Full Judgment Text
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 8912 OF 2003
JEYAR CONSULTANT & INVESTMENT
PVT. LTD. .....APPELLANT(S)
VERSUS
COMMISSIONER OF INCOME TAX,
MADRAS .....RESPONDENT(S)
J U D G M E N T
A.K. SIKRI, J.
What is the correct method of computation of deductions
under Section 80HHC(3) of the Income Tax Act, 1961, in the given
JUDGMENT
facts and circumstances, is the question which needs an answer
in the present appeal.
2) The given facts and circumstances, as they appear on record, are
stated in the summary form herein below:
Finance Act of 1983 introduced Section 80HHC of the
Income Tax Act, providing incentives to exporters and deductions
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for persons involved in the export business. Section 80HHC(3)(b)
provided the formula for the computation of deduction for persons
who do not have business exclusively of export out of India, that
is to say, in cases where the assessee is having turnover and
income from business in India as well as from the export
business. For the sake of convenience, relevant portions of
Section 80HHC are extracted hereinbelow:
“80HHC. Deduction in respect of profits
retained for export business.-(1) Where an
assessee, being an Indian company or a
person (other than a company) resident in
India, is engaged in the business export out of
India of any goods or merchandise to which this
section applies, there shall, in accordance with
and subject to the provisions of this section, be
allowed, in computing the total income of the
assessee, a deduction of the profits derived by
the assessee from the export of such goods or
merchandise:
Provided that if the assessee, being a holder of
an Export House Certificate or a Trading House
Certificate (hereinafter in this section referred to
as an Export to in clause (b) of sub-section
(4a), that in respect of the amount of the export
turnover specified therein, the deduction under
this sub-section is to be allowed to a supporting
manufacturer, then the amount of deduction in
the case of the assessee shall be reduced by
such amount which bears to the total profits of
the export business of the assessee the same
proportion as the amount of export turnover
specified in the said certificate bears to the total
export turnover of the assessee.
JUDGMENT
xx xx xx
3) For the purposes of sub-section (1),
profits derived from the export of goods or
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merchandise out of India shall be -
(a) in a case where the business carried on
by the assessee consists exclusively of the
export out of India of the goods or merchandise
to which this section applies, the profits of the
business as computed under the head “profits
and gains of business or profession”.
(b) in a case where the business carried on
by the assessee does not consist exclusively of
the export out of India of the goods or
merchandise to which this section applies, the
amount which bears to the profits of the
business (as computed under the head “Profits
and gains of business or profession”) the same
proportion as the export turnover bears to the
total turnover of the business carried on by the
assessee.”
3) On 05.07.1990, the Central Board of Direct Taxes (CBDT) issued
Circular No.564 dated 05.07.1990 giving detailed guidelines as to
how the deductions under Section 80HHC are to be calculated.
The formula prescribed by CBDT circular is as follows:
Export Turnover
Profit of the Business X
JUDGMENT
Total Turnover
4) The appellant company is engaged in the business of export of
Marine products and also financial consultancy and trading in
equity shares. Its total business does not consist purely of
exports but includes business within the country as well which
situation is covered by Section 80HHC(3)(b), noted hereinabove.
Civil Appeal No. 8912 of 2003 Page 3 of 24
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5) The Assessing Officer while dealing with the assessments of the
appellant in respect of the Assessment Year 1989-1990 took the
view that the deduction was not allowable on the ground that
there is no relationship between the Assessee Company and the
Processors. The appellant carried the said order in appeal. The
appeal against the assessment order was dismissed by the
Commissioner of Income Tax (Appeals), Madras vide order dated
17.08.1991. The appellant filed an appeal before the Income Tax
Appellate Tribunal. By its judgment dated 24.04.1992, the
Appellate Tribunal set aside the order of the Assessing Officer
and came to a conclusion that the appellant was entitled to full
relief under Section 80HHC and directed the Assessing Officer to
grant relief to the assessee.
