* IN THE HIGH COURT OF DELHI AT NEW DELHI
Reserved on: 12.01.2017
Pronounced on: 16.02.2017
+ ITA 166/2004
ROLLATAINERS LTD. ..... Appellant
Through: Ms. Kavita Jha and Sh. Vaibhav
Kulkarni, Advocates.
Versus
COMMISSIONER OF INCOME TAX ..... Respondent
Through: Ms. Vibhooti Malhotra, Advocate.
CORAM:
HON'BLE MR. JUSTICE S. RAVINDRA BHAT
HON'BLE MR. JUSTICE NAJMI WAZIRI
MR. JUSTICE S. RAVINDRA BHAT
%
1. This is an assessee's appeal under Section 260A of the Income Tax
Act, 1961 ("the Act") against the consolidated order of the Income Tax
Appellate Tribunal ("ITAT") (Delhi Bench) dated 30.07.2003. The following
questions of law were framed for consideration, at the time of admission of
the appeal:
i. Whether on the facts and in the circumstances of the case the
Tribunal was correct in law in holding that deduction under Section
80HHC of the Income Tax Act had to be computed by
apportioning the profits of the entire business in the ratio of export
turnover to total turnover of the entire business?
ii. Whether on the facts and in the circumstances of the case the
Tribunal erred in holding that for calculating profits derived from
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export of trading goods, indirect costs that need to be reduced from
the export turnover of such goods had to be computed with
reference to all costs and not only those costs which were
attributable to export of trading goods?
iii. Whether on the facts and in the circumstances of the case, the
Tribunal was justified in law in holding that the write back of
liabilities is squarely covered by the expression "any other receipt
of similar nature" and consequently 90% thereof was to be
excluded from profits of the business in terms of explanation (baa)
of Section 80HHC of the Act?
2. The assessee is engaged in the business of manufacturing packaging
cartons and packaging machinery. It carries out its activities under the
following divisions:
a) Packaging division
b) Paper Board division
c) Machine Manufacture division
d) Writing and specialty paper division
e) Machine Trading Division.
3. During the relevant assessment years i.e. 1994-95, the assessee
exported cartons from the packaging division, packaging machines and
bought out components from the Machine Trading division. In addition to
exports, these divisions also had local sales. The assessee in its return of
income for the assessment years 1994-95 claimed deduction under Section
80HHC of the Act for ` 48,75,358. It claimed deduction under Section
80HHC(3)(a) of the Act on division-wise basis, i.e. by taking the total profit
of each division which had made exports and thereafter computing the
ITA 166/2004 Page 2 of 23
deduction in the same ratio as export turnover of the division bore to the total
turnover of that division. The profits and turnover derived from other
divisions were not considered while computing deduction under Section
80HHC for a particular division. The Assessing Officer (AO), while framing
the assessment order clubbed the profits and turnover of all the divisions and
allowed deduction under Section 80HHC of the Act by considering the
various divisions of the assessee as one business.
4. During the relevant assessment year, the assessee was also engaged in
the business of export of trading as well as manufacture of goods. The
assessee claimed deduction under Section 80HHC of the Act in respect of its
trading activity at ` 36,27,283. However, in computing the "indirect cost" of
trading goods, the AO reduced the claim to `17,42,565 thus denying
deduction on a sum of `18,84,718. The assessee had also written back
`13,80,000 on account of liabilities and miscellaneous balances no longer
required, which formed part of taxable profits. The AO excluded 90% of the
said amount while calculating the "profits of the business" for the purpos es
of Section 80HHC of the Act. Aggrieved by the orders of the AO, the
assessee appealed to the Commissioner of Income Tax (Appeals)
("CIT(A)"), challenging the restrictions on deductions claimed under Section
80HHC of the Act. The CIT(A) confirmed the AO's order as regard
computation of deduction allowable under Section 80HHC of the Act with
respect to the profits and total turnover of the entire business. With regard to
the computation of indirect cost in respect of export of trading goods, the
CIT (A) reversed the AO's order and upheld the calculation adopted by the
assessee. In relation to the exclusion of 90% of the amounts written back, the
CIT(A) held that 90% of such amount could not be reduced for working out
ITA 166/2004 Page 3 of 23
profits of the business and accordingly directed the AO to recompute
admissible deduction under Section 80HHC of the Act.
