IPCA
Laboratory Ltd. Vs. Deputy Commissioner of Income Tax, Mumbai [2004] Insc 156 (11 March 2004)
S.
N. Variava & H. K. Sema S. N. Variava, J.
This
Appeal is against a Judgment dated 2nd July, 2001 passed by the Bombay High Court.
Briefly
stated the facts are as follows:
The
Appellants are a Export House. They hold a certificate issued by the Chief
Controller of Imports and Exports. For the Assessment Year 1996-97 the
Appellants filed a return of income declaring Nil income.
It is
an admitted position that the taxable income, before the deductions under
Chapter VIA, was Rs. 4.39 crores. However, against this taxable income the
Appellants claimed various deductions. One such deduction was under Section 80
HHC for Rs. 3.78 crores. During the assessment proceedings it was found that
the Appellants were exporting goods which were self manufactured as well as
goods manufactured by supporting manufacturers i.e. trading goods. It was found
that the sum of Rs. 3.78 crores, which had been claimed as a deduction, was the
profit from exports of self manufactured goods. It was found that from the
exports of trading goods there was a loss of Rs. 6.86 crores. It was found that
the Appellants had issued certificates of disclaimer in favour of the
supporting manufacturers in respect of the entire export of trading goods. The
Assessing Officer therefore held that there was a net loss from export of goods
and disallowed the deduction of Rs. 3.78 crores. The Commissioner (Appeals)
dismissed the Appeal filed by the Appellants on 11th October, 1999. On 29th
December, 2000 the
Income Tax Appellate Tribunal dismissed the Second Appeal. By the impugned
Judgment the Bombay High Court has dismissed the Appeal filed under Section
260A of the Income Tax Act.
The
question for consideration is whether the Appellants are entitled to deduction
under Section 80HHC in respect of the sum of Rs. 3.78 crores by ignoring the
loss of Rs. 6.86 crores. It therefore becomes necessary to look at Section
80HHC of the Income Tax Act.
The
relevant portions of Section 80HHC reads as follows:
"80HHC.
DEDUCTION IN RESPECT OF PROFITS RETAINED FOR EXPORT BUSINESS.
(1)
Where an assessee, being an Indian company or a person (other than a company)
resident in 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 provisions of this section, be allowed, in computing
the total income of the assessee, [a deduction to the extent of profits,
referred to in sub-section (1B)] 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 House Certificate (hereafter in this section referred to as an Export
House or a Trading House, as the case may be,) issues a certificate referred to
in clause (b) of sub-section (4A), that in respect of the amount of the export
turnover specified therein, the deduction under this sub-section is to be
allowed to a supporting manufacturer, then the amount of deduction in the case
of the assessee shall be reduced by such amount which bears to the [total
profits derived by the assessee from the export of trading goods, the same
proportion as the amount of export turnover specified in the said certificate
bears to the total export turnover of the assessee in respect of such trading
goods.] (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 to the extent of profits, referred to in
sub-section (1B)], 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. xxx xxx xxx xxx
xxx xxx
(3)
For the purposes of sub-section (1), -
(a)
where the export out of India is of goods or merchandise manufactured or
processed by the assessee, the profits derived from such export shall be the
amount which bears to the profits of the business, the same proportion as the
export turnover in respect of such goods bears to the total turnover of the
business carried on by the assessee;
(b) where
the export out of India is of trading goods, the profits
derived from such export shall be the export turnover in respect of such
trading goods as reduced by the direct costs and indirect costs attributable to
such export;
(c) where
the export out of India is of goods or merchandise
manufactured [or processed] by the assessee and of trading goods, the profits
derived from such export shall, -
(i) in
respect of the goods or merchandise manufactured [or processed] by the assessee,
be the amount which bears to the adjusted profits of the business, the same
proportion as the adjusted export turnover in respect of such goods bears to
the adjusted total turnover of the business carried on by the assessee; and
(ii) in
respect of trading goods, be the export turnover in respect of such trading
goods as reduced by the direct and indirect costs attributable to export of
such trading goods :
Provided
that the profits computed under clause (a) or clause (b) or clause (c) of this
sub-section shall be further increased by the amount which bears to ninety per
cent of any sum referred to in clause (iiia) (not being profits on sale of a licence
acquired from any other person), and clauses (iiib) and (iiic), of section 28,
the same proportion as the export turnover bears to the total turnover of
business carried on by the assessee.
