TMI Blog1994 (7) TMI 304X X X X Extracts X X X X X X X X Extracts X X X X ..... e greatest amount of fillip to the promotion of exports and thereby earn for the country the much needed foreign exchange. The object is to provide incentives to accelerate exports by granting exemption on the export related profits. The basis for working out this deduction was being changed over years. Sometimes it was related to a portion of the turnover plus a portion of the export earnings brought into India but only in convertible foreign exchange and sometimes it was related to a percentage of the profits derived from the export related profits. Eventually, a stage has come when further boosting of the export became necessary and cent per cent. exemption was granted. That was how section 80HHC has undergone several changes and modifications by way of amendments. We shall refer to the history of these amendments a little later. The introduction of this benefit to the exporters has brought in its wake certain difficulties in its implementation. While certain targeted groups were not getting the intended benefit, the other groups were securing the unintended benefit by manipulations and camouflaging. The attempt of the Legislature has been to identify these manipulations, diff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stic, irrespective of the commodities dealt in, must be aggregated. If in the process of aggregation the export profits got diluted, it is the consequence of the legislative policy just as if the local business turns out to be more than export business, by the same process of turnover based apportionment, a slice of domestic profits would get exempted too. These distortions should be taken as intended by Parliament while enacting the sub-section but these distortions, which were described assiduously before us as absurdities, should not be taken as a guide for the interpretation of section 80HHC. If attention is riveted on the object of section 80HHC, it would be seen that it is to promote exports more than local business. Circulars issued by the Central Board of Direct Taxes explaining the provisions of section 80HHC and providing guidelines as to how it should be implemented were relied upon by this section to show that there need not be profits on exports provided there is export turnover. In such a case, local profits will get exemption on the basis of apportionment. While the other section refuting this point of view submitted that if the circulars of the Central Board of Di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... andise exported out of India are receivable by the assessee in convertible foreign exchange. (b) The goods or merchandise referred to in clause (a) are the following, namely : (i) agricultural primary commodities, not being produce or plantations ; (ii) mineral oil (iii) minerals and ores ; and (iv) such other goods or merchandise as the Central Government may. by notification in the Official Gazette, specify in this behalf. (3) No deduction under clause (b) of sub-section (1) shall be allowed unless the assessee had, during the immediately preceding previous year, exported out of India goods or merchandise to which this section applies: Explanation.-For the purposes of this section, (a) ' convertible foreign exchange' means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange Regulation Act, 1973 (46 of 1973), and any rules made thereunder ; (b) 'export turnover' means the sale proceeds of any goods or merchandise 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee 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. (1A) Where the assessee, being a supporting manufacturer, has during the previous year, sold goods or merchandise to any Export House or Trading House in respect of which the Export House or Trading House has issued a certificate under the proviso to sub-section (1), 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 sale of goods or merchandise to the Export House or Trading House in respect of which the certificate has been issued by the Export House or Trading House. (2) (a) This section applies to all goods or merchandise other than those specified in clause (b), if the sale proceeds of such goods or merchandise exported out of India are receivable by the assessee (other than the supporting manufacturer) in convertible foreign exchange, within a period of six months from the end of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the deduction has been correctly claimed on the basis of the amount of export turnover.-But for the assessment year 1991-92, another change was introduced in sub-section (3) of section 80HHC by combining the effect of both clauses (a) and (b) and the combined. section as was referred stood as under " (3) For the purposes of sub-section (1), profits derived from the export of goods or merchandise out of India shall be 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." We are not reproducing here the other portions of the section as we are not concerned with those portions in these appeals but they remain more or less the same without any change but the major change was brought about with effect from April 1, 1992, by introducing certain radical changes in the section with effect from April 1, 1992. The major change with which we are concerned is the addition of clause (baa) in the Explanation added to sub-section (4A) by the Finance (No. 2) Act, 1991, with effect from April 1, 1992, pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in opposition to this view was that profits in export business were never contemplated provided there is total profit in the business conducted by the assessee both in export and domestic business. They say that when the legislative mandate in clause (b) is to compute the profit and gains of the business as a whole under the head "Profits and gains