5. Aggrieved by the orders of the CIT(A), both the Revenue and the
assessee filed appeals before the ITAT. In respect of the question as to
whether the deduction under Section 80HHC had to be calculated with
reference to the profits and turnover of the divisions carrying on export
business only, or the entire business of the assessee had to be considered, the
ITAT found in favor of the Revenue. In relation to the computation of the
"indirect costs", the ITAT found that the method adopted by the assessing
officer could not be faulted and therefore, reversed the CIT (A)'s order on
that issue. As regards the issue of exclusion of amounts written back by the
assessee, the ITAT set aside the order of the CIT(A) and confirmed the AO's
order. The assessee therefore appeals to this court.
Proceedings before the CIT(A) and ITAT
6. The assessee had contended before the CIT(A), that deduction under
Section 80HHC had to be based on the profits and turnover of only the
export divisions of its business, without taking into account the entire
business, i.e without including those divisions that were unrelated to export
activity. The assessee contended that each division of the assessee's busine ss
was a separate unit for which separate accounts were maintained and
therefore deduction under Section 80HHC should be computed with
reference to export turnover and total turnover of the exporting division
separately, instead of the entire business as a whole. In relation to the
quantum of "indirect costs", the assessee contended that only those amounts
could be considered which had some nexus with the export costs, and not all
costs debited to the P&L Account including manufacturing expenses, which
ITA 166/2004 Page 4 of 23
had no nexus with the export of trading goods. Further, in relation to the
exclusion of 90% of the amounts written back, the assessee contended that
since such written back liabilities were not in the nature of brokerage,
commission, interest rent, charges or any other receipt of a similar nature,
such amounts would not fall within Explanation (baa) of Section 80HHC.
The CIT (A) however rejected this argument, holding that computation of
admissible deduction had to be with reference to the total turnover of the
entire business as a whole and not just the export division separately. As
regards computation of "indirect costs", the CIT(A) held that since deduction
under Section 80HHC on merchant export was admissible on merchant
export turnover as reduced by direct and indirect cost of export, it would not
be appropriate to apportion a part of the manufacturing cost to the cost of
merchant exports. Here, the asssessee succeeded, because the CIT (A) ruled
that the computation of "indirect costs" had to be with refer ence to the costs
that had some relation to the export of trading goods. With regard to the
written back liabilities, the CIT(A) held that such amounts would not be
covered under Explanation (baa) as they were not in the nature of brokerage,
commission etc. On that basis, the CIT(A) proceeded to delete the exclusion
of such written back liabilities from the profits of business as computed
under Explanation (baa). Against this order of the CIT(A), both the assessee
and the Revenue preferred appeals before the ITAT.
7. Before the ITAT, the assessee placed reliance on the decision of the
Madras High Court in CIT v. Madras Motors Ltd., 257 ITR 60, where it was
held that while computing profits under Section 80HHC, the turnover of
exports should be taken and not the total turnover. The ITAT, however,
rejected the assessee's contention and placed reliance on the Tribunal's
ITA 166/2004 Page 5 of 23
decision in the case of International Park Research Laboratory v. CIT, 50
ITD 37 and the decision of the Kerala High Court in CIT v. Parry Agro
Industries Ltd., 257 ITR 41, stating that "total turnover" unambiguously
referred to the total turnover of the entire business and not just the turnover
of exports. In relation to the computation of "indirect costs", the ITAT found
that the computation by the AO was in accordance with the definition of
"indirect costs" provided in Explanation (e) to Section 80HHC(3). Therefore,
on this issue, the ITAT reversed the findings of the CIT(A) and upheld the
computation of the AO. Regarding the amounts written back by the assessee,
the ITAT held that such written back liabilities are squarely covered by the
expression "any other receipt of similar nature" in Explanation (baa) of
Section 80HHC and such amounts had to be excluded from the "profits of
the business". Thus, on the third issue as well, the Tribunal found in favour
of the Revenue and reversed the order of the CIT(A).
