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TMI Blog2012 (4) TMI 344X X X X Extracts X X X X X X X X Extracts X X X X ..... t deductions under Section 80HHC and also while working out income under the head business” even “ if not claimed by the assessee in the return of the income Where the profits of trading goods determined under Section 80HHC(3)(c)(ii) after deducting direct and indirect cost of trading goods from the export turnover of trading goods is a loss, then, whether such loss has to be ignored while computing deduction under Section 80HHC(1) of the Act - In the present case, the export turnover of trading goods is Rs.41,50,59,635/and direct/indirect costs are Rs. 35,81,34,588/and Rs.11,14,89,257/respectively. If the export turnover of trading goods amounting to Rs.41,50,59,635/is reduced by the direct and indirect costs amounting to Rs. 46,96,23,845/( Rs.35,81,34,588/+ Rs. 11,14,89,257/), the result would be loss of Rs. 5,45,64,210/. As per Section 80HHC(3)(c)(ii), the amount so determined i.e. Rs. 5,45,64,210/is liable to be treated as profits derived from export of trading goods - Held that: in calculating the profits under Section 80HHC(3)(c)(i), one has to necessarily reduce the profits determined under Section 80HHC(3)(c)(ii) and if there is loss, then, those losses in export of trad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded to the profits of the business to arrive at the adjusted profit of the business as given in the Explanation (b) to subsection (3) of section 80HHC for computing deduction under Section 80HHC or such loss to be ignored. 4. The brief facts needed to be stated for appreciation of the above questions are that respondent no.1, the assessee is mainly engaged in extraction processing and export of iron ore. It also has other income by way of hotel division and other services. It had filed returns of income for the years 19941995, 19951996 and 19961997 along with audit reports under Section 44 AB of the Act and other documents. The returns were processed under Section 143(1)(a) of the Act. The department issued notices under Section 143(2) and 142 (1) to the assessee, who had responded by furnishing the required details. 5. The assessee, while computing the total income, did not claim depreciation in respect of the assets used for the purpose of the assessee s business. The depreciation was also not claimed while claiming deduction under Section 80 HHC of the Act. Further the assessee had while computing profits under Section 80 HHC (3)(c) from export of goods, which included bot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal held that since the profits of trading goods includes losses, loss account of sale to the extent of disclaimer certificates issued is to be further added to the deduction under Section 80 HHC (3)(c). This order of the tribunal is challenged by the revenue in the present appeals. 9. For the sake of convenience, Section 80HHC is reproduced below : [(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 of the extend of profits, referred to in subsection (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 subsection (4A), that in respect of the amount of the export turnover specified therein, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for regulating payments and dealings in foreign exchange.] (b) This section does not apply to the following goods or merchandise, namely : ( i) mineral oil; and (ii) minerals and ores [(other than processed minerals and ores specified in the Twelfth Schedule)]. [Explanation 1 : The sale proceeds referred to in clause (a) shall be deemed to have been received in India where such sale proceeds are credited to a separate account maintained for the purpose by the assessee with any bank outside India with the approval of the Reserve Bank of India]. [Explanation 2 : For the removal of doubts, it is hereby declared that where any goods or merchandise are transferred by an assessee to a branch, office, warehouse or any other establishment of the assessee situate outside India and such goods or merchandise are sold from such branch, office, warehouse or establishment, then, such transfer shall be deemed to be export out of India of such goods and merchandise and the value of such goods or merchandise declared in the shipping bill or bill of export as referred to in subsection (1) of section 50 of the Customs Act, 1962 (52 of 1962), shall, for the purposes of this section, be dee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g export turnover exceeding rupees ten crores during the previous year, the profits computed under clause (a) or clause (b) or clause (c ) of this subsection or after giving effect to the first proviso, as the case may be, shall be further increased by the amount which bears to ninety per cent, of any sum referred to in clause (iiid) of Section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee, if the assess has necessary and sufficient evidence to prove that,( a) he had an option to choose either the duty drawback or the Duty Entitlement Pass Book Scheme, being the Duty Remission Scheme; and (b) the rate of drawback credit attributable to the customs duty was higher than the rate of credit