of the business or profession" and then apportion the same in the ratio the export turnover bears to the total turnover of the business carried on, the question of splitting the profits and gains of business to find out whether there is any profit in export or not does not come in or fit in. They further argue that for clause (a) of sub-section (3) to apply, the business in export must be exclusive when the legislative mandate is the profits of the business in export, which are exclusively to be computed under the head " Profits and gains of the business or profession " and the total amount so arrived at must be exempted from tax by way of deduction, in case such exporters do not deal exclusively in export and have domestic business also either of manufacture or of trading, then the profits of such business must be computed in the manner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rafting section 80HHC, which is not permissible. (6) Since the base for the deduction is profits of the business of the assessee as computed under the head "Profits and gains of business or profess ion", the expression "profits of the business" as computed under the head 'Profits and gains of business or profession' must mean the profits of the business of the assessee as a whole, a portion of which has to be apportioned to export turnover and that was based on turnovers. The profits of the business should, therefore, include the profits of the export business as well as any other business carried on by the assessee and all other receipts which have a direct bearing on the carrying on of the business or engagement in business. That was also how the Central Board of Direct Taxes understood those provisions and clarified them so in their Circular No. 564 (see [1990] 184 ITR (St.) 137), issued on July 5, 1990. These circulars are binding on the Revenue authorities and they should not therefore be permitted to ignore the circulars and it is the duty of the court to direct the authorities to make the assessments in accordance with the circulars of the Central Board of Direct Taxes and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ods the export of which goods are not entitled to exemption. Therefore, whether the assessee derives income from carrying on any other business or not is wholly extraneous to the scheme of granting the deduction under this section. If, therefore, an assessee is engaged in export business as well as non-export business, the profits on export business must be entitled to total exemption and the question of aggregating the turnover would arise only if there is local turnover in such goods. It is only in a case where the assessee was engaged in the export of qualifying goods and also deals with them locally making or rendering it not feasible to ascertain precisely the profits from export turnover, the situation contemplated in clause (b) of sub-section (3) will come into operation. If an assessee, therefore, maintains separate sets of accounts in respect of export business, from which the profits or losses earned in the business are clearly ascertainable, it is immaterial what other goods he is selling in India. Any attempt at applying the provisions of sub-section (3)(b) to such a case will negate the very object behind the enactment of section 80HHC because this will involve reducin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laced by Shri G. C. Sharma alone should be accepted as the proper and correct interpretation of section 80HHC(3)(b) and not the interpretation sought to be placed upon it by Shri O. P. Vaish or the Revenue. In other words, these two interveners, Shri G. C. Sharma and Shri R. Ganesan, opposed the interpretation placed by Shri 0. P. Vaish. Shri Ganesan after narrating briefly the facts obtaining in Messrs. U. K. Paints (I.) (P.) Ltd., submitted that since the assessee was maintaining separate books of account for the activities of exports and activities in India, the activities of exports must be regarded as separate and distinct from the activities in India, more so because, for the activities in exports, the assessee has prepared even a separate balance-sheet. In this case, the assessee secured orders from the U. S. S. R. On the basis of the technology supplied by the U. S. S. R. party, the assessee has to manufacture paints in its factory and export the same. Besides, the assessee also exported detergent goods, tooth pastes, toilet soaps, etc. The assessee also manufactured paints on the basis of technology from the U. S. A. The U. S. collaborators obliged the assessee to market t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity. (5) When section 80HHC contained two activities, one of exclusive export and the other of mixed export, both of them cannot be seen as one single activity. Seen as two activities, the effort must be to arrive at the export profit. If export profits are otherwise available by means of maintenance of separate accounts, that profit alone must be taken as the basis subject to such allowances or deductions as are admissible in computing the income of that activity as income under the head "Profits and gains of the business ". Any conflict that may be noticed between sections 80HHC and 80AB must give way to the provisions of section 80AB as contained in the non obstante provision. He drew support from a large number of decided cases both by the High Courts and Supreme Court for his views and reliance in this context was particularly placed upon the following decisions : (i) CIT v. Canara Workshops P. Ltd. [19861 161 ITR 320 (SC) on the interpretation of section 80AB ; (ii) CIT v. Agency Marketing Co-operative Society Ltd. [19931 201 ITR 881 (Orissa) ; (iii) CIT v. H. M. T. Ltd. (No. 1) [1993] 203 ITR 811 (Kar). In elucidation of the same proposition that each activity is a