Question (a)
8. Section 80HHC was introduced by the Finance Act of 1983, with
effect from 01.04.1983 to provide incentives to exporters and allow for
deductions for persons involved in the export business. The relevant parts of
Section 80HHC are extracted 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 to the
extent of profit, referred to is sub-section (1B) derived by the
assessee from the export of such goods or merchandise:
ITA 166/2004 Page 6 of 23
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 subsection
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 derived by the
assessee from the export of trading goods, the same proportion
as the amount of export turnover specified in the said certificate
bears to the total export turnover of the assessee in respect of
such trading goods.
XXXXXX XXXXXX XXXXXX
(3) For the purposes of sub-section (1),
(a) where the export out of India is of goods or merchandise
manufactured or processed by the assessee, the profits derived
from such export shall be the amount which bears to the profits
of the business, the same proportion as the export turnover in
respect of such goods bears to the total turnover of the business
carried on by the assessee;
(b) where the export out of India is of trading goods, the
profits derived from such export shall be the export turnover in
respect of such trading goods as reduced by the direct costs and
indirect costs attributable to such export;
(c) where the export out of India is of goods or merchandise
manufactured or processed by the assessee and of trading
goods, the profits derived from such export shall,
(i) in respect of the goods or merchandise manufactured or
processed by the assessee, be the amount which bears to the
adjusted profits of the business, the same proportion as the
adjusted export turnover in respect of such goods bears to the
adjusted total turnover of the business carried on by the
assessee; and
ITA 166/2004 Page 7 of 23
(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."
9. The first question that arises before the court is what is meant by the
term, "total turnover of the business carried on by the assessee". On this
point, the ITAT has relied on the decision of the Kerala High Court in Parry
Agro (supra) as well as the decision of the Special Bench of the ITAT
(Delhi) in International Park Research Laboratory (supra) to hold that the
expression "total turnover" refers to the total turnover of the entire business
of the assessee. The assessee relied on the decision of the Madras High Court
in Madras Motors Ltd. (supra) for saying that "total turnover of the
business" can only mean the total turnover from the export business of the
assessee. In Madras Motors (supra) it was held that:
"8. It cannot be forgotten that the assessee's business is not
exclusively of export in the sense that it has the income out of
the local sales of forgings also and as such, it would be
governed by clause (b) of sub-section (3). However, that is not
the be all and end all of the matter as the whole section pertains
to defined goods. Sub-section (1) very clearly provides a rider
for the application of section 80HHC in the opening words
itself which are as follows :
"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 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
profits derived by the assessee from the export of such goods or
merchandise."
ITA 166/2004 Page 8 of 23
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 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 receivable in
convertible foreign exchange. There is again almost by way of
abundant caution the user of the words "goods or
merchandise" to which this section applies. Once we have this
stage then the task of interpreting clause (b) of sub-section (3)
becomes easier because even in clause (a) of sub-section (2)
and clause (a) of sub-section (3) the same terminology is used
in respect of the goods and merchandise. When a plain meaning
has to be given to the opening part of the section, it is clear that
the word "business" means the business relating to the goods
to which the section applies and the thrust is on the word
"exclusively". The sub-section considers a situation where the
assessee's business is of exports and the assessee's business is
not that of export alone. However, one thing is certain that the
business has to be only in respect of the goods or merchandise
to which the section applies. As has been stated earlier, the
thrust is on the word "exclusively". The legislature has rightly
intended the situation where the business could be relating to
the goods which would fetch the foreign exchange but there
could also be the business in relation to these goods which may
not be exported or which may not fetch foreign exchange.