6) On remand, the Assessing Officer passed fresh order dated
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28.05.1992 giving effect to the orders of the ITAT. While giving
the effect, the Assessing Officer found that the appellant had not
earned any profits from the export of Marine products and in fact,
from the said export business, it had suffered a loss. Therefore,
according to the Assessing Officer, as per Section 80AB, the
deduction under Section 80HHC could not exceed the amount of
income included in the total income. He found that as the income
Civil Appeal No. 8912 of 2003 Page 4 of 24
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from export of Marine product business was in the negative i.e.
there was a loss, the deduction under Section 80HHC would be
nil, even when the assessee is entitled to deduction under the
said provision. With this order, second round of litigation started.
The assessee challenged the order passed by the Assessing
Officer before the Commissioner (Appeals) contending that the
formula which was applied by the Assessing Officer was different
from the formula prescribed under Section 80HHC of the Act and
it was also in direct violation of CBDT Circular dated 05.07.1990.
The Commissioner (Appeals), however, dismissed the appeal of
the assessee principally on the ground that under Section 246 of
the Income Tax Act, an order of the Assessing Officer giving effect
to the order of the ITAT is not an appealable order. The assessee
approached the ITAT questioning the validity of the orders passed
JUDGMENT
by the Assessing Officer and Commissioner (Appeals). However,
ITAT also dismissed the appeal of the assessee vide its order
dated 31.03.1993 and upheld the order of the Assessing Officer.
Challenging the order of the ITAT, the assessee approached the
High Court, under Section 256(2) of the Act seeking reference to
it. Order dated 03.02.1994 was passed by the High Court
directing ITAT to frame the reference and place the same before
the High Court. On this direction of the High Court, the ITAT
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referred the following question to the High Court:
“Whether on the facts and in the circumstances of
the case, the Tribunal was right in law in holding
that the deduction admissible to the assessee
under Section 80HHC is nil?”
7) The High Court has now pronounced on the aforesaid question
referred to it by the impugned judgment dated 20.08.2002
answering this question against the assessee holding as under:
“5. In this case, the assessment admittedly had
not earned any profits from the export of the
Marine products. On the other hand, it had
suffered a loss. The deduction permissible
under Section 80HHC is only a deduction of the
profits of the assessee from the export of the
goods or merchandise. By the very terms of
Section 80HHC, it is clear that the assessee
was not entitled to any benefit thereunder in the
absence of any profits.
The question referred to us therefore is
answered against the assessee and in favour of
the revenue.”
JUDGMENT
8) Special leave petition was filed against the judgment of the High
Court in which leave was granted on 10.11.2003. This is how the
appeal has come up for hearing.
9) Mr. Nikhil Nayyar, learned counsel appearing for the assessee,
submitted that the aforesaid reasoning of the High Court is
palpably wrong in holding that when there are losses suffered in
the export business, no deduction under Section 80HHC is
Civil Appeal No. 8912 of 2003 Page 6 of 24
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permissible. According to him, while forming this opinion the High
Court looked into sub-section (1) of Section 80HHC alone as is
clear from the order of the High Court, and did not take into
consideration provisions of sub-section (3) thereof. His
submission was that no doubt, this Court in the case of IPCA
Laboratory Ltd. v. Deputy Commissioner of Income Tax,
1
Mumbai held that the benefit of Section 80HHC shall not be
given in cases where there was loss. He, however, pointed out
that the judgment in IPCA Laboratory Ltd. (supra) was explained
and clarified subsequently by this Court in A.M. Moosa v.
