TaxTMI 
TaxTMI 
2008 (11) TMI 434
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....t of cancellation of foreign exchange contract as part of the business profit eligible for deduction under section 80HHC(1) of the Act to be taken as one falling under clause (baa)(1) of the Explanation below section 80HHC(4B) of the Act." 3. The assessee is also aggrieved by the findings given by the learned CIT(A) on this issue in ground No. 2 of its appeal which is as under:- "2. The learned Commissioner of Income-tax (Appeals) ought to have: (a )held that income of Rs. 14,13,19,172 derived from Unit I of your petitioner is to be granted exemption under section 10A of the Act, in assessing the income for the year. (b )held that the Gains (net) on cancellation of forward exchange contracts for the year of Rs. 2,56,00,006 have not to be deducted in terms of Explanation (baa ) to section 80HHC of the Act in quantifying "profits of the business" relevant for determining admissible deduction under section 80HHC of the Act. (c )held that the unabsorbed business loss and depreciation allowance aggregating to Rs. 2,02,51,007 relating to assessment year 1996-97 have not to be deducted in quantifying the "profits of the business" in terms of Explanation (baa ) to section 80....
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....sessee are supported." 5. Not convinced with the assessee's submission the Assessing Officer observed that entering into exchange forward contracts was not mandatory for the assessee's export business and hence the forward contracts could not be categorized as part of export activity. In his opinion the true test was to determine as to whether export activity could take place even without forward exchange contract and as the answer to this test in his opinion was in affirmative, he held that the entering into the foreign exchange forward contract with the banks in India would not be considered as the activity of assessee's export business. He further considered the provisions of section 43(5) and opined that the forward exchange contracts were entered into or cancelled for earning profit and such profits would not have been earned if these contracts had not been entered and cancelled. He, therefore, held the income from cancellation of foreign exchange forward contracts as speculative business income not eligible for deduction under section 80HHC. In the first appeal the learned CIT(A) by relying on the judgment of the Hon'ble jurisdictional High Court in CIT v. Badridas Gaurida....
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....efore the Hon'ble Court was only to decide the includibility or otherwise of the processing charges, an independent income, in the total turnover. He submitted that the reasoning given by the Hon'ble Supreme Court in the latter part of the judgment by which it was held that 90 per cent thereof needed to be reduced from the gross total income, cannot be considered as the ratio decidendi of the case inasmuch as it was neither the question raised nor argued before it. 9. We have heard the rival submissions and perused the relevant material on record in the light of precedents cited by both the parties. There is no dispute about the nature of income of Rs. 2.56 crores which was earned by the assessee on the cancellation of forward foreign exchange contracts. During the course of its business of export the assessee entered into such contracts for sale of foreign exchange with the banks. As the assessee is engaged in the export activity, these type of contracts are allowable as per the Exchange Control Manual of the Reserve Bank of India. In our considered opinion there is no need to wander here and there to find out the classification of this income being a speculative or normal busi....
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....section 80HHC(4C), which reads as under:- "(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), (iiic ), (iiid) and (iiie ) 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 outside India:" 11. On going through the above statutory provision it can be seen that 90 per cent of the sums referred to in some clauses of section 28 or the independent receipts such as brokerage, commission, interest and rent etc. are required to be reduced from the "Profits and gains of business or profession" for computing "profits of the business". The Hon'ble Supreme Court considered the provisions of this section along with clause (baa) of Explanation to section 80HHC in K. Ravindranathan Nair's case (supra). In that case the assessee had a factory in which cashew nuts were processed which were grown in his farm and ....
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.... be considered as eligible for deduction under this section in view of the clear mandate of sub-section (2) which refers to the receiving in of the convertible foreign exchange into India. It is quite possible that apart from export business, an assessee may also have any other income from business in India. Sub-section (3) sets out the procedure for computing the deduction under section 80HHC by removing that part of the total income from its purview which does not emanate from the export activity. To put it simply, the deduction is confined to the profits from the activity of export only. As noted earlier that an assessee may also have other independent incomes apart from the export activity. When the books of account are maintained on a consolidated basis and the "profits of the business" are to be computed for the purposes of section 80HHC in relation to the export income, then to overcome a situation in which the benefit of deduction may not percolate in relation to the other independent incomes, Explanation (baa ) was inserted by providing that 90 per cent of the items referred to in this clause shall be reduced from the profits and gains of business or profession. The logic ....
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.... decisive test for bringing it directly under the purview of deduction. What is material consideration for allowing deduction is that the income should directly result from the export activity. 13. The contention of the learned A.R. that the income from cancellation of forward exchange contracts is directly relatable to the export business and hence 90 per cent of the same should not be excluded is not acceptable for the obvious reason that such income has not been "received in or brought into India in convertible foreign exchange". It is an income earned from the banks in India. Even though it has got some connection with the export business, but the same falls short of "the sale proceeds of such goods or merchandise exported out of India" as explained in sub-section (2) of section 80HHC. In our considered opinion it is an independent income of the nature as explained in K. Ravindranathan Nair case (supra) and deserves the same treatment as given to the processing charges. 14. The learned A.R. has also stated that the judgment of the Hon'ble Supreme Court in the case of K. Ravindranathan Nair (supra) needed to be considered only in the context in which it was rendered and in....
