Full Judgment Text
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CASE NO.:
Appeal (civil) 877 of 2006
PETITIONER:
P.R. Prabhakar
RESPONDENT:
Commissioner of Income Tax, Coimbatore
DATE OF JUDGMENT: 18/07/2006
BENCH:
S.B. Sinha & Dalveer Bhandari
JUDGMENT:
JUDGMENT
S.B. Sinha, J.
The Appellant carries on business of export of its ownn products as also
procuring export contracts for other exporters on commission. In the
Assessment year 1990-1991, he derived an income of Rs. 56,69321/- by way of
comission, whereas as an exporter of goods incurred a loss of Rs. 6,372/-.
The value of the total exported goods outside India by the Appellant during
the said assessment year was Rs.3,67,600/-. He claimed a deduction in
respect of aforementioned income in terms of Section 80HHC of the Income
Tax Act, 1961 (for short "the Act"). Exemption claimed under the
aforementioned provision was disallowed by the Assessing Officer on the
premise that they having incurred loss in respect of export business were
not entitled thereto. An appeal preferred thereagainst was rejected by the
Commissioner of Income Tax (Appeal). The Income Tax Appellate Tribunal,
however, on further appeal preferred by the Appellant opined that the
commissioner received by the Appellant from the other exporters is to be
taken into consideration for the said purpose.
The Respondent aggrieved by and dissatisfied with the said decision field
an application for reference to the High Court and by an order dated
13.9.1996 the following questions were referred by the Tribunal:
"1. Whether on the facts and in the circumstances of the case, the Tribunal
was right in law in holding that the assessee is entitled to deduction
under Section 80HHC of the Income-Tax Act even though the export business
resulted in a loss of Rs. 6,372/-?
2. Whether on the facts and in the circumstances of the case the Tribunal
is right in law in holding that commission and brokerage for procuring
export contracts for other exporters is exempt under section 80HHC of the
Act on the ground that the same is export profits?"
By reason of the impugned judgment the High Court opined that income
derived by the Appellant towards commission/borkerage for procuring orders
of export for others is not eligible to exemption from tax under Section
80HHC of the Act. Referring to the circulars issued by the Central Board of
Direct Taxes (CBDI), the High Court held that although the said provision
was amended with effect from 1.4.1992 by inserting an explanation whereby
and whereunder the profit derived out of such commission/brokerage was
confined to 10% of the income, the same, being clarificatory in nature,
would have retropective effect. On the said findings, answers to both the
questions were rendered in the negative and in favour of the Revenue.
Mr. C.A. Sundaram, learned senior counsel appearing on behalf of the
Appellant principally raised two contentions before us:
(i) The CBDT circular clarified that the amendment would have a
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prospective application with effect from 1.4.1992 the High Court committed
a serious error in holding that the same would operate retrospectively
being clarificatory in nature.
(ii) Earing of commission being a part of the export business, the
income derived therefrom should be calculated for the purpose of computing
profit or loss in regard to the applicability of Section 80HHC of the Act.
Mr. Rajiv Dutta, learned senior counsel appearing on behalf of the
Respondents, on the other hand, would submit that on a plain reading of the
said provision it would be evident that income from commission/brokerage
could not have been given any exemption for the purpose of invoking the
provision of Section 80HC of the Act as it received statutory recognition
only by reason of the said amendment which came into force with effect
ffrom 1.4.1992.
Sub-sections (1) and (3) of Section 80HHC of the Income Tax Act read as
under:
"(1) Where an assessee, being an Indiann company or a person (other than a
company) resident in India, is engaged in the business of 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 to the
extent of profits, referred to in sub-section (1B), 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 (hereafter in this sectiion
referred to as an Export House or a Trading House, as the case may be,)
issues a certificate referred 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 amountt which bears to the total profits derived
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-section (1),-
(a) where the export out of India is of goods or merchandise manufactured
or processed by the assessee, 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 dervied 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 adjusted profits of the
business, the same proportion as the adjusted export turnover in respect of
such goods bears to the adjusted total turnover of the business carried on
by the assessee: and
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(ii) in respect of trading goods, be the export turnover in respect of such
trading goods as reduced by the direct and indirect costs attirbutable to
export of such trading goods:
Provided that the profits computed under clause (a) or clause (b) or clause
(c) of this sub-section shall be further increased by the amount which
bears to ninety per cent of any sum referred to in clause (iii-a) (not
being profit on sale of a licence acquired from any other person), and
clauses (iii-b) and (iii-c) of Section 28, the same proportion as the
export turnover bears to the total turnover of business carried on by the
assessee.
