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TMI Blog2004 (2) TMI 294X X X X Extracts X X X X X X X X Extracts X X X X ..... as 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 under section 80HHC is required to be allowed on the amounts computed under proviso to section 80HHC(3) of the Income-tax Act? (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 under section 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?" 2. All the three questions involve the interpretation of section 80HHC, which has become perhaps the most debated section of the Act lately. The section has been amended many times and some of the amendments were purportedly made to clarify or rationalise or streamline the provisions but that has not stopped the rival parties - the taxpayer and the Revenue - from raisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able to export of such trading goods: Provided that the profits computed under clause (a) or clause (b) or clause (e) 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 (iiie) of section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee. Explanation (baa). -"Profits of the business" means the profits of the business as computed under the head 'Profits and gains of business or profession' as reduced by- (1) ninety per cent of any sum referred to in clauses (iiia), (iiib) and (iiic) of section 28 or of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits; and (2) the profits of any branch, office, warehouse or any other establishment of the assessee situate outsideIndia;" 5. We may now take up the questions referred to us for decision, seriatim. As regards the first question, it was agreed before us by both the sides that the reference therein to clauses (a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds but suffered losses in the export of trading goods. It appears from paragraph 3 in Smt. T.C. Usha's case that the judgment of the Bombay High Court in IPCA Laboratories Ltd.'s case was cited before the Kerala High Court on behalf of the Department. There does not appear to be any discussion of the judgment. But after discussing the issue elaborately, the Kerala High Court held the view that the words 'profits of the business' or 'adjusted profits of the business' occurring in sub-section (3) must be read with Explanation (baa) below the section which defines the words 'profits of the business' for the purposes of the section to mean profits and gains computed under the head 'profits and gains of the business or profession' and so read they have to be computed only in accordance with the provisions of sections 28 to 43D of the Act which fall under Chapter IV-D of the Act, and that sections 70 and 71, which provide for adjustment of the loss under one source or head against the profits from another source or head respectively, do not fall under the computation provisions relating to business income and therefore the mutual adjustment of the loss or profit from the export of tradin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... justments.-This section deals with intra-head adjustments, i.e., adjustments as between several sources of income under one and the same head of income in respect of the same previous year. Under the 1922 Act, there was no corresponding provision, though the principle underlying this set-off was held to be implicit in the manner of computation of the income under a head and of the total income. In Rajapalayam Mills Ltd. v. CIT [1978] 115 ITR 777, the Supreme Court reiterated this position and held that though the profits of each distinct business carried on by the assessee have to be computed separately in accordance with the provisions of section 10 of the 1922 Act, the tax is chargeable under that section not separately on the profits of each business but on the aggregate of the profits of all the businesses carried on by the assessee. For instance, where the assessee carries on several businesses, he was held entitled to set-off losses incurred in one business against profits in another. The resultant negative figure may be due to the allowances permitted under a particular head in the computation of income. Section 70 incorporates the principle of the above decisions and fills ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eful contention. He cited the circular of the Board reported in 190 ITR (St.) 270 @ 299, which explains the provisions of Finance (No.2) Bill, 1991 by which the present subsection (3) was introduced into section 80HHC with effect from1-4-1992. The circular, in paragraph 48, explains the object behind the new subsection in the following words: "Under the existing provisions of sub-section (3) of section 80HHC of the Income-tax Act, profit derived from the export of goods is computed in the following manner: Export turnover Profit of the business x --------------- Total turnover The application of this formula has given rise to some misuse. Many cases have come to notice where persons, who are not chargeable to income-tax, transfer their export turnover to business houses merely by endorsement of letter of credit rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the export of the products actually manufactured by it, without taking into account the results, namely both the profits