However, the whole sub-section speaks only about the goods,
ITA 166/2004 Page 9 of 23
which are exportable, exported and fetch foreign exchange. It
is, therefore, clear that the thrust of the opening clause of
clause (b) of sub-section (3) has a stress on the words "does
not consist, exclusively of the export". The sub -section takes
into consideration the situation of income out of the export of
the goods vis-a-vis the income out of those goods other than by
way of exports. The words "total turnover of the business"
would then be controlled by and have to be read in the colour
of the opening clause. The formula envisaged by the section
would be "export turnover/total turnover x profits and gains of
business". The business contemplated in the section would be
restricted to only the goods to which the section applies and,
therefore, by necessary implication even the total turnover of
the business would be the total turnover of the business of the
goods to which the section applies. If we include the turnover of
the goods to which the section does not apply, it would amount
to doing violence to the language of the sub-section itself. The
sub-section has been 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 contemplated 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), we would be unnaturally
making the section applicable even to the goods which are
ITA 166/2004 Page 10 of 23
outside the limits of clause (a) of sub-section (2) and that will
not be permissible.
9. Once this situation is clear, there would be no scope of
accepting the argument of revenue that the total turnover of
business would include even the turnover of the goods which
are outside the scope of clause (a) of sub-section (2). Hence, we
are of the clear opinion that the turnover from the business of
sale of motorcycles, motorcycle spare parts, television sets
cannot be introduced to inflate the total turnover artificially in
order to reduce the benefit which the assessee is entitled to.
That would be clearly going against the object of section
80HHC, which is solely to encourage the exports."
10. The above decision of the Madras High Court was followed and
applied by this Court in Commissioner of Income Tax v. Padmini
Technologies, 2011 VIII AD (Delhi) 425, where the Court interpreted the
term "total turnover of the business" in Section 80HHC. This Court held
that:
"It is pertinent to note that the revenue has not assailed before
us the finding of fact returned by the Tribunal that in so far as
the two businesses were concerned, they were carried on in two
separate undertakings. It was also not disputed that in respect
of the said undertakings, the Assessee maintained separate
books of accounts and also prepared separate profit and loss
accounts and balance sheets. In the judgment of Madras
Motors Ltd. (supra), the rationale given is that the word
"business" which follows the expression "total turnover"
would have to be confined to only those goods to which the
section applies. Therefore, by necessary implication, the total
turnover of business would only mean total turnover of business
of goods to which the section applies. Inclusion of turnover of
goods to which the section does not apply, would be doing
violence to the language of Sub-section (3)(b). Sub-section (3)
is inserted only to determine the deductible profits out of the
total profits of business which can be attributed to the export
ITA 166/2004 Page 11 of 23
business. We are in respectful agreement with the rationale
adopted by the Madras High Court in Madras Motors Ltd.
(supra). As a matter of fact, there could be a circumstance
where one unit is completely engaged in export and not
partially as was the case in Madras Motors Ltd. (supra). In
those circumstances, there would be no occasion for
disallowing a portion of the export earnings by adopting
formula provided in Section 80HHC of the Income Tax Act.
This view was taken by the Madras High Court not only in
Rathore Brothers (supra) but also in M.Gani and
Company(supra) which in turn followed yet another judgment
of the Madras High Courtin the case of CIT v. Suresh B. Mehta
MANU/TN/7542/2007 : (2007) 291 ITR 462.
In our opinion, the view taken by the Tribunal is in conformity
with the decision of the Madras High Court, with which we are
in respectful agreement. Therefore, we do not propose to frame
a question of law on this issue. It is ordered accordingly."
11. Since the decision of this Court was pronounced in the year 2011, the
ITAT in its decision in 2003 did not have the benefit of considering this
Court's decision. Seeing that this question has been answered by the Madras
High Court and the same has been followed by this Court, we are of the
opinion that no substantial question of law arises on this issue. The ITAT's
decision on the first question is thus reversed and is answered in favour of
the assessee.