separ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pretation, i.e., purposive approach is to be adopted as mentioned by the Bombay High Court in the case of CIT v. Shri Shakti! Trading Co. [1994] 207 ITR 442 (Born) and earlier in Ajit Investment Co. (P.) Ltd. v. K G. Malvandkar, SubRegistrar [19741 95 ITR 546 (Born), if it does not lead to unreasonable and ridiculous results. Relying upon the Supreme Court decision in the case of CIT v. B. N. Bhattachargee [1979] 118 ITR 461 (SC) and the commentary made by Sampath 1yengar, edition VIII, Volume 3, at page 3220, and pressing into service the ruling of the Calcutta High Court in the case of CIT v. Indian Products Ltd. [1994] 207 ITR 647, the learned advocate, Dr. Narayanan, submitted that in certain circumstances even the heading of the section assumes importance and becomes relevant as an aid to interpretation. The expression used in section 80HHC is "profits derived". According to Dr. Narayanan. the word "derived" is very impor tant and held the key for the resolution of the controversy. The expression "derived" came up for interpretation before the Madhya Pradesh High Court in the case of Gwalior Rayon Silh Mfg. (Wvg.) Co. Ltd. v. CIT [1983] 143 ITR 590, where the High Court held t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n assignment of export orders and was also realising lease rent of cylinders and consultancy fees by providing security services struck the same line of argument as that of his predecessors, Shri G. C. Sharma, Shri R. Ganesan and Dr. S. Narayanan, and sought to support his argument by reference to the Memorandum explaining the provisions of the Finance Bill and passed by Parliament and having acquired legislative sanction and said that it should be considered as an important aid in construing the section and in finding out the legislative intention. He referred us to [1985] 152 ITR (St.) 155, at page 163, where it was pointed out in the Memorandum in paragraph 29 that the object of section 80HHC was to benefit the economy as a whole. Economy cannot be benefited unless the export profits are totally exempted without being diluted in the manner done by the Department by applying the provisions of clause (b) of sub-section (3) of section 80HHC. He submitted as Dr. 8. Narayanan that the word "derived " should not be seen in isolation. Tracing the legislative history of section 80HHC, he submitted that the commission received on assignment of export orders was considered as profits deri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or clarification nor is there any suggestion to this effect in the Memorandum explaining the introduction of these provisions. He, therefore, asked how it could then be construed as retrospective in operation. He then submitted that sub-section (3) of section 80HHC was a definition section. This being so even if its meaning is different from the other meanings, the definition meaning must prevail. Even if the definition clause is capable of giving more than one meaning, the meaning beneficial to the assessee must be preferred. However, this definition clause was not capable of two meanings. He then referred us to the meaning of the word "business" as given in the Commentary by Kanga and Pallihiivala, Volume 1, Eighth edition, at page 464. He then struck a different line of argument from his predecessors by stating that if turnover has to be aggregated, if an assessee falls in clause (b) of sub-section (3) of section 80HI-IC, the entire turnover no matter what he is selling, must be aggregated, and not segregated. That was the meaning of the expression "total turnover" used in sub-section (3)(b) and that must be kept in view and that was the intention of the Legislature and also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits to be exempted. That being the object of the Legislature, this cannot be seen as an absurdity as propounded by Shri G. C. Sharma and other proponents of that theory. When the law said that export profits and local profits must be aggregated and apportioned on the basis of turnover, the Assessing Officer while granting the exemption arrived at export profits by allocating the expenses in proportion to turnover, which was never even in the contemplation of the Legislature. This is wholly against the provisions of section 80HHC(3) and is wholly untenable and unjustified and illegal also. The mandate of section 80HHC(3) was deliberately flouted. The Commissioner of Income-tax (Appeals) has gone a step further by putting his approval by even enhancing it. The intention is to bring foreign exchange by providing fiscal incentive. That fiscal incentive should not be diluted in any manner. To point out the intention, he referred us to [1984] 149 ITR (St.) 29 ; [1985] 152 ITR (St.) 82 and [1991] 190 ITR (St.) 299. This object of earning foreign exchange for the country is sought to be achieved even by sacrificing a part of the tax on local profits by this process. He then submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt business becomes immaterial. That is how his argument proceeded all to say that the manner in which his client had understood the section and computed the profits to be exempted under section 80HHC should be accepted. Shri B. B. Ahuja, special counsel engaged by the Department to appear before us in these matters, submitted his views in his methodical way refuting point by point the arguments raised by the main appellant and the interveners and also by citing authority after authority. Mainly, his submissions can be divided into four parts. The first part is about the principles of interpretation as to when the golden rule of interpretation should be adopted and as to when the contextual rule of interpretation should be adopted and as to when the subsequent amendments made could or should be seen as declaratory, clarificatory or retrospective in