2
Commissioner of Income Tax, Trivandrum wherein it was
made clear that in arriving at profits earned from export of both
self-manufactured goods and trading goods, the profits and
losses in both the trades have to be taken into consideration. If
JUDGMENT
after such adjustments there is a positive profit, the assessee
would be entitled to deduction under Section 80HHC(1) and if
there is a loss, he will not be entitled to any deduction. He, thus,
submitted that the term “profit of business” would not confine to
profit from export business but income both from export business
as well as from domestic business, had to be taken into
consideration. Therefore, even if there was a loss from the export
1 (2004) 12 SCC 742
2 (2007) 9 SCR 831
Civil Appeal No. 8912 of 2003 Page 7 of 24
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business, but there was profit from the business done within the
country and on adjustment of loss from the export business
against the profits from the business in India, in the balance
sheet, it was still profit resulting into positive income, the benefit of
Section 80HHC was admissible.
10) He further argued that the objective behind Section 80HHC was
to give incentive to those export houses who were earning foreign
exchange. Even if there was loss from the export business,
assessee had earned the foreign exchange and once it was found
that overall there were profits, the following formula contained in
Section 80HHC became applicable:
Export Turnover
Profit of the Business X
Total Turnover
11) He also referred to the “Provisions Relating To Direct Taxes”
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stated in the Finance (No.2) Bill, 1991 presented in the Budget of
1991-1992 and referred to the provisions contained therein which
relates to incentives for earning foreign exchange. It makes the
following reading:
“20. Under the existing provisions of Section
80HHC of the Income Tax Act, exporters are
allowed. In the computation of their total
income, a deduction of the entire profits derived
from export of goods or merchandise other than
mineral oil, minerals and ores. The deduction is
subject to the condition that the sale proceeds of
Civil Appeal No. 8912 of 2003 Page 8 of 24
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such goods or merchandise are received in, or
brought into, India in convertible foreign
exchange.
In view of the fact that significant value
addition is achieved when a mineral is
processed or when a stone is cut and polished, it
is desirable to encourage their export. It is,
therefore, proposed to extend the benefit of
deduction under Section 80HHC to exporters of
processed minerals. The list of processed
minerals, in respect of which this concession is
being extended, is being provided in a new
schedule to the Income-Tax Act.
The proposed amendment will take effect
st
from the 1 day of April, 1991 and will,
accordingly, apply in relation to the assessment
year 1991-1992 and subsequent years.”
12) Mr. Gupta, the learned senior counsel, appearing for the
Revenue, on the other hand, supported the view taken by the
High Court. He also specifically referred to the conclusion arrived
at by the Tribunal in support of his plea that in the instance case,
formula sought to be involved would not apply. He pointed out
JUDGMENT
that in the present case, there was no income from indigenous
business but it was only in the form of brokerage, dividend,
interest etc. which, in no case, be described as “turnover” and be
part of “total turnover”. He referred to the same document viz.
“Provisions Relating to Direct Taxes” where following clarification
also appears:
“It is, therefore, proposed to clarify that “profits of
the business” for the purpose of Section 80HHC
Civil Appeal No. 8912 of 2003 Page 9 of 24
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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.”
13) We have considered the submissions of counsel appearing on
both sides.
14) There are two facets of this case which need to be looked into. In
the first instance, we have to consider as to whether view of the
High Court that the deduction is permissible under Section
80HHC only when there are profits from the exports of the goods
or merchandise is correct or it would be open to the assessee to
club the income from export business as well as domestic
business and even if there are losses in the export business but
JUDGMENT
after setting off those losses against the income/profits from the
business in India, still there is net-profit of the business, the
benefit under Section 80HHC will be available? The second
question would arise is as to whether formula applied by the fora
below is correct? In other words, while applying the formula, we
have to see what would comprise “total turnover”?