Question (b)
12. The second question concerns the interpretation of the term "indirect
costs" which is defined in Explanation (e) to sub-section (3) of Section
80HHC. Explanation (e) reads:
"Explanation: For the purposes of this subsection,-
ITA 166/2004 Page 12 of 23
(e) "indirect costs" means costs, not being direct
costs, allocated in the ratio of the export turnover in
respect of trading goods to the total turnover"
13. In this case, the AO in computing the "indirect costs" has taken into
consideration all costs (other than the direct costs) debited to the Profit and
Loss account, such as manufacturing costs, which are not related to the
export turnover. The ITAT in its decision held that the same was in
conformity to the method prescribed under the statute. On this point, the
Supreme Court in Hero Exports v. Commissioner of Income Tax, (2007) 13
SCC 1, had the occasion to interpret the term "indirect costs" as defined in
Explanation (e) to Section 80HHC(3). The Court in that case held as follows:
"Under Section 80HHC(3)(b) which is the main section, the
Legislature has provided that in cases falling under Section
80HHC(3)(b) direct and indirect costs attributable to such
exports have to be deducted from the export turnover to arrive
at Export Profits. Similar provision is made in Clause (d) which
defines the words "direct costs" to mean costs attributable to
exports of trading goods. Moreover, Clause (e) of the
Explanation defines "indirect costs" as costs which is not
direct costs as defined in Clause (d).
Firstly, Clause (e) to the Explanation which refers to allocation
of costs applies to Sections 80HHC(3)(b), 80HHC(3)(b) and
80HHC(3)(c). Secondly, Section 80HHC(3)(b) equates export
profits to export turnover less direct and indirect costs
attributable to the exports of trading goods. Therefore, the
principle of attribution is retained. Thirdly, keeping in mind the
provisions of Section 80HHC(3)(b) read with Clauses (d) and
(e) of the Explanation it is clear that Legislature intended
allocation of costs between export turnover and total turnover .
ITA 166/2004 Page 13 of 23
14. It is thus clear that Explanation (e) which defines "indirect costs" has
to be read in conjunction with sub-section (3)(c)(ii) of Section 80HHC,
which provides that the profits shall be reduced by the "direct and indirect
costs attributable to export of such trading goods." Since the word
"attributable" has been used, it is clear that the indirect costs also must be
attributable to the export of such goods; in other words, there must be some
nexus that the "indirect costs" have to the export turnover of the assessee. Au
contraire, if the term "indirect costs" is interpreted to also include such costs
which are not attributable to the export of trading goods, then that would go
against the language of the provision, as clarified by the Supreme Court.
That being the position, in view of the declaration of the law in Hero Exports
(supra), "indirect costs" computed must have some nexus (or in other words
must be "attributable") to the export of trading goods. The decision of the
ITAT on this question is therefore reversed.
Question (c)
15. The third question involves interpretation of Explanation (baa) to
Section 80HHC. Explanation (baa) reads:
"Explanation : For the purposes of this section,
(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), (iiic), (iiid) and (iiie) 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;"
ITA 166/2004 Page 14 of 23
16. The assessee submits - and it is argued on its behalf that Section
80HHC (3) requires that profits derived from export should mean the amount
that bears to the profits of the business same ratio as the export turnover
bears to the total turnover of the business carried on by the assessee. Further
Explanation (baa) to s. 80HHC defines the "profits of the business" as profits
of the business as computed under the head "Profits and gains of business or
profession" as reduced by the specified deductions. It is contended that the
items to be excluded from the profits of the business have to be seen in the
context of the assessee's business activities. In the case of a manufacturing
company which undertakes exports, receipt of interest or commission may
not be operational income because they do not have the element of turnover
and consequently Explanation (baa) will apply. However, that would not be
the case if the assessee were carrying on financing business because the
interest income which accrues will have the element of turnover and in such
a case, receipts like interest will not attract Explanation (baa). Broadly, the
Revenue has to consider the memorandum and articles of association of the
company, the nature of the business, the nature of the activity and such other
tests. It also has to verify what is the dominant business of the company and
whether receipts like interest, commission, etc., accrue as a part of the main
business activity or whether they accrue out of incidental business.
17. In the present case, the ITAT has held that the written back amount
was squarely covered by the expression "any other receipt of similar nature"
used in Explanation (baa) of Section 80HHC. Therefore, the question before
this Court is with respect to the interpretation of the term "any other receipt
of a similar nature" in Explanation (baa). It is trite to say that such a term
occurring in a statute must be interpreted ejusdem generis. In this context,
ITA 166/2004 Page 15 of 23
the Supreme Court had the occasion to deal with the interpretation of
Explanation (baa) in the case of Commissioner of Income Tax v. K.
