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TMI Blog2006 (1) TMI 115X X X X Extracts X X X X X X X X Extracts X X X X ..... ultiple activities including the business of export out of India of goods or merchandise, then the clear intent of the Legislature was to permit only proportionate profit of the total business to the extent the business of export out of India of goods or merchandise forms part of its total business, e.g., if the assessee's business of export out of India is only 2 per cent. of its total business activities, then the Legislature intended that only 2 per cent. of the total profit of business as a whole should be eligible for deduction under section 80HHC. If, on the other hand, the business of export outside India of goods and merchandise as in the present case is shown to exist, is a substantial part of its total business, then the total profit and profit eligible for deduction under section 80HHC will be in that ratio. We have already noticed above that with effect from April 1, 1989, special mode was provided for computing income falling under the aforesaid three heads. Only 10 per cent. of the income from such income was to be included in computing profits and gains from business or profession and 90 per cent. of such income was to be directly added to the allowable deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the profit of business on the ground that since they are not the income arising out of sale of goods, they are not to be included in the computation of income from business or profession for the purpose of computing deduction u/s 80HHC. Interest receipts from computation of business profit - There is no reason to reduce profit of business as computed under the head of profits and gains of business further by such amount of interest received by the assessee after adjusting deduction allowable u/s 32AB. We, therefore, find that the order of the Tribunal does not call for any interference. It may be noticed that this amount was directly related to credit earned by the assessee in respect of his export business on account of early payment of foreign exchange bills, hence was really part of income from business of export. Had the assessee been engaged in business of exporting goods and merchandise out of India, such amount have become part of income from such business only being incidental to such trade only. Accordingly, the appeal is dismissed and the Assessing Officer is directed to recompute the deduction allowable u/s 80HHC in the light of the aforesaid principles. - HON'BLE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... engaged in the other business or businesses. Since the assessee at the first instance filed a return of loss, no claim under section 80HHC was made by the assessee. However, with the revised return, the assessee claimed deduction under section 80HHC by showing net profit of Rs. 12,45,075. 7. While considering the income from profits and gains of business , the Assessing Officer had disallowed inclusion of processing charges and the profit on sale of import licence and after deducting all these items, net balance remaining as Rs. 2,20,943 was further reduced by the deduction claimed by the assessee under section 32AB resulting in a net negative figure of Rs. 22,592. Thus, assessing the negative income, the assessee's claim for deduction under section 80HHC was disallowed. 8. On appeal, the Commissioner of Income-tax (Appeals) accepted the assessee's claim to include profit from sale of import licence amounting to Rs. 5,55,081 as part of profit of business under section 28(iiia). Similarly, the commission from the State Trading Corporation (STC) on export counter trade of Rs. 2,19,190 was considered as income from business or profession and was considered as part of business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reating the interest receipts as income from business instead of income from other sources. Accordingly, the appeal of the assessee was partly allowed by order under appeal. In allowing the claim of the assessee in respect of interest, the Tribunal has reasoned that sale consideration of import licences received by the assessee on account of exports made by them has direct nexus with the export business carried on by the assessee. 13. One factor may also be noticed that the Revenue is supporting the adjustment made by the Assessing Officer in respect of profits earned on the sale of import licence by deducting it from the profits by contending that it is not a profit arising out from the sale of goods outside India merely on account of sale of import licence and therefore this income has no connection with export business. 14. The substantive contention of the Revenue in this connection is that since the sale of import licence does not fall within the purview of business of selling goods and merchandise through export out of India, that cannot be considered while computing deduction under section 80HHC. 15. In like way, it has been contended that since the processing charges receiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 an amount not exceeding fifty per cent. of the profits derived by the assessee from the export of such goods or merchandise. The limit of deduction was restricted to 50 per cent. of such profit. 23. Sub-section (3) of the amended section 80HHC provided that where the business carried on by the assessee consists exclusively of the export out of India of the goods or merchandise to which this section applies, the profits of the business as computed under the head Profits and gains of business or profession will be the profits derived from the export of goods or merchandise out of India. Secondly it provided where the business carried on by the assessee does not consist exclusively of the export out of India of the goods or merchandise to which this section applies, the amount which bears to the profits of the business (as computed under the head Profits and gains of business or profession ) the same proportion as the export turnover bears to the total turnover of the business carried on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt 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 profits 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 sub-section (4A), that in respect of the amount of the export turnover specified therein, the deduction under this sub-section is to be allowed to a supporting manufacturer, then the amount of deduction in the case of the assessee shall be reduced by such amount which bears to the total profits of the export business of the assessee the same proportion as the amount of export turnover specified in the said certificate bears to the total export turnover of the assessee. (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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1, 1992, vide the Finance (No.2) Act, 1991. 34. It is relevant to mention here that by the Finance (No.2) Act of 1991, in 34 the Explanation, clause (aa) was inserted with retrospective effect from April 1, 1986. Clause (ba) defining total turnover was inserted with effect from April 1, 1987, and clause (baa) was inserted with effect from April 1, 1992. 