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TMI Blog2005 (6) TMI 560X X X X Extracts X X X X X X X X Extracts X X X X ..... e said proviso, requires reconsideration in view of the subsequent decision of the Hon'ble Supreme Court in the case of IPCA Laboratory Ltd. v. Dy. CIT 266 ITR 521, especially considering the observations of the Hon'ble Apex Court recorded therein to the effect that the provisions of section 80HHC are also governed by section 80AB. (2) Whether in any view of the matter, if the figures as computed under clause (a) or (b) or (c) of sub-section (3) is a negative figure, would an assessee be entitled to a deduction under section 80HHC, if after setting off the said negative figure against the amount computed under the proviso to sub-section (3), there remains a positive figure." 2. The above issues have, in fact, arisen from ITA No. 6503/M/2002 filed by M/s. B. Sorabjee against the income-tax assessment order for the assessment year 1999-2000, as upheld by the learned CIT(A). The facts in this case are that the assessee is a manufacturer and exporter of readymade garments. For assessment year 1999-2000, the assessee claimed deduction under section 80HHC of Rs. 1,75,08,996. It had credited Rs. 1,91,93,598 as incentive of exports in its profit and loss account. There is a resultant lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. V.T. Joseph (1997) 225 ITR 731holding that only the actual profit in the export business can be considered for deduction under section 80HHC, was also relied on by the Assessing Officer. As such, the assessee's claim for deduction under section 80HHC was rejected. 3. By virtue of the order dated 22-10-2002, the learned CIT(A) upheld the assessment order. 4. Before us, the following assessees have sought to be impleaded as interveners : S. No. ITA No. Assessee Represented by Asst. yr. 1. 7071/M/2004 Mrs. Arun S. Jain Sh. M. Subramanian 2001-02 2. 4153/M/2001 Indokem Export Ltd. Ms. D.J. Jariwala 1997-98 3. 6380/M2004 M/s SDM International Sh. R.R. Vora 2001-02 4. 2781/M/1999 TATA International Ltd. Withdrawal Appli. 1992-93 5. 2738/M/1999 TATA International Ltd. Withdrawal Appli. 1992-93 6. CO-297/M/99 TATA International Ltd. Withdrawal Appli. 1992-93 7. 2697/M/2000 Tata International Ltd. Withdrawal Appli. 1994-95 8. 2846/M/2000 Tata International Ltd. Withdrawal Appli. 1994-95 9. 4171/M/2000 Tata International Ltd. Withdrawal Appli. 1995-96 10. 4296/M/2000 Tata International Ltd. Withdrawal Appli. 1995-96 11. CO 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g manufacturer, then the amount of deduction in the case of the assessee shall be reduced by such amount which bears to the total profits derived by the assessee from the export of trading goods, the same proportion as the amount of the export turnover specified in the said certificate bears to the total turnover of the assessee in respect of such trading goods. (1A) Where the assessee, being a supporting manufacturer, has during the previous year, sold goods or merchandise to any Export House or Trading House in respect of which the Export House or Trading House has issued a certificate under the proviso to sub-section (1), 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 profits. (2)(a) This section applies to all goods or merchandise, other than those specified in clause (b), if the sale proceeds of such goods or merchandise exported out of India are the supporting manufacturer in convertible foreign exchange, within a period of six months from the end of the previous year or, where the Chief Commissioner or Commissioner is satisfied (for reasons to be recorded in writi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oods bears to the adjusted total turnover of the business carried on by the assessee; and (ii) in respect of trading goods, be the export turnover in respect of such trading goods as reduced by the direct and indirect costs attributable to export of such trading goods : Provided that the profits computed under clause (a) or clause (b) or clause (c) 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 (iiic) of section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee. Explanation. -For the purposes of this sub-section, (a) 'adjusted export turnover' means the export turnover as reduced by the export turnover in respect of trading goods; (b) 'adjusted profits of the business' means the profits of the business as reduced from the profits derived from the business of export out of India of trading goods as computed in the manner provided in clause (b) of sub-section (3); (c) 'adjusted total turnover' means the total turnover of the bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clause (b) shall be duly certified by the auditor auditing the accounts of the Export House or Trading House under the provisions of this Act or under any other law. (4B) For the purposes of computing the total income under sub-section (1) or sub-section (1A), any income not charged to tax under this Act shall be excluded. Explanation. -For the purposes of this section, (a) 'convertible foreign exchange' means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange Regulation Act, 1973 (46 of 1973), and any rules made thereunder : (aa) 'export out of India' shall not include any transaction by way of sale or otherwise, in a shop, emporium or any other establishment situate in India, not involving clearance at any customs station as defined in the Customs Act, 1962 (52 of 1962); (b) 'export turnover' means the sale proceeds received in, or brought into, India by the assessee in convertible foreign exchange in accordance with clause (a) of sub-section (2) of any goods or merchandise to which this section applies and which are exported out of India, but does not include freight ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loss suffered has to be ignored. Other Benches have held that the loss is to be adjusted against incentive receipts and if resultant figure is a positive figure, then deduction under the section is to be allowed on such positive figure. 