TMI Blog2007 (1) TMI 86X X X X Extracts X X X X X X X X Extracts X X X X ..... this Section applies, there shall, inaccordance with and subject to the provisions of this section, be allowed, incomputing the total income of the assessee, a deduction to the extent ofprofits, referred to in sub-section (1B), derived by the assessee from theexport of such goods or merchandise: . . . (1B) For the purposes of sub-sections (1) and (1A), the extent of deduction of the profits shall be an amount equal to- (i) eighty per cent thereof for an assessment year beginning on the 1st day of April, 2001; (ii) seventy per cent thereof for an assessment year beginning on the 1st day of April, 2002; (iii) fifty per cent thereof for an assessment year beginning on the 1st day of April, 2003; (iv) thirty per cent thereof for an assessment year beginning on the 1st day of April, 2004, and no deduction shall be allowed in respect of the assessment year beginning on the 1st day of April, 2005 and any subsequent assessment year.. . . . . . . .. (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 profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia' shall not include any transaction by way of sale or otherwise, in a shop, emporium or any other establishment situate in India, not involving clearance at any customs station as defined in the Customs Act, 1962 (52 of 1962) ; (b) 'export turnover' means the sale proceeds, received in, or brought into, India by the assessee in convertible foreign exchange in accordance with clause (a) of sub-section (2) of any goods or merchandise to which this section applies and which are exported out of India, but does not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act, 1962 (52 of 1962); (ba) 'total turnover' shall not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act, 1962 (52 of 1962) : Provided that in relation to any assessment year commencing on or after the 1st day of April, 1991, the expression "total turnover" shall have effect as if it also excluded any sum referred to in clauses (iiia), (iiib), (iiic), (iiid) and (iiie) of section 28; (baa) 'profits of the business' means the profits of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... porter for the comparative disadvantage faced by him in the international market. With a view to ensuring that the tax concession is not misused, sub-section (3) of section 80HHC of the Income-tax Act has been amended." 6. This Circular also clarifies certain other concepts that will be presently discussed. 7. A plain reading of the provision is indicative of the overall scheme which appears to be as follows : (a) The assessee has to be an Indian company engaged in the business of exports out of India of any goods or merchandise. (b) In computing the total income of such assessee, a deduction is allowed "to the extent of profits", referred to in sub-section (1B) "derived by the assessee from the export of such goods or merchandise". (c) Sub-section (1B) specifies the extent of deduction of profits. In a graded scale this has been progressively reduced by the legislature from 80 per cent for the Assessment Year 2001-02 to 30 per cent for the Assessment Year 2004-05, after which this deduction has been done away with. Effectively, therefore, the benefit under Section 80HHC is no longer available to an assessee after the beginning of the Assessment Year on April 1, 2005. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by way of brokerage, commission, interest, rent, charges or any other receipts of a similar nature included in such profits [B] - Profits of any branch, office, warehouse or any other establishment of the assessee situate outside India [C] In other words, by using the symbols in the above equation, it can be further represented as under : POB = PAGBP - 90 per cent A - 90 per cent B - C Thus profits derived from exports would be: [PAGBP - 90 per cent A - 90 per cent B - C] x export turnover/Total turnover The use of the words computed under the head "profits and gains of business and profession" in clause (baa) is a direct reference to the exercise of computation of business income in accordance with Sections 28 to 44 of the Act. Questions and Issues 8. The questions that arise in this batch of appeals may be stated as under : (a) Does the expression "profits derived from such export" occurring in sub-section (3) read with Explanation (baa) restrict the profits available for deduction in terms of sub-section (1) to only those items of income directly relatable to the business of export ? (b) Does the expression "interest" in Explanation (baa) connote ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... position that the interest income in question should be computed under the head "income from other sources" i.e., Section 56, the real issue is to find out the nature of the interest income in question. (b) even if interest income is assessed under the head "Income from other sources", if interest income is seen to have arisen from a business activity or, in other words, it has a close nexus with the business carried on by the assessee then it will bear the imprint of or have the quality of business income for limited purposes. © reliance is placed on the judgment of this Court in Snam Progetti S.P.A v. CIT [1981]132 ITR 70 which has been upheld by the Hon'ble Supreme Court by the dismissal of the Special Leave Petition in [1991] 189 ITR (St.) 116. Here it was held that the question to be examined is whether the interest income was derived from what may be described as a business activity. If it is so derived then the mere fact that it is taxed under a different section will make no difference. It was held that in that case the income earned by way of interest from deposits which represented the spare funds of the assessee, would nevertheless constitute business income. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The interpretation should reflect a liberal construction conforming to the object of encouraging exports. By adopting such approach, it is urged that the Explanation "included in such profits" following the words "brokerage, commission, interest, rent, charges or any other receipts of a similar nature" is indicative of the fact that such amounts are the 'net' amounts and not the gross amounts because profits cannot be arrived at by any businessman without accounting for the expenditure incurred in earning such interest. Only such interest would be "included in the profits". 15. It is further urged that clause (baa) states that the "profits and gains of business or profession" have to be first "computed". This necessarily takes us to Sections 28 to 44 of the Act. The various stages in such computation, including Section 37, perforce envisage accounting for the expenditure incurred by an assessee for earning the income. The assessees further draw support from Circular No.621 dated December 19, 1991 and paragraph 30.11 thereof which states: "As some expenditure might be incurred in earning these incomes, which in the generality of cases is part of common expenses, ad hoc 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etting, it is submitted on behalf of the Department that even where the interest income is determined to be business income, netting should not be permitted. It is submitted that there could be no casus omissus. In other words, the Court ought not to supply words when none exist. It is maintained that just as the assessees argue that in this behalf if the Legislature intended that these receipts like commission, brokerage, interest had to be net interest, then clearly the Legislature would have said so and in the absence of such a clear enunciation, the word "interest" has to be interpreted to mean "gross interest". Applying the strict rule of construction in interpreting the statutes, the Department urges that the expression 'interest' occurring in Clause (baa) can only mean gross interest. A comparison is sought to be drawn between clauses (a) and (b) of sub-section (3) to urge that the treatment in either case should be uniform. 21. It is urged that the Legislature has permitted the retention of 10 per cent of the interest income to compensate for the expenses laid out for earning such income and therefore a further deduction of the expenditure incurred for earning such inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. [1998] 227 ITR 172, which was rendered in the context of Sections 56 and 57, has been followed in CIT v. Autokast Ltd. [2001] 248 ITR 110 (SC). Likewise, in CIT v. Dr. V. P. Gopinathan [2001] 248 ITR 449 (SC) interest on fixed deposits was held not to qualify for setting off against interest on loans borrowed. The other decisions on the same lines, in the context of Section 80HHC are CIT v. Sterling Foods [1999] 237 ITR 579 (SC) and Pandian Chemicals [2003] 262 ITR 278 (SC). In these decisions, the Hon'ble Supreme Court reiterated the nexus theory and declined to treat such interest earned as business income. Significantly, the provision of the Act involved in these cases do not contain a machinery clause similar to clause (baa) to the Explanation below sub-section (4C) of Section 80HHC. Still, if one were to draw an analogy, an assessee who is engaged in the business of exports and invests the surplus funds in fixed deposits will not be able to treat the interest earned thereon as business income since it does not bear any direct nexus with the export business of the assessee. 24. On the distinction between the words "attributable to" and "derived fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such income and therefore would not come within the purview of Section 57 (iii). Predictably, the High Court followed the judgment of the Hon'ble Supreme Court in Dr. V. P. Gopinathan, Auto Kast Ltd., Tuticorin Alkali Chemicals and CIT v. Bokaro Steel Ltd [1999] 236 ITR 315. The decision of the Hon'ble Supreme Court in CIT v. Karnal Co-operative Sugar Mills [2000] 243 ITR 2 was in the context of determining the nature of income earned by way of interest on the amounts deposited for opening a letter of credit for the purchase of machinery required for setting up a plant. It was held that the interest earned was a capital receipt since the deposit was incidental to the acquisition of assets. The decision of the Madras High Court in South India Shipping Corporation v. CIT [1999] 240 ITR 24 (Mad) was also rendered in the context of treating certain receipts not as business income but income from other sources for the purposes of Section 56 read with Section 57(iii) of the Act. 26. It is true that none of these cases considered or discussed a clause similar to clause (baa) of the Explanation below sub-section (4C) of Section 80HHC of the Act. If, as contended b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... GTN Textiles v. Deputy CIT (Assessment) [2005] 279 ITR 72. (Ker) ; 30. In particular, reference may be made to the observations in Urban Stanislaus Co. [2003] 263 ITR 10 (Ker) where the assessee had contended that as a condition for obtaining a loan from the bank, 20 per cent. of the sale receipts had to be deposited by way of security. It was claimed that the interest earned on such deposit was business income for the purpose of Section 80HHC. This was negatived by the Kerala High Court by observing (ITR Page 12) that "the assessee can claim deduction in respect of the profits derived from the export of goods only when it is established that the income is solely related to the export. The obvious intention behind the provision in Section 80HHC is to promote exports. However, the income earned by way of interest from fixed deposit is not an income from exports. Thus, it was rightly taken into account as income from other sources." This decision has been affirmed by the Hon'ble Supreme Court by the dismissal of the Special Leave Petition [order reported in [2004] 265 ITR (St) 38]. 31. In K. Ravindranathan Nair, in dealing with a similar issue, the Kerala High Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... derived from export of goods." It is not clear from the narration of the facts in Punit Commercial whether the interest earned was as a result of parking surplus funds in deposits. If it was so earned then it is difficult, in view of the decisions of the Kerala High Court that have been affirmed by the Hon'ble Supreme Court, to categorise such income as business income. 