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TMI Blog2008 (11) TMI 434X X X X Extracts X X X X X X X X Extracts X X X X ..... e Hon ble High Court and accordingly hold that it is a regular business income and not as speculation income. Whether gain should be considered as eligible for deduction u/s 80HHC in entirety as claimed by the assessee or ninety per cent of it be excluded in view of Explanation ( baa ) below section 80HHC(4C)?- HELD THAT:- From Persual of the case of K. Ravindranathan Nair [ 2007 (11) TMI 10 - SUPREME COURT] . It is amply clear that the foreign exchange gain on the cancellation of forward exchange contract is independent income and 90 per cent of the same is liable to be reduced from the business income for computing profits of the business as per clause ( baa ) of Explanation ( 1 ) to section 80HHC. AO is directed to re-compute the deduction u/s 80HHC in terms of our discussion. It is absolutely impermissible to argue and for that matter for the courts or the authorities to distort the judgment of the highest court of the land by needlessly endeavouring to brand the ratio decidendi of a judgment as the obiter dictum and ignore the same. Obiter dictum is an expression of opinion by a Judge on a question immaterial to the ratio decidendi, and unn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -98. 2. The following two effective grounds have been raised by the Revenue in its appeal : "1.On the facts and in the circumstances of the case and in law, the CIT(A) erred in holding that the gains received on account of cancellation of foreign exchange contract as part of the business profit placing reliance on Mumbai High Court decision (261 ITR 256) not accepted by the department. 2.On the facts and in the circumstances of the case and in law, the CIT(A) erred in directing the Assessing Officer to treat the gains received on account of cancellation of foreign exchange contract as part of the business profit eligible for deduction under section 80HHC(1) of the Act to be taken as one falling under clause ( baa )(1) of the Explanation below section 80HHC(4B) of the Act." 3. The assessee is also aggrieved by the findings given by the learned CIT(A) on this issue in ground No. 2 of its appeal which is as under: "2. The learned Commissioner of Income-tax (Appeals) ought to have: ( a )held that income of Rs. 14,13,19,172 derived from Unit I of your petitioner is to be granted exemption under section 10A of the Act, in assessing the income for the year. ( b )he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee-company to enter into forward exchange contract. ( vi )The section 43(5) does not apply the assessee since it relates to purchase and sale of commodity inclusive of Stock and Shares and forward exchange contract cannot come in the category of sale of commodity including stocks and shares. Therefore the gain/losses on cancellation of forward contracts are to be considered as gain/losses of export business only. ( vii )In the decision of Calcutta High Court in the case of CIT Central v. Soorajmul Nagarmal reported in 129 ITR 169, the above submissions of the assessee are supported." 5. Not convinced with the assessee s submission the Assessing Officer observed that entering into exchange forward contracts was not mandatory for the assessee s export business and hence the forward contracts could not be categorized as part of export activity. In his opinion the true test was to determine as to whether export activity could take place even without forward exchange contract and as the answer to this test in his opinion was in affirmative, he held that the entering into the foreign exchange forward contract with the banks in India would not be considered as the activity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e further contended that the Hon ble Supreme Court in the case of CIT v. Ravindranathan Nair [2007] 295 ITR 228 has held that the independent incomes be included in the total turnover in the formula given in section 80HHC and 90 per cent thereof had to be reduced from the gross total income. 8. In the rejoinder the learned A.R. submitted that the judgment of the Hon ble Supreme Court in the case of K. Ravindranathan Nair ( supra ) has to be considered in the light of the question which was before it for consideration. He read out some part of this judgment to contend that the question raised before the Hon ble Court was only to decide the includibility or otherwise of the processing charges, an independent income, in the total turnover. He submitted that the reasoning given by the Hon ble Supreme Court in the latter part of the judgment by which it was held that 90 per cent thereof needed to be reduced from the gross total income, cannot be considered as the ratio decidendi of the case inasmuch as it was neither the question raised nor argued before it. 9. We have heard the rival submissions and perused the relevant material on record in the light of precedents ci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eeds of the goods or merchandise exported out of India are received in, or brought into, India by the assessee within the stipulated time. The amount of Profits derived from such exports eligible for deduction has been explained in sub-section (3) which, in turn, lays down mechanism for its determination with reference to "profits of the business". Thus the computation of "profits of the business" for availing the benefit of deduction under section 80HHC is sine qua non as the amount of deduction depends on such working. The expression "profits of the business" has been explained in clause ( baa ) of Explanation below section 80HHC(4C), which reads as under: "( 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 ), ( iiic ), ( iiid ) and ( iiie ) 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 sit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me has to be reduced from the profits of the business as per Explanation ( baa ) to section 80HHC. 12. The object behind the insertion of section 80HHC is to promote exports and realize the foreign exchange. With such intention in mind this section was introduced enabling the exporters to claim deduction if the sale proceeds of the goods or merchandise exported out of India is "received in or brought into India by the assessee in convertible foreign exchange" within the prescribed time. Thus it can be seen that the intention of the Legislature is to allow deduction in respect of profits earned from the export of goods. Every business income cannot be considered as eligible for deduction under this section in view of the clear mandate of sub-section (2) which refers to the receiving in of the convertible foreign exchange into India. It is quite possible that apart from export business, an assessee may also have any other income from business in India. Sub-section (3) sets out the procedure for computing the deduction under section 80HHC by removing that part of the total income from its purview which does not emanate from the export activity. To put it simply, the deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y when it is first includible in the Business income , that is it is not Income from other sources . Coming back to our point, the deduction under this section is permissible in respect of the income from export business and not every business income. So unless the income arises from the export activity, the same cannot qualify for deduction. The independent business incomes , that is, those which are albeit derived from business and are includible under the head Profits and gains of business or profession but do not result from the export activity, cannot be made eligible for deduction. Further the relation of the independent incomes with the export business is not a decisive test for bringing it directly under the purview of deduction. What is material consideration for allowing deduction is that the income should directly result from the export activity. 