15) Before we provide the answer to the first question, it would be
Civil Appeal No. 8912 of 2003 Page 10 of 24
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appropriate to take note of the judgments in IPCA Laboratory as
well as A.M. Moosa . In IPCA Laboratory , the appellant was a
holder of an Export House certificate issued by CCI&E. It
exported self-manufactured goods as well as goods manufactured
by supporting manufacturers i.e. trading goods. In the previous
year relevant to AY 1996-97 its taxable income, before the
deductions under Chapter VI-A, IT Act was Rs.4.39 crores. It had
earned a profit of Rs. 3.78 crores from the export of self-
manufactured goods. However, from the exports of trading goods
there was a loss of Rs.6.86 crores. The appellant issued
certificates of disclaimer in favour of supporting manufacturers in
respect of the entire export of the trading goods. In its return for
AY 1996-97, it claimed deduction under Section 80-HHC, IT Act in
the sum of Rs. 3.78 crores. But, holding that there was a net loss
JUDGMENT
from export of goods, the Assessing Officer disallowed the
deduction. This order of the Assessing Officer was unsuccessfully
challenged by the appellant as all the authorities upto the High
Court upheld that order. This Court also, in the aforesaid
judgment, concurred with the view taken by the courts below.
Before this Court, specific reliance was placed on sub-section (3)
of Section 80HHC and on that basis, it was contended that in a
case where the assessee exported goods manufactured by
Civil Appeal No. 8912 of 2003 Page 11 of 24
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himself as well as trading goods, profits from the two types of
exports were to be considered separately and the profit in respect
of one could not be negated or set off against the loss from the
other. It was pleaded that when the main purpose behind that
Section was to given incentive for earning for an exchange, the
Section must be given an interpretation which would further that
object. It was also argued that the expression “profit” occurring
under Section 80HHC(1), so also in Section 80HHC(3), should be
construed to mean positive profit and, therefore, in Section
80HHC(3)(c) it would not include losses and if there were any
losses, they were to be ignored. Another submission was that
even when the profits were to be reduced by the losses, in cases
of disclaimer of its turnover by an assessee export house in
favour of a supporting manufacturer, the turnover of the export
JUDGMENT
house got reduced to that extent. Therefore, it could not be taken
into consideration for the purposes of computing profits under
Section 80HHC(3)(c)(ii). Reliance was also placed on Circular
No.421 dated 12.06.1985 of the CBDT to show that Section
80HHC was incorporated with a view to providing incentives to its
exporters with requisite resources of modernization, technological
upgradation, product development and other activities.
Civil Appeal No. 8912 of 2003 Page 12 of 24
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16) None of the aforesaid arguments weighed with this Court. While
dismissing the appeal of the appellant, the Court laid down the
following law:
“Although Section 80-HHC has been
incorporated with a view to provide incentive to
export houses and a liberal interpretation has to
be given to such a provision, the interpretation
has to be as per the wordings of that section.
When the legislature wanted to take exports from
self-manufactured goods or trading goods
separately, it has already so provided in sub-
sections (3)(a) and (3)(b). The word “profit” in
Section 80-HHC(1) and Sections 80-HHC(3)(a)
and (b) means a positive profit. In other words, if
there is a loss then no deduction would be
available under Section 80-HHC(1) or (3)(a) or
(3)(b). In arriving at the figure of positive profit,
both the profits and the losses will have to be
considered. If the net figure is a loss then the
assessee will not be entitled to a deduction. The
opening words “profit derived from such exports”
occurring in Section 80-HHC(3) together with the
work “and” occurring between clauses (i) and (ii)
thereof clearly indicate that the profits have to be
calculated by counting both the exports.
Under Section 80-HHC(1), the deduction is
to be given in computing the total income of the
assessee. In computing the total income of the
assessee both profits as well as losses will have
to be taken into consideration. Sections 80-AB
and 80-B(5) are relevant. Section 80-AB has
been given an overriding effect over all other
sections in Chapter VI-A. Section 80-HHC would
thus be governed by Section 80-AB which makes
it clear that the computation of income has to be
in accordance with the provisions of the Act.
