TMI Blog2010 (3) TMI 455X X X X Extracts X X X X X X X X Extracts X X X X ..... , 1961 raises a question of law as regards the interpretation of the provisions of section 80HHC. The question of law has been formulated as follows in the memo of appeal : "Whether on the facts and in the circumstances of the case and in law, the hon'ble Tribunal was correct in holding that net interest on fixed deposits in banks received by the assessee-company should be considered for the purpose of working out the deduction under section 80HHC and not the gross interest ?" 2. The appeal was admitted on the aforesaid question. The facts : 3. The assessee in the present case carries on the business of the export of cut and polished diamonds. A return of income for assessment year 2003-04 was filed on November 28, 2003, declaring a total income of Rs. 13.91 crores, after claiming a deduction of Rs. 13.22 crores under section 80HHC. The return was initially processed under section 143(1), after which the case was selected for scrutiny under section 143(2) by the issuance of a notice. The assessee had debited an amount of Rs. 21.46 crores as interest paid/payable to the profit and loss account. The assessee, however, stated that the interest charged to the profit and loss ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t have to be reduced are the gross receipts. Consequently, it is the submission of the Revenue that gross receipts by way of interest cannot be netted against expenditure which is laid out for the earning of those receipts. On the other hand, the contention of the assessee is that section 80HHC must have a purposive interpretation and the reduction that is to be applied of ninety per cent. of the receipts, must relate to the inclusion of receipts in the profits and gains of business or profession which is comprised both of receipts and the expenditure which is incurred directly for the purpose of earning the receipts. Section 80HHC : 6. Sub-section (1) of section 80HHC provides that where an assessee, being an Indian company or a person residing in India, is engaged in the business of export out of India of goods or merchandise to which the section applies, there shall be allowed in computing the total income of the assessee, a deduction to the extent of profit referred to in sub-section (1B) derived by the assessee from the export of such goods. Sub-section (1B) stipulates the extent of the permissible deduction and the period during which the deduction could be claimed. Sub- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iid) and (iiie) of section 28, or (b) any receipt by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits ; and (ii) profits of a branch, office, ware-house or any other establishment of the assessee situated outside India. The issue which falls for determination in the present case relates to the reduction factor of ninety per cent. that is to be applied in respect of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits. As noticed earlier, it is the contention of the Revenue that the reduction factor of ninety per cent. must be applied to the gross receipts, independent of any expenditure that may be incurred in the earning of those receipts, while, according to the asses-see, the use of the words "included in such profits" must, in particular, result in the conclusion that the reduction factor cannot be applied in isolation only to the gross receipts without reference to the expenditure laid out directly for the purpose of earning those receipts. It is in this back-ground that it would be necessary now to advert to the rival submis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shi. Counsel appearing on behalf of the assessee submitted that (i) the words "any receipts" denote the nature and not the quantum of the receipt ; (ii) the expression, therefore, requires the nature of the receipts to be examined ; (iii) Explanation (baa) refers to any receipts of a similar nature "included in such profits". The words "such profits" would mean profits and gains of business or profession computed under sections 28 to 44D ; (iv) profits can only be arrived at after the deduction of expenditure from income and the net effect thereof would constitute profits ; (v) Explanation (baa) does not use the expression "gross or net". However, having regard to the purpose and object of the provision and the nature of the language used in the Explanation, ninety per cent. of the receipts that is required to be excluded would have to be computed with reference to the inclusion of such receipts in the profits and gains of business which in turn involves both the credit and the debit sides of the profit and loss account ; (vi) for the purposes of Explanation (baa), income from other sources would not come within the purview of the Explanation; Only business income would have to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d could not be regarded as being derived from export. Section 80HHC had to be amended several times since the formula had resulted in a distorted figure of export profits where receipts such as interest, rent, commission and brokerage which did not have a direct nexus with export turnover were included in the profit and loss account and resultantly became a subject of deduction. By the amendment, the position that emerged was that receipts which do not have any element of or nexus with export turnover would not become eligible for deduction merely because they form part of the profit and loss account. This aspect of the history underlying section 80HHC, has been elaborated upon in the judgment of the hon'ble Shri Justice S. H. Kapadia, speaking for the Supreme Court, in CIT v. Lakshmi Machine Works [2007] 290 ITR 667. 