Ravindranathan Nair, (2007) 15 SCC 1:
"18. ........The above discussion indicates that the formula in
Section 80HHC(3) of the I.T. Act provided for a fraction of
export turnover divided by total turnover to be applied to
Business Profits calculated after deducting 90% of the sums
mentioned in Clause (baa) to the said Explanation. That, profit
incentives and items like rent, commission, brokerage, charges
etc. though formed part of gross total income had to be
excluded as they were "independent incomes" which had no
element of export turnover. That, the said items distorted the
figure of export profits.
19. In our view, for the above reasons, the said processing
charges, which was part of gross total income, was an
independent income like rent, commission, brokerage etc. and,
therefore, 90% of the said sum had to be reduced from the
gross total income to arrive at the Business Profits and since
the said processing charge was an important component of
Business Profits, it also had to be included in the total turnover
in the said formula to arrive at business profits in terms of
Clause (baa) to the said Explanation.
21. .........This aspect needs to be kept in mind while
interpreting Clause (baa) to thesaid Explanation. The said
clause stated that 90% of incentive profits or receipts by way of
brokerage, commission, interest, rent, charges or any other
receipt of like nature included in Business Profits, had to be
deducted from Business Profits computed in terms of Sections
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
ITA 166/2004 Page 16 of 23
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."
18. Therefore, the Supreme Court in K. Ravindranathan (supra)has taken
the view that Explanation (baa) deals with such receipts which although
constitute "independent incomes" of the assessee, are incomes that are not
relatable to the exports of the assessee. Since Section 80HHC aims to
incentivize exports, it is necessary that all incomes of the assessee which are
not related to exports be excluded while calculating the profits of business
under this section, such that the assessee cannot claim the benefit of this
section in respect of "independent incomes" which have no relation to export
activity. That being the case, the phrase "any other receipt of a similar
nature" must necessarily relate to incomes under the Act which are no t
attributable to the export activity of the assessee.
19. In this context, in order to arrive at the "profits of the business" in
terms of Explanation (baa), the "profits and gains of business or profession"
of the assessee has to be computed under the provisions of Sections 28 to
43C of the Act. With respect to liabilities written back, Section 41 provides:
"(1) 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 (hereinafter referred
to as the first-mentioned person) and subsequently during any
previous year, -
(a) the first-mentioned person has obtained, whether in cash or in
any other manner whatsoever, any amount in respect of such
ITA 166/2004 Page 17 of 23
loss or expenditure or some benefit in respect of such trading
liability by way of remission or cessation thereof, the amount
obtained by such person or the value of benefit accruing to him
shall be deemed to be profits and gains of business or
profession and accordingly chargeable to income-tax as the
income of that previous year, whether the business or
profession in respect of which the allowance or deduction has
been made is in existence in that year or not"
Therefore, written back liabilities are considered as profits and gains
of business or profession under Section 41(1) of the Act, and thus would be
relevant for computation of the "profits of the business" under Explanation
(baa).
20. Once it is established that written back liabilities are considered as
profits and gains of business or profession under the Act, for the purposes of
Section 80HHC what needs to be seen is whether such profits are relatable to
export or would they constitute "independent incomes" which according to
K. Ravindranathan (supra) would have to be excluded by virtue of
Explanation (baa).
21. In a subsequent judgment, reported as ACG Associated Capsules (P)
Ltd. v Commissioner of Income Tax [2012] 247 CTR 372 (SC) the issue was
examined by the Supreme Court, which held as follows:
"10. Under cl. (1) of Expln. (baa), ninety per cent of any
receipts by way of brokerage, commission, interest, rent,
charges or any other receipt of a similar nature included in any
such profits are to be deducted from the profits of the business
as computed under the head "Profits and gains of business or
profession". The expression "included in such profits" in cl. (1)
of the Expln. (baa) would mean only such receipts by way of
brokerage, commission, interest, rent, charges or any other
receipt which are included in the profits of the business as
ITA 166/2004 Page 18 of 23
computed under the head "Profits and gains of business or
profession". Therefore, if any quantum of the receipts by way of
brokerage, commission, interest, rent, charges or any other
receipt of a similar nature is allowed as expenses under ss. 30
to 44D of the Act and is not included in the profits of business
as computed under the head "Profits and gains of business or
profession", ninety per cent of such quantum of receipts cannot
be reduced under cl. (1) of Expln. (baa) from the profits of the
business. In other words, only ninety per cent of the net amount
of any receipt of the nature mentioned in cl. (1) which is
actually included in the profits of the assessee is to be deducted
from the profits of the assessee for determining "profits of the
business" of the assessee under Expln. (baa) to s. 80HHC.