and the turnover, of the trading business, then, the quantum of deduction under section 80HHC of the Act would have been computed as follows [(Profits from manufacturing business) X (Export turnover of manufacturing business)/(Total turnover of manufacturing business)] = [1050 X 200/2900] = Rs. 72.41. [Rs. 3000 - Rs. 100] Thus, the assessee got an advantage to the tune of Rs. 27.59 [Rs. 100 - Rs.72.41] under section 80HHC of the Act, on the strength of exporting trading goods worth Rs. 300, even though the assessee had actually incurred a loss of Rs. 50 on account of its trading business. In other words, the assessee was able to claim benefits of deduction under section 80HHC of the Act merely by buying in trading loss, which was conceived of by the Legislature as a misuse of the incentives granted by the said section. With a view to stop the said misuse, the formula was amended with effect from the assessment year 1992-93 by segregating trading exports and manufactured exports for the purposes of section 80HHC of the Act. Computation of deduction subsequent t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s discussed above." Mr. Mitra further contended that the memorandum explaining the provisions of the amending Act can be looked into as "contemporanea exposito" as held by the Supreme Court in K.P. Varghese v. ITO [1981] 131 ITR 597. As further held in this judgment, the new provisions should be so interpreted as to suppress the mischief and advance the remedy. With regard to the use of the conjunction 'and' between sub-clauses (i) and (ii) of clause (c) of the sub-section Mr. Mitra submitted that it is permissible, in certain circumstances, to read the provisions disjunctively despite the use of the conjunction and invited our attention in this regard to the judgment of the Supreme Court in Municipal Corpn. ofDelhiv. Tek Chand Bhatia AIR 1980 SC 360. These contentions were controverted on behalf of the Department, especially the applicability of the Heydon's rule, and it was contended, relying on the observations at page 348 of Vol. 1 of Chaturvedi and Pithisaria's Income-tax Law that the rule is not applicable where the statute is unambiguous, which is the case with clause (c) of the sub-section. 14. Despite the forceful point made by Mr. Mitra, we are unable to hold that sub-c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, lightly and proceed to consider the entire issue afresh, as if for the first time, in a spirit of judicial adventurism. Perforce, the enquiry into the problem will have to be circumscribed by the parameters of judicial decorum, discipline and propriety. But the problem gets compounded because any attempt at a solution to the questions posed before the Special Bench, which are concluded one way or the other by judgments of High Courts of other States (States other than the State where the Special Bench is sitting), would necessarily involve the making of a conscious choice to follow one view or the other which in turn involves the giving of reasons for the choice. The Special Bench is thus placed in a somewhat tricky position where it must act with great circumspection and responsibility. The reasons given for making the choice and the language used should not be adventurstic or attempt to cross the frontiers that are never to be crossed. The Special Bench has to guard against any such tendency. However, having been constituted it has to decide the issue, taking guidance from the judgments and giving cogent and acceptable reasons, tempered with judicial dignity, discipline and d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g under any of the clauses of sub-section (3) is adjusted against the incentives, the whole object of the section, which is to encourage exporters, will be defeated; (c) section 80HHC is a beneficial provision and should be liberally interpreted; (d) at any rate, if two interpretations are reasonably possible, the one in favour of the assessee should be adopted; and (e) the assessee's own case for the assessment year 1992-93 having been decided by the Tribunal in its favour, the rule of consistency demands that it should not be departed from. 17. In support of the above contentions, Mr. Sapra invited our attention to the following judgments/orders: (i) A.M. Moosa v. Asstt. CIT [1996] 54 TTJ (Cochin) 193 (ii) Pratibha Syntex Ltd. v. It. CIT [2002] 81 ITD 118 (Ahd.) (iii) Smt. T.C. Usha's case (iv) Indian Sugars & General Industry Export Import Corpn. Ltd. v. Dy. CIT [2002] 121 Taxman 305 (Delhi) (Mag.) (v) Vishal Exports Overseas Ltd. v. ITO [IT Appeal No. 1248 (Mum.) of 2002, dated20-1-2003] (vi) Asstt CIT v. Avon Cycles Ltd. [2003] 86 ITD 156 (Chd.) (vii) Bajaj Tempo Ltd. v. CIT [1992] 196 ITR 188 (SC). 