8. The third situation is the one pleaded and canvassed on behalf of the revenue. As per this situation no deduction to the assessee is permissible if there is no profit from export. According to the revenue the assessee is not entitled to any relief under section 80HHC if there is no profit under sub-section (1) of section 80HHC. Some Benches of the Tribunal have accepted the view canvassed on behalf of the revenue. Thereafter, the Hon'ble Bombay High Court in the case of IPCA Laboratories Ltd. v. Dy. CIT (No. 1) (2001) 251 ITR 401considered the matter and held that the loss, if any, incurred by the assessee in any of its activities is to be set off against the profit arising out of the assessee's remaining activities. 9. As per the revenue, the decision of Hon'ble Bombay High Court in the case of IPCA (supra) fully supported their stand and the assessee was not entitled to any relief where there was no profit from export and there is no questio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igure of positive profit, both the profits and losses will have to be considered. If the net figure is a positive profit, the assessee will be entitled to a deduction. If it is a loss, the assessee will not be entitled be available under sections 80HHC(1) or 3(a) or 3(b). In arriving at the figure of positive profit, both the profits and losses will have to be considered. If the net figure is a positive profit, the assessee will be entitled to a deduction. If it is a loss, the assessee will not be entitled to any deduction. Sub-section (3)(c) and section 80HHC deal with cases where the export is of both self-manufactured goods as well trading goods. As per sub-section (1) of section 80HHC(3) a deduction can be permitted only if there is a positive profit in the exports of both self-manufactured goods as well as trading goods. If there is a loss in either, that loss has to be taken into account for the purpose of computing profits. Section 80AB has been given an overriding effect over all other sections contained in Chapter VI-A, including section 80HHC. If the income has to be computed in accordance with the provisions of the Act, not only profits but also losses have to be taken i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upreme Court decision in IPCA's case (supra) on the Special Bench decision of the ITAT in the case of Lalsons Enterprises (supra). 16. After considering the matter, the Hon'ble President constituted a Special Bench of 5 Members to consider and decide the questions referred to above. 17. The case was fixed for hearing. Before the matter was heard by this Special Bench, a similar issue was considered by the Hon'ble Bombay High Court in the case of Rohan Dyes & Intermediates Ltd. v. CIT (2004) 270 ITR 350. 18. We have heard the learned representatives of the parties and the interveners in extenso. The arguments of the learned counsel for the assessee and the interveners and the learned Departmental Representatives are summarized as under: Arguments on behalf of the assessee 19. Before us, Sarv Shri K. Shivaram, Y.P. Trivedi, V.H. Patil, R.R. Vora, Subramaniam Choksi and Ms. D.J. Jeriwala have addressed their arguments. A fact-sheet and 3 paper books have been filed. Contentions have been advanced with regard to deduction of the tax incentive for exports under section 80HHC of the Act. Attention in this regard has been drawn to pages 170 to 178 and 180 to 181 of the Assessee's Pap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. v. State of Haryana (1991) 188 ITR 402(SC); 2. CIT v. K. Ramakrishnan (1993) 202 ITR 997(Ker.); 3. CIT v. Smt. Kamla Devi Rathi (1995) 213 ITR 177(Pat.) (FB); and 4. CIT v. Sudhir Jayantilal Mulji (1995) 214 ITR 154(Bom.). It has further been alleged that the decision in Rohan Dyes & Intermediates Ltd.'s case (supra) is also not applicable to the present facts. In the said case, the assessee had a loss, even after applying the provisions. In that case, the Assessing Officer himself adjusted the incentives against the losses. As the amount computed under sub-section (3) was a negative amount and the facts were identical with IPCA's case (supra), the assessee was not allowed deduction under section 80HHC. The CIT(A) allowed the deduction. The Tribunal, relying on the decision of Hon'ble Bombay High Court in IPCA's case (supra), allowed the department's appeal. However, there is no discussion in the Tribunal's order regarding the proviso to sub-section (3). The Hon'ble Bombay High Court has dismissed the appeal filed by the assessee on the ground that the issue under consideration is covered by the decision of the Hon'ble Supreme Court in IPCA's case (supra). 