Explanation: For the purposes of this
sub-section, -
(a)
"adjusted export turnover" means the export turnover as reduced by
the export turnover in respect of trading goods;
(b)
"adjusted profits of the business" means the profits of the business
as reduced by the profits derived from the business of export out of India of
trading goods as computed in the manner provided in clause (b) of sub-section
(3);
(c)
"adjusted total turnover" means the total turnover of the business as
reduced by the export turnover in respect of trading goods;
(d)
"direct costs" means costs directly attributable to the trading goods
exported out of India including the purchase price of
such goods;
(e)
"indirect costs" means costs, not being direct costs, allocated in
the ratio of the export turnover in respect of trading goods to the total
turnover;
(f)
"trading goods" means goods which are not manufactured or processed
by the assessee.
(3A) For
the purposes of sub-section (1A), profits derived by a supporting manufacturer
from the sale of goods or merchandise shall be, -
(a) in
a case where the business carried on by the supporting manufacturer consists
exclusively of sale of goods or merchandise to one or more Export Houses or
Trading Houses, the profits of the business;
(b) in
a case where the business carried on by the supporting manufacturer does not
consist exclusively of sale of goods or merchandise to one or more Export
Houses or Trading Houses, the amount which bears to the profits of the business
the same proportion as the turnover in respect of sale to the respective Export
House or Trading House bears to the total turnover of the business carried on
by the assessee.
(4)
The deduction under sub-section (1) shall not be admissible unless the assessee
furnishes in the prescribed form, along with the return of income, the report
of an accountant, as defined in the Explanation below sub- section (2) of
section 288, certifying that the deduction has been correctly claimed in
accordance with the provisions of this section." Mr. Dastur submitted that
Section 80 HHC appears in Chapter VIA of the Income Tax Act. He submitted that
Chapter VIA provides for deduction to be made in computing the total income. He
took us through the various provisions of Chapter VIA and submitted that these
provisions were enacted for encouraging business out of India so that foreign exchange is earned.
He submitted that these provisions are meant to be an incentive for earning
foreign exchange. He submitted that with this aim in mind deductions were given
(a) under
Section 80 HHB for profits from projects outside India;
(b) under
Section 80 HHC for profits from exports;
(c) under
Section 80 HHD for hotels and tour operators;
(d) under
Section 80 HHE from exports of computer software;
(e) under
Section 80 HHF from exports or transfer of film software;
(f) under
Section 80-O for royalties etc. from foreign enterprises;
(g) under
Section 80R for deduction of remuneration from foreign sources of professors,
teachers etc.;
(h) under
Section 80RR for deduction of professional income from foreign sources and
(i) under
Section 80RRA for remuneration received for services rendered outside India. He submitted that these incentives
were given as the Parliament considered earning of foreign exchange to be in
national interest and in the interest of our society.
Mr. Dastur
submitted that as the Appellants were exporting goods manufactured by them as
well as trading goods the deduction under Section 80HHC had to be computed in
the manner set out in Sub-section (3)(c). He submitted that the provision
having been enacted to give an incentive for earning foreign exchange the
Section must be given an interpretation which would further that object. He
pointed out that from the export trade the Appellants had brought in foreign exchange
to the tune of approximately Rs. 81,62,49,276/-.
Mr. Dastur
relied upon the case of Sea Pearl Industries vs. Commissioner of Income Tax
reported in (2001) Vol. 247 ITR 578. In this case the Appellant (therein) was
not an export house and therefore could not avail of special facilities granted
to export houses.
The
Appellant however entered into an agreement with an export house under which
the Appellant exported sea food in the name of the export house against
Purchase Orders placed on the export house by foreign buyers. The question was
whether the Appellant (therein) could claim deduction under Section 80HHC in
respect of exports made by them on account of the export house. This Court held
that the object of Section 80HHC was to grant an incentive to the earners of
foreign exchange and that the matter therefore had to be considered with
reference to this object. Section 80HHC at the relevant time read as follows:
"80HHC.
