2004 (2) TMI 294 - AT - Income Tax

Interpretation of statutes - Deductions u/s 80HHC - Exporters - export profits - set off of interest paid against the interest receipt - concession u/s 80HHC of the Act misused prior to the amendments brought about in subsection (3) of section 8HHC of the Act, which the Parliament wanted to abolish? - Mischief rule (Heydon's rule) - Principle of netting - nexus between the interest paid and the interest received - HELD THAT - In Circular No. 621, dated19-12-1991 explaining the amendment, it was recognized that the, tax concession under section is intended to compensate an exporter for the comparative disadvantage faced by him in the international market. With a view to ensuring that the tax concession is not misused, sub-section (3) of section 80HHC of the Income-tax Act has been amended. According to Circular No.621 cited, explaining the introduction of Explanation (baa) w.e.f. 1-4-1992, the formula that existed before the date for computing the export profits on which deduction was to be allowed gave a distorted figure when receipts like interest, commission, etc. which do not have element of turnover are included in the profit and loss account and it was with a view to removing the distortion that it was clarified through the Explanation that 'profits of the business' for the purpose of section 80HHC will not include receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature. In fact, it would be incongruous to hold that the Legislature recognised the principle of netting in clause (2), it did not do so in clause (1) of the same Explanation, though both the clauses deal with the same subject-matter, viz., exclusion from business profits of something which cannot strictly be called business income. In clause (2), it is significant to note, no ad hoc deduction is allowed for common expenses, obviously because it speaks of profits of any branch, office, warehouse or any other establishment of the assessee situate outside India, in which case it would not be difficult to ascertain the expenses incurred in maintaining such branch etc. The case of the assessees was not put forward before us on the basis of the accounting principles, which do recognise the principle of netting. The Income-tax Act itself is concerned with the principle of netting, in the sense that it does not tax the gross receipts but taxes only the gross receipts minus the expenditure incurred in relation thereto. All the computation provisions of the Act, whatever be the head of income, are aimed at bringing only the net income to assessment. Even under the head 'capital gains' it is only the gains that are assessed and not the entire sale proceeds. Therefore there is no violence done to the language employed in the Explanation when we read into it the principle of netting. We do not think that any absurdity ensues by doing so. We are however not inclined to accept the argument of Mr. Ajay Vohra, the learned counsel for Lalsons Enterprises, based on the use of the words 'gross receipts' in sections 44AA and 44AB. As rightly pointed out on behalf of the Department by Mr. Salil Gupta, those are provisions designed for a different situation and do not impinge on the determination of the eligibility for or the conditions of or the actual computation of any deduction. In our opinion, the Explanation (baa) has to be construed on its own terms, keeping in mind the general scheme of section 80RRC, which is perceived to be a self-contained provision. Conclusion (i) Whether the negative profit (loss) from the business or export computed in accordance with clause (a), (b) or (c) of sub-section (3) of section 80HHC of the Income-tax Act should be ignored or it should be adjusted/set-off against export profits computed under any of the aforesaid clauses for the purpose of computing deductions u/s 80HHC(1) of the Income-tax Act? - For purposes of clause (c) of sub-section (3) of section 80HHC, the loss arising in either the export of manufactured goods or trading goods shall be set-off or adjusted against the profits arising in the other business. In other words, the results of the business of export of manufactured goods and the business of export of the trading goods shall be adjusted against each other. (ii) Whether the proviso to section 80HHC(3) can be applied in a case where the export profit computed as per clause (a), (b) or (c) of sub-section (3) or aggregate thereof is a negative profit (loss) and if so whether the said negative profit (loss) has to be adjusted/setoff against the amount of deduction allowable under the proviso to section 80HHC(3) or the loss computed under all or any of the clause (a), (b) or (c) of section 80HHC(3) has to be ignored and deduction u/s 80HHC is required to be allowed on the amounts computed under proviso to section 80HHC(3) of the Income-tax Act? - For the purpose of computing the deduction allowable under the proviso to sub-section (3) of section 80HHC in respect of the export incentives mentioned in section 28(iiia),(iiib) and (iiic), the loss, if any, suffered by the assessee under any of the clause (a),(b) or (c) of the sub-section shall be ignored and the deduction shall be allowed in respect of the amount computed under the said proviso. (iii) Whether 90 per cent of the gross interest received by the assessee shall be reduced from the profit and gains of the business or profession to determine profits of the business as given in Explanation (baa) below sub-section 4(b) of section 80HHC of the Income-tax Act in order to compute the deduction u/s 80HHC of the Income-tax Act or only 90 per cent of net receipt of the interest after allowing a set off of interest paid against the interest receipt? - For the purpose of applying Explanation (baa) below sub-section (4B) of section 80HHC and while reducing 90 per cent of the receipt by way of interest from the profits of the business, it is only the 90 per cent of the net interest remaining after allowing a set-off of interest paid, which has a nexus with the interest received, that can be reduced and not 90 per cent of the gross interest. The appeals will now be placed before the Division Bench for being disposed of in accordance with our decision. It will be open to the assessees to place all the relevant facts before the Division Bench in connection with the principle of netting raised in question No.(iii) and seek to establish the nexus between the interest paid and the interest received.