13. The contention of the learned A.R. that the income from cancellation of forward exchange contracts is directly relatable to the export business and hence 90 per cent of the same should not be excluded is not acceptable for the obvious reason that such income has not been "received in or brought into India in convert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s income, is required to be excluded for determining the profits of the business . We are unable to concur with the submission made on behalf of the assessee that there were no arguments before the Hon ble Supreme Court about the deducibility or otherwise of 90 per cent of the independent income in terms of clause ( baa ) to the said Explanation, as is palpable from the portion of the arguments, extracted above, made on behalf of that assessee. Though the primary question for decision was the inclusion or otherwise of the processing charges in the total turnover but the computation of "business profits" under clause ( baa ) was also not untouched. By the judgment the entire controversy raised before it was set to rest. It is not as if the Hon ble Supreme Court was only deciding about the inclusion of the independent income in the total turnover but the other aspect of the same issue being the reduction of 90 per cent in terms of Explanation ( baa ), which is germane to the main question, was also adjudicated for giving finality to the larger issue. Both the points decided by the Hon ble Supreme Court relate to the same issue and are in fact complimentary to each other. When b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssion, whereas it incurred a loss in export business. He claimed that the deduction under section 80HHC be allowed on the net positive commission income. The Hon ble High Court held that income derived towards commission or brokerage for procuring the export orders for others was not eligible for deduction as Explanation to section 80HHC inserted by the Finance (No. 2) Act, 1991 will apply. Overruling the said view, the Hon ble Apex Court held that the assessee was entitled to deduction on such amount of commission as the assessment year involved was 1990-91 and in that year Circular No. 621, dated 19-12-1991 was applicable. It was specifically held that the amendment carried out by the Finance (No. 2) Act, 1991, by which Explanation was inserted to section 80HHC, was prospective in nature and would not apply to the earlier assessment years. Similar is the position in K.K. Doshi Co. s case ( supra ) in which case also the assessment year involved was 1990-91 and the deduction was held to be allowable by holding that Explanation to section 80HHC will not apply. On the contrary we are dealing with the assessment year 1997-98, when the Explanation to section 80HHC is very ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tention in view of the following reasons: ( i )Assessee filed its Return of Income in 1997 when it was due. Return was filed on the basis of existing provisions of Income-tax Act and accordingly assessee had not claimed exemption under section 10A. Thus there is no mistake or necessity of amendment in the computation of income filed with the Return of Income. ( ii )The amendment to section 10A(3) came with effect from 1-4-1999. The change of period for exemption under section 10A has been increased from five years to ten years as on 1-4-1999. Extending the amended provisions prior to the period of amendment is not possible until and unless the amendment is with retrospective effect. I have gone through the intentions and the text of the amendment in section 10A(3). The said amendment is only for the period starting 1-4-1999 and not applicable for the period prior to that. ( iii )In the assessee s case the deduction was claimed for five years out of eight years and the period of exemption was over in 1996-97 itself. Thereafter the unit has become a taxable unit under the other provisions of Income-tax Act. How can such unit become exempt on the basis of prospective amendment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt in sections 10A and 10B was similarly worded and hence the order rendered in the context of section 10B would apply to his case as well. 21. In the opposition the learned D.R. relied on the impugned order. His further submissions were the reiteration of reasoning recorded by the lower authorities for denying the benefit of deduction under section 10A. 22. We have heard the rival submissions and perused the relevant material on record. There is no dispute about the fact that the assessee was eligible for deduction under section 10A and it also availed the same for block of five assessment years from 1992-93 to 1996-97. This Unit was set up in assessment year 1989-90. Sub-section (3) of section 10A provided that the profits and gains referred to in sub-section (1) shall not be included in the total income of the assessee in respect of any five consecutive assessment years, falling within the period of eight years beginning with the assessment year, relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles or things. The learned A.R. has admitted that the assessee had availed the deduction under section 10A in last five cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed above the deduction was allowed to the assessee for five consecutive assessment years falling within the period of eight years beginning with the assessment year relevant to the previous year in which the industrial undertaking began to manufacture or produce articles or things. By virtue of the amendment carried out with effect from 1-4-1999 the deduction came to be allowed in respect of ten consecutive assessment years beginning with the assessment year relevant to the assessment year in which the industrial undertaking begins to manufacture or produce article or things. Whereas in the period anterior to the amendment, the deduction was allowed for five consecutive assessment years at the option of the assessee, in the period posterior to amendment it came to be allowed for ten consecutive assessment years. Obviously the amendment so made to sub-section (3) is substantive as it has expanded the period of deduction from the earlier five years to ten years. There is nothing like giving any clarification for the earlier provision or laying down any procedure in respect of the existing provision. A new extended benefit was conferred for the first time. By no stretch of imagination ..... X X X X Extracts X X X X X X X X Extracts X X X X
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