which form a part of the computation under the head of profits and gains of business or profession under sections 28 to 44D of the....
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....rliament. The Delhi High Court, with respect, has not adequately emphasised the entire rationale for confining the deduction only to the extent of ninety per cent. of the excludible receipts. While the judgment of the Delhi High Court referred to the Central Board of Direct Taxes Circular dated December 19, 1991, as noted earlier, we have also adverted to the Memorandum explaining the clauses of the Finance Bill of 1991. The Memorandum can be relied upon as a legitimate instrument of statutory interpretation and to shed light upon the provisions of Explanation (baa). 29. Before concluding, it would be necessary to note that the Delhi High Court affirmed the judgment of a Special Bench of Income-tax Appellate Tribunal in the case of Lalsons. The Tribunal in the course of its decision, adverted to the deduction of ten per cent. allowed by Parliament in Explanation (baa) while legislating that only ninety per cent. of the receipts unrelated to export turnover would be excluded from the profits of business. The Tribunal, observed that the allowance of ten per cent. had been made by Parliament only for meeting common expenses, according to Circular 621 dated December 19, 1991 of the ....