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2015 (4) TMI 195 - SUPREME COURT

2015 (4) TMI 195 - SUPREME COURT - [2015] 373 ITR 87 (SC), 2015 (7) SCC 705, 2015 (4) JT 109, 2015 (4) SCALE 410 - Correct method of computation of deductions under Section 80HHC(3) - in the present case, the domestic income in respect of which benefit is sought is from dividend income, interest income, profit or sale of shares and fees received from arranging finance for the assessee's clients, thus no income from indigenous business which, in no case, be described as "turnover" and be part of .....

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o start with. It should, therefore, follow that the aggregate sum of dividend income, interest income, profit or sale of shares and fees received from arranging finance for the assessee's clients cannot be regarded as turnover, and that by the same token, it should be left out of reckoning for purposes of computing deduction admissible to the assessee under Section 80HHC.

In the first instance, it has to be satisfied that there are profits from the export business. That is the pre-re .....

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a are more than the export losses, benefit under Section 80HHC would still be available. In the present case, since there are losses in the export business, question of providing deduction under Section 80HHC does not arise and as a consequence, there is no question of computation of any such deduction in the manner provided under sub-section (3). This would mean that the deduction admissible to the assessee under Section 80HHC would be nil, especially in view of the fact that the export busines .....

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use not only the manufacturing activities but also the selling activities (including the activities connected with exports) from a continuous, integrated whole. Even so, the intention of Parliament, was to extend the benefit of Section 80HHC to the extent of the profits generated by exports. With this end in view, Parliament incorporated a rule of thumb in Section 80HHC(3)(b). As long as the assessee has cleared profits in a particular year of account, export profits are computed by applying to .....

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nil Katiyar,Adv. JUDGMENT A.K. SIKRI, J. What is the correct method of computation of deductions under Section 80HHC(3) of the Income Tax Act, 1961, in the given facts and circumstances, is the question which needs an answer in the present appeal. 2) The given facts and circumstances, as they appear on record, are stated in the summary form herein below: Finance Act of 1983 introduced Section 80HHC of the Income Tax Act, providing incentives to exporters and deductions for persons involved in th .....

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ndian company or a person (other than a company) resident in India, is engaged in the business export out of India of any goods or merchandise to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of the profits derived by the assessee from the export of such goods or merchandise: Provided that if the assessee, being a holder of an Export House Certificate or a Trading H .....

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certificate bears to the total export turnover of the assessee. xx xx xx 3) For the purposes of sub-section (1), profits derived from the export of goods or merchandise out of India shall be - (a) in a case where the business carried on by the assessee consists exclusively of the export out of India of the goods or merchandise to which this section applies, the profits of the business as computed under the head "profits and gains of business or profession". (b) in a case where the bus .....

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7.1990 giving detailed guidelines as to how the deductions under Section 80HHC are to be calculated. The formula prescribed by CBDT circular is as follows: Export Turnover Profit of the Business X Total Turnover 4) The appellant company is engaged in the business of export of Marine products and also financial consultancy and trading in equity shares. Its total business does not consist purely of exports but includes business within the country as well which situation is covered by Section 80HHC .....

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peal before the Income Tax Appellate Tribunal. By its judgment dated 24.04.1992, the Appellate Tribunal set aside the order of the Assessing Officer and came to a conclusion that the appellant was entitled to full relief under Section 80HHC and directed the Assessing Officer to grant relief to the assessee. 6) On remand, the Assessing Officer passed fresh order dated 28.05.1992 giving effect to the orders of the ITAT. While giving the effect, the Assessing Officer found that the appellant had no .....

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under the said provision. With this order, second round of litigation started. The assessee challenged the order passed by the Assessing Officer before the Commissioner (Appeals) contending that the formula which was applied by the Assessing Officer was different from the formula prescribed under Section 80HHC of the Act and it was also in direct violation of CBDT Circular dated 05.07.1990. The Commissioner (Appeals), however, dismissed the appeal of the assessee principally on the ground that u .....

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(2) of the Act seeking reference to it. Order dated 03.02.1994 was passed by the High Court directing ITAT to frame the reference and place the same before the High Court. On this direction of the High Court, the ITAT referred the following question to the High Court: "Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the deduction admissible to the assessee under Section 80HHC is nil?" 7) The High Court has now pronounced on the a .....

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ssee was not entitled to any benefit thereunder in the absence of any profits. The question referred to us therefore is answered against the assessee and in favour of the revenue." 8) Special leave petition was filed against the judgment of the High Court in which leave was granted on 10.11.2003. This is how the appeal has come up for hearing. 9) Mr. Nikhil Nayyar, learned counsel appearing for the assessee, submitted that the aforesaid reasoning of the High Court is palpably wrong in holdi .....

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e benefit of Section 80HHC shall not be given in cases where there was loss. He, however, pointed out that the judgment in IPCA Laboratory Ltd. (supra) was explained and clarified subsequently by this Court in A.M. Moosa v. Commissioner of Income Tax, Trivandrum (2007) 9 SCR 831 wherein it was made clear that in arriving at profits earned from export of both self-manufactured goods and trading goods, the profits and losses in both the trades have to be taken into consideration. If after such adj .....