12. Explanation (baa) has to be read in the context of this background underlying the exclusion of certain constituent elements of the profit and loss account from the eligibility for deduction under section 80HHC. What Explanation (baa) postulates is that, in computing the profits of business for the purposes of section 80HHC, the profits of business have to be fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t and form a constituent element in the computation of the profits or gains of business or profession under sections 28 to 44D. The interpretation which we place on the provisions of section 80HHC and on Explanation (baa) must be consistent with the law laid down by the Supreme Court. 15. In CIT v. K. Ravindranathan Nair [2007] 295 ITR 228 the Supreme Court held that processing charges, though a part of gross total income constituted an item of independent income like rent, commission and brokerage and consequently, ninety per cent. of the processing charges would have to be reduced from gross total income to arrive at business profits. As a result, the processing charges would be includible in total turnover in the formula under section 80HHC(3). For the purpose of this appeal, it would be appropriate to formulate the principles which emerge from the decision in Ravindranathan Nair. These may be summarized as follows: (i) Section 80HHC is not a charging section, but a provision by way of an incentive and its object is not to ascertain real income ; (ii) The expression "derived from" in sub-section (1) of section 80HHC is narrower than the expression "attributable to" and con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pts which result in an independent income which has no nexus with export, are required to be reduced from business profits under Explanation (baa) ; (xii) Though receipts by way of brokerage, commission, interest, rent, charges or any receipts of a similar nature form part of the gross total income, yet for the purpose of working out the formula and in order to avoid a distortion in arriving at export profits, Explanation (baa) has been inserted ; (xiii) As a result of the insertion of Explanation (baa) incentive profits and receipts which result in "independent income" have to be excluded from the gross total income to the extent of ninety per cent. because such receipts have no nexus with the export turnover. 16. In Lakshmi Machine Works [2007] 290 ITR 667 the issue before the Supreme Court was whether excise duty and sales tax were to be included in the total turnover for the purpose of working out the formula contained in section 80HHC(3). The Supreme Court held that the object of the Legislature in enacting section 80HHC was to confer benefit on profits accruing with reference to export turnover. The Supreme Court observed that "commission, rent, interest, etc., did not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on, rent, charges or other similar receipts had also gone into the computation of business profits, Parliament thought it fit to exclude only ninety per cent. of the receipts received by the assessee in order to ensure that the expenditure which is incurred by the assessee in earning the receipts which has gone into the computation of the business profits is taken care of. 18. The reason why Parliament confined the reduction factor to ninety per cent. of the receipts is stated in the Memorandum explaining the provisions of the Finance (No. 2) Bill of 1991. In so far as it is relevant, the Memorandum states thus [1991] 191 ITR (St.) 270, 300) : "The existing formula may also give a distorted figure of export profits when receipts like interest, commission, etc., which do not have an element of turnover are included in the profit and loss account. It is, therefore, proposed to clarify that 'profits of the business' for the purpose of section 80HHC 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccount while computing the business profits. In other words, the distortion in the profits of business that would take place by excluding only the sums, receipts and profits from the credit side, but not the expenditure from the debit side, is offset by excluding only ninety per cent. of such sums, receipts and profits to represent the expenditure incurred on earning them. As stated earlier, it may well be that the actual expenditure incurred in a case may be more or less than the statutory factor of ten per cent. enacted by Parliament, but in order to simplify the application of the law, Parliament treated a uniform expenditure computed at ten per cent. to be applicable in order to ensure that there is no distortion of profits by exclusion of income which is not relatable to export profits. Distributors Baroda : 20. In Distributors (Baroda) P. Ltd. v. UOI [1985] 155 ITR 120 what was in issue before the Supreme Court was the deduction provided for in section 80M. Section 80M provided that where the gross total income of an assessee, being a company includes any income by way of dividends received from a domestic company, in computing the total income of the assessee, there shal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce the intent of Parliament that such receipts ought to have formed a part of the profits and gains of business or profession as computed in accordance with the pro-visions of sections 28 to 44D. The distinguishing aspect of Explanation (baa) is that the profits of the business as computed under the head of "Profits and gains of business or profession" are subject to a reduction factor of ninety per cent. The rationale for the exclusion which has been