(1) Where the assessee, being an Indian company or a person (other than a company),
who is resident in India, exports out of India during the previous year
relevant to an assessment year 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, the
following deductions, namely:-
(a) a
deduction of an amount equal to one per cent of the export turnover of such
goods or merchandise during the previous year; and
(b) a
deduction of an amount equal to five per cent of the amount by which the export
turnover of such goods or merchandise during the previous year exceeds the
export turnover of such goods or merchandise during the immediately preceding
previous year.
(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 in
convertible foreign exchange." This Court negatived the argument that,
because the Appellant (therein) received commission on the sales, the words
"sale proceeds of such goods" were to be construed to mean sale
proceeds ultimately received. On a construction of Section 80HHC this Court
held that if the contention of the Appellant (therein) were to be upheld, it
would mean that not only the export house but also the Appellant could claim
deduction under Section 80HHC in respect of same amount. It was held that such
an outcome would be contrary to the language of the Section itself. This Court therefore
dismissed the claim of the Appellant (therein) and held that the Appellant was
not entitled to the benefits of Section 80HHC. In our view, far from assisting
the Appellants, this case is against them. It shows that even though Section
80HHC has to be construed in the light of the object of giving incentives, it
still has to be interpreted as per its language. An interpretation which leads
to an absurd result or a result not contemplated by its language cannot be
given.
Mr. Dastur
also relied upon the case of Commissioner of Income Tax vs. Shirke Construction
Equipments Ltd. reported in (2000) Vol. 246 ITR 429. In this case the Bombay
High Court has held that Section 80HHC is a complete code in itself and that it
is not controlled by Section 80AB. It was held that profits had to be computed
under Section 29 and Section 72 was not applicable. It was held that carry
forward losses could not be set off for computing profits for the purpose of
Section 80HHC. In this case it was also noticed that the object was to
encourage exports.
Mr. Dastur
also relied upon the case of Bajaj Tempo Ltd. vs. Commissioner of Income Tax
reported in (1992) Vol. 196 ITR 188. In this case it has been held that
provisions granting incentive should be construed liberally and that if a
literal construction would defeat the purpose of the section then it becomes
necessary to resort to a construction which is reasonable and purposeful to
make the provision meaningful.
Mr. Dastur
also relied upon a Circular issued by the Board bearing No. 421 dated 12th June, 1985 wherein it has been mentioned that
Section 80HHC is a provision relating to incentives for exporters and has been
incorporated with a view to providing its exporters with requisite resources
for modernization, technological upgradation, product development and other
activities.
Mr. Dastur
also relied upon a Judgment in the case of Commissioner of Income-tax vs. Smt.
T.C. Usha, reported in 2003(137) Taxman 297. In this case the Kerala High Court
was considering an identical question i.e. whether the profits earned from
export of self manufactured goods were to be set off against loss incurred in
export of trading goods. The Kerala High Court has accepted arguments similar
to those made by Mr. Dastur and has concluded that the losses were not to be
set off against the profits earned from export of own manufactured goods. In
coming to this conclusion the Kerala High Court has proceeded on the footing
that Section 80HHC is a self contained code and the proceeds have to be worked out
strictly in accordance with the provisions.
Mr. Dastur
submitted that a reading of Section 80HHC would show that where the assessee
exports goods manufactured by him he would be covered by sub-clause (3)(a) and
only the profits of such business would be taken into account. He submitted
that where the assessee exports only trading goods then the profits of those
goods only would be taken into account in sub-clause (3)(b). He submitted that
sub-clause (3)(c) dealt with a case where the assessee exported goods
manufactured by him as well as trading goods. He submitted that in such a case
profits from export of goods manufactured by the assessee were to be considered
separately and the profits from exports of trading goods were to be considered
separately. He submitted that if there were profits from both then both the
profits would be taken into consideration. He submitted that if there were
profits only in respect of one type of exports then those profits could not be negatived
or set off against the loss from the other export. He submitted that the word
"and" in Section 80HHC(3)(c) has to be liberally construed and cannot
to be taken to mean that both the profits have to be clubbed or considered
together. He submitted that persons who earn valuable foreign exchange cannot
be deprived of the benefits of his export by adopting a construction which
would defeat the very purpose for which the provision has been enacted. He
submitted that the fact that the word "and" does not mean that sub-
clauses 3(c)(i) and (ii) have to be taken together is clear from the fact that
in other Sections, such as Section 80HHD, the Legislature has used the words
"aggregate of". He submitted that wherever the Legislature intended
that both were to be taken together it has used words like "aggregate
of". He submitted that when the Legislature has not used such words it
necessarily meant that the intention of the Legislature was that the two are
not to be taken together, but that each has to be considered separately and on its
own. He submitted that the aim being to give an incentive for earning foreign
exchange, so long as there was a profit from export either of self manufactured
goods or from export of trading goods deduction has to be given for that profit
by ignoring a loss in respect of other export. He submitted that a party who
has earned valuable foreign exchange cannot be deprived of the benefit on an
interpretation which defeats the very purpose of the enactment.