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thin the country and on adjustment of loss from the export business against the profits from the business in India, in the balance sheet, it was still profit resulting into positive income, the benefit of Section 80HHC was admissible. 10) He further argued that the objective behind Section 80HHC was to give incentive to those export houses who were earning foreign exchange. Even if there was loss from the export business, assessee had earned the foreign exchange and once it was found that overal .....

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e Income Tax Act, exporters are allowed. In the computation of their total income, a deduction of the entire profits derived from export of goods or merchandise other than mineral oil, minerals and ores. The deduction is subject to the condition that the sale proceeds of such goods or merchandise are received in, or brought into, India in convertible foreign exchange. In view of the fact that significant value addition is achieved when a mineral is processed or when a stone is cut and polished, .....

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learned senior counsel, appearing for the Revenue, on the other hand, supported the view taken by the High Court. He also specifically referred to the conclusion arrived at by the Tribunal in support of his plea that in the instance case, formula sought to be involved would not apply. He pointed out that in the present case, there was no income from indigenous business but it was only in the form of brokerage, dividend, interest etc. which, in no case, be described as "turnover" and b .....

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f cases is part of common expenses, it is proposed to provide ad hoc 10 per cent deduction from such incomes to account for these expenses." 13) We have considered the submissions of counsel appearing on both sides. 14) There are two facets of this case which need to be looked into. In the first instance, we have to consider as to whether view of the High Court that the deduction is permissible under Section 80HHC only when there are profits from the exports of the goods or merchandise is c .....

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e what would comprise "total turnover"? 15) Before we provide the answer to the first question, it would be appropriate to take note of the judgments in IPCA Laboratory as well as A.M. Moosa. In IPCA Laboratory, the appellant was a holder of an Export House certificate issued by CCI&E. It exported self-manufactured goods as well as goods manufactured by supporting manufacturers i.e. trading goods. In the previous year relevant to AY 1996-97 its taxable income, before the deductions .....

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there was a net loss from export of goods, the Assessing Officer disallowed the deduction. This order of the Assessing Officer was unsuccessfully challenged by the appellant as all the authorities upto the High Court upheld that order. This Court also, in the aforesaid judgment, concurred with the view taken by the courts below. Before this Court, specific reliance was placed on sub-section (3) of Section 80HHC and on that basis, it was contended that in a case where the assessee exported goods .....

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, so also in Section 80HHC(3), should be construed to mean positive profit and, therefore, in Section 80HHC(3) (c) it would not include losses and if there were any losses, they were to be ignored. Another submission was that even when the profits were to be reduced by the losses, in cases of disclaimer of its turnover by an assessee export house in favour of a supporting manufacturer, the turnover of the export house got reduced to that extent. Therefore, it could not be taken into consideratio .....

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quot;Although Section 80-HHC has been incorporated with a view to provide incentive to export houses and a liberal interpretation has to be given to such a provision, the interpretation has to be as per the wordings of that section. When the legislature wanted to take exports from self-manufactured goods or trading goods separately, it has already so provided in sub-sections (3) (a) and (3)(b). The word "profit" in Section 80-HHC(1) and Sections 80-HHC(3)(a) and (b) means a positive pr .....

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indicate that the profits have to be calculated by counting both the exports. Under Section 80-HHC(1), the deduction is to be given in computing the total income of the assessee. In computing the total income of the assessee both profits as well as losses will have to be taken into consideration. Sections 80-AB and 80-B(5) are relevant. Section 80-AB has been given an overriding effect over all other sections in Chapter VI-A. Section 80-HHC would thus be governed by Section 80-AB which makes it .....

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th self-manufactured goods and trading goods, the profits and losses in both the trades have to be taken into consideration. If after such adjustments there is a positive profit the assessee would be entitled to deduction under Section 80-HHC(i). If there is a loss he will not be entitled to any deduction. In Section 80-HHC, the word "profit" is admittedly used to indicate positive "profit" because the deduction will only be of a positive profit. Section 80-HHC(3) provides ho .....

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(3). The proviso to sub-section (1) of Section 80-HHC enables a disclaimer only to enable the export house to pass on deductions. It in no way reduces the turnover of the export house. The disclaimer is only for purposes of enabling the export house to pass on the deduction which it would have got to the supporting manufacturer. It follows that if no deduction is available, because there is a loss, then the export house cannot pass on or give credit of such non-existing deduction to a supporting .....

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d affirmed by this Court in the aforesaid judgment. Before this Court, submission of the appellant/assessee was that a reading of Section 80HHC would show that where the assessee exports goods manufactured by him, he would be covered by sub-section (3)(a) and only the profits of such business would be taken into account. Where the assessee exports only trading goods other than profits of these goods only would be taken into account of sub-section (3)(b). It was submitted that sub-section (3)(c) .....

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he following manner: "7. The stand needs careful consideration. Undoubtedly, Section 80-HHC has been incorporated with a view to providing incentive to export houses. Even though a liberal interpretation has to be given to such a provision, the interpretation has to be as per the wordings of this section. If the wordings of the section are clear, then benefits, which are not available under the section, cannot be conferred by ignoring or misinterpreting words in the section. In this case we .....