18. Mr. Ajay Vohra, the learned counsel for M/s. Eicher International ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et deduction in respect of the export incentives. (e) The judgment of the Bombay High Court in IPCA Laboratories Ltd s case, which is sought to be relied upon by the income tax authorities as authorising the adjustment of the losses against the export incentives does not deal with the precise controversy. In that case, the proviso was not considered. The aggregation was permitted because of the conjunction land occurring between sub-clauses (i) and (ii) of clause (3). The question whether the losses can be adjusted against the export incentives under the proviso was not before the High Court. The point of distinction has been noticed by the Mumbai Bench of the Tribunal in Vishal Exports Overseas Ltd.'s case, Chandigarh Bench in Avon Cycles Ltd.'s case and by the Ahmedabad Bench in Asstt. CIT v. Sumedh Synthetics (P.) Ltd. [2003] 81 TTJ (Ahd.) 804. At any rate, the judgment of the Bombay High Court in IPCA Laboratories Ltd.'s case cannot be considered to be binding on Special Bench sitting inDelhi, as held in the following judgments: (i) All India Lakshmi Commercial Bank OfficersUnionv.UnionofIndia[1984] 150 ITR 1 (Delhi) (ii) CIT v. Thana Electricity Supply Ltd. [1994] 206 ITR 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se and it cannot act independently of the existence of the profit-base. (e) If the contention of the assessees is accepted, then even if the loss in the export activity is larger than the export incentives, they will be entitled to the deduction, a consequence which cannot be countenanced. (f) The question of applying the rule of liberal construction does not arise when the language of the provision is clear, and if the language is clear the rule of literal construction shall apply. Thus, the proviso will apply only where there is a profit under any of the clauses of the sub-section. The proviso does not refer to a situation where there is a loss. Literally construed, in such a case, the proviso simply does not apply. The ratio of the judgment of the Supreme Court in CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294 is attracted. 21. Mr. Jain, the learned senior DR, supporting the case of the department, submitted that there is no logic in allowing deduction even if there is a loss in the export activity. According to him, in case of a loss, the grant of export incentives itself is sufficient, and no further relief to the assessee is due. He relied on the judgment of the Supreme Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the proviso stands on its own and has to be interpreted as if it is an independent provision. It cannot be understood in the same manner of understanding a proviso proper, in the conventional sense. The function of a proviso normally is to carve out an exception which, but for the proviso, would have fallen within the main provision. But "the insertion of a proviso by the draftsman is not always strictly adhered to its legitimate use and at times a section worded as a proviso may wholly or partly be in substance a fresh enactment adding to and not merely excepting something out of or qualifying what goes before". If this principle is applied, it will be seen the proviso is not one in the real and conventional sense. 24. Before 1-4-1992, the date on which the provisions of sub-section (3) were amended, the sub-section provided for a simpler form of deduction in the sense that the exporter was entitled to a deduction of the profits computed under the head 'Profits and gains of business' in the proportion which the export turnover bears to the total turnover. Implicit in this was the principle that if there is a loss computed in the export business, no deduction was allowable. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be ignored since there can be no question of a loss being further increased'. It is common ground that the proviso does not expressly provide for the contingency of a loss arising in the exports. At best (or worst), it can only be said that it is silent on this aspect. The judgments of the Delhi High Court in Modi Cement Ltd's case and the Allahabad High Court in Indo-Gulf Fertilizers & Chemicals Corpn. Ltd.'s case cited on behalf of the assessees were rendered in the context of the levy of additional tax under section 143(1A) and the question arose whether, in a case where the loss returned by the assessee is increased as a result of the assessment, the Assessing Officer can treat it as a case of a 'further increase' of the tax payable. It was held that where no tax is payable as a result of the assessment there is no question of it being 'further increased' by an additional levy. It seems to us that it would not be apposite to draw support from these judgments for the purpose of the interpreting the proviso which is before us. They were rendered in the context of a levy of tax. If there is no initial levy of tax, there is no question of an additional levy. This is what was held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other hand, if you suffer losses in the export business, your entitlement to the deduction will be restricted to the prescribed proportion of 90 per cent of the export incentives. It seems to us that the intention behind enacting the proviso is to reward profit-making exporters by a further deduction, but at the same time not to punish or discourage loss-making exporters by reducing the deduction in respect of the export incentives. This is so because the object behind enacting section 80HHC is "to compensate an exporter for the comparative disadvantage faced by him in the international market" and the reduction of the deduction given in respect of the export incentives (by the proviso) by the amount of loss suffered in the export business would, in our humble view, run counter to the object. 