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TMI Blog2017 (4) TMI 1107X X X X Extracts X X X X X X X X Extracts X X X X ..... ial question of law has been raised by the Appellant-Assessee for consideration: Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in holding that the Explanation (baa) to Section 80HHC of the Income-tax Act, 1961 would apply to the Sales Tax Subsidy received by the Appellant 3. The Assessee is carrying on business of manufacture and export of leather shoes and shoe uppers. It has received Sales Tax REP subsidy in a sum of ₹ 1,70,29,716/- and reflected the same, as 'other income' for the Assessment year 1999-2000. During earlier assessment years viz., 1988-89 to 1994-95 the Assessee has transferred certain REP Licenses and no Sales Tax was paid thereon as the transfer of REP Licenses did not involve any transfer of property. The Tamil Nadu General Sales Tax Act has been amended charging Sales Tax on transfer of REP Licenses. A challenge mounted to the provisions of the amended Sales Tax Act has ended before the Supreme Court which upheld the amendment. In those circumstances, Sales Tax has become liable to be paid and accordingly the same has been paid by the Assessee to the State. But however, exporters o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Thus, whenever any allowance or deduction has been made or claimed in any previous assessment year(s) towards loss, expenditure or trading liability and subsequently the Assessee obtains in cash or in any other form any remission or cessation or benefit in respect of such loss or expenditure the value of such benefit accruing is liable to be treated as profit or gain chargeable to Income Tax. 6. Under Section 2(34) the expression previous year has been defined as the previous year as defined in Section 3 which in turn means the financial year immediately preceding the assessment year. Chapter VIA of the Act dealt with deductions to be made in computing the total income of an Assessee. Section 80HHC, falling in Chapter VIA, has specifically dealt with deduction in respect of profits retained for export business. Sub-section (1) thereof will have certain bearing upon the controversy at issue and hence the relevant part of it, as it stood prior to 01.04.2001, is extracted below:- 80HHC. Deduction in respect of profits retained for export business:- (1) Where an assessee, being an Indian Company or a person (other than a company) resident in India, is engaged in the business o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch profits. Thus, when we bear this Explanation in mind for the purpose of reducing the profit derived by the Assessee from the export of goods or merchandise, it becomes imperative that the other income must have a bearing or nexus to such a profit derived from the export business. The main theme incorporated behind Section 80HHC is to enable every Assessee who derives profit from out of the business of export of goods or merchandise carried on by it, to retain it as it is and not subject the same to the assessment of income tax, by reducing it from the total income derived from the whole of the business or profession of such an Assessee. Thus, what was insulated against incidence of Tax by Section 80HHC was that part of the profit derived from export of goods. A formula is required to be applied to find out or for segregating the profit earned from the export business segment from out of the total profits earned, where the Assessee is not carrying on exclusively business of export of goods or merchandise but indulges in carrying on business of both export of goods as well as domestic sales. There may not present a problem where the Assessee is carrying on 100% export oriented bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ession as chargeable to income tax. Whereas Section 41 has dealt with as to how profits chargeable to tax are liable to be computed and in that process it was set out that where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the Assessee but subsequently the Assessee has obtained any amount in respect of such loss or expenditure, the amount so obtained by such Assessee shall be deemed to be profit and gain of the business or profession and accordingly chargeable to income tax. In the instant case, in the previous assessment years expenditure towards Sales Tax has been claimed by the Assessee. But however, during the previous financial year to the Assessment year 1999-2000, the amount representing Sales Tax has been remitted back to the Assessee. Thus, the said remission amounts to obtaining profit and gain of the business during the relevant Assessment year, in terms of sub-section (1) of Section 41 and chargeable to Income Tax. When we keep in mind the provisions contained under Section 28 read with Section 41 further read with Section 80HHC, it becomes clear that the remission of Sales Tax ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vs. IRC (1947) 29 Tax Cases 274 (KB). In that case, the assessee-company carried on the business of jewellers and pawn-brokers. In the course of its business of pawnbroking, it received various articles as pledges on the strength of which it lent money. The pledges were of three types (a) pledges pawned for a sum of ten shillings or under; (b) pledges pawned for a sum exceeding ten shillings and not exceeding ten pounds; and ) pledges pawned for a sum exceeding ten pounds. The business of pawnbroking was controlled by the Pawnbrokers Act, 1872. It was pointed out in that Act that if a pledge pawned for ten shillings or under was not redeemed