nature. He cited several authorities in support of each of the propositions. The second part of his argument was whether sub-section (3) of section 80HHC is to be taken as a definition section as enunciating a formula for the purposes of computing the profits on or attributable to the export turnover. The third part was whether in arri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o give benefit of any item without reference to the export turnover. There has to be "turnover" before there is any benefit to be conferred. Dealing with the third part of his argument, he submitted that since the object of the Legislature is to confer a benefit on profits accruing with reference to export turnover, there ought to be turnover and since commission received on assignment of export orders did not involve any turnover, such commission should be totally excluded. That this is the object of the Legislature according to him, is seen by the subsequent amendment brought with effect from April 1, 1992, whereby 90 per cent. of such commissions are to be excluded from the profits derived from the export. When the Legislature made it clear by this amendment that 90 per cent. of the commission, etc., is not to be regarded as profits derived from exports and when the Memorandum explaining the Finance Bill as introduced in Parliament mentioned that this was being done with a view to see that the benefit unassociated with export turnover should not be taken and the grant of such benefit was a misuse of the section, it meant and shall be deemed to have always meant that such commi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cal. After referring us to these arguments and vivifying them with great detail and supported by authorities, he gave certain examples to show how the interpretation sought to be placed by his adversaries on the working of section 80HHC(3) led to absurdities and such an interpretation which led to absurdities should be avoided. According to his examples, unintended benefit will be conferred upon the exporters if the interpretation placed by the opposite side is accepted. He reiterated that commission received on assignment of contracts cannot form part of the formula mentioned in sub-section (3) for the simple reason that it does not spring from the export turnover much less any turnover. Even if the assessee is an exclusive dealer in export, the commission is not includible as part of his business. The, Memorandum explaining the amendments introduced with effect from April 1, 1992, used the word "clarified". It should, therefore, be, construed that these amendments are only clarification in nature and if so the question of regarding the commission as export profits does not simply arise. He took us to the decision of the Supreme Court in S. Sundaram Pillai v. V. R. Pattabiraman, A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is total income. 4. Section 80HHC(3), is a machinery clause providing for a mechanism to determine the quantum of profits derived from exports which are eligible for deduction. It is not a deeming fiction. 5. The expression "profits of the business" in sub-sections (3) and (3A) has to be understood as profits of business relating to trading transactions of which the source is the turnover of the assessee's business. The expression "to total turnover" means aggregate of sale prices received or receivable for the sale of goods both from exports and in the domestic market. 6. Section 80HHC(3)(a) lays down the formula for determining of profits derived from exports where the business carried on by the assessee consisted exclusively of exports out of India of qualified goods. Under it the profits derived from exports would be the profits of the business as computed under the head "Profits and gains of a business or profession", the only business being the trading transactions of exports. 7. Section 80HHC(3)(b) dealt with a case where the assessee's business did not consist exclusively of the export out of India of qualified goods and the assessee dealt with the sales of other go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in nature, it was meant to clarify the ambiguity resulting from the use of this expression in section 80HHC(3) and (3A) and has to be given effect to for past assessment years also. The fact that the Explanation has been inserted with effect from April 1, 1992, with a view to clarify cannot lead to the inference that the expression "profits of the business" for the earlier assessment years did not mean what is provided in the Explanation now by way of clarification. The Legislature cannot be imputed with the intention to have restricted the incentive for exports now by inserting the Explanation. 14. While determining the profits derived from exports, receipts like commission, consultancy fees, brokerage, etc. (even if assessable under the head "Business"), if included in the profit and loss account, have to be excluded as the source of these receipts is not trading transactions, these are income receipts in the first instance. 