TMI Blog1998 (6) TMI 570X X X X Extracts X X X X X X X X Extracts X X X X ..... to the extent of ₹ 17,54,465 only. The AO curtailed the claim made under s. 80HHC mainly on the following grounds : (a) The assessee declared profit from export of leather garments at ₹ 94,97,000 and in the engineering division the assessee declared a loss of ₹ 17,92,200. The AO adjusted the loss claimed in the engineering division against profits shown in leather garment division from export sales for the purposes of allowing deduction under s. 80HHC. (b) The AO noted that sub-s. (3A) which prescribes computation of profits derived by supporting manufacturers does not have any clause or proviso thereunder to allow deduction for export incentives earned on the sale of goods made through the trading house. He differentiated the provisions of sub-s. (3) and sub-s. (3A) to the effect that whereas the former through the proviso allow deduction on account of export incentive but latter does not have similar proviso. The AO, therefore, concluded that sub-s. (3) relates to only direct exports and export incentives received thereon are to be considered for deduction under s. 80HHC only in respect of the direct export business and not on export made through tradi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orts. The CIT(A) noted that this objection has been duly dealt with in the booklet brought out by the Bombay Chartered Accountants Society wherein they undertook a study of the provision of s. 80HHC published in 1993. The relevant extract from the booklet is contained in para 16.9 reproduced by the CIT(A). The CIT(A) observed that it is clear therefrom that whereas for direct export there is specific provision in sub-s. (3) to exempt a part of export incentive, no such provision exists for supporting manufacturer. The objection thus raised in this behalf was also not found valid. 2.5. The assessee also objected to the AO's presuming the entire direct export of ₹ 1,54,30,851 to represent the trading goods only as there was no basis for such presumption. It was also claimed that sale of trading goods through the trading house also qualify for deduction under s. 80HHC. The CIT(A) noted that if the components of trading goods is reduced from the direct export the assessee will have a larger share of trading goods in its sale through trading house and to that extent the eligible exports through the trading house consisting of manufactured of processed goods will be reduced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es. The first reason given for inadequate disallowance under s. 80HHC is the action of the AO for adjusting the loss of ₹ 17,92,200 of the engineering unit against the export profit of the leather garment unit. Such loss could not legally be adjusted against the export profits of the leather garment unit while allowing deduction under s. 80HHC in view of the plain reading of s. 80HHC and also placing reliance on the ratio of decision in the case of CIT vs. Canara Workshop (P) Ltd. (1987) 161 ITR 320 (SC) and CIT vs. Sidh Ganga Oil Extraction (P) Ltd. (1993) 201 ITR 968 (Kar). The learned counsel has further pointed out that cl. (baa) of Second Expln. to s. 80HHC simply corresponds to profit of the export business to be computed under the head profits and gains of business or profession and it nowhere lays down that if there was a loss in altogether different units not connected with the export unit the same will also be adjusted against the export profits. The learned counsel, therefore, pleaded that the lower authorities were not justified in adjusting the loss of engineering unit against the profit of leather garment unit for the purpose of allowing deduction under s. 80H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income earned on the sale of goods to the export house in respect of which a certificate has been issued under proviso to sub-s. (1). Learned counsel has also pointed out that the assessee-company exported the goods as per the orders of the export house directly to foreign constituents and had received the incentive also directly from the Government and the same are duly credited in the bank account of the assessee-company. (f) If deduction under s. 80HHC in respect of such incentives is not allowed to the assessee-company and which has also not been allowed to the export house Fortune International Ltd. then whole object of s. 80HHC will be frustrated and the same is obviously against the spirit of s. 80HHC. Elaborating further it is stated that action of the authorities below has resulted in non-allowance of deduction under s. 80HHC both to the trading house in view of their disclaimer certificate and to the assessee-company thereby making s. 80HHC as redundant. In support of this proposition the learned counsel has placed reliance on the following decisions : (i) Bajaj Tempo Ltd. vs. CIT (1992) 196 ITR 188 (SC) wherein it was held that the provision in a tax statute gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Departmental Representative, therefore, submitted that the order of the CIT(A) deserves to be upheld. 5. We have carefully considered the facts, material evidence on record and submissions made by the learned representatives of the assessee as well as the Revenue. Before we go into the allowance of the claim of the assessee-company we would state and examine the correct facts as borne out from the records. 