24. So far ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed at the admission stage itself in the case of Rohan Dyes & Intermediates Ltd. (supra) on the ground that no substantial question of law arose from the order, the said order would be binding only on the parties to the appeal and not on others. The decision of the Hon'ble Bombay High Court in IPCA's case (supra) was considered by the Mumbai Tribunal in the case of Vishal Exports Overseas Ltd. v. ITO [IT Appeal No. 1248 (Mum.) of 2002, dated 20-1-2003] and in the case of Shri Samdas T. Budhrani and by the Special Bench of the Delhi Tribunal in Lalsons Enterprises' case (supra). In all these decisions, the Tribunal has held that the issue before the Hon'ble Bombay High Court was different from that in the present case. 28. It has thus been submitted that the decision of the Delhi Special Bench of the Tribunal in Lalsons Enterprises' case (supra) is still good law and accordingly, the loss under clauses (a), (b) or (c) of sub-section (3) of section 80HHC has to be ignored and deduction is available on the basis of the proviso to sub-section (3). In the facts of the assessee's case, as the gross total income is positive and there is export profit considering duty drawback, the provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n as specified in section 80HHC. 33. It is further submitted that if the resultant figure under sub-section (3)(c) of section 80HHC is a negative figure, there is nothing at hand to further increase, and hence, the proviso does not come into play at all. The moment the working under sections 80HHC(3)(a), (b) or (c) arrives at a loss, there is no further computation needed, as there is no profit 'derived' from export of the specified goods or merchandise. The export incentives received by the assessee were not profits derived from the export of goods, but merely benefit given by the Government after the export had been made. 34. It has been pointed out that according to the Special Bench of the ITAT in Lalsons Enterprises' case (supra), the loss in the export business and the grant of export incentives referred to in section 28(iiia), (iiib) and (iiic) represent different specifies of income. The latter is not considered as profit of the business in view of the fact that it is reduced from the profits of the business by Explanation (baa) to section 80HHC(4B). It is brought to tax within the purview of the deduction by the proviso to sub-section (3) as a separate category of income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fits, which are not available under the section, cannot be conferred by ignoring or misinterpreting words in the section. Sub-section (3)(a) deals with the case where the export is only of self-manufactured goods. Sub-section 3(b) considers the case where the export is only of trading goods. Thus, when the Legislature wanted to take exports from self-manufactured goods or trading goods separately, it has already so provided in sub-sections (3)(a) and 3(b). It would not be denied that the word 'profit' in section 80HHC(1) and section 80HHC(3)(a) and (3)(b) means a positive profit. In other words, if there is a loss, then no deduction would be available under section 80HHC(1) or (3)(a) or (3)(b). In arriving at the figure of positive profit, both the profits and the losses will have to be considered. If the net figure is a positive profit, both the profits and the losses will have to be considered. If the net figure is a positive profit, then the assessee will be entitled to a deduction. In case the net figure is a loss, the assessee will not be entitled to a deduction. Sub-section (3)(c) deals with cases where the export is of both self-manufactured goods as well as trading goods. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be calculated by counting both the exports. Even under section 80HHC(3)(c)(i), the profit is to be the adjusted profit of business. The adjusted profit of the business means a profit as reduced by the profit derived from business of exports out of India of trading goods. Thus, in calculating the profits, under sub-section 3(c)(i), one necessarily has to reduce by profits under sub-section (3)(c)(ii). The term 'profit' means positive profit. Thus, if there is a loss, then those losses in exports of trading goods have to be adjusted. They cannot be ignored. Therefore, a plain reading of section 80HHC makes it clear that in arriving at the profits earned from export of both self-manufactured goods and trading goods, the profits and losses in both the trades have to be taken into consideration. If after such adjustments there is a positive profit, the assessee would be entitled to deduction under section 80HHC(1). If there is a loss, he will not be entitled to any deduction. 40. The aforesaid decision of the Hon'ble Supreme Court in IPCA's case (supra) was considered by the Hon'ble Bombay High Court in Rohan Dyes & Intermediates Ltd.'s case (supra). In the said case, the Tribunal, r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch exports' has to be profits of exports of self-manufactured goods plus profits of exports of trading good. If there is a loss in either of the two, then that loss has to be taken into account for the purposes of computing profits." 