Explanation.-For the purposes of this sub-section-
(a) ‘adjusted export turnover’ means the export turnover as reduced by the
export turnover in respect of trading goods;
(b) ‘adjusted profits of the business’ means the profits of the business as
reduced by the profits dervied from the business of export out of India of
trading goods as computed in the manner provided in clause (b) of sub-
section (3);
(c) ‘adjusted total turnover’ means the total turnover of the business as
reduced by the export turnover in respect of trading goods:
(d) ‘direct costs’ means costs directly attributable to the trading goods
exported out of India including the purchase price of such goods;
(e) ‘indirect costs’ means costs, not being direct costs, allocated in the
ratio of the export turnover in respect of trading goods to the the total
turnover;
(f) ‘trading goods’ means goods which are not manufactured or processed by
the assessee."
On a plain reading of the said provisions, it is evident that it applies to
the assessee engaged in the business of export out of India including
trading of goods. The expression ‘business of export’ must be given its due
meaning. It not only speaks of ‘export out of India, but also includes,
trading of goods’.
Indisputably, the CBDT issued a circular bearing No. 621 dated 19th
December, 1991 by way of explanatory notes to the said provision.
Paragraph 32 of the said circular provides for modification of provisions
relating to exemption of income from exports. The amendment by inserting
sub-section (3) in the said provision was carried out so as to compensate
the exporter from the comparative disadvantages faced by him in the
international market. The formula, as was existing prior to 1991 as stated
in the circular often used to provide a distorted figure of export profits
when receipts like interest, commission, etc. which did not have an element
of turnover were included in the profit and loss account and, thus, it was
clarified that "profits of the business" for the said provision would not
include receipt by way of brokerage, commission, interest or any other
receipt of a similar nature. It was, however, categorically stated:
"...As some expenditure might be incurred in earning 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."
The amendments in no uncertain terms were to take effect from 1st April,
1992, i.e. for the assessment year 1992-93 and subsequent assessment years.
Where however, the provisions were to operate with retrospective effect
the same had been categorically stated as, for example, in paragraph 32.17
thereof, which is as under:
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"This amendment takes effect retrospectively from 1st April, 1986, the day
on which the substituted section 80HHC took effect. It will, accordingly.
apply in relation to assessment year 1986-87 and susbequent years."
The aforementioned circular dated 19th December, 1991 issued by the CBDT
is binding on the Department. [See Mercantile Bank Ltd. Bombay v. The
Commissioner of Income Tax, Bombay City-III, (2006) 5 SCALE 244 and Union
of India Anr. v. Azadi Bachao Andolan and Anr., [2004] 10 SCC 1.]
Once it is held that the amendment carried out in 1991 by reason of
Finance Act (No. 2), Act, 1991 was prospective in nature, ex facie the
High Court committed a serious error in opining that the same being
clarificatory in character would apply to the assessment year in question.
By reason of the purported clarification issued by the CBDT in term of the
said circular, the area of exemption had not been widened. It has, in
effect and substance as would appear from paragraph 32.11, been curtailed.
By reason of such amendment, the Parliament did not intend that the income
dervied by way of brokerage/commission by the assessee should not be
reckoned for the purpose of computing profit or loss earned by a person
engaged in the business of export but by reason thereof the deduction to
the extent of 10% held to be allowable thereby. We, therefore, cannot
accept the submission of Mr. Dutta that the income dervied by way of
commission and/or brokerage by an assessee carrying on business of export
became exigible to exemption to the extent of 10% for the first time with
effect from 1.4.1992.