JUDGMENT
Moreover, even under Section 80-HHC(3)
(c)(i) the profit is to be adjusted profit of business
which means a profit as reduced by the profit
derived from business of exports out of India of
trading goods. Thus in calculating the profits,
Civil Appeal No. 8912 of 2003 Page 13 of 24
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under Section 3(c)(i), one necessarily has to
reduce the profits under Section 3(c)(ii). Section
80-HHC makes it clear that in arriving at profits
earned from export of both self-manufactured
goods and trading goods, the profits and losses
in both the trades have to be taken into
consideration. If after such adjustments there is
a positive profit the assessee would be entitled to
deduction under Section 80-HHC(i). If there is a
loss he will not be entitled to any deduction.
In Section 80-HHC, the word “profit” is
admittedly used to indicate positive “profit”
because the deduction will only be of a positive
profit. Section 80-HHC(3) provides how profits
are to be worked out in computing total income.
For the purposes of such computation both
profits and losses have to be taken into account.
Thus the word “profit” in Section 80-HHC(3) will
mean profits after taking into account losses, if
any. The term “profit” in both Sections 80-
HHC(1) and 80-HHC(3) means a positive profit
worked out after taking into consideration the
losses, if any. Thus the word “profit” has the
same meaning in Sections 80-HHC(1) and (3).
The proviso to sub-section (1) of Section
80-HHC enables a disclaimer only to enable the
export house to pass on deductions. It in no way
reduces the turnover of the export house. The
disclaimer is only for purposes of enabling the
export house to pass on the deduction which it
would have got to the supporting manufacturer.
It follows that if no deduction is available,
because there is a loss, then the export house
cannot pass on or give credit of such non-
existing deduction to a supporting manufacturer.
JUDGMENT
The Board circular also shows that only
positive profits can be considered for purposes of
deduction.”
17) We find that in A.M. Moosa , this Court, in fact, reiterated IPCA
principles, as noted above. That was a case where Assessing
Civil Appeal No. 8912 of 2003 Page 14 of 24
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Officer had disallowed the deduction claim of the assessee under
Section 80HHC of the Act on the ground that the 'profits of the
business computed under Section 80HHC indicated a negative
figure'. This view was accepted by all the Courts and affirmed by
this Court in the aforesaid judgment. Before this Court,
submission of the appellant/assessee was that a reading of
Section 80HHC would show that where the assessee exports
goods manufactured by him, he would be covered by sub-section
(3)(a) and only the profits of such business would be taken into
account. Where the assessee exports only trading goods other
than profits of these goods only would be taken into account of
sub-section (3)(b). It was submitted that sub-section (3)(c) dealt
with a case where the assessee exported goods manufactured by
him as well as trading goods. In such a case, profits from export
JUDGMENT
of goods manufactured by the assessee were to be considered
separately and the profits from export of trading goods were to be
considered separately. If there were profits only in respect of one
type of exports then this profit could not be negatived or set off
from the loss from the other export. This contention was,
obviously, not accepted and brushed aside in the following
manner:
“7. The stand needs careful consideration.
Undoubtedly, Section 80-HHC has been
Civil Appeal No. 8912 of 2003 Page 15 of 24
Page 15
incorporated with a view to providing incentive to
export houses. Even though a liberal
interpretation has to be given to such a provision,
the interpretation has to be as per the wordings
of this section. If the wordings of the section are
clear, then benefits, which are not available
under the section, cannot be conferred by
ignoring or misinterpreting words in the section.
In this case we are concerned with the wordings
of sub-section (3)(c) of Section 80-HHC. As
noted earlier, sub-section (3)(a) deals with the
case where the export is only of self-
manufactured goods. Sub- section (3)(b) deals
with the case where the export is only of trading
goods. Thus, when the legislature wanted to take
exports from self- manufactured goods or trading
goods separately, it has already so provided in
sub-sections (3)(a) and (3)(b). It would not be
denied that the word "profit" in Section 80-HHC
(1) and Sections 80- HHC(3)(a) or (3)(b)means a
positive profit. In other words, if there is a loss
then no deduction would be available under
Section 80-HHC (1) or (3)(a) or (3)(b). In arriving
at the figure of positive profit, both the profits and
the losses will have to be considered. If the net
figure is a positive profit, then the assessee will
be entitled to a deduction. If the net figure is a
loss then the assessee will not be entitled to a
deduction. Sub-section (3)(c) deals with cases
where the export is of both self-manufactured
goods as well as trading goods. The opening
part of sub-section (3)(c) states "profits derived
from such export shall". Then follow clauses (i)
and (ii). Between clauses (i) and (ii) the word
"and" appears. A plain reading of sub- section (3)
(c) shows that "profits from such exports" has to
be profits from exports of self-manufactured
goods plus profits from exports of trading goods.