within the year of redemption and days of grace, the pledge article would become the pawnbroker's absolute property. There was no dispute that profit arising out of sale of such pledged article would be the pawnbroker's income. Under the second type of pledges which were pawned for a sum exceeding ten shillings and not exceeding ten pounds, the pledged article did not become the property of the pawnbrokers. If the pledges were sold for more than the amount of the loan and interest due at the time of sale, the excess had to be paid to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It became a definite trade surplus. Atkinson J. pointed out that in Tattersall's case (supra) no trading asset was created. Mere change of method of book-keeping had taken place. But, where a new asset came into being automatically by operation of law, commonsense demanded that the amount should be entered in the P L a/c for the year and be treated as taxable income. In other words, the principle appears to be that if an amount is received in the course of trading transaction, even though it is not taxable in the year of receipt as being of revenue character, the amount changes its character when the amount becomes the assessee's own money because of limitation or by any other statutory or contractual right. When such a thing happens, commonsense demands that the amount should be treated as income of the assessee. 12. The Supreme Court in Lakshsmi MaachineWorks case had an occasion to consider the whole scheme of rationalization of provisions relating to tax concession for export profits and held as under:- 7. A brief analysis of the above Section 80HHC of the Act, as amended with effect from 1.4.1992, indicates rationalization of provisions relating to tax conce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of brokerage, commission, interest, rent etc. do not form part of business profits as they have no nexus with the activity of exports. If interest or rent was not regarded by the legislature as business profits, the question of treating the same as part of the total turnover in the above formula did not arise. In fact, Section 80 HHC had to be amended several times since the formula on several occasions gave a distorted figure of export profits when receipts like interest, rent, commission etc. which did not have the element of turnover got included in the profit and loss account and consequently became entitled to deduction. This was clarified by the above amendment to Section 80HHC commencing from 1.4.92. The said amendment made it clear that though commission and interest emanated from exports, they did not involve any element of turnover and merely for the reason that commission, interest, rent etc. were included in the profit and loss account, they did not become eligible to deduction. We have to give purposeful interpretation to the above section. The said section is entirely based on the formula. The amendments from time to time indicate that they became necessary in order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . [See: page no.24 of the paper book], if so, then excise duty and sales tax also cannot form part of the total turnover under Section 80HHC(3), otherwise the formula becomes unworkable. In our view, sales tax and excise duty also do not have any element of turnover which is the position even in the case of rent, commission, interest etc. It is important to bear in mind that excise duty and sales tax are indirect taxes. They are recovered by the assessee on behalf of the Government. Therefore, if they are made relatable to exports, the formula under Section 80HHC would become unworkable. The view which we have taken is in the light of amendments made to Section 80HHC from time to time. 17. Before concluding we may state that profits are of three types, namely, book-profits, statutory profits and actual profits. The amendments to Section 80HHC(3) indicate exclusion of book profits. For example, commission, interest, etc. do form part of the profit and loss account but for the purposes of calculation of profits derived from local sales and exports, they stand excluded. The difficulty arises because the formula is based on the Hybrid System of Profits, namely, actual and stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 28 to 44D of the I.T. Act. In other words, receipts constituting independent income having no nexus with exports were required to be reduced from Business Profits under clause (baa). A bare reading of clause (baa)(1) indicates that receipts by way of brokerage, commission, interest, rent, charges etc. formed part of gross total income being Business Profits. But for the purposes of working out the formula and in order to avoid distortion of arriving export profits clause (baa) stood inserted to say that although incentive profits and independent incomes constituted part of gross total income, they had to be excluded from gross total income because such receipts had no nexus with the export turnover. Therefore, in the above formula, we have to read all the four variables. On reading all the variables it becomes clear that every receipt may not constitute sale proceeds from exports. That, every receipt is not income under the I.T. Act and every income may not be attributable to exports. This was the reason for this Court to hold that indirect taxes like excise duty which are recovered by the taxpayers for and on behalf of the government, shall not be included in the total turnover ..... X X X X Extracts X X X X X X X X Extracts X X X X
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