The purport and reason for enacting Section 80HHC of the Income Tax Act
indisputably was to provide incentive to export houses. It is now a well-
settled principle of law that although the exemption provisions are to be
construed strictly as regards the applicability thereof to the case of the
assessee but once it is found that the same is applicable, the same are
required to be interpreted liberally. [See Tata Iron & Steel Co. Ltd. v.
State of Jharkhand and Ors., [2005] 4 SCC 272, Government of India and Ors.
v. Indian Tobacco Association, [2005] 7 SCC 396 and Commr. of Central
Excise, Raipur v. Hira Cement, JT, (2006) 2 SC 369.]
It is also trite law that an exemption is to be granted unless it is
expressly taken away. [See Adityapur Industril Area Development Authority
v. Union of India and Ors., (2006) 5 SCALE 321]
The expression "income arising out of business of export" brings within its
sweep not only the export of any goods or merchandise manufactured or
processed by the assessee but also of trading goods. The Parliament,
therefore, intended to provide incentive when a positive profit is earned
by an exporter. [See IPCA Laboratory Ltd. v. Dy. Commissioner of Income
Tax, Mumbai, [2004] 12 SCC 742.]
The question again came up for consideration before a Division Bench of
this Court in Income Tax Officer, Bangalore v. M/s. Induflex Products (P)
Ltd., (2005) 10 SCALE 132, wherein: it was opined.
"...It is no doubt true that the term ‘profit’ implies positive profit
which has to be arrived at after taking into consideration the profit
earned from export of both self-manufactured goods and the trading goods
and the profits and losses, in both the trades have, thus, to be taken
into consideration..."
Indeed the question as to whether earning of income by way of
commission/brokerage would attract Section 80HHC of the Act or not
precisely came up for consideration before a Special Bench of the Income
Tax Appellate Tribunal, Delhi Bench in International Research Park
Laboraties Ltd. v. Assistant Commissioner of Income-Tax, 212 ITR wherein
interpreting the CBDT circular, it was stated:
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"Now, we come to whether the commission received could form part of export
profits. Here again, we are unable to see it differently. It is no doubt
true that this commission is not turnover but it is a profit relatable to
exports. Coming back to section 80HHC(1), if the assessee is an exclusive
exporter without having any local sales, then the profit on commission is
admittedly includible as profit of the business computed under the head
"Profits and gains of business or profession" and the whole of it would be
eligible for exemption under clause (a) of sub-section (3) of section
80HHC. When such commission could be regarded as profit dervided from
export for the purpose of clause (a), how can the same be excluded for the
purpose of clause (b) unless it amounted to discrimination. The
interpretation of clauses (a) and (b) must be harmoinous and not
discriminatory, cutting against each other. What is sauce for the goose is
also sauce for the gander. Secondly, we have just mentioned that this
profit is profit derived from export and export is the basis or the
foundation of the nexus. The argument of Shri B.B. Ahuja and all his
effort to show to us that it has no reference to the export is, therefore,
unacceptable to us. In our opinion, the argument advanced by Shri Ahuja
overlooks the fact that the commission would not have come to the assessee
had he not engaged in the export business. He sought to justify his
argument by referring to subsequent amendments made from April 1, 1992,
whereunder as we have pointed out above by adding clause (baa) to the
Explanation at the end of sub-section (4A) with effect from April 1, 1992,
90 per cent of this commission etc. is not to be regarded as profits
derived from export business and this amendment as explained in the
Memorandum of Bill was only to clarify the position."
It is stated at the Bar that the Revenue did not prefer any appeal
thereagainst. We, for the reasons stated hereinbefore, agree with the law
laid down by the Tribunal.
For the views, we have taken, the judgment of the High Court cannot be
sustained. It is set aside accordingly. The appeal is, accordingly,
allowed. The parties shall, however, pay and bear their own costs.