11. For this interpretation of Expln. (baa) to s. 80HHC of the
Act, we rely on the judgment of the Constitution Bench of this
Court in Distributors (Baroda) (P) Ltd. vs. Union of India &
Ors. (supra). Sec. 80M of the Act provided for deduction in
respect of certain intercorporate dividends and it provided in
sub-s. (1) of s. 80M that "where the gross total income of an
assessee being a company includes any income by way of
dividends received by it from a domestic company, 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 from such income by way of dividends an amount
equal to" a certain percentage of the income mentioned in this
section. The Constitution Bench held that the Court must
construe s. 80M on its own language and arrive at its true
interpretation according to the plain natural meaning of the
words used by the legislature and so construed the words "such
income by way of dividends" in sub-s. (1) of s. 80M must be
referable not only to the category of income included in the
gross total income but also to the quantum of the income so
included. Similarly, Expln. (baa) has to be construed on its own
language and as per the plain natural meaning of the words
used in Expln. (baa), the words "receipts by way of brokerage,
commission, interest, rent, charges or any other receipt of a
similar nature included in such profits" will not only refer to
ITA 166/2004 Page 19 of 23
the nature of receipts but also the quantum of receipts included
in the profits of the business as computed under the head
"Profits and gains of business or profession" referred to in the
first part of the Expln. (baa). Accordingly, if any quantum of
any receipt of the nature mentioned in cl. (1) of Expln. (baa)
has not been included in the profits of business of an assessee
as computed under the head "Profits and gains of business or
profession", ninety per cent of such quantum of the receipt
cannot be deducted under Expln. (baa) to s. 80HHC.
12. If we now apply Expln. (baa) as interpreted by us in this
judgment to the facts of the case before us, if the rent or interest
is a receipt chargeable as profits and gains of business and
chargeable to tax under s. 28 of the Act, and if any quantum of
the rent or interest of the assessee is allowable as an expense in
accordance with ss. 30 to 44D of the Act and is not to be
included in the profits of the business of the assessee as
computed under the head "Profits and gains of business or
profession", ninety per cent of such quantum of the receipt of
rent or interest will not be deducted under cl. (1) of Expln.
(baa) to s. 80HHC. In other words, ninety per cent of not the
gross rent or gross interest but only the net interest or net rent,
which has been included in the profits of business of the
assessee as computed under the head "Profits and gains of
business or profession", is to be deducted under cl. (1) of Expln.
(baa) to s. 80HHC for determining the profits of the business.
13. The view that we have taken of Expln. (baa) to s. 80HHC is
also the view of the Delhi High Court in CIT vs. Shri Ram
Honda Power Equip (supra) and the Tribunal in the present
case has followed the judgment of the Delhi High Court. On
appeal being filed by the Revenue against the order of the
Tribunal, the High Court has set aside the order of the Tribunal
and directed the AO to dispose of the issue in accordance with
the judgment of the Bombay High Court in CIT vs. Asian Star
Co. Ltd. (supra). We must, thus, examine whether reasons given
by the High Court in its judgment in CIT vs. Asian Star Co. Ltd.
(supra) were correct in law.
ITA 166/2004 Page 20 of 23
14. On a perusal of the judgment of the High Court in CIT vs.
Asian Star Co. Ltd. (supra), we find that the reason which
weighed with the High Court for taking a different view, is that
rent, commission, interest and brokerage do not possess any
nexus with export turnover and, therefore, the inclusion of such
items in the profits of the business would result in a distortion
of the figure of export profits. The High Court has relied on a
decision of this Court in CIT vs. K. Ravindranathan Nair
(2007) 295 ITR 228 (SC) in which the issue raised before this
Court was entirely different from the issue raised in this case.