The profit is to be calculated in the manner laid
down in Sections (3)(c)(i) and (ii). The opening
words "profit derived from such exports" together
with the word "and" clearly indicate that the
profits have to be calculated by counting both the
exports. It is clear from a reading of sub-section
(1) of Section 80-HHC(3) that a deduction can be
permitted only if there is a positive profit in the
exports of both self-manufactured goods as well
JUDGMENT
Civil Appeal No. 8912 of 2003 Page 16 of 24
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as trading goods. If there is a loss in either of the
two then that loss has to be taken into account
for the purposes of computing profits.
8. Under Section 80-HHC(1), the deduction is to
be given in computing the total income of the
assessee. In computing the total income of the
assessee both profits as well as losses will have
to be taken into consideration. Section 80-AB is
relevant. It reads as follows:
"80-AB. Where any deduction is required to
be made or allowed under any section
included in this Chapter under the heading
'C'. Deductions in respect of certain incomes
in respect of any income of the nature
specified in that section which is included in
the gross total income of the assessee, then,
notwithstanding anything contained in that
section, for the purpose of computing the
deduction under that section, the amount of
income of that nature as computed in
accordance with the provision of this Act
(before making any deduction under this
Chapter) shall alone be deemed to be the
amount of income of that nature which is
derived or received by the assessee and
which is included in his gross total income."
JUDGMENT
(emphasis in original)
9. Section 80-B(5) is also relevant. Section 80-
B(5) provides that "gross total income" means
total income computed in accordance with the
provisions of the Income Tax Act.
10. Section 80-AB is also in Chapter VI-A. It
starts with the words "where any deduction is
required to be made or allowed under any
section included in this Chapter". This would
include Section 80- HHC. Section 80-AB further
Civil Appeal No. 8912 of 2003 Page 17 of 24
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provides that "notwithstanding anything
contained in that section". Thus Section 80-AB
has been given an overriding effect over all other
sections in Chapter VI-A. Section 80-HHC does
not provide that its provisions are to prevail over
Section 80-AB or over any other provision of the
Act. Section 80-HHC would thus be governed by
Section 80-AB. Decisions of the Bombay High
Court in CIT v. Shirke Construction Equipment
Ltd. (2000 (246) ITR 429) and the Kerala High
Court in CIT v. T.C. Usha (2003 (132) Taxman
297) to the contrary cannot be said to be the
correct law. Section 80-AB makes it clear that
the computation of income has to be in
accordance with the provisions of the Act. If the
income has to be computed in accordance with
the provisions of the Act, then not only profits but
also losses have to be taken into consideration.
11. Even under Section 80-HHC (3) (c) (i) the
profit is to be adjusted profit of business. The
adjusted profit of the business means a profit as
reduced by the profit derived from business of
exports out of India of trading goods. Thus in
calculating the profits under sub-section (3)(c)(i)
one necessarily has to reduce profits under sub-
section (3)(c)(ii). As seen above, the term "profit"
means positive profit. Thus if there is loss then
those losses in export of trading goods have to
be adjusted. They cannot be ignored. A plain
reading of Section 80-HHC makes it clear that in
arriving at profits earned from export of both self-
manufactured goods and trading goods, the
profits and losses in both the trades have to be
taken into consideration. If after such
adjustments there is a positive profit, the
assessee would be entitled to deduction under
Section 80-HHC(1). If there is a loss he will not
be entitled to any deduction.