35. Turning to the submissions in the present cases, as regards the first of the categories, viz., the parking of surplus funds, there should be no difficulty at all. In view of the large number of the decisions of the Hon'ble Supreme Court in the context of Section 56 and Section 57 and those of the Kerala High Court in the context of Section 80HHC itself, we are unable to accept the contention of the assesses based on Snam Progretti [1981]132 ITR 70 that interest earned on parked surplus funds should qualify as business income. Clearly, Snam Progretti [1981] 132 ITR 70 was not rendered in the context of Section 80HHC and cannot but be confined to the facts of that case. Circular No. 564 dated April 5, 1990 can also not help in interpreting Section 80HHC which is a "stand alone" provision. We are theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pened or questioned thereafter by the Department or where this Court has not formulated such a question while admitting the appeal. Therefore, the only question that arises in such cases is whether having held such income to be business income, the Assessing Officer would be justified in denying netting of interest. This is the question we proceed to address next. Netting 39. Clause (baa) of the Explanation to Section 80HHC envisages a two-step process in computing profits derived from exports. First, the Assessing Officer is required to apply Sections 28 to 44 in order to compute the profits and gains of business or profession. In doing so, the Assessing Officer may find that certain incomes, which have no nexus to the export business of the assessee, are not allowable and therefore ought to be treated as income from other sources. Once the Assessing Officer computes what is business income then he proceeds to the next step of deducting 90 per cent of the receipts referred in clause (baa) of the Explanation to Section 80HHC in order to arrive at the profits derived from profits. It is at this stage that the questions (b) and (c) arise. To recapitulate these are : ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y way of dividends 60 per cent. of such income." 42. Overruling its earlier decision in Cloth Traders' [1979] 118 ITR 243 case, the Hon'ble Supreme Court now held (ITR Page 135): "Income by way of dividends from a domestic company included in the gross total income would, therefore, obviously be income computed in accordance with the provision of the Act, that is, after deducting interest on monies borrowed for earning such income. If the income by way of dividends from a domestic company computed in accordance with the provisions of the Act is included in the gross total income or in other words, forms part of the gross total income, the condition specified in the opening part of sub-section (1) of Section 80M would be fulfilled and the provision enacted in that sub-section would be attracted." 43. The Hon'ble Supreme Court clarified (page. 134) that : "Now when an amount by way of dividend is received by the assessee from the paying company, the full amount of such dividend would have suffered tax in the assessment of the paying company and it is obvious, that, in order to encourage inter-company investments, the Legislature intended that this amount s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of dividends" as a matter of plain grammar must be substituted by the words "income by way of dividends from a domestic company" in order to arrive at a proper construction of the section, but there is a clear fallacy in this observation, because in making the substitution, it stops short with the words "income by way of dividends from a domestic company" and does not go into the full length to which plain grammar must dictate us to go, namely, "income by way of dividends from a domestic company included in the gross total income" (emphasis supplied). Otherwise, we would not be giving to the word "such" its full meaning and effect. The word "such" in the context which it occurs can only mean that income by way of dividends from a domestic company which is included in the gross total income and that must necessarily be income by way of dividends computed in accordance with the provisions of the Act." 46. The expression "by way of" which qualified the word "income" in Section 80M is similar to the words "receipts by way of" occurring in Explanation (baa) of Section 80HHC of the Act. Further the words "included in such profits" occurs in both the provisions. Just as in Dist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntion of the Legislature and produce a rational construction. The task of interpretation of a statutory provision is an attempt to discover the intention of the Legislature from the language used. It is necessary to remember that language is at best an imperfect instrument for the expression of human intention. It is well to remember the warning administered by Judge Learned Hand that one should not make a fortress out of the dictionary but remember that statutes always have some purpose or object to accomplish and sympathetic and imaginative discovery is the surest guide to their meaning." 50. There is also merit in the contention of the assessees that an interpretation other than that suggested by them, i.e. interest in this context refers to net interest, might produce unintended or absurd results. A reference may be made to the decision of the Hon'ble Supreme Court in Keshavji Ravji and Co. v. CIT [1990] 183 ITR 1. 