In that case, the assessee owned a factory in which he
processed cashew nuts grown in his farm and he exported the
cashew nuts as an exporter. At the same time, the assessee
processed cashew nuts which were supplied to him by exporters
on job work basis and he collected processing charges for the
same. He, however, did not include such processing charges
collected on job work basis in his total turnover for the purpose
of computing the deduction under s. 80HHC(3) of the Act and
as a result this turnover of collection charges was left out in the
computation of profits and gains of business of the assessee and
as a result ninety per cent of the profits of the assessee arising
out of the receipt of processing charges was not deducted under
cls. (1) of the Expln. (baa) to s. 80HHC. This Court held that
the processing charges was included in the gross total income
from cashew business and hence in terms of Expln. (baa),
ninety per cent of the gross total income arising from
processing charges had to be deducted under Expln. (baa) to
arrive at the profits of the business. In this case, this Court held
that the processing charges received by the assessee were part
of the business turnover and accordingly the income arising
therefrom should have been included in the profits and gains of
business of the assessee and ninety per cent of this income also
would have to be deducted under Expln. (baa) to s. 80HHC of
the Act. In this case, this Court was not deciding the issue
whether ninety per cent deduction is to be made from the gross
or net income of any of the receipts mentioned in cl. (1) of the
Expln. (baa).
ITA 166/2004 Page 21 of 23
15. The Bombay High Court has also relied on the
Memorandum Explaining the Clauses of the Finance Bill, 1991
contained in the Circular dt. 19th Dec., 1991 [(1992) 101 CTR
(St) 1] of the CBDT to come to the conclusion that the
Parliament intended to exclude items which were unrelated to
the export turnover from the computation of deduction and
while excluding such items which are unrelated to export for
the purpose of s. 80HHC, Parliament has taken due note of the
fact that the exporter assessee would have incurred such
expenditure in earning the profits and to avoid a distorted
figure of export profits, ninety per cent of the receipts like
brokerage, commission, interest, rent, charges are sought to be
excluded from the profits of the business. In our considered
opinion, it was not necessary to refer to the Explanatory
Memorandum when the language of Expln. (baa) to s. 80HHC
was clear that only ninety per cent of receipts by way of
brokerage, commission, interest, rent, charges or any other
receipt of a similar nature included in such profits computed
under the head profits and gains of business of an assessee
could be deducted under cl. (1) of Expln. (baa) and not ninety
per cent of the quantum of any of the aforesaid receipts which
are allowed as expenses and therefore not included in the
profits of business."
22. In the present case, there is no record of the assessee claiming before
the authorities below that the liabilities written back related to or were
relatable to its export profits. Thus, the observation that
"if any quantum of any receipt of the nature mentioned in cl. (1)
of Expln. (baa) has not been included in the profits of business
of an assessee as computed under the head "Profits and gains
of business or profession", ninety per cent of such quantum of
the receipt cannot be deducted under Expln. (baa) to s.
80HHC."
in ACG Associated Capsules (supra) squarely applies to the facts of this
case. Since such amounts written back would fall within the "profits and
ITA 166/2004 Page 22 of 23
gains of business or profession" as computed under Section 41(1), and
considering that such amounts do not have any nexus with the export activity
of the assessee, keeping the view adopted by K. Ravindranathan (supra) in
mind, they would have to be excluded from the "profits of the business"
under Explanation (baa). In other words, such written back amounts would
constitute "independent income" having no relation to the export profits of
the assessee. They have to be excluded by virtue of Explanation (baa), to
avoid distortion in the computation of export profits under Section 80HHC.
This Court, therefore, finds that on this question, the ITAT's decision does
not call for any interference. The third question of law framed is thus
answered in favour of the Revenue.
23. For the foregoing reasons, the appeal is partly allowed in respect of
questions (i) and (ii); the Revenue succeeds in respect of the third question.
There shall be no order as to costs.
S. RAVINDRA BHAT
(JUDGE)
NAJMI WAZIRI
FEBRUARY 16, 2017 (JUDGE)
ITA 166/2004 Page 23 of 23
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