Bombay H.C : Whether, in determination of business profits under s. 80HHC, the unabsorbed business losses of the earlier years under s. 72 should be set off ?

High Court Of Bombay

CIT vs. Shirke Construction Equipments Ltd.

Sections 80AB, 80HHC

Asst. Year 1995-96

S.H. Kapadia & J.N. Patel, JJ.

IT Appeal No. 133 of 1999

24th July, 2000

Counsel Appeared

R.V. Desai with J.P. Deodhar, for the Appellant : S.N. Inamdar, for the Respondent

JUDGMENT

S.H. KAPADIA, J. :

Two important questions of law arise for determination in this appeal. Whether, s. 80AB applied to s. 80HHC? Whether, in determination of business profits under s. 80HHC, the unabsorbed business losses of the earlier years under s. 72 should be set off ? The facts giving rise to this appeal, briefly, are as follows : The appeal concerns asst. yr. 1995-96. The assessee filed its return of income on 30th Nov., 1995. The assessee claimed deduction under s. 80HHC in respect of profits derived from exports. The export profits were calculated with reference to profits of business in proportion of the export turnover to the total turnover as per s. 80HHC(3). The assessee contended that in view of s. 80HHC r/w Explanation (baa), profits of the business has been defined to mean profits computed under the head “profits of business” which, in turn, referred to ss. 28 to 44D and it did not refer to s. 72 of the Act. Therefore, the assessee claimed the deduction with reference to the provisions of ss. 28 to 44D under the head “profits and gains of business” of the current year. Therefore, the assessee did not set off the brought forward losses while computing profits of the business. This computation was rejected by the AO. Briefly, the AO came to the conclusion that in view of s. 80AB which contained a non obstante clause, the assessee was required to compute business profits by setting off the brought forward losses as contemplated by s. 72 of the IT Act. Being aggrieved, the assessee went in appeal to CIT(A). The assessee succeeded on this point before the CIT(A) who allowed the appeal in view of the judgment of the Tribunal in the case of Salgaocar Mining Industries Ltd. vs. Dy. CIT (1997) 58 TTJ (Pune) 468 : (1997) 61 ITD 105 (Pune). Being aggrieved, the Department carried the matter to the Tribunal. The Department lost the appeal before the Tribunal. Hence, this appeal under s. 260A of the IT Act.

4. Mr. Desai, learned senior counsel for the Revenue, contended that Chapter VI-A deals with deductions to be made in computing total income. He contended that under s. 80A, it is expressly provided that in computing the total income of an assessee, there shall be allowed from his gross total income deductions specified in s. 80C to s.

80U which included s. 80HHC. Mr. Desai emphasised the provisions of s. 80AB which refers to deductions to be made with reference to the income included in the gross total income. Mr. Desai contended that under s. 80AB, any income of a specified nature which is included in the gross total income shall be computed in accordance with the provisions of the Act. In other words, he contended that on reading s. 80AB, s. 80B(5) and s. 80HHC it was clear that in computing the total income of an assessee, deductions specified in s. 80HHC shall be allowed from the gross total income and such deduction shall not exceed the gross total income. He further contended that gross total income was required to be computed in accordance with the provisions of the Act. That it was required to be computed before making any deduction under Chapter VI-A of the Act. Therefore, he contended that the mandate of s. 80AB is that the gross total income shall be computed after setting off brought forward business losses under s. 72. According to the learned counsel, this was the first step and the second step, thereafter, was to allow the deductions under Chapter VI-A from the resultant positive income of the previous year, if any, which is left after setting off of the aforestated brought forward business losses under s. 72 of the Act. Accordingly, he contended that s. 80AB controlled s. 80HHC. In this connection, learned counsel has also relied upon s. 80B(5) which defines gross total income to mean total income computed in accordance with the provisions of the Act, before making any deduction under Chapter VI-A. Mr. Desai placed reliance on the judgments of the Supreme Court in the case of Motilal Pesticides (I) (P) Ltd. vs. CIT (2000) 160 CTR (SC) 389 : (2000) 243 ITR 26 (SC), also in the case of Cambay Electric Supply Industrial Co. Ltd. vs. CIT 1978 CTR (SC) 50 : (1978) 113 ITR 84 (SC) : TC 25R.306. He also relied upon the judgment of the Kerala High Court in the case of CIT vs. V.T. Joseph (1997) 137 CTR (Ker) 318 : (1997) 225 ITR 731 (Ker) : TC S25.2571. In fairness he also invited our attention to the contra view of the Kerala High Court in favour of the assessee in the case of CIT vs. A.V. Thomas and Co. Ltd. (1997) 142 CTR (Ker) 364 : (1997) 225 ITR 29 (Ker) : TC S25.2572.

