TaxTMI 
TaxTMI 
2004 (4) TMI 259
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....in holding that for the purpose of computation of the deduction under s. 80HHC, the loss on export of trading goods is to be reduced from the deduction available in respect of export benefits under the provisions of s. 80HHC(3). 4. As the appellant had incurred loss from export of trading goods, the learned CIT(A) ought to have held that the profit from export of trading goods for the purpose of s. 80HHC(3)(b) is to be taken at Rs. Nil. The CIT(A) ought to have directed the Dy. CIT to allow deduction under the proviso." 2. From the aforesaid, it is clear that the appeal filed by the assessee raises two issues. The first issue deals with the allowability of Rs. 3,67,818 under s. 37(4) r/w s. 37(5) in respect of Ahmedabad bungalow expenses. The second issue relates to the allowability of claim of the assessee for deduction of Rs. 22,34,456 under s. 80HHC of the IT Act, 1961 ('ITA' in short). Ground No. 1: 3. As regards ground No. 1, it was fairly conceded by the learned Authorised Representative for the assessee ("AR" in short) that the ground is covered against the assessee by the orders of the Tribunal in assessee's own case for earlier years as also b....
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....ds and merchandise out of India. Therefore, the assessee should earn a profit from exporting goods out of India in order to claim deduction under s. 80HHC of the IT Act, 1961. In the present case, from the following facts, it is very clear that the assessee has not earned any profit but instead has incurred a loss from exporting of goods: "Total export turnover 16,55,93,559 Less: Direct cost 14,85,54,350 Indirect cost 1,96,31,392 16,81,85,742 Loss 25,92,183 Add : Export incentives received 25,03,760 Loss 88,423 Therefore, even on this count, the assessee is not entitled to claim deduction under s. 80HHC of the IT Act, 1961, and the same is rejected by me." 5. From the assessment order, as extracted above, it is clear that the assessee was denied deduction under s. 80HHC on three grounds: a. The assessee has failed to comply with the provisions of s. 80HHC(4) of the Act inasmuch as he has failed to furnish the report of the accountant in the prescribed form along with the return of income. b. The assessee has suffered loss from export of goods whereas the condition ....
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....under the International Price Reimbursement Scheme. In other words, his submission was that losses from the export should be ignored while computing the deduction in terms of the proviso to sub-s. (3) of s. 80HHC. 10. His second submission was that the Hon'ble Supreme Court was not concerned in IPCA with the interpretation of the proviso to sub-s. (3) of s. 80HHC and hence, its decision would not affect or dilute the decision of the Special Bench in Lalsons with reference to the scope of the proviso. 11. Elaborating his arguments, the learned Authorised Representative took us through the question referred to the Special Bench for decision by the Hon'ble President of the Tribunal under s. 255(3) of the IT Act as also the various paragraphs in the said order to which references shall be made at appropriate places in this order. 12. The learned Authorised Representative further submitted that the Special Bench in Lalsons has categorically held that the intention behind enacting the proviso to sub-s. (3) of s. 80HHC was to compensate the exporter for the disadvantage that he suffered on account of international competition and, therefore, there was no logic in saying t....
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.... the proviso. His submission, in brief, was that an assessee showing losses from exports would not satisfy the statutory requirement of the profits having been derived from the export and hence, he would not be eligible for deduction under s. 80HHC(1). (ii) His alternative proposition, which was without prejudice to the first proposition, was that since sub-s. (1) of s. 80HHC granted deduction on the positive profits derived from the export, as held by the Hon'ble Supreme Court, in IPCA, both the profits and losses would have to be considered in order to work out the positive profit. He submitted that the question of adjustment of losses against the profits was very much under the consideration of the Hon'ble Supreme Court which fact is evident from the question taken up by the Hon'ble Court for consideration as also from the reproduction of the provisions of sub-s. (1) and sub-s. (3) of s. 80HHC including the proviso to sub-s. (3) of s. 80HHC in the judgment in IPCA. He submitted that the law laid down by the Hon'ble Supreme Court in IPCA was clear in that it was the net profit after adjustment of loss that was liable to be considered for deduction under s....
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....d by the assessee from the export of trading goods, the same proportion as the amount of export turnover specified in the said certificate bears to the total export turnover of the assessee in respect of such trading goods." xxx xxx xxx (3) For the purposes of sub-s. (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 business carried on by the assessee; (b) where the export out of India is of trading goods, the profits derived from such export shall be the export turnover in respect of such trading goods as reduced by the direct costs and indirect costs attributable to such export; (c) where the export out of India is of goods or merchandise manufactured or processed by the assessee and of trading goods, the profits derived from such export shall,- (i) in respect of the goods or merchandise manufactured or processed by the assessee, be the amount which bears to the adjus....