15. The Legislature never intended to treat the business in each commodity as a separate source for determination of profits derived from exports as contended by some of the interveners. The Legislature has classified the goods in two categories, one cove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r. That context included any other phrases under the Act which may throw light on the sense in which the makers of the Act used the words in dispute. Though the rule of causus omissus is advocated, we do not propose to apply it because we are not able to find any omission. We do not, therefore, think it proper to create an omission and supply the omission. In other words, the consequence of this rule of supplying casual omission, etc., in the statutory provision, is to extend the meaning of the section to meet the cases for which a provision is not clearly and undoubtedly made. This conclusion of ours obviates the necessity to discuss in detail the various authorities cited. Section 80HHC(3) is a beneficial section. It was intended to provide incentives to promote exports to earn foreign exchange for the country. The incentive provided is to exempt the profits relatable to exports. Since it is not possible to conceive of an exclusive exporter without having domestic business and it is often found impracticable to ascertain profits of export exclusively and since there is a possibility of mixing up of either overheads or costs of export with domestic or vice versa and this differe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rat Hari Singhania [1994] 207 ITR 1. The question there was whether rule 11) which provided for valuation of unquoted equity shares was ultra vires the Act and whether any other method should be adopted. While construing rule 1D as intra vires, the Supreme Court observed at page 14 of the Report: "It is thus left to the rule-making authority to prescribe an appropriate method for the purpose. There may be several methods of valuing an asset or for that matter an unquoted equity share. The rule-making authority cannot prescribe all of them together, it has to choose one of them which according to it is more appropriate. The rule-making authority has in rule 1D chosen the break-up method, which is undoubtedly one of the recognised methods of valuing unquoted equity shares. Even if it is assumed that there was another method available which was more appropriate still the method chosen cannot be faulted so long as the method chosen is one of the recognised methods, though less popular. " The Supreme Court thus approved that if there were more than one method available for the purpose of achieving the object of the Legislature, it can follow any one method if it is a recognised meth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are to be computed in the manner laid down in that subsection, namely, under the head "Profits and gains of business or profession" and only a part of those amalgamated profits or the result of the computation have to be apportioned on the basis of the turnover. We see no words in sub-section (3) to limit this apportionment of profit on the basis of turnover in exports and the apportionment has to be resorted to only when the same kind of goods exported are also dealt with locally. We find no support for this view in the language used by the Legislature. To our mind, the Legislature has contemplated the ascertainment of total profits in the entire business and then apportionment thereof on the basis of turnover. This is how the Central Board of Direct Taxes also understood this provision and explained it in its circulars for the benefit and also for the uniform application of this provision throughout the country by all Assessing Officers. To bring the intention of the Board more clearly to Assessing Officers, they have given examples and those examples do not suggest that if there is export turnover and local turnover, either the local turnover must be excluded or the aggregation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it for issuing of such orders, instructions or directions. So an order, instruction or direction given by the Board, if it remains within its confines has to be observed and followed by all the authorities employed in the execution of the Income-tax Act but if they traverse beyond their jurisdiction, namely, interpretation of the Act, then a controversy may arise. In this case, there is no such interpretation. Under sub-section (1) of section 119, the Board can issue a general or a special order in respect of any class of income or cases setting forth directions or instructions not being prejudicial to the assessees as to the guidelines, principles or procedures to be followed by the other incometax authorities in the working relating to assessments or collection of revenue. The instructions given in this case fall under this nature. They cannot, therefore, be perceived as interpretation of the statute. In any case, the Board performs a sovereign executive power of the Government of India and that cannot be faulted merely on the ground that in some cases certain unintended hardships have arisen or are likely to arise. We, therefore, think it unnecessary to refer to the various auth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d exclusively of export of goods outside India. Carrying on an exclusive export business out of India without domestic turnover will disclose only the profits in such exclusive export business. That does not mean that the purpose of clause (a) is to find out whether the profits in export are easily identifiable even in a case where the business carried on does not consist exclusively of exports outside India of the goods or merchandise. If in addition to the export, there are dealings in India then clause (b) will automatically take over the position. With a view not to deny the benefit of exemption to persons having domestic turnover and with a view to avoid litigation, the Legislature has provided a formula to arrive at the profits in such situations where the business carried on by the assessee does not consist exclusively of export of goods outside India. So the test for the purpose of sub-section (3) of section 80HHC is whether the assessee is carrying on business of exclusive export or exports and domestic business also. If it is the former, clause (a) would apply and if it is the latter clause (b) would apply. If clause (a) applies, the entire profit computed in the manner i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting exemption is fraught with litigation, it was sought to be avoided by providing this omnibus method of apportionment of profits