5. Mr. Inamdar, learned counsel appearing on behalf of the assessee, contended that the object of s. 80HHC was to encourage exports. He contended that the object of s. 80HHC was to ascertain the export profits out of the business profits. He contended that the basic formula to be applied under s. 80HHC(3) to arrive at the export profits was as follows : Business profits X Export turnover/Total turnover He contended that, initially, the deduction under s. 80HHC was based on annual turnover. Thereafter, it underwent a change under which it was based on 50 per cent of the profits from exports of the current year plus 4 per cent of foreign exchange realisations. Thereafter, the section was further amended and the deduction was required to be determined on the basis of percentage of profits to be arrived at by applying the ratio of export turnover to total turnover of the current year. The emphasis of the learned counsel was on the current year. He contended that all throughout the legislature has calculated the deduction on the basis of the profits of the current year and, therefore, there was no scope for taking into account the brought forward losses of the earlier years. He further contended that s. 80HHC provides for deductions to trader exporters as well as manufacturer exporters. Therefore, s. 80HHC categorically refers to profits of a given year and not the brought forward losses. He further contended that under cl. (baa) profits of the business has been defined to mean profits of the business as computed under the head “profits and gains of business” which clearly indicates that s. 80HHC is a separate code by itself. It has its own definition of the business profits. Therefore, he contended that s. 80AB cannot control s. 80HHC. Mr. Inamdar further contended that when the legislature has used the expression “profits and gains of business”, the legislature was very clear in its mind to the effect that business profits were required to be computed under the head “profits and gains of business” which covers ss. 28 to 44D. The legislature was very clear that profits of the business shall mean profits of that year. In the circumstances, he contended that s. 72 has no application. He further contended that under cl. (ba) of the Explanation to s.80HHC, total turnover has been defined not to include freight or insurance. A proviso was added under which theexpression “total turnover” also excluded sums referred to in s. 28(iiia), (iiib) and (iiic). Mr. Inamdar invited our attention to s. 29 of the IT Act which, inter alia, provides that income in s. 28 shall be computed in accordance with theprovisions contained in s. 30 to s. 43D which excluded ss. 71 and 72 from the computation of business profits. Mr. Inamdar further contended that s. 80AB only deals with computation of specified income. Such income is required to be computed in accordance with the provisions of the Act. He contended that the purpose of s. 80AB was to compute profits of a specified category. However, he pointed out that s. 80AB specifically refers to deductions to be made with reference to the income included in the gross total income. He contended that under s. 80AB it is provided, inter alia, that where any deduction is required to be made under any section of Chapter VI-A under the heading “C” in respect of any income of the specified nature which is included in the gross total income of the assessee then such income shall be computed in accordance with the provisions of the Act. He contended that the effect of s. 80AB was that where any income in respect of which deduction is claimed falls under heading “C” of Chapter VI- A is included in gross total income, then the amount of income of that nature shall first be decided in accordance with the provisions of the Act before making any deductions under Chapter VI-A. However, s. 80HHC does not provide that income from exports should be included in the gross total income. He contended that the legislature has made departure from other sections of Chapter VI-A in enacting s. 80HHC. He contended that s. 80AB came into picture because a controversy arose as to whether dividend income was relatable to gross income or whether it was relatable to net income. Hence, s. 80AB came to be introduced and it was made applicable to all specified incomes like royalty. He contended that when this section was originally enacted the deduction was allowed with reference to the turnover, irrespective of any income and in order to advance such intention of promoting exports, the Parliament did not provide the deduction which should be allowed if export profits were included in the gross total income. It allowed the deduction on the basis of the turnover even though there was no profit from the exports. However, such deduction was subject to s. 80A(2). In other words, s. 80A(2) provided a ceiling on such deduction. Subsequently, the legislature changed the basis from turnover to profit. However, it did not provide that such specified income must be included in the gross total income. Therefore, the learned counsel submitted that s. 80AB did not control s. 80HHC. In the alternative, he contended that s. 80HHC(3) provides for an artificial formula. It specifically refers to the current year profits. Therefore, even if the gross total income included deductions under s. 72 still the question of deduction under s. 80HHC(3) was required to be decided independently by taking into account export profits of a given year only. The said deduction, however, would stand limited by s. 80A(2). For example, if the gross total income is Rs. 10 lakhs and deduction works out to Rs. 20 lakhs then in view of s. 80A(2) the assessee will get the deduction of only Rs. 10 lakhs. He, therefore, contended that the formula under s. 80HHC(3) and the computation of deduction under that section has nothing to do with the computation of gross total income. He relied upon the judgment of the Andhra Pradesh High Court in the case of CIT vs. Gogineni Tobacco Ltd. (2000) 158 CTR (AP) 119 : (1999) 238 ITR 970 (AP) which has laid down that deduction shall be allowed in accordance with and subject to s. 80HHC.