35. This journey from 1983 to 1992 does reflect one thing that at every stage 35 new provisions have been made for expanding the claim to deduction on broader canvass. 36. From the complexity of these amendments, two things come out clearly firstly that so far as deduction is concerned, the essential condition is that it is a benefit extended to the business of export of any goods or merchandise out of India. This condition has remained unchanged throughout. How much deduction is to be allowed and what is to be the basis for computing such deduction, has been undergoing changes as we have noticed above from lower to higher degree. 37. Apparently, the Assessing Officer in considering the income which is to be included in computing income from profits and gains of business or profession opined that to arrive at the commercial profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business or profession of the assessee. Sub-section (3) does not make out any retrospective amendment that for the purpose of computing deduction in respect of profits and gains of business, it should be confined only to one other activities which fall properly within the ambit of business or profession. 40. Therefore, the Assessing Officer fell into error at this junction by delving into something which was not germane for the purpose of arriving at the income from the business or profession as computed under the head Profits and gains of business under the provisions of the Act. 41. Section 80HHC as it stood during the relevant assessment year 1989-90 envisaged in no uncertain terms that where the business carried on by the assessee does not consist exclusively of the export out of India of the goods or merchandise to which this section applies, the amount which bears to the profits of the business as computed under the head Profits and gains of business or profession, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee shall be profit derived from the export of goods or merchandise out of India. In computing such pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er section 80HHC will be in that ratio. 45. It may be noticed here that when the assessment year commenced on April 1, 1989, clauses (iiia), (iiib) and (iiic) had not been inserted in section 28, but the same have been inserted with retrospective effect vide the Finance Act, 1990, which reads as under: 28. The following income shall be chargeable to income-tax under the head 'Profits and gains of business or profession',- (i) the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year; (ii) any compensation or other payment due to or received by, (a) any person, by whatever name called, managing the whole or substantially the whole of the affairs of an Indian company, at or in connection with the termination of his management or the modification of the terms and conditions relating thereto; (b) any person, by whatever name called, managing the whole or substantially the whole of the affairs in India of any other company, at or in connection with the termination of his office or the modification of the terms and conditions relating thereto; (c) any person, by whatever name called, holding an agency in India fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In view of the aforesaid legal position existing during the assessment year in question, there cannot be any justification that in the computation of income from business, items properly falling with clauses (iiia), (iiib) and (iiic) are not computed as income from business under the head Profits and gains of business or profession . Until the amendment that became effective with effect from April 1, 1991, only, there was no provision for excluding the income falling within clauses (iiia), (iiib) and (iiic) from computation of profits of business or profession for the purpose of computing allowable deduction under section 80HHC. 50. We have already noticed above that with effect from April 1, 1989, special mode was provided for computing income falling under the aforesaid three heads. Only 10 per cent. of the income from such income was to be included in computing profits and gains from business or profession and 90 per cent. of such income was to be directly added to the allowable deduction in the proportionate profit allocated to the business of export out of India of goods and merchandise. In other words by amending the mode of computing allowable deduction under section 80HHC, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rriving at profit of business for the purpose of finding profit of business of export out of India of goods and merchandise, the computation of income has to be made in accordance with the other provisions of the Income-tax Act and, therefore, deduction under section 32AB had to be accounted for before arriving at profit of business for the purpose of section 80HHC. It is only proportionate profits attributable to the business of export out of India of goods and merchandise which are eligible for deduction under section 80HHC. The Legislature in its wisdom has thought it fit to extend benefit of deduction firstly by including such profit in the income as mentioned in clauses (iiia), (iiib) and (iiic) of section 28 with retrospective effect and later on by directly allocating 90 per cent. of such profit to the allowable deduction. Consequently, the Commissioner of Income-tax (Appeals) was right in allowing the appeal of the assessee by directing inclusion of income falling under clause (iiia), (iiib) or (iiic) of section 28 in computing profits and gains of business carried on by the assessee. 57. The Tribunal was also right in affirming the finding of Commissioner of Income-tax (Ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee in respect of his export business on account of early payment of foreign exchange bills, hence was really part of income from business of export. Had the assessee been engaged in business of exporting goods and merchandise out of India, such amount have become part of income from such business only being incidental to such trade only. 60. Learned counsel for the Revenue has placed reliance on three decisions of the Kerala High Court to exclude processing charges from the computation of income from business as well as other income to be excluded from the computation of profit of business or profession for the purpose of section 80HHC. The decisions relied on by learned counsel for the Revenue are CIT v. T.C. Usha [2003] 264 ITR 368, CIT v. K. Rajendranathan Nair [2004] 265 ITR 35, CIT v. T.C. Usha [2004] 266 ITR 497. 61. In the three judgments of the Kerala High Court, the Kerala High Court has taken the view that profit of business and total turnover referred to in sub-section (3) of section 80HHC are referable only to turnover of sale and purchase of goods. In coming to this conclusion, the Kerala High Court has derived support from the definition of turnover in the Kerala Ge ..... X X X X Extracts X X X X X X X X Extracts X X X X
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