51. The underlying principle of netting appears to logically get attracted as no prudent businessman would allow taxation of the interest income de hors the expenditure incurred for earning such income. The words "included any such profits" following the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expression "included any such profits" which follows the words "receipts by way of brokerage, commission, interest..." in Explanation baa (i) itself. There is much force in the contention that what can possibly be included in the profits is such interest which has a potential of contributing to the profit of the business. This supports the argument that unless netting is permitted it will not be in sync with the entire Section. 55. There is one other contention of the assessees which merits acceptance. It is submitted that if the deduction of 90 per cent is of the gross interest itself, the amount spent in earning such interest will remain on the debit side of the Profit and Loss account and will depress the profit to that extent. The idea of Section 80HHC is to ensure that the exporter gets the benefit of the profits derived from export and not to depress the profit further. Therefore, it can only be the net interest which can be included in the profits. If netting were not to be permitted the result would be that the profits of the exporter would be depressed by an item that is expenditure incurred on earning interest, which does not form part of the profit at all. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... when the legislature has fixed an ad hoc percentage as expenditure incurred to earn the receipts, can it be further argued that only the net income, which means gross receipt by way of commission, interest, rent, etc. minus all the expenditure which has a nexus with the receipt, can be excluded from the "profits of the business" as computed under the head "business"? Is there any warrant for such an argument" ? 61. It then proceeded to answer the question thus (page 58) : "On the language of Explanation (baa) there is reason to think there is. The ad hoc 10 per cent. deduction, given indirectly by saying that only 90 per cent. of the receipts will be excluded from the profits of the business as computed, instead of the entire receipts, has been given for common expenses, according to the circular. Such common expenses are generally the indirect or fixed expenses which every businessman has to incur to continue in business, such as salaries and wages, other administrative expenses and so on. In addition to such common expenses, there may be expenses which have a direct bearing or nexus with the receipts by way of interest, commission, brokerage, rent etc. If such receipts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o refer to the exclusion on account of receipts by way of brokerage, interest, etc., which are treated as a separate category of exclusion." We fully concur with this reasoning. 64. The other contention that since already 10 per cent. deduction has been permitted for common expenses incurred in earning the receipts mentioned in Explanation (baa), no further "netting" of expenditure is contemplated has been answered by the Income-tax Appellate Tribunal convincingly in para 40, which has already been extracted hereinabove. The Income-tax Appellate Tribunal has also negatived the argument that receipts can only mean what actually comes in and what is actually received and not what goes out. 65. We affirm the decision of the Special Bench of the Income-tax Appellate Tribunal in Lalsons Enterprises [2004] 89 ITD 25 (Delhi) that the expression "interest" in clause (baa) of the Explanation to Section 80HHC connotes "net interest" and not "gross interest". 66. Question (b) is answered accordingly by holding that the word "interest"in clause (baa) of the Explanation connotes "net interest" and not "gross interest" 67. Question (c): Is netting allowable on bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ormulation of the Special Bench of the Tribunal in Lalsons [2004] 89 ITD 25 (Delhi) (page 62) : "If the interest received is found to have a nexus with the business, still it remains to be excluded from the profits of the business by virtue of Explanation (baa) (1), but the claim is that the quantum of such interest income to be excluded must be determined in accordance with the computation provisions relating to business by allowing expenditure by way of interest which bears a nexus with the interest receipt. The computation provisions include Section 37 (1) under which any expenditure incurred or laid wholly and exclusively for the purpose of the business is to be allowed as a deduction. Therefore, any expenditure incurred which has a connection or nexus with the interest receipt has to be allowed as a deduction and only the balance can be excluded from business profits." 71. To the above, we may add a few lines by way of clarification. It will bear examination whether obtaining the loan and paying interest thereon (laying out the expenditure by way of interest) was "wholly and exclusively"for the purpose of earning the interest on the fixed deposit, to draw an anal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deposits for the purposes of availing credit facilities from the bank, does not have an immediate nexus with the export business and therefore has to necessarily be treated as income from other sources and not business income. (vi) Once business income has been determined by applying accounting standards as well as the provisions contained in the Act, the assessee would be permitted to, in terms of Section 37 of the Act, claim as deduction, expenditure laid out for the purposes of earning such business income. (vii) In the second stage, the Assessing Officer will deduct from the profits of the business computed under the head profits and gains of business or profession the following sums in order to arrive at the "profits of the business" for the purposes of Section 80HHC (3): (a) 90 per cent. of any sum referred to in clauses (iiia), (iiib) and (iiic) of Section 28 i.e. export incentives; (b) 90 per cent. of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits; and (c) profits of any branch, office, warehouse or any other establishment of the assessee situate outside India (viii) The wor ..... X X X X Extracts X X X X X X X X Extracts X X X X
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