5.1. As mentioned above, the assessee-company was running two industrial units. One unit called Eastern Engineering Industries, was engaged in the manufacture and sale of industrial machinery for pharmaceutical concerns at Sahibabad in U.P. This unit was run independently and separate books of account were maintained therefor. Its books of account have also been got audited as per the provisions of s. 44AB of the IT Act for the current year. From the copies of accounts filed in the paper book we find that the assessee-company during the current year made total sales of ₹ 20,13,341 and it had other income of ₹ 44,668 and the assessee incurred in this unit a loss of ₹ 20,82,193 during the current year. Its audited accounts are placed at pp. 60 to 80 of the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sales at ₹ 3,97,46,700 through the export house. Though the objection was raised before the lower authorities about the figures so adopted but before us no objection has been raised for adopting the above figures for trading export sales and manufactured goods export sales directly as well as through the export house and the same figures are therefore to be adopted in computing the deduction under s. 80HHC. 5.3. The first issue raised by the assessee-company is against adjusting the loss of engineering unit at ₹ 17,92,200 against the export profits of the leather unit for the purpose of computing the benefit under s. 80HHC. Sec. 80HHC provides that where an assessee being an Indian company or a person resident of India is engaged in the business of export out of India of any goods or merchandise to which this section applies, there shall in accordance with and subject to the provision 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 of merchandise. It is clear from the plain reading of the section that while computing the income a deduction shall be allowed of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elow : Sec. 80HH of the IT Act, 1961, provides for the deduction of 20 per cent, from the profits and gains derived from the industrial undertaking. The gross total income of the assessee would include the income derived from several sources or units. The profits and gains of one unit is only one of the constituents of the gross total income. Even item of additions and deductions to be considered at the stage of computing the taxable income to be arrived at from the gross total income need not necessarily be considered while computing the profits and gains of one unit for purposes of s. 80HH Under s. 80HH, the relevant question is whether there is profits and gains derived from an industrial undertaking, which was ultimately added to the gross income of the assessee. If there is any such profits and gains, the assessee is entitled to the benefit of s. 80HH. If the loss sustained by another unit is set off against this profits and gains of an industrial undertaking, the resultant figure would not reflect the profits and gains of the said industrial undertaking, in any sense, much less in a commercial sense : it will be an unnatural and artificial profits and gains of that i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 80HHC of the IT Act in respect of such export turnover. A certificate so given is placed at p. 8 of the paper book. Further, details of the export made are placed at pp. 10 to 13 of the paper book according to which 60,023 pieces of leather garments were exported to Russia. According to the assessee, the assessee-company exported the goods directly to Russia as per the orders of the export house and assessee-company received the payment therefor directly and also the export incentives thereon directly from the Government and the same stands credited in its bank account. The Revenue has not controverted the position so stated about the exports made through the export house. The assessee-company has claimed deduction in respect of the export benefits received relating to its direct export as well as the export made through the export house. The Revenue has objected to the claim in respect of export incentives received as relating to the export made through the export house mainly for the reason that a separate proviso below sub-s. (3A) of s. 80HHC has not been inserted as similar to that provided under sub-s. (3) of s. 89HHC. Proviso to sub-s. (3) of s. 80HHC relating to direct e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit from income-tax. It was also proposed to extend the benefit to supporting manufacturers exporting through trading or export houses. The notes on clauses relating to sub-s. (1A) and sub-s. (3A) given on p. 157 of the report reads as under : The new sub-s. (1A) provides for deduction in relation to a supporting manufacturer. Under the new sub-section, if an assessee being a supporting manufacturer has sold goods or merchandise to any Export House to Trading House, in computing his income chargeable to tax, he will be allowed a deduction of the whole of the income earned on the sale of goods or merchandise to the Export House or the Trading House in respect of which a certificate has been issued under the proviso to sub-s. (1). Sub-cl. (b) seeks to insert a new sub-s. (3A) in the section specifying the basis for computation of the profits derived from the sale of goods or merchandise in the case of a supporting manufacturer. The new sub-section provides that in a case where the business of the supporting manufacturer consists exclusively of sale of goods or merchandise to one or more Export Houses or Trading Houses, the whole of the profit of the business of such manufac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reason for its introduction can certainly be referred to for the purpose of ascertaining the mischief sought to be remedied by the legislation and the object and purpose for which the legislation is enacted. This is in accorded with the recent trend in justice though not only in western countries but also in India, that the interpretation of a statute being an exercise in the ascertainment of meaning, everything which is logically relevant should be admissible. 5.10. Though the section does not specifically provide for benefit under s. 80HHC on export incentives to supporting manufacturers as such incentives are normally received by the trading/export houses but in the present case the assessee-company being a supporting manufacturer has received the export incentives directly from the Government on the goods exported as per the orders received through the export house and the same have been assessed as income as per the provisions of s. 28 of the IT Act. Therefore, the benefit of s. 80HHC is legitimately admissible to the assessee-company in a way similar to the benefits available to the direct exporters. Having regard to all the facts, provisions of law and the ratio of dec ..... X X X X Extracts X X X X X X X X Extracts X X X X
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