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....ing the losses or losses suffered by the assessee from the export of specified goods or merchandise can be ignored or treated as nil for computation of the deduction under s. 80HHC. (iii) Whether the export incentives alone are sufficient to form the basis for deduction under s. 80HHC(1) without there being any positive profit by which they are required to be further increased, in terms of the proviso thereto. 19. At the time of hearing, the learned Authorised Representative has strongly relied upon the decision of the Hon'ble Special Bench in Lalsons and argued that the case of the assessee is squarely covered by the said decision inasmuch as the Special Bench in the aforesaid case has held that the losses incurred by the assessee should be ignored and deduction under s. 80HHC should be allowed with reference to the export incentives alone. Perusal of the order of the Special Bench in Lalsons shows that the following question was considered by the Special Bench : "(iii) Whether the proviso to s. 80HHC(3) can be applied in a case where the export profit computed as per cl. (a), (b) or (c) of sub-s. (3) or aggregate hereof, is a negative profit (loss) and if....
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....not be interpreted in a manner that would result in such injustice. (iii) 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. (iv) It would be inappropriate to extend the area of an adjustment of a positive figure and a negative figure, inter se, beyond cl. (c) of sub-s. (3). 21. The propositions laid down by the Special Bench in Lalsons revolve around the adjustment of losses against export incentives under the proviso to sub-s. (3). The Hon'ble Special Bench has stated in para 25 of its order that it was not the case of the Revenue in Lalsons that in case of a loss in the export business under any of the three clauses of the sub-section, the proviso would not be attracted at all and that the assessee would not be eligible for any deduction in respect of the export incentive. In the present appeal before us, it is very much the case of the Revenue that in case of a loss in export business, the proviso would not be attracted at all and the assessee would not be eligible for a....
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....., "profits derived from such export" has been used in cls. (a) to (c) of sub-s. (3) of s. 80HHC. The first limb of the proviso also uses the words "profits computed under cl. (a) or cl. (b) or cl. (c) of this sub-section". Thus, the phrase "profits derived from the export" has been distinctly used in sub-ss. (1) and (3) of s. 80HHC. The third limb of the proviso, however, refers to the export incentives in the nature of any sum referred to in cls. (iiia), (iiib) and (iiic) of s. 28. Thus, the third limb of the proviso refers to the export incentives whereas the first limb of the proviso refers to the profits derived from the export. While both, i.e., the profits derived from the export and the export incentives are assessed as income from business under s. 28, they are, in fact, altogether different species of income. The profits derived from export arise directly on account of the difference in the cost price and sale price of the goods exported whereas the export incentives arise as a result of the Governmental measure to enable the exporters to compete effectively in the international market. Export incentives follow the export and hence can at the most be treated as attributab....
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..... What is, therefore, required to be seen is whether the assessee has derived profits from the export. In order to avail the deduction under s. 80HHC, the assessee must, in the first instance, establish that his case falls under sub-s. (1). It is only after an assessee has fulfilled the mandatory conditions of sub-s. (1) that the doors of sub-s. (3) will open and enable the assessee to compute the profits in the manner laid down therein including the proviso thereto. In the appeal before us, it is not in dispute that the assessee satisfies the requirements of the first part of sub-s. (1) but does not satisfy the requirement of the second part in that the assessee has not derived any positive profit from the export. In IPCA, the Hon'ble Supreme Court has interpreted the term "profits" used in sub-s. (1) as a positive profit. The deduction required to be made by the substantive provisions of sub-s. (1) of s. 80HHC is, therefore, dependent upon the positive profits derived by the assessee from the export and not upon the export turnover or upon the earnings of foreign exchange or upon the income of the assessee under s. 28. Once he establishes that he has a positive profit derived....
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.... are also significant inasmuch as they denote and require that a positive profit alone as computed in terms of the first limb shall be further increased by the export incentives as per the prescription of the proviso. The word "increased" which is prefixed by the word "further" is also significant. The words "increase", "adjustment" and "aggregate" carry precise meanings. According to the Black's Law Dictionary-Seventh Edn., the term "adjusted" has been defined under the head "basis" and sub-head "adjusted basis" as follows : "It is well to consider the word "adjusted" in the term 'adjusted basis'. Often, after property is acquired, certain adjustments (increases or decreases to the dollar amount of the original basis) must be made. After these adjustments, the property then has an 'adjusted basis'. Michael D Rose & John C Chommie, Federal Income Taxation 6.04, at 300." Under the head "income", the same dictionary defines "adjusted gross income" to mean "gross income minus allowable deductions specified in the tax code, Abbr. AGI." Under the head "income", the same dictionary defines "aggregate income" to mean "the combined income of the husband and wife who fil....