on the basis of turnover, which is a recognised method. Shri R. Ganesan, the learned chartered accountant, has argued by introducing section 80AB, which we have referred to earlier in great detail. We are of the opinion that even this argument does not appear to us to be proper. What section 80AB provides is that where any deduction is required to be allowed under any sections of Chapter VI-A, in respect of any income of the nature specified in that section, which is included in the gross total income, then, notwithstanding anything contained in that section, for the purpose of computing the deduction under that section, the amount of income of that nature has to be computed in accordance with the provisions of the Income-tax Act before making any deduction under Chapter VI-A shall alone be deemed to be the amount of that nature which is derived or received by the assessee and included in the gross total income. In other words, section 80AB prescribes that if any particular income referred to in any of the sections of Chapter VI-A is to be allowed as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly a type of business that an assessee was carrying on to be able to earn exemption. It is, therefore, difficult to see that export business is a different business or an undertaking distinct from local business or even a combined business. Mr. Ganesan says each activity must be taken as as separate business. This is not possible to accept. We are also unable to agree with the interpretation sought to be placed by Dr. S. Narayanan, based upon purposive interpretation or contextual interpretation. As we have mentioned in the beginning if the language of the section is plain, there was no need to go into the process of any interpretation on the basis of supposed difficulties. Since the language according to us is plain, unambiguous giving out clearly the legislative intention, we find no need to go either to purposive interpretation or contextual interpretation as was held by some of the Benches of the Income-tax Appellate Tribunal while deciding this issue. That would, in our opinion, amount to rewriting the section to suit particular needs of their assessees and not to bring out the legislative intention. We, however, agree with the view canvassed by Shri O. P. Vaish, Shri Aja ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CCAC. Rule 18BBA provides that the report of the accountant, which is required to be furnished by an assessee under sub-section (4) or (4A) shall be in the Form abovementioned, namely, 1OCCAC. This Form No. 1OCCAC provided in clause (2) as under : " I/We certify that the deduction to be claimed by the assessee under sub-section (1) of section 80HHC of the Income-tax Act, 1961, in respect of the assessment year .... is Rs.... which has been determined on the basis of the sale proceeds received by the assessee in convertible foreign exchange. The said amount has been worked out on the basis of the details in annexure 'A' to this Form. " This shows that the profits are to be ascertained on the basis of the sale proceeds received in convertible foreign exchange in the manner provided in annexure 'A' which we shall refer to a little later and not necessarily with reference to the profits ascertained as per books even though separately maintained exclusively for export business. This annexure 'A' has got ten items and we think it is very essential to reproduce it in order to bring out our thinking more clearly and vividly " 1. Name of the assessee. 2. Assessment year. 3. Total turn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... processor of goods. Thus, a seafood processor, for example, or any other processing unit exporting goods or merchandise through an export house/trading house, will now be eligible to claim deduction under section 80HHC on the condition that he obtains a disclaimer certificate from the export house/trading house ; (iv) under the existing provisions, deduction under section 80HHC is allowed if the sale proceeds are receivable in convertible foreign exchange. With effect from the assessment year 1991-92, the deduction under this section shall be allowed only if the sale proceeds are received in or brought into India within a period of six months from the end of the relevant previous year. However, in case of genuine hardship, the Chief Commissioner or the Commissioner may allow further time for the remittance of foreign exchange if he is satisfied that the assessee was unable to bring the foreign exchange within the period of six months for reasons beyond his control. While allowing a further period in this regard, the Chief Commissioner or the Commissioner shall record reasons for the same in writing ; (v) The deduction shall be of the profits derived by the assessee from the exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er' to 'total turnover', will be applied to his profits computed under the head 'Profits and gains of business or profession' (which again will include the three export incentives). The operation of section 80HHC read with section 28, as amended by the Finance Act, 1990, can be illustrated by way of the following examples Code I Code II 2/3 Code III Code IV exclusively export 1/3 1/2 export 1/3 export export domestic 1/2 2/3 business sale domestic domestic sale sale (Figures in lakhs of rupees) -------------------------------------------------------------------------------------------------------------------------------------------(i) Turnover (a) FOB exports 100 100 100 100 (b) Domestic sale 50 100 200 (c) Total turnover 100 150 200 300 (ii) Business profits before incentives (assumed figures) 10 15 20 30 (iii) CCS, DDK, I/L 10 10 10 10 Total profits of the business 20 25 30 40 (iv) Deduction under section 80HHC, if entire export 100 100 100 proceeds, i.e., Rs. 100 lakhs ---------------------------is