JUDGMENT
Civil Appeal No. 8912 of 2003 Page 18 of 24
Page 18
12. It was submitted that the word "profit" in
Section 80-HHC must have the same meaning in
the entire section, and that as the word profit in
Section 80-HHC(1) means only positive profit, it
will have the same meaning in Section 80-
HHC(3)(c). It is submitted that thus the word
profit in Section 80-HHC(3)(c) would not include
losses and if there are any losses, they are to be
ignored. The plea is clearly without substance.
Firstly, it is not necessary that the word "profit"
must have the same meaning. The meaning of
the word "profit" will depend on the context in
which it is used. In Section 80-HHC (1) it is
admittedly used to indicate positive "profit"
because the deduction will only be of a positive
profit. Section 80- HHC(3) is the sub-section
which provides how profits are to be worked out
in computing total income. For purposes of such
computation both profits and losses have to be
taken into account. Thus the word "profit" in
Section 80-HHC(3) will mean profits after taking
into account losses, if any. More importantly, in
our view, the term "profit" in Section 80-HHC
both in sub-section (1) and in sub-section (3)
means a positive profit worked out after taking
into consideration the losses, if any. Thus the
word "profit" has the same meaning in Sections
80-HHC(1) and (3).
JUDGMENT
13. In IPCA Laboratory Ltd. Vs. Dy.
Commissioner of Income Tax, Mumbai, (2004)
12 SCC 742), after analyzing the position in the
manner done above, it was held that the profit as
contemplated under Section 80-HHC (1) and
Section 80-HHC (3) means positive profit. Said
view was reiterated in Income Tax Officer,
Bangalore Vs. Induflex Products (P) Ltd., (2006
(1) SCC 458). We are in respectful agreement
with the view.”
Civil Appeal No. 8912 of 2003 Page 19 of 24
Page 19
18) It stands settled, on the co-joint reading of IPCA and A.M. Moosa,
that where there are losses in the export of one type of goods (for
example self-manufactured goods) and profits from the export of
other type of goods (for example trading goods) then both are to
be clubbed together to arrive at net-profits or losses for the
purpose of applying the provisions of Section 80HHC of the Act.
If the net result was loss from the export business, then the
deduction under the aforesaid Act is not permissible. As a fortiori,
if there is net profit from the export business, after adjusting the
losses from one type of export business from other type of export
business, the benefit of the said provision would be granted.
19) It is also to be borne in mind that in both the aforesaid cases
namely IPCA and A.M. Moosa , the Court was concerned with two
JUDGMENT
business activities, both of which related to export, one from
export of self manufactured goods and other in respect of trading
goods i.e. those which are manufactured by others. In other
words, the Court was concerned only with the income from
exports. In the present case, however, the fact situation is
somewhat different. Here, in so far as export business is
concerned, there are losses. However, the appellant-assessee
relies upon Section 80HHC(3)(b), as existed at the relevant time,
Civil Appeal No. 8912 of 2003 Page 20 of 24
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to contend that the profits of the business as a whole i.e. including
profits earned from the goods or merchandise within India will
also be taken into consideration. In this manner, argues the
appellant, even if there are losses in the export business, but
profits of indigenous business outweigh those losses and the net
result is that there is profit of the business, then the deduction
under Section 80HHC should be given. However, having regard
to the law laid down in IPCA and A.M. Moosa, we cannot agree
with the learned counsel for the appellant. From the scheme of
Section 80HHC, it is clear that deduction is to be provided under
sub-section (1) thereof which is “in respect of profits retained for
export business”. Therefore, in the first instance, it has to be
satisfied that there are profits from the export business. That is
the pre-requisite as held in IPCA and A.M. Moosa as well. Sub-
JUDGMENT
section (3) comes into picture only for the purpose of computation
of deduction. For such an eventuality, while computing the “total
turnover”, one may apply the formula stated in clause (b) of sub-
section (3) of Section 80HHC. However, that would not mean that
even if there are losses in the export business but the profits in
respect of business carried out within India are more than the
export losses, benefit under Section 80HHC would still be
available. In the present case, since there are losses in the
Civil Appeal No. 8912 of 2003 Page 21 of 24
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export business, question of providing deduction under Section
80HHC does not arise and as a consequence, there is no
question of computation of any such deduction in the manner
provided under sub-section (3).
