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TMI Blog2002 (3) TMI 10X X X X Extracts X X X X X X X X Extracts X X X X ..... e necessary for us to consider that argument because the interpretation of that term is clear from the language of clause (a) of sub-section (1), clause (a) of sub-section (2) and clauses (a) and (b) of sub-section (3). - In the circumstances, we answer the reference against the Revenue and in favour of the assessee. - - - - - Dated:- 4-3-2002 - Judge(s) : V. S. SIRPURKAR., K. RAVIRAJA PANDIAN. JUDGMENT The judgment of the court was delivered by V.S. SIRPURKAR J.-This common tax case reference pertains to two assessment years 1989-90 and 1990-91 and hence technically two tax cases have been filed they being T.C. Nos. 948 and 949 of 1995. The referred common questions are as follows: "1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in its conclusion that in respect of income derived from (a) interest receipts, (b) Modvat credits, and (c) International Price Rationalisation the assessee was entitled to deductions under sections 80HH and 80-I of the Income-tax Act, 1961? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in its conclusion that the total turnover in section 80HHC of the Act is only t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edits, since the assessee had been using the raw material as its input on which the excise duty was levied under the Modvat scheme the assessee was entitled for the credit of the excise duty which was paid on raw material while the finished products were liable for full excise duty. The assessee in its activity of manufacture of forgings had received Modvat credits in respect of excise duty paid on the raw materials and claimed benefits under sections 80HH and 80-I of the Act. The Tribunal accepted even this as income derived from the industrial undertaking. Lastly, the Tribunal also accepted the amounts earned by way of International Price Rationalisation. The assessee used to purchase the raw materials which were being used in the process of manufacture of forgings which finished products were exported to the foreign countries. In order to make the assessee's products internationally competitive, the Government of India had formulated a scheme called International Price Rationalisation and under the said scheme, in order to encourage exports and to reduce the cost of production of the assessee's goods, the assessee was paid a sum of Rs. 6 per kg in respect of the raw materials ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the assessee in addition to the export-oriented business of forgings had other business also and was earning income therefrom. The Tribunal also realised that apart from the export of the forgings the assessee had the advantage of the local sales of those forgings also. The contention of the assessee was that the forging division was entirely separate from the other division of the company which was engaged in the business of sale of motorcycles, motorcycle spare parts and television sets and it was the further contention of the assessee that the accounts were completely separate. Therefore, the assessee's contention was that only the turnover of the forgings meaning the export sales of forgings as also the local sales of the forgings was the only turnover which was liable to be used in the aforementioned formula which would be less than the turnover of the whole business of the assessee including that of the sale of motorcycles, spare parts thereof and television sets. In short, according to the assessee, more profits were liable to be arrived at by showing a lower turnover as the denominator in the formula and thereby more profit was liable to be allowed in favour of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rted in Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 (SC) where it was held that the expression "attributable to" was used when the Legislature intended to cover receipts from sources other than the actual conduct of the business. In Cambay Electric Supply Industrial Co. Ltd.'s case [1978] 113 ITR 84, the apex court was considering two conflicting decisions of the High Court in the case of the same assessee. While the earlier decision of the High Court was that to obtain the benefit of section 80HH the assessee had to establish that the profits and gains were derived from its industrial undertaking and it was just not sufficient that the commercial connection was established between the profits earned and the industrial undertaking. It was held by the Division Bench further that: "The industrial undertaking itself had to be the source of the profit. The business of the industrial undertaking had directly to yield that profit." The High Court subsequently had taken a contrary view basing itself on the amendment to section 28. Realising this contrary stand taken by the High Court, the apex court set aside the subsequent contrary judgment. The apex court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest thereupon. Learned counsel pointed out that for any other business, the said letters of credit could have been opened and for opening such letters of credit the assessee had to deposit the margin money with its bankers and it would earn interest thereupon. Merely because the letters of credit were for the purpose of business of forgings, it could not be said that the interest earned was directly attributable to the industrial undertaking of the assessee. Learned counsel contends that such interest would be only