We are
unable to accept the submission of Mr. Dastur.
Undoubtedly
Section 80HHC 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 are concerned with the wordings of sub- section
3(c) of Section 80HHC. As noted earlier sub-Section 3(a) deals with the case
where the export is only of self manufactured goods.
Sub-section
3(b) deals with the case where the export is only of trading goods. Thus when
the Legislature wanted to take exports from self manufactured goods or trading goods
separately, it has already so provided in sub-section (3)(a) and (3)(b). It
would not be denied that the word "profit" in Section 80HHC(1) and
Sections 80HHC (3)(a) and 3(b) means a positive profit. In other words if there
is a loss then no deduction would be available under Section 80HHC (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 with cases where the export is of both self manufactured goods as
well as trading goods. The opening part of sub-section 3(c) states
"profits derived from such export shall". Then follows (i) and (ii).
Between (i) and (ii) the word "and" appears. A plain reading of
sub-section (c) shows that "profits from such exports" has to be
profits of exports of self manufactured goods plus profits of exports of
trading goods. The profit is to be calculated in the manner laid down in 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 80HHC(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 then that loss
has to be taken into account for the purposes of computing profits.
Under
Section 80HHC(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. Section 80AB is
relevant. It reads as follows:
"80AB.
Where any deduction is required to be made or allowed under any section
included in this Chapter under the heading "C-Deductions 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 provisions 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 derived or received by the assessee and which is
included in his gross total income." Section 80B(5) is also relevant.
Section 80B(5) provides that "gross total income" means total income
computed in accordance with the provisions of the Income Tax Act.
Section
80AB is also in Chapter VI-A. It starts with the words "where any
deduction is required to be made or allowed under any Section of this
Chapter". This would include Section 80HHC. Section 80AB further provides
that "notwithstanding anything contained in that Section". Thus
Section 80AB has been given an overriding effect over all other Sections in
Chapter VIA. Section 80HHC does not provide that its provisions are to prevail
over Section 80AB or over any other provision of the Act. Section 80HHC would
thus be governed by Section 80AB. Decisions of the Bombay High Court and the Kerala
High Court to the contrary cannot be said to be the correct law.
Section
80AB makes it clear that the computation of income has to be in accordance with
the provisions of the Act. If the income has to be computed in accordance with
the provisions of the Act, then not only profits but also losses have to be
taken into consideration.
Another
reason why the argument of Mr. Dastur cannot be accepted is that even under
Section 80HHC (3)(c)(i) the profit is to be adjusted profit of business. The
adjusted profit of the business 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 Section 3(c)(i),
one necessarily has to reduce by profits under 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. We, therefore, hold that a plain reading of Section 80HHC
makes it 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 adjustments there is a
positive profit the assessee would be entitled to deduction under Section 80HHC(i).
If there is a loss he will not be entitled to any deduction.
Mr. Dastur
submitted that the word "profit" in Section 80 HHC must have the same
meaning in the entire Section. He submitted that as the word profit in Section
80HHC (1) means only positive profit, it will have the same meaning in Section
80HHC (3)(c). He submitted that thus the word profit in Section 80HHC (3)(c)
would not include losses and if there are any losses they are to be ignored. We
are unable to accept this submission for more than one reason. Firstly it is
not necessary that the word "profit" must have the same meaning.
The
meaning that the word "profit" will depend on the context in which it
is used. In Section 80HHC (1) it is admittedly used to indicate positive
"profit" because the deduction will only be of a positive profit.