20) Therefore, we are of the opinion that the view taken by the High
Court is correct on the facts of this case. With this, there may not
be need to answer the second facet of the problem as the
question of computation of deduction does not arise. However, we
find that even here, the approach of the ITAT is correct.
21) In the present case, the domestic income in respect of which
benefit is sought is from dividend income, interest income, profit
or sale of shares and fees received from arranging finance for the
assessee's clients. The Tribunal has recorded this aspect as
under:
JUDGMENT
13. It is, however, seen from the assessee's Profit &
Loss Account for the year of account ending on 31.03.1989
that the aggregate sum of Rs.26,04,477 (which the assessee
has labeled as total turnover) comprised not only export
turnover of Rs.16,67,084 but also the following items which
cannot properly be regarded as turnover:
(1) Brokerage received for arranging
Finance for the assessee's claims
: Rs.8,50,321
(2) Dividend : Rs. 5,247
(3) Interest : Rs. 7,212
(4) Profit on sale of shares : Rs. 74,913
Rs.9,37,693
Civil Appeal No. 8912 of 2003 Page 22 of 24
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22) The Tribunal observed that aforesaid four items are income
simplicitor and cannot be covered by the expression “total
turnover”. Following discussion of the Tribunal in this behalf
needs to be quoted:
“17. Now the mode and mechanics of
computing the deduction admissible to an
assessee falling under Section 80HHC(3)(b)
clearly proceeds on the basis that in trading
transactions profit, or, as the case may be, loss
is embedded in the gross turnover. The most
significant conclusion that flows from the said
provision is that when Section 80HHC(3) talks of
turnover, it talks of trading receipts and not of
receipts which are of the nature of income to
start with. It should, therefore, follow that the
aggregate sum of Rs.9,37,693/- referred to
supra cannot be regarded as turnover, and that
by the same token, it should be left out of
reckoning for purposes of computing deduction
admissible to the assessee under Section
80HHC. If this exercise is done, we are back to
Proposition No.1. This would mean that the
deduction admissible to the assessee under
Section 80HHC would be nil, especially in view
of the fact that the export business of the
assessee has resulted in a loss.
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xx xx xx
19. But a manufacturer may not invariably be
able to export, in their entirety, the goods or
merchandise manufactured. He may export a
part of them and sell the rest in India. Given the
paramount need to give fillip to exports,
Parliament clearly intended that the benefit of
Section 80HHC should not be denied in such
cases. But the difficulty in such cases is that the
profits attributable to exports cannot be ascertain
with precision. This is because not only the
Civil Appeal No. 8912 of 2003 Page 23 of 24
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manufacturing activities but also the selling
activities (including the activities connected with
exports) from a continuous, integrated whole.
Even so, the intention of Parliament, was to
extend the benefit of Section 80HHC to the
extent of the profits generated by exports. With
this end in view, Parliament incorporated a rule
of thumb in Section 80HHC(3)(b). As long as
the assessee has cleared profits in a particular
year of account, export profits are computed by
applying to total profits the ratio which export
turnover bears to total turnover.”
23) We are in agreement with the aforesaid view of the Tribunal.
Therefore, even otherwise, the formula as sought to be applied by
the appellant does not become applicable on the facts of this
case.
24) Thus, from every angle the matter is to be looked into, the appeal
lacks merit. Same is, accordingly, dismissed with costs.
JUDGMENT
.............................................J.
(A.K. SIKRI)
.............................................J.
(ROHINTON FALI NARIMAN)
NEW DELHI;
APRIL 01, 2015.
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