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.... it was set to rest. It is not as if the Hon'ble Supreme Court was only deciding about the inclusion of the independent income in the total turnover but the other aspect of the same issue being the reduction of 90 per cent in terms of Explanation ( baa), which is germane to the main question, was also adjudicated for giving finality to the larger issue. Both the points decided by the Hon'ble Supreme Court relate to the same issue and are in fact complimentary to each other. When both the issues are so inter-linked and inter-twinned that they cannot be separated, we are not prepared to accept the argument that the later part of the judgment be held as obiter dicta and hence ignored. The decision of the Hon'ble Court on both the points involves the same issue and that too only in the context of the deduction under section 80HHC. It is not as if one issue was raised and it adjudicated on an altogether different issue de hors the controversy before it. When the subject-matter continues to remain the same, how it can be held that one part of the decision is relevant and the other is alien. It is absolutely impermissible to argue and for that matter for the courts or the authorities to d....
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....as inserted to section 80HHC, was prospective in nature and would not apply to the earlier assessment years. Similar is the position in K.K. Doshi & Co.'s case (supra) in which case also the assessment year involved was 1990-91 and the deduction was held to be allowable by holding that Explanation to section 80HHC will not apply. On the contrary we are dealing with the assessment year 1997-98, when the Explanation to section 80HHC is very much applicable. In that view of the matter, these two judgments will have no application to the case. Rather the case of K. Ravindranathan Nair (supra), which relates to the post amendment era, will be applicable. 18. From the above discussion it is amply clear that the foreign exchange gain on the cancellation of forward exchange contract is "independent income" and 90 per cent of the same is liable to be reduced from the business income for computing "profits of the business" as per clause (baa ) of Explanation (1 ) to section 80HHC. The Assessing Officer is directed to re-compute the deduction under section 80HHC in terms of our above discussion. 19. Ground No. 1 of the assessee's appeal is against the denial of deduction of Rs. 14,13,19....
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....n 10A(3). The said amendment is only for the period starting 1-4-1999 and not applicable for the period prior to that. (iii)In the assessee's case the deduction was claimed for five years out of eight years and the period of exemption was over in 1996-97 itself. Thereafter the unit has become a taxable unit under the other provisions of Income-tax Act. How can such unit become exempt on the basis of prospective amendment from 1-4-1999. (iv)When the amendment is clear the same cannot be construed to be applicable to the cases which are already outside the purview of the said provision. If the prospective amendments are construed retrospectively, it will cause absurdity and mischief and I am in agreement with assessee in view of the Supreme Court decisions that the statutory provisions must not be interpreted if it is able to give a clear meaning. (v)Even if the amendment of ten years is considered assessee has already completed ten years period by assessment year 1998-99 and, therefore, the amendment which is coming on 1-4-1999 cannot extend benefit to the assessee who cannot get benefit with effect from 1-4-1999. (vi)It has been decided by various Courts from time to ti....
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....) shall not be included in the total income of the assessee in respect of any five consecutive assessment years, falling within the period of eight years beginning with the assessment year, relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles or things. The learned A.R. has admitted that the assessee had availed the deduction under section 10A in last five consecutive assessment years which period terminated in assessment year 1996-97. In other words the period of eligible eight years expired in 1996-97 and the assessee chose last five years for having the benefit of deduction under this section. If there had been no change in section, the assessee could not have claimed any deduction under section 10A in the assessment year 1997-98 which is under consideration, as the prescribed period of eight years had expired and the assessee had also already availed deduction in five years as permissible under law. Amendment to section 10A was carried out by the Income-tax (Second Amendment) Act, 1998 by which sub-section (3) was amended to provide that the profits and gains referred to in sub-section (1) shall not be included in the total....
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....ten consecutive assessment years. Obviously the amendment so made to sub-section (3) is substantive as it has expanded the period of deduction from the earlier five years to ten years. There is nothing like giving any clarification for the earlier provision or laying down any procedure in respect of the existing provision. A new extended benefit was conferred for the first time. By no stretch of imagination it can be said to be clarificatory or procedural so as to the branded as the retrospective. It is, indeed a substantive amendment and will hold the field from the date when it has been made applicable from, which in the present case is assessment year 1999-2000. The position would have been different if the period of five years had not yet expired and the amendment had come in between. In that case the assessee would have been entitled to deduction for the larger period as per the amendment. 24. As per the earlier provision the assessee was entitled to have the deduction for five consecutive assessment years in the eight years from the date when it began to manufacture or produce the articles or things. The assessee opted for availing the benefit of deduction in the last five....