incidental to the assessee's business activity of manufacture of forgings and export thereof. Learned counsel also invited our attention to the Division Bench decision of this court reported in CIT v. Pandian Chemicals Ltd. [1998] 233 ITR 497 (Mad). In that case, the assessee had made deposits with the Tamil Nadu Electricity Board and was earning interest thereupon. It was no doubt true that for getting power connection, every industrial undertaking had to make the deposits with the Electricity Board. However, it was held by the Division Bench that the interest derived from such deposits could not be said to have been derived from industrial undertaking. The court fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t takes us to the amounts received by the assessee under Modvat credits and International Price Rationalisation. In respect of both these payments, it will have to be found that they are directly relatable to the industrial undertaking alone and to no other activity other than the business activity of the assessee as regards the forgings. Truly speaking, the amount received by way of Modvat credits could not have been received by the assessee had the assessee not purchased the raw materials for running its industry of manufacturing the forgings. It is only on account of the purchase of the raw materials that it was required to pay the excise duty thereupon in respect of which, the assessee has earned Modvat credits. Therefore, that credit will have to be held as directly relatable to the industrial undertaking and the activity of the assessee company and that would have to be held in favour of the assessee. Thus, the income from the Modvat credits would be entitled to be held as allowable deduction under section 80HH of the Act. The same logic applies to the income earned by the assessee under the International Price Rationalisation Scheme. The amount paid at the rate of Rs. 6 per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribunal, is that the last words indicated above would mean a turnover of the business relating to forgings alone. The Revenue insists that the total turnover of the whole business, i.e., including the sale of motorcycles, motor cycle spareparts, television sets should also be included in the total turnover. There can be no doubt that under the formula which emerges from the language of the sub-section export turnover becomes the numerator while the total turnover becomes the denominator. If the claim of the assessee is accepted as has been done by the Tribunal the denominator should only relate to the business of forgings thereby the denominator will be less and the result would be more deductible profits. Similarly, if the contention of the Revenue is accepted then, since the denominator would increase because of the turnover of sale of motorcycles, motorcycle spare parts, television sets, that is bound to result in a smaller quotient and ultimately the lesser deductible profits. Mrs. Venkataraman very strongly urged that where the language of the sub-section is clear enough then, there would be no scope to accept the assessee's contention. Learned counsel urges that since t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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 profits derived by the assessee from the export of such goods or merchandise:" The goods or merchandise to which the whole section applies are to be found in clause (a) of sub-section (2). The language is extremely important and hence we would reproduce the said sub-section. "(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 receivable by the assessee in convertible foreign exchange." Therefore, it is crystal clear that the whole section 80HHC applies only to the goods which are not only exported out of India but the sale proceeds of which are receivable in convertible foreign exchange. When we sit to consider sub-section (3), clause (a) thereof speaks about the assessee who has an exclusive business of exports of such goods or merchandise. Clause (a) would apply where the assessee has no other business meaning all his income would be out of the export sales, the proceeds of which are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... created only to see the ratio of the income out of the export to the total income out of the business in respect of those goods because of the obvious difficulty of segregating the profits earned out of export alone vis-a-vis the profits earned otherwise than by export. The total profits earned out of the business of such goods are not exemptible because those profits would include both profits out of exports and the profits earned otherwise than by export but one thing is certain that the business contemplated in the sub-section would be in relation to those goods alone to which the section applies as per clause (a) of sub-section (2). Once we read sub-section (1) of section 80HHC, clause (a) of sub-section (2) and clauses (a) and (b) of sub-section (3), there remains no doubt that the total turnover of the business would contemplate only the business regarding such goods part of which are exported and the others are not so exported. There is just no scope to include the turnover of the business of the goods which are not contemplated by the section. That way, though the Legislature has specified about the applicability of the section to the goods by clause (a) of sub-section (2), ..... X X X X Extracts X X X X X X X X Extracts X X X X
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