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tion 80-HHC (1) and Sections 80- HHC(3)(a) or (3)(b)means a positive profit. In other words, if there is a loss then no deduction would be available under Section 80-HHC (1) or (3)(a) or (3) (b). In arriving at the figure of positive profit, both the profits and the losses will have to be considered. If the net figure is a positive profit, then the assessee will be entitled to a deduction. If the net figure is a loss then the assessee will not be entitled to a deduction. Sub-section (3)(c) deals .....

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lated in the manner laid down in Sections (3)(c)(i) and (ii). The opening words "profit derived from such exports" together with the word "and" clearly indicate that the profits have to be calculated by counting both the exports. It is clear from a reading of sub-section (1) of Section 80-HHC(3) that a deduction can be permitted only if there is a positive profit in the exports of both self-manufactured goods as well as trading goods. If there is a loss in either of the two t .....

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ions in respect of certain incomes in respect of any income of the nature specified in that section which is included in the gross total income of the assessee, then, notwithstanding anything contained in that section, for the purpose of computing the deduction under that section, the amount of income of that nature as computed in accordance with the provision of this Act (before making any deduction under this Chapter) shall alone be deemed to be the amount of income of that nature which is der .....

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0- HHC. Section 80-AB further provides that "notwithstanding anything contained in that section". Thus Section 80-AB has been given an overriding effect over all other sections in Chapter VI-A. Section 80-HHC does not provide that its provisions are to prevail over Section 80-AB or over any other provision of the Act. Section 80-HHC would thus be governed by Section 80-AB. Decisions of the Bombay High Court in CIT v. Shirke Construction Equipment Ltd. (2000 (246) ITR 429) and the Keral .....

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usiness means a profit as reduced by the profit derived from business of exports out of India of trading goods. Thus in calculating the profits under sub-section (3)(c)(i) one necessarily has to reduce profits under sub-section (3)(c)(ii). As seen above, the term "profit" means positive profit. Thus if there is loss then those losses in export of trading goods have to be adjusted. They cannot be ignored. A plain reading of Section 80-HHC makes it clear that in arriving at profits earne .....

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eans only positive profit, it will have the same meaning in Section 80-HHC(3)(c). It is submitted that thus the word profit in Section 80-HHC(3)(c) would not include losses and if there are any losses, they are to be ignored. The plea is clearly without substance. Firstly, it is not necessary that the word "profit" must have the same meaning. The meaning of the word "profit" will depend on the context in which it is used. In Section 80-HHC (1) it is admittedly used to indicat .....

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1) and in sub-section (3) means a positive profit worked out after taking into consideration the losses, if any. Thus the word "profit" has the same meaning in Sections 80-HHC(1) and (3). 13. In IPCA Laboratory Ltd. Vs. Dy. Commissioner of Income Tax, Mumbai, (2004) 12 SCC 742), after analyzing the position in the manner done above, it was held that the profit as contemplated under Section 80-HHC (1) and Section 80-HHC (3) means positive profit. Said view was reiterated in Income Tax O .....

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0HHC of the Act. If the net result was loss from the export business, then the deduction under the aforesaid Act is not permissible. As a fortiori, if there is net profit from the export business, after adjusting the losses from one type of export business from other type of export business, the benefit of the said provision would be granted. 19) It is also to be borne in mind that in both the aforesaid cases namely IPCA and A.M. Moosa, the Court was concerned with two business activities, both .....

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business as a whole i.e. including profits earned from the goods or merchandise within India will also be taken into consideration. In this manner, argues the appellant, even if there are losses in the export business, but profits of indigenous business outweigh those losses and the net result is that there is profit of the business, then the deduction under Section 80HHC should be given. However, having regard to the law laid down in IPCA and A.M. Moosa, we cannot agree with the learned counse .....

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the "total turnover", one may apply the formula stated in clause (b) of sub-section (3) of Section 80HHC. However, that would not mean that even if there are losses in the export business but the profits in respect of business carried out within India are more than the export losses, benefit under Section 80HHC would still be available. In the present case, since there are losses in the export business, question of providing deduction under Section 80HHC does not arise and as a conseq .....

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t is sought is from dividend income, interest income, profit or sale of shares and fees received from arranging finance for the assessee's clients. The Tribunal has recorded this aspect as under: 13. It is, however, seen from the assessee's Profit & Loss Account for the year of account ending on 31.03.1989 that the aggregate sum of ₹ 26,04,477 (which the assessee has labeled as total turnover) comprised not only export turnover of ₹ 16,67,084 but also the following items .....

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computing the deduction admissible to an assessee falling under Section 80HHC(3)(b) clearly proceeds on the basis that in trading transactions profit, or, as the case may be, loss is embedded in the gross turnover. The most significant conclusion that flows from the said provision is that when Section 80HHC(3) talks of turnover, it talks of trading receipts and not of receipts which are of the nature of income to start with. It should, therefore, follow that the aggregate sum of ₹ 9,37,69 .....

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