Section
80HHC(3) is the sub-section which provides how profits are to be worked out in
computing total income. For purposes of such computation both profit and losses
have to be taken into account.
Thus
the word "profit" in Section 80HHC(3) will mean profits after taking
into account losses, if any. More importantly, in our view, the term
"profit" in Section 80HHC both in Sub-section (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
Section 80HHC (1) and (3).
It was
next submitted that even when the profits are to be reduced by the losses in
cases where an export house has disclaimed its turn over in favour of a
supporting manufacturer, the turn over of the exporter gets reduced to the
extent disclaimed. It is submitted that as the turnover, which is disclaimed,
is reduced it cannot then be taken into consideration for the purposes of
computing profits under sub-section 3(c)(ii). In our view this is an argument
which merely needs to be stated to be rejected. If such an argument is accepted
it would lead to an absurd result. It would mean when if there was no
disclaimer the export house would not be entitled to any deduction in cases
where there is a loss but because disclaimer has been made both the export
house and the supporting manufacturer would become entitled to deductions. The
proviso to sub-section (i) of Section 80HHC enables a disclaimer only to enable
the export house to pass on deductions. It in no way reduces the turnover of
the export house.
In
computing total income, the entire turnover is taken into account even though
there is a disclaimer. Thus even though the disclaimer is made the taxable
income of Rs. 4.39 crores has been arrived at by the Appellants after taking
into account the entire turnover from export of trading goods. In arriving at
the figure of Rs. 4.39 crores admittedly the loss of Rs. 6.86 crores has been
taken into account.
Even
after disclaimer the turnover has remained the turnover of the Export House
i.e. the Appellants. 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 manufacturer.
Faced
with this situation, it was submitted that even a loss is a negative profit. In
support of the submission, reliance was placed upon the authority of this Court
in the case of Commissioner of Income-Tax(Central), Delhi vs. Harprasad &
Co. P. Ltd. reported in 1975 (Vol. 99) ITR 118. In this case the meaning of
loss was being considered in the context of capital gains made from sale of
shares.
The
question was whether the loss could be carried forward and set off against
capital gains in a subsequent year. While considering this question, it was
held as follows:
"From
the charging provision of the Act, it is discernible that the words
"income" or "profits and gains" should be understood as
including losses also, so that, in one sense "profits and gains"
represent "plus income" whereas losses represent "minus
income". In other words, loss is negative profit. Both positive and
negative profits are of a revenue character. Both must enter into computation,
wherever it becomes material, in the same mode of the taxable income of the assessee."
In our view, the above observations are against the Appellants.
They
show that in computing income profits and gains, losses must also be taken into
consideration.
Mr. Dastur
relied on a format of Form No. 10CCAC and a Circular of the Board wherein it is
stated as follows:
"With
the adoption of the dual system for computing export profit, the computation of
the disclaimed export turnover also required modification. The Finance Act has
therefore amended section 80HHC in order to provide that, where the Export or
Trading House disclaims the tax concession in favour of the supporting
manufacturer, the concession to the Export or Trading House will be reduced by
the amount which bears to the total export profits of trading goods the same
proportion as the disclaimed export turnover bears to the total export turnover
of trading goods. The formula in such cases will now be - 80HHC concession =
export profit - [export profits on trading goods x disclaimed export turnover ]
total export turnover " Mr. Dastur submitted that if even both profits and
losses are to be taken into account the, on a disclaimer the losses will also
have to be considered as negative profits and as per the Board Circular the
calculation would be as follows:
"80HHC
Concession = *Export Profits - [Export Profits on Trading Goods x Disclaimed
Export Turnover] Total Export Turnover of Trading Goods = * (-3,07,84,867) -
(-6,86,65,804) x 18,53,53,371 18,53,53,371 = (-3,07,84,867) - (-6,86,65,804) =
(-3,07,84,867) + 6,86,65,804 = 3,78,80,937" He submitted that even on this
calculation the Appellants are entitled to deduction of Rs. 3,78,80,937/-. We
are unable to accept this submission. The calculation as per the Board Circular
would not be as claimed. The Board Circular nowhere provides for negative
profits.
The
Board Circular also shows that only positive profits can be considered for
purposes of deduction.
We,
therefore, see no substance in the Appeal. The same stands dismissed. There
shall be no order as to costs.
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