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....her increased" makes it all the more clear that nobody has the discretion to treat the export incentives in any other manner other than by way of further increasing the profits derived from the export. (iv) If the assessee does not have a positive profit derived from the export, there remains nothing which can be further increased by the export incentives. Losses derived from the export as computed under cls. (a) to (c) of sub-s. (3) cannot be further increased by the export incentives as losses can be further increased by losses or negative figures only and not by positive figures. In view of the judgment in IPCA, the first limb of the proviso can also not be interpreted to mean that the losses incurred by the assessee from the export should be ignored or treated as 'nil' as against the use of clear and unambiguous words that it is the profit (i.e., positive profit) derived from export which is to be further increased by the export incentives. Such an interpretation will make the first limb of the proviso and the provisions of sub-s. (1) and (3) of s. 80HHC otiose and redundant and will be inconsistent with the observations made in IPCA. 28. The contention of t....
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....o other class. It is only this class which is entitled to the additional benefit contemplated by the proviso by further increasing the profits derived from the export by export incentives. This position is again reiterated through the first and second limbs of the proviso. The substantive part of sub-s. (1) and the computation part laid down in cls. (a) to (c) of sub-s. (3) cannot, therefore, be made applicable to an assessee who has not derived the profit from the export and in such a case, and, consequently the proviso would not apply either. In Juvvi Subbaramaiah & Co. vs. CIT (1964) 51 ITR 742 (AP), the Hon'ble High Court has held, in the context of the first proviso to s. 24(1) of the Indian IT Act, 1922, that when the substantive part of sub-s. (1) itself was not applicable, the proviso thereto would not apply either. The applicability of s. 80HHC is restricted, in terms of the provisions of sub-s. (1), to the assessees deriving profits from export. The proviso is neither capable of enlarging that field of application as mandated by the main provisions of sub-s. (1) nor has it altered the same either expressly or impliedly. Please see CIT vs. Madurai Mills 1973 CTR (SC) 2....
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.... The aforesaid judgment lends credence to the view that export incentives by themselves cannot form the basis for deduction under s. 80HHC de hors the provisions of sub-s. (1) thereof. 33. We shall now deal with the submissions of the learned Authorised Representative. His first submission was that the assessee should be allowed deduction with reference to the export incentives ignoring the losses suffered by it by taking them to be nil. We are unable to agree with this submission for two main reasons. One, there is nothing in sub-s. (1) or sub-s. (3) including the proviso thereto on the basis of which it can be interpreted that losses suffered by the assessee should be ignored. As stated earlier, the plain and unambiguous language used in sub-s. (1) of sub-s. (3) including the proviso thereto makes it amply clear that the benefits of deduction should be extended only to those assessees who have positive profits derived from the export. In the face of such clear expression of law, we are unable to hold that the losses suffered by the assessee should be ignored and the benefits should be given on the basis of export incentives alone without attaching any importance to the statuto....
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...., the Hon'ble Supreme Court has held that exemption being in the nature of exception is to be construed strictly at the stage of determination, whether the assessee falls within its terms or not, and in case of doubt or ambiguity, benefit of it must go to the State, but once the provision is found applicable full effect must be given. We, therefore, see no reason to take a view different from the one clearly conveyed by the provisions of sub-s. (1) and sub-s. (3) of s. 80HHC. (ii) The plea of the assessee that denial of deduction to the loss-making exporters with reference to the export incentives will be unjust and cause hardship to them is again an argument which cannot be accepted. As held in H.H. Lakshmi Bai & Anr. Etc. vs. CWT (1994) 117 CTR (SC) 43 : (1994) 206 ITR 688 (SC), it is a settled law that taxation statutes in particular have to be strictly construed and that there is no equity in a taxing provision. It is because of this that the submission of the assessee in the aforesaid case before the Supreme Court that strict interpretation of the proviso would cause hardship to small depositors as against richer ones, even if true, was held to be of no relevance.....
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....of the proposition that losses cannot be ignored. It is further submitted by the Revenue that the Special Bench decision of the Tribunal in Lalsons must yield to the law subsequently declared by the Supreme Court in IPCA Laboratories as the same is binding on us under the Constitutional provisions of Art. 141. 38. We have carefully perused the order of the Special Bench of the Tribunal in Lalsons as also the judgment of the Hon'ble Supreme Court in IPCA Laboratories. The Hon'ble Special Bench has held in Lalsons that losses should be ignored whereas the Hon'ble Supreme Court has held that losses cannot be ignored. The Special Bench of the Tribunal has held that losses should be treated as 'nil' whereas the Hon'ble Supreme Court has held that losses should be adjusted against the profits and the deduction allowed only on positive profits. The Hon'ble Supreme Court has considered the provisions of s. 80AB, whereas the Hon'ble Special Bench of the Tribunal has not considered the provisions of s. 80AB. In view of the judgment of the Hon'ble Supreme Court in IPCA Laboratories, we are of the view that losses can neither be ignored nor taken as nil. ....