2007 (11) TMI 10 - SC - Income Tax

Export Question arises (i) Whether processing charges were includible in the total turnover for purpose of deduction u/s 80HHC (ii) Whether the assessee would be entitled to deduction if net figure is loss u/s 80HHC Held (i) no (ii) no

Summary

Issues Involved:
1. Inclusion of processing charges in the total turnover for computing export incentives under Section 80HHC(3) of the Income Tax Act, 1961.
2. Adjustment of losses from the export of trading goods against profits from the export of manufactured goods.

Issue-Wise Detailed Analysis:

1. Inclusion of Processing Charges in Total Turnover:
The primary issue was whether processing charges amounting to Rs.1,54,68,811 should be included in the total turnover while arriving at export profits under Section 80HHC(3) of the Income Tax Act, 1961. The assessee contended that these charges, although part of business profits, should not be included in the total turnover for the purpose of computing export incentives. The Department disagreed, arguing that since these charges were part of business profits, they should also be included in the total turnover.

The court examined the formula under Section 80HHC(3), which is:
\[ \text{Export Profits} = \left(\frac{\text{Export Turnover}}{\text{Total Turnover}}\right) \times \text{Business Profits} \]

The court noted that Section 80HHC was an incentive provision aimed at encouraging exports and not a charging section. The court emphasized that the term "profits of the business" had to be computed as per Sections 28 to 44D of the Income Tax Act, and all components of business profits, including processing charges, should be included in the total turnover to avoid distortion of export profits.

The court concluded that processing charges, being part of the gross total income, were independent income similar to rent, commission, etc., and thus 90% of such charges had to be reduced from the gross total income to arrive at business profits. Consequently, these charges should be included in the total turnover in the formula under Section 80HHC(3).

2. Adjustment of Losses from Export of Trading Goods against Profits from Export of Manufactured Goods:
Another issue was whether losses suffered by the taxpayer in the export of trading goods could be set off against profits from the export of manufactured goods for computing deductions under Section 80HHC(3)(c). The court referred to its recent judgment in A.M. Moosa v. Commissioner of Income-tax, which stated that profits and losses from both trades (self-manufactured goods and trading goods) must be considered. If the net result after adjustments is a loss, the assessee would not be entitled to any deduction under Section 80HHC(1).

The court reiterated that for the assessment year 1993-94, Section 80HHC(3) was a self-contained code, and all four variables-business profits, export turnover, total turnover, and 90% of sums referred to in clause (baa)-had to be considered. The court held that losses from trading goods could be adjusted against profits from manufactured goods, and if the net result was a loss, no deduction would be allowed.

Conclusion:
The Supreme Court allowed the Department's appeals, setting aside the High Court and Tribunal's judgments. The court held that processing charges should be included in the total turnover for computing export incentives under Section 80HHC(3) and that losses from trading goods could be set off against profits from manufactured goods. The matters were remitted to the Assessing Officer for fresh disposal in accordance with the law declared by the court.