Summary

Issues Involved:
1. Whether the negative profit (loss) from the business of export should be ignored or adjusted/set-off against export profits for computing deductions u/s 80HHC(1).
2. Whether the proviso to section 80HHC(3) applies in cases of negative profit (loss) and if such loss should be adjusted/set-off against the deduction allowable under the proviso.
3. Whether 90% of the gross interest received by the assessee should be reduced from the profits of the business or only 90% of the net receipt of the interest after allowing a set-off of interest paid against the interest receipt.

Summary:

Issue 1: Negative Profit (Loss) Adjustment
The Tribunal addressed whether the negative profit (loss) from the business of export computed u/s 80HHC(3)(c) should be ignored or adjusted/set-off against export profits. The Tribunal preferred the judgment of the Bombay High Court in IPCA Laboratories Ltd. v. Dy. CIT, which held that the loss incurred in the export of trading goods should be set-off against the profits earned in the export of manufactured goods due to the conjunction 'and' between the sub-clauses, suggesting aggregation. The Tribunal concluded that the results of the export of trading goods and the export of manufactured goods must be aggregated and any loss should be set-off against the profits under clause (c) of section 80HHC(3).

Issue 2: Application of Proviso to Section 80HHC(3)
The Tribunal examined whether the proviso to section 80HHC(3) applies in cases where the export profit is negative and if such loss should be adjusted/set-off against the deduction allowable under the proviso. The Tribunal concluded that the proviso stands as an independent provision and should be interpreted as such. It held that the loss under any of the clauses of sub-section (3) should be ignored for computing the deduction under the proviso, allowing the deduction in respect of the export incentives even if the assessee suffers a loss in the actual export business.

Issue 3: Reduction of Interest Receipts
The Tribunal considered whether 90% of the gross interest received by the assessee should be reduced from the profits of the business or only 90% of the net receipt of the interest after allowing a set-off of interest paid against the interest receipt. The Tribunal held that for the purpose of applying Explanation (baa) below sub-section (4B) of section 80HHC, it is only 90% of the net interest remaining after allowing a set-off of interest paid, which has a nexus with the interest received, that can be reduced and not 90% of the gross interest.

Conclusion:
1. Losses from export of trading goods should be set-off against profits from export of manufactured goods u/s 80HHC(3)(c).
2. Losses should be ignored for computing deductions under the proviso to section 80HHC(3).
3. Only 90% of the net interest (interest received minus interest paid) should be reduced from the profits of the business for the purpose of Explanation (baa) below sub-section (4B) of section 80HHC.