brought into India within 25 X 100 30 X 200 40 X 300 stipulated period 20.00 16.67 15.00 13.33 (v) Deduction under section 80HHC if only 50 per cent. 50 50 50 50 of export proceeds, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the purpose of the assessee's business. The third point appears to be consequential, namely, deletion of interest levied under sections 234B and 234C of the Income-tax Act. The assessee is a public limited company engaged, inter alia, in the business of export of cosmetic goods and other products. For the previous year ended March 31, 1990, relevant to the assessment year 1990-91, the assessee filed a return declaring an income of Rs. 1.01 crores. But the assessment was completed on an income of Rs. 2.04 crores. One of the points was about the correct computation of the relief under section 80HHC. The assessee during the year had an export turnover of Rs. 2.19 crores and received export fees of Rs. 2.04 crores. This export fee was received on assignment of certain export orders to another` exporter Messrs. Hindustan Lever Ltd. In the return filed by the assessee deduction under section 80HHC was claimed treating the commission received from Messrs. Hindustan Lever Ltd. as profits derived from export business eligible for apportionment on the basis of export turnover to the total turnover. This is how the assessee made the claim Export turnover Profit under the head "Profits an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (P.) Ltd. v. Asst. Commissioner [1993] 46 ITD 71 and that of the Delhi Benches in the case of Ashwini Kumar Consultants (P.) Ltd. v. Dy. CIT, New Delhi in Income-tax Appeal No. 74 of 1985, dated July 5, 1993 (now found reported in [1993] 47 ITD 1). In our opinion, the view taken by the learned Commissioner (Appeals) does not conform to the provisions of the Income-tax Act or the circulars given by the Board referred to above or the requirements of the rule 18BBA and Form No. 1OCCAC. We have endeavoured to point out above that there is no need for any profit to be in existence in export business so as to confer this benefit. The circular of the Board makes it abundantly clear and also the Form No. 1OCCAC, which has the sanction of the law. So the submission that there should be a profit, is not acceptable as not in conformity with the provisions of section 80HHC. Secondly, the commission received on the assignment of export orders cannot be seen divorced from or de hors the export turnover. It is directly linked to the export business and has a direct nexus with the export. Because the assessee was engaged in export business, he could obtain export orders and owing to his inabilit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be regarded as profit derived 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 harmonious and not discriminatory, cutting against each other. What is sauce for the goose. 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 or 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 been 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest, commission, etc., which do not have an element of turnover are included in the profit and loss account. By clarifying this position, what the Legislature thought was that though the commission and interest spring from export, yet as they do not involve any element of turnover and merely for the reason that they were included in the profit and loss account, they were becoming eligible for exemption. In order to remove this distortion, it became necessary to clarify what was meant by " profits of the business" for the purpose of section 80HHC. That was why it was provided in paragraph 32.11 as under "32.11. It has, therefore, been clarified that 'profits of the business' for the purpose of section 80HHC will not include receipts by way of brokerage, commission, interest, rent, charges or an 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, ad hoc ten per cent. deduction from such incomes is provided to account for these expenses. " In paragraph 32.15, it was clearly pointed out 32.15. These amendments will take effect from April 1, 1992, and will, accordingly, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in sub-section (3)(b). Non-receipt of sale proceeds in convertible foreign exchange will only mean that that turnover is not export turnover and will not, therefore, stand in the way of the assessee getting the benefit. of sub-section (3). So long as there is export turnover within the meaning of ' definition clause (b) of the Explanation referred to above, the assessee is entitled to the benefit. In the instant case, the entire sale proceeds are received in convertible exchange. Therefore, the entire export turnover will be eligible for inclusion in the formula. The commission as we have said is part of profit derived from export business and for the application of formula, such commission need not be received in convertible foreign exchange. The formula applied by the assessee is the one stipulated in clause (b) of -sub-section (3). The Department negatived the claim of the assessee not for the reason that in principle clause (b) of subsection (3) does not apply, but for the reasons that the commission amount was not received in convertible foreign exchange, and secondly, there was no profit in export turnover. As regards the first objection, as we have shown, there is no requi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the view that those decisions would not be of much help to the assessee because the establishment of such a direct nexus with the borrowals was not made in those cases. Therefore, in those cases, a presumption was raised that if all the sale proceeds and the receipts of the business and other moneys were put only in one bank account and if moneys were drawn from such an amalgamated bank account for payment of taxes and