26. In IPCA Laboratories Ltd.'s case the Bombay High Court was not concerned with the proviso to sub-section (3) of section 80HHC. The question before the High Court was limited to the interpretation of clause (3) of the sub-section. It was held that the word 'profits' in sub-section (1) means positive income and does not include loss (negative income), that however the word 'profit' in sub- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness, as the assessee's claim, then, there would be substantially more profits of the export business left to enjoy the deduction. The following example may roughly explain the controversy: PROFIT & LOSS ACCOUNT OF THE ASSESSEE FOR THE YEAR ENDED... Expenditure Income Rs. Rs. To Salaries and wages 6,000 By Gross profit 20,000 " Interest paid 1,000 "Interest re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p; ---------- Rs. 12,200 Less: Depreciation allowable Rs. 1,500 ---------- Taxable income: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sp; --------- Amount eligible for deduction Rs. 7,700 --------- 29. The issue arises in the case of Lalsons Enterprises, the appellant in ITA No.3990/Del/99. The arguments of Mr. Ajay Vohra, the learned counsel for the assessee, were heard along with the arguments of Mr. Rajan Vohra, the learned chartered accountant from Bombay appearing for the intervener M/s. Swani Corporation and Mr. Rahul Mitra, the learned chartered accountant from M/s. Price Waterhouse, Calcutta for the intervener M/s. Exide Industries, on behalf of the Department, we heard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tation should be adopted in understanding Explanation (baa). (f) The Circular No. 621 explaining the provisions of Explanation (baa) recognizes that there may be some common expenses and estimates an ad hoc 10 per cent of such common expenses to be allowed as deduction against the receipts such as interest, brokerage, commission etc. but this deduction is only for common expenses. Deduction in respect of expenditure which has a nexus with the receipts of the nature referred to in the Explanation has to be allowed further, which is not prohibited. 31. Mr. Rajan Vohra, the learned representative for M/s. Swani Corporation, intervener, submitted as follows: (a) Under Explanation (baa) the computation of business income is to be made as per the computation provisions of sections 28 to 44D and not as per the Profit & Loss account. This means that the expenditure to earn the receipts has to be allowed as deduction. Automatically therefore the exclusion can be only of the net income. (b) The orders of the Mumbai Benches of the Tribunal in Pink Star v. Dy. CIT[2000] 72 ITD 137 and Dy. CIT v. Diamond Creek [2002] 82 ITD 291 illustrate the illogic in the interpretation sought to be place ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns. First, the interest is not related to the business at all, in which case section 80HHC is not applicable. The second is that where interest is credited to the profit and loss account, the interest expenditure is connected purely with the exports, in which case it cannot be adjusted against the receipt. The third is that where the interest expenditure is directly connected to the earning of the interest income, it may be adjusted against the receipt. (b) If netting principle is accepted, it would mean that the Department would also be entitled to deduct the expenditure incurred to earn the export incentives referred to in section 28(iiia), (iiib) and (iiic). (c) Section 80M and section 80L refer to deduction from "income", in contrast to the word 'receipt' used in Explanation (baa) which shows that where the Legislature wanted to allow deduction for net income, they have expressly said so. (d) The provisions of sections 44AA and 44AB have been enacted to provide for a different situation in a different context. They are not provisions relating to computation of income and are not for determination of eligibility to any deduction. Reliance on them by the assessees is misplaced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Allahabad High Court in Rani Amrit Kunwar v. CIT [1946] 14 ITR 561 @ 570. (c) The principle of 'netting' is implicit in the words 'receipts . . . included in such profits' occurring in the Explanation. There is no attempt to introduce words into the Explanation, as alleged by the Department. (d) The Explanation is workable in all cases, even where the expenditure is equal to or more than the receipt. (e) The assessees are not relying on any principles of accounting in support of their contention. The principle of 'netting' is implicit in the language employed in the Explanation itself. (f) There is no difference in the ideas expressed by clauses (1) and (2) of the Explanation. Whereas the idea of netting is implicit in both, only the language employed is different. The words 'receipts...included in such profits' appearing in clause (1) and the words "profits of any branch . . ." appearing in clause (2) convey the same idea. (g) The judgment of the Supreme Court in Dr. V.P. Gopinathan's case has no application to the facts of the present case. (h) The provisions of section 80HHC are not controlled by section 