provided for by Parliament in Explanation (baa) is that items which are unrelated to export turnover have to be excluded in computing the profits of business. Including items which are unrelated to export turnover in computing the profits of business would result in a distortion of the formula which is to be applied in construing the provisions of section 80HHC. The reason for exclusion, therefore, is that in computing the profits of business items which are unrelated to export turnover must be excluded because the basis of section 80HHC is to provide an incentive for export. The extent of the exclusion which is statutorily mandated by Parliament is ninety per cent. of the total receipts. Though the entire quantum of receipts unrela ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business computed under the head 'Pro-fits and gains of business or profession'. Addition of prefix 'the' to 'profits' in clause (baa), while referring to the profits and gains of business or profession makes it clear that it is only the amounts already included in that computation which are now to be reduced to the extent of 90 per cent., if those items are included in sub-clause (1) of that definition." 24. The High Court held that interest paid and claimed as a deduction in the computation of profits and gains for business could not be set off against interest received and paid under income from other sources. The judgment in Subbiah Pillai was followed by another Division Bench in CIT v. V.Chinnapandi [2006] 282 ITR 389 (Mad) In the case before the Madras High Court, the assessee had paid interest of Rs. 9.24 lakhs and had received interest of Rs. 2.65 lakhs and the net interest of Rs. 6.59 lakhs came to be debited. The Assessing Officer held that under section 80HHC, ninety per cent. of the receipts had to be excluded and consequently the deduction was confined to ninety per cent. of the income of Rs.2.65 lakhs received on account of interest. The order of the Assessing Off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r was of the view that ninety per cent. of the receipts on account of interest in the amount of Rs. 6.33 lakhs was liable to be deducted from the profits of the business for the purposes of deduction under section 80HHC. The Commissioner of Income-tax (Appeals) however, took the view that the interest would have to be netted. The Income-tax Appellate Tribunal, on appeal, confirmed the view of the Assessing Officer by holding that ninety per cent. of the interest that was deductible for the claim under section 80HHC was from the gross interest received by the assessee and that the amount of the interest paid by the assessee could not be deducted therefrom. The Division Bench held that "a plain reading of clause (baa) of Explanation to section 80HHC . . . makes this aspect quite clear" and the Tribunal was right in disallowing the claim of the assessee. A subsequent decision of the Punjab and Haryana High Court in CIT v. Liberty Footwear Company [2006] 287 ITR 339 also adopts the same position. 26. Reliance is, however, sought to be placed on behalf of the assessee upon the judgment of a Division Bench of the Delhi High Court in CIT v. Shri Ram Honda Power Equip [2007] 289 ITR 47 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the idea of section 80HHC was to ensure that the exporter gets benefit from the profits derived from export and not to depress the profits further. Hence, accord-ing to the High Court, it can only be net interest which can be included in the profits and 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 profits at all. 28. Having given a careful consideration to the judgment of the Delhi High Court, we are not inclined to follow the view for a number of reasons. The substratum of the judgment of the Delhi High Court proceeds on the basis that the question as to whether netting should be permissible stands concluded by the judgment of the Supreme Court in Distributors (Baroda) [1985] 155 ITR 120. In Distributors (Baroda) [1985] 155 ITR 120, while considering the provisions of section 80M, the Supreme Court interpreted the words "where the gross total income of the assessee being a company included any income by way of dividend received" and the words which provided that in computing the total income of the assessee "a deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... legislative provision. The task of interpretation is to find out the true intent of a legislative provision. Undoubtedly, in dealing with a provision by way of an incentive, the court must adopt a broad and liberal interpretation which would advance the purpose. While doing so, the court is duty bound to iron out the creases but, it is clearly not open to the court to legislate by substituting a formula or provision other than what has been legislated by Parliament. The Delhi High Court, with respect, has not adequately emphasised the entire rationale for confining the deduction only to the extent of ninety per cent. of the excludible receipts. While the judgment of the Delhi High Court referred to the Central Board of Direct Taxes Circular dated December 19, 1991, as noted earlier, we have also adverted to the Memorandum explaining the clauses of the Finance Bill of 1991. The Memorandum can be relied upon as a legitimate instrument of statutory interpretation and to shed light upon the provisions of Explanation (baa). 29. Before concluding, it would be necessary to note that the Delhi High Court affirmed the judgment of a Special Bench of Income-tax Appellate Tribunal in the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X
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