allowable under the Duty Entitlement Pass Book Scheme, being the Duty Remission Scheme: Provided also that in the case of an assessee having export turnover exceeding rupees ten crores during the previous year, the profits computed under clause (a) or clause (b) or clause (c ) of this subsection or after giving effect to the first proviso, as the case may be, shall be further increased by the amount which bears to ninety per cen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee. (3A) For the purposes of subsection (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 subsection (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 subsection (2) of section 288, certifying that the deduction has been correctly claimed [in accordance with the provisions of this section. (4A) The deduction under subsection (1A) shall not be admissible unless the sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on "total turnover" shall have effect as if it also excluded any sum referred to in clauses (iiia), (iiib) and (iiic) of section 28; (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 outside India; Question No. (i) : 10. The disclaimer by the assessee of depreciation in respect of the assets used for the purpose of its business, while computing the total income was accepted by the Assessing Officer in view of the decision of this court in C.I.T. Vs. Someshwar Sahakari Sakhar Karkhana, reported in 177 I.T.R. Page 443 and the earlier decisions of C.I.T. (A), that the depreciation could not be thrust upon the assessee. In the case of Someshwar Karkhana, our High Court has held that allowance of a deduction for depreciation is subject to two pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I.T., reported in (2008) 219 C.T.R. Page 0152 (Delhi). In this case, she submits that the Delhi High Court has considered issue of claiming depreciation visavis Section 80HHC of the Act and held that the judgment of Mahendra Mill s case has no application. Mr. Pardiwala, the learned Senior Counsel appearing for the assessee, on the other hand seeks to justify the view of the Tribunal distinguishing the decisions relied upon by the revenue. On his part, Mr. Pardiwala, along with the decisions in Someshwar Karkhana and Mahendra Mills, relies upon decision of the Apex Court in C.I.T. vs. Williamson Financial Services and others, reported in (2008) 297 I.T.R. (S.C.). 12. The earliest decision relied upon by Ms. Asha Desai is the decision in Indian Rayon s case. The reference in that case concerned the assessment year 19761977. The assessee had deducted development rebate from profits as per the profits and loss account to arrive at an amount for claiming relief under Section 80 HH. This computation of the assessee was rejected by the Assessing Officer, who deducted depreciation also from the profits. The contention of the assessee was further rejected by both, the first appellate aut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al income and which would be exigible to 20 per cent deduction. The reason is that Chapter VIA deals with special types of income. The deduction of 20 per cent is not to be equated with deprecation, which is an ordinary expense. The idea under the above formula is that the assessee should not claim more than what he is entitled to. Take the case of section 80HHC under which deduction is given in commensuration with the foreign exchange, which the assessee brings in. Therefore, if an assessee claims deduction under section 80HHC, depreciation has got to be set off against the gross income. Our view is supported by the judgment of the Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84. After stating the above position in law arising from scheme of the Act, our Court considered the rival arguments advanced before it. One of the arguments advanced, on behalf of the assessee, was based on the decision in Mahendra Mills case. The argument of reading Section 80HH of the Act in the light of Mahendra Mill s case was rejected by the Court by holding that Mahendra Mill s case considered only whether while computing profits and gains of the busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... those observations, have to be confined, if they have any precedential value, to a case for claim of deduction under Section 80HH is made. 14. We are not inclined to accept the distinction sought to be drawn by Mr. Pardiwala since the decision is seen to consider the situation of disclaimer also. Besides Section 80HH and Section 80HHC are part of the same Chapter VIA of the Act. Indian Rayons case has in terms held that if the assessee claims relief under Chapter VIA of the Act, then it is not open to the assessee to disclaim depreciation allowance. 