80AB. 37. We also sought clarifications from both sides on the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowed 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. As some expenditure might be incurred in earning these incomes, which in the generality of cases is part of common expenses, ad hoc 10 per cent. Deduction from such incomes is provided to account for these expenses". Now when the Legislature has fixed an ad hoc percentage as expenditure incurred to earn the receipts, can it be further argued that only the net income, which means gross receipt by way of commission, interest, rent etc. minus all the expenditure which has a nexus with the receipt, can be excluded from the 'profits of the business' as computed under the head 'business'? Is there any warrant for such an argument? On the language of Explanation (baa) there is reason to think there is. The ad hoc 10 per cent deduction, given indirectl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng contended before us by the Department, that is to say, that the deduction with reference to section 80M must be allowed with reference to the dividend 'receipt', on the ground that what was received was the gross amount of dividend without being reduced by any expenditure incurred in relation thereto. The Department's stand (similar to the one which is being contended before us by the assessees) was that the deduction could be allowed only with reference to the net income by way of dividend, i.e., gross amount of dividend reduced by the expenditure incurred in relation to it. The stand taken by the Department in that case was upheld by the Supreme Court. In doing so, it was held that what was included in the gross total income as income by way of dividend, on which deduction under section 80M was allowable, was only the net income after adjusting the expenditure against the gross amount of dividend, and therefore the deduction was allowable only on the net income. On parity of reasoning, the amount of 'receipts' included in the profits of the business as computed under the Act is the gross receipts as reduced by the expenditure incurred in relation thereto. It is this concept th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the language employed. There is nothing, in our humble view, in the language of clause (1) of the Explanation which would militate against the principle of netting. 44. 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. 45. It was argued on behalf of the Department that if netting is allowed then the income-tax authorities would be entitled to deduct expenditure incurred by the assessee for receiving export incentives mentioned in section 28(iiia), (iiib) and (iiic). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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. 47. What now remain for consideration are the judgments of the Supreme Court in Dr. V.P. Gopinathan's case and Karnal Co-operative Sugar Mills Ltd.'s case. In order to appreciate the relevance of these decisions to the issue under consideration, the facts in these cases have to be noted. In Dr. V.P. Gopinathan's case the facts as we find from the judgment of the Kerala High Court in CIT v. Dr. V.P. Gopinathan [1998] 229 ITR 801 the assessee received certain amount of interest on the fixed deposits placed with banks. He took a loan against the fixed deposits and paid interest thereon. In his income-tax return, he set-off the interest paid against the interest received. The Kerala High Court allowed the claim, but on appeal by the Department the Supreme Court reversed the judgment of the High Court. It is seen from the facts of the case that in the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest which bears a nexus with the interest receipt. The computation provisions include section 37(1) under which any expenditure incurred or laid wholly and exclusively for the purpose of the business is to be allowed as deduction. Therefore, any expenditure incurred which has a connection or nexus with the interest receipt has to be allowed as a deduction and only the balance can be excluded from the business profits. There may be other provisions in the computation sections permitting other allowances or deductions, provided a nexus is established between the expenditure and the interest receipt. Thus, there are statutory provisions which authorise the claim of the assessees in the case before us when they contend that the net income by way of interest be computed and excluded from business profits. This takes the case out of the purview of the judgment. 48. In Karnal Co-operative Sugar Mills Ltd.'s case, the facts as seen from the judgment of the Punjab & Haryana High Court, are that the interest was received by the assessee on fixed deposits placed with the banks in connection with the purchase of machinery. The finding of the income-tax authorities was that the business h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f manufactured goods and the business of export of the trading goods shall be adjusted against each other. (ii) 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) 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. 50. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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