if there are profits at the end of the year, it could be presumed that the taxes were paid not out of borrowed funds but out of profits. Here, such not being the case, we are unable to accede to the view canvassed on behalf of the assessee, We, therefore, confirm the disallowance. The third ground of levy of interest under sections 234B and 234C are consequential and we direct the Department to give such relief as the assessee is entitled to after giving effect to our order. In the end we wish to perform a duty which is pleasant and which we think it is necessary, namely, to express our grateful thanks to all the interveners, who have taken extraordinary pains to explain to us the provisions of section 80HHC with its hidden intricacies, Shri G. C. Sharma, learne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee carries on domestic trade of goods or merchandise, in addition to the export of goods or merchandise. For applying clause (b) of sub-section (3), the domestic turnover is necessary and domestic turnover would exist only on sale of goods or merchandise but not otherwise. In a case where the domestic income was from commission, consultancy, interest, etc., there was no income because of there being no safe of goods or merchandise and hence the assessee is not entitled to deduction. The learned advocates, counsel as well as the standing counsel for the Revenue felt that unless the words "a deduction of the profits derived by the assessee from the export of such goods or merchandise" are interpreted and their true meaning found out, it is not possible to have a key to the whole section. It would appear they held the view that a literal, ordinary, equitable, rational and common sense point of view of interpretation which the above words bear would signify their true meaning. For instance, they thought that once deduction depends upon profits derived by the assessee from export of goods or merchandise, how can an assessee who sustained loss in the export of goods be allowed deductio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... could strictly be described as " profits derived from the export of goods or merchandise out of India", the deduction is to be worked out by applying the formula provided in that paragraph of the Central Board of Direct Taxes circular. The special meaning carried by those words was thus exphasised even by the Central Board of Direct Taxes. Shri Vohra, one of the advocates for the interveners, argued that subsection (3) of section 80HHC provides a straight-jacket formula for determination of profits from exports in order not to leave that determination to the subjective satisfaction of the assessee or the assessing authority and to steer clear of any litigation on this aspect. It appears to us to be the correct understanding of the provision, The words "profits derived by the assessee from the export of such goods or merchandise" carry a special meaning and in our view a fictional meaning. That meaning is to be given while interpreting sub-section (3) and, therefore, the ordinary meaning which the said words "profits derived from the export of such goods or merchandise" should not be adopted. Now if a fictional meaning is given by the statute, we have to take that fiction till t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s without reference to it. The assumption which the statute requires to be made that a partition had in fact taken place must permeate the entire process of ascertainment of the ultimate share of the heirs, through all its stages. To make the assumption at the initial stage for the limited purpose of ascertaining the share of the deceased and then to ignore it for calculating the quantum of the share of the heirs is truly to permit one's imagination to boggle. All the consequences which flow from a real partition have to be logically worked out, which means that the share of the heirs must be ascertained on the basis that they had separated from one another and had received a share in the partition which had taken place during the lifetime of the deceased. " In the appeals before us also the special meaning given to the words "profits derived by the assessee from the export of such goods or merchandise" should be carried all through and permeate all the stages of assessment. The special meaning cannot be given at a particular stage and be left out at another particular stage or for another purpose. What we have to see is whether there were profits of business. Any sort of receipt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnover as well as the total turnover would remain one and the same and he does not lose the deduction by virtue of the fact that he does not carry on any business in India but merely earns profits on commission. We have already seen that 90 per cent. of the commission, brokerage, etc., were excluded from the profits of business only from April 1, 1992, by means of an amendment brought about by the Finance (No. 2) Act, 1991. The fact that it is not a retrospective amendment is also borne out by the Memorandum explaining the provisions of the statute in Parliament which is entitled for great weight. The said prospective amendment as well as the Memorandum explaining the provisions at the time of introducing the Bill in Parliament would inferentially suggest that for the assessment years with which we are concerned, namely, 1990-91 and 199192, hundred per cent. commission and brokerage should be considered as part of the profits of the business. Further, the Central Board of Direct Taxes by virtue of its Circulars Nos. 564 (see [1990] 184 ITR (St.) 137), dated July 5, 1990, and No. 621 (see [1992] 195 ITR (St.) 154), dated December 19, 1991, which were already adverted to earlier in t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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