6. Two points arise for determination in this appeal. viz., whether s. 80AB controls s. 80HHC and whether while computing business profits under s. 80HHC(3), the unabsorbed business losses of the earlier years under s. 72 should be set off ? At the outset, it may be mentioned that under Chapter VI-A, there are two different sets of sections. The language used in ss. 80HH, 80P, 80M as it stood etc. is different from the language used in s.80HHC. The former set of sections start with the words viz, “Where the gross total income of an assessee includes any income by way of……..”. On the other hand, these words do not find place in s. 80HHC. The reason is obvious. In the set of sections which start with above words, the legislature intended that before an assessee becomes entitled to claim relief of deduction in respect of specified category of income like income by way of dividends a precondition was required to be satisfied viz., that such specified income should form part of the gross total income. This precondition is there in cases of ss. 80P, 80HH, 80M, etc. This precondition is not there, however, in respect of s. 80HHC(3) which primarily deals with ascertaining export profits. In the case of CIT vs. Kotagiri Industrial Co-operative Tea Factory Ltd. (1997) 139 CTR (SC) 359 : (1997) 224 ITR 604 (SC) : TC S26.2692, the Supreme Court was required to decide the question as to whether unabsorbed losses of earlier years were required to be set off before allowing deduction under s. 80P. Reading the provisions of s. 80P with s. 80B(5), it was held that for the purposes of making deduction under s. 80P, it was necessary to determine, in the first instance, the gross total income as per the provisions of the Act. That meant that for the purposes of s. 80P the gross total income was required to be decided by setting off against the income, the business losses of the earlier years under s. 72 of the Act. This judgment did not deal with s. 80HHC. However, it indicates the scope of ss. 80AB and 80B(5). If one reads s. 80P(1) of the IT Act, as it then stood, it lays down that in cases where a cooperative society is an assessee and the gross total income includes any income from carrying on banking business or from running of cottage industry, etc. then such income shall be deducted in accordance with and subject to the provisions of s. 80P. The important words to be noted in s. 80P and similar sections under Chapter VI-A are the words “where the gross total income includes any income”. These words, however, do not find place in s. 80HHC. These words find place in s. 80AB and in the sections like ss. 80P, 80HH and s. 80M as it stood at the relevant time. Sec. 80AB clearly indicates a non obstante clause. It says that where deduction is required to be made under any section of Chapter VI-A in respect of any income of the nature specified in that section which is included in the gross total income of the assessee then notwithstanding anything contained in that section, for the purposes of computing deduction under that section, the amount of income of that nature shall be computed in accordance with the provisions of the Act. Therefore, while computing deduction under s. 80P(2), the AO was required to first determine the gross total income in accordance with the provisions of the IT Act by setting off against the income, the business losses of the earlier years as required under s. 72 of the Act. This is primarily because the income under s. 80P(2) stood included in the gross total income as a condition to claim deduction under s. 80P but when we come to s. 80HHC, the legislature has not provided for any such precondition. This was to encourage exports.