43. After quoting from the decision of IPCA's case (supra), as referred above, Their Lordships further observed that : "The meaning of the word 'profit' occurring in section 80HHC, sub-sections (1) and (3), as held by the Supreme Court, is the same and that is positive profit worked out after taking into consideration the losses. The meaning of the word 'profit' in the proviso appended to sub-section (3)(c) is no different and it carries the same meaning, i.e., the positive profit worked out after taking into consideration the losses. It is true that in the case of IPCA Laboratory Ltd. (2004) 266 ITR 521, the Supreme Court was not concerned with the proviso appended to sub-section (3)(c) of section 80HHC, as it was not necessary for the purpose of that case, but the construction of the word 'profit' by the Supreme Court in relation to the main provision contained in sub-section (3) of section 80HHC is equally applicable to the word 'profits' occurri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Central Board of Direct Taxes relied upon by learned counsel for the assessee, suffice it to observe that the said circular also shows that the positive profits can only be considered for the purpose of deduction. This is what the Supreme Court said regarding the said circular in IPCA Laboratory Ltd. (2004) 266 ITR 521." 45. The main contention advanced before us on behalf of the assessee and the interveners was that the decision of the Hon'ble Bombay High Court in Rohan Dyes & Intermediates Ltd.'s case (supra) cannot be treated as a binding precedent, as the question before their Lordships was not whether loss suffered by an exporter under sub-section (1) of section 80HHC was to be ignored and deduction allowed on incentive as per proviso (1) to section 80HHC(3) of Income-tax Act. Therefore, the view expressed by the High Court cannot be treated as a ratio decidendi but at best, it is obiter dicta, which is not binding. 46. As we understand, the case of the assessee and the interveners is that the decision of the Hon'ble Supreme Court in IPCA's case (supra) is to be considered in the light of the question posed before the Hon'ble Supreme Court. There, the assessee had exported ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit' in the proviso to section 80HHC(3)(c) means the same as 'profit' in section 80HHC(1) and (3). This profit means a positive profit arrived at after taking into consideration, the losses incurred. Only profits derived from exports can be 'further increased'. That which is absent cannot be increased. So, in the event of the resultant of figure under section 80HHC(3)(c) being a negative figure, there cannot be anything that can be 'further increased'. Therefore, the proviso cannot be invoked. In view of the Supreme Court decision in IPCA's case (supra), section 80HHC is governed by section 80AB. 48. The main submission of the assessee is that the Supreme Court decision in IPCA's case (supra) and the Bombay High Court decision in Rohan Dyes & Intermediates Ltd.'s case (supra) are not applicable to the present case, and that the question raised is wide open. According to the learned counsel for the assessee and the interveners IPCA's case (supra) and Rohan Dyes & Intermediates Ltd.'s case (supra) are to be read in the light of the respective questions agitated therein, respectively. What is binding and applicable is the ratio of a decision, and not any passing remark or observation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The nature of ratio decidendi has been discussed in, inter alia : 1. Jagdish Lal v. State of Haryana (1997) 6 SCC 538; and 2. John Martin v. State of West Bengal AIR 1935 SC 772. 53. Opposed to the ratio decidendi stand obiter dicta. Literally, this phrase means things said (dicta) by the way (obiter). Judicial obiter dicta, that is to say, as per Sir John Salmond, in 'Salmond on Jurisprudence', Twelfth Edition by P.J. Fitzgerald, statements of law which go beyond the occasion, and lay down a rule that is irrelevant to the purpose in hand, or is stated by way of analogy merely, or is regarded by a later court as being unduly wide, on the other hand, are persuasive precedents. A court may give various observations not precisely relevant to the issue before it. Such observations do not give the court's final decision on a live issue. So, they are not endowed with as much authority as the actual decision. They are without binding authority, but are nonetheless important. Not only do they help to rationalize the law, they serve to suggest solutions to problems, not yet decided by the courts. The nature of obiter dicta has been considered in, inter alia : 1. H.H. Maharajadhiraja ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on in IPCA's case (supra) is fully applicable hereto. 59. The two decisions in Rohan Dyes & Intermediates Ltd.'s case (supra) and A.M. Moosa, Bharath Sea Foods' case (supra), are also precedents, and their ratios are fully applicable to the controversy at hand. As already noted above, a ratio is the rule of law applied and acted upon by the Court. Now when we examine the question as to what the ratio of these decisions is, we have to examine the reasons given therein. In both the said cases, in order to resolve the controversy, it was deemed necessary to determine as to what the meaning of the word 'profit' in section 80HHC(3) of the Income-tax Act is. It was held in both these cases that such profit means 'positive profit' and not loss. No deduction under section 80HHC(3) is permissible in case of a loss. There is no question of ignoring the resultant (sic). 60. Having regard to the elaborate discussion in Rohan Dyes & Intermediates Ltd.'s case (supra), it is difficult to accept that the said decision is not a reasoned decision. It cannot be distinguished or surpassed. 61. The questions before us are, therefore, squarely covered by the Supreme Court decision in IPCA's case (sup ..... X X X X Extracts X X X X X X X X Extracts X X X X
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