15. Ms. Asha Desai next places heavy reliance upon the decision of the Full Bench of this Court in Plastiblends case (supra). The facts in Plastiblends case were that in the assessment year in question, the assessee had filed its return of income without claiming depreciation. It had added back depreciation (as per books) to the net business profit, because the net business profit under the profit and loss account was arrived at after deducting depreciation (as per books). Thus, in the return of income, the assessee computed total income under Chapter IV without claiming depreciation. After making deduction and additions as per cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in reply, submits that the decision of the Full Bench in Plastiblends case, may, at the first blush, appear to control the issue against the assessee but a closer look will confirm that it is not applicable to the facts of the present case. In Plastiblend s case, the full bench was considering a claim for deduction under Section 80IA of the Act and not under Section 80HHC. He submits that though the Full Bench had started with the consideration of a larger question, what was actually decided was a narrower question. In order to substantiate the argument, he draws our attention to the question of law referred to the Full Bench which has been reproduced above. He then refers to paragraphs 14 and 24 of the judgment where the dispute is said to be narrowed down. The same read as follows: 14. The basic controversy, therefore, is whether the assessee had an option not to claim current depreciation and if so, whether the same would have any bearing in computing the deduction allowable under Section 80IA of the Act? 24. In the present case, the dispute relates to the special deduction allowable under section 80IA contained in Chapter VIA . We have carefully gone through the text ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the decision in Mahendra Mills case was rendered in the context of determining total income of an industrial undertaking under Chapter IV of the Act and not in the context of determining deduction under Chapter VIA of the Act. Secondly, it was held in Mahendra Mills case that when there are two provisions under which an assessee can claim benefit, it is for the assessee to choose one and that the consequence of the assessee not claiming depreciation in the current year would be that, the written down value would remain the same in the following year. Thirdly, the Full Bench noted that the Apex Court in Mahendra Mills case had not laid down any proposition of law that by disclaiming depreciation, the assessee can claim enhanced deduction allowable under any other provision of the Act. These observations of the Full Bench would be applicable with equal force to the facts of the present case also. 20. Mr. Pardiwala, seeks to draw support from Williamson s case. He submits that in that case, the Supreme Court was concerned with a claim for deduction under Section 80HHC by a company that was engaged in the business of growing and manufacturing tea. The company claimed that out of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t compute the income chargeable under the head Profits or gains of business or profession . This argument has already been dealt with earlier and rejected. 22. The decision of Full Bench of this Court in Plastiblend s case, that for the purposes of deduction under Chapter VIA, the gross total income has to be computed, interalia, by deducting the deductions allowable under Sections 32 to 43D of the Act, including depreciation allowable under Section 32 of the Act even though the assessee has computed the total income under Chapter IV by disclaiming the current depreciation, is binding on this Court. Besides, we are also in complete agreement with the position of law stated therein. Therefore, we accept the argument of Ms. Asha Desai that the first question is no more resintegra and we hold that depreciation has to be allowed to the assessee while working out deductions under Section 80HHC and also while working out income under the head business even if not claimed by the assessee in the return of the income. Question (i) is accordingly answered in favour of the revenue. Questions No. (ii) and (iii) : 23. These questions are two facets of one question namely, where the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manufacturing activity. If the trading activity results in a loss, which as per Section 80HHC(3)(c) is liable to be treated as profit derived from trading activity, it has to be added to the composite profits to determine the profit from the export of manufactured goods. 28. According to the revenue, in the light of the decision of the Apex Court in the case of IPCA Laboratory Limited vs. Deputy Commissioner of IncomeTax, reported in [2004] Income Tax Reports, page 521, the loss on account of trading goods has to be ignored and cannot be taken into consideration in determining the adjusted profits of business. The decision of the Apex Court in the case of IPCA Laboratory Ltd. (supra) has no relevance in the present case, because in that case, the assessee had profits arising from the export of manufactured goods and loss from export of trading goods and the assessee chose to ignore the loss and claimed a deduction only in respect of profits. The Apex Court held that the loss has to be adjusted and cannot be ignored. Therefore, the decision of the Apex Court in the case of IPCA Laboratory Ltd. (supra) does not support the case of revenue. 29. Similarly the decision of the Apex ..... X X X X Extracts X X X X X X X X Extracts X X X X
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