Hence, s. 80HHC marks a departure from other sections in Chapter VI-A. It does not use the expression “where the gross total income includes any income”. Hence, s. 80AB does not control s. 80HHC. In the case of CIT vs. Thomas & Co. (supra), the Kerala High Court has also taken a similar view with which we agree respectfully. It has been held that a reading of s. 80AB would show that computation of deduction was required to be made under other sections of Chapter VI-A on the basis of the amount of income but in the case of s. 90HHC the computation of deduction or the quantification of the amount of deduction was based on export turnover and not on the basis of income. This was in order to encourage exports. The legislature clearly intended to give the benefit of deduction even if there was no income on the basis of the export turnover. In the case of CIT vs. Gogineni Tobacco Ltd. (supra), the Division Bench of the Andhra Pradesh High Court has also laid down that in computing the total income of the assessee deductions were required to be allowed in accordance with and subject to the provisions of s. 80HHC. The said section does not say that the deduction shall be allowed from the gross total income as in the case of s. 80P or in the case of s. 80M as it then stood. It was held that under the circumstances, s. 72 had no application. With respect, we agree with the said judgment. There is one more way of looking at the above question. For the purposes of computing the deduction under s. 80HHC(3) the above formula of business profits X Export turnover/Total turnover is very important. A bare reading of the section along with cls. (ba) and (baa) indicate that profits of the business were required to be computed under the head “profits and gains of business”. Sec. 28 and s. 29 of the IT Act clearly lays down different types of income chargeable to income-tax under the above head. Sec. 28 comes under the caption “profits and gains of business”. Sec. 29 categorically states that the income referred to in s. 28 shall be computed in accordance with the provisions contained in s. 30 to s. 43D. Therefore, s. 72 is excluded. The object being to encourage the exports. The object being to ascertain the export profits out of the business profits. Moreover, reading of s. 80HHC with the Explanations show that profits of the current year were required to be taken into account and hence s. 72 of the IT Act did not apply. The position is, therefore, clear. Sec. 80HHC(3) refers to the above formula. It says that export profits shall be equal to business profits X Export turnover/Total turnover. In the case of s. 80P, s. 80M as it then stood, and other set of sections under Chapter VI-A, the business profits in the above formula is required to be worked out by computing the same as per the provisions of the Act. This would include s. 72 also. However, when it comes to s. 80HHC(3), a special definition of the words “profits of the business” as mentioned in cl. (baa) of the Explanation is required to be kept in mind. This clause expressly refers to profits of the business under the head “profits and gains of business”. It refers to ss. 28 and 29. Therefore, the legislature has provided for an artificial formula only in s. 80HHC(3) under which the profits of the business are required to be computed on the basis of ss. 28 to 44D. It excludes s. 72. This is because the legislature wanted the profits of the current year to be taken into account. Hence, the legislature intended s. 72 to be kept out. The object appears to be to give maximum benefits to the exporter who earns foreign exchange for the country. Therefore, even though s. 80AB contemplates a non obstante clause, the said s. 80AB will be subject to s. 80HHC to the extent of export profits being worked out from the business profits. This view is also supported by the language of s. 80AB. In the case of s. 80P, etc., the same formula would work. However, in these cases, the business profits are required to be computed on the basis of the provisions of the Act in their entirety including s. 71 and s. 72 of the Act. However, when it comes to the artificial formula of computing the export profits for the purposes of deduction from the gross total income in s. 80HHC(3) the business profits shall be computed under the head “profits and gains of business” which, in turn, refers to s. 28 to s. 44D and which will exclude s. 71 and s. 72 of the Act. Therefore, s. 80AB does not control s. 80HHC(3). Therefore, s. 80HHC is a complete code by itself. Hence, there is no merit in this appeal. Before concluding this judgment, we may refer to the judgments cited on behalf of the Department. In the case of Motilal Pesticides (supra), the question was regarding computation of special deduction under s. 80P of the Act. We have already discussed the abovejudgment in a different context to show the difference in language between s. 80AB and s. 80P on one hand and s. 80HHC on the other hand. We do not wish to once again discuss the scope of the said judgment. In the case of CIT vs. Joseph (supra), the Kerala High Court took the view that s. 80AB controls s. 80HHC. However, on reading the said judgment, it is clear that the Kerala High Court, with respect, did not notice the difference in the language of s. 80HHC and the other sections of Chapter VI-A like s. 80HH, 80P, etc. The Kerala High Court, with respect, did not notice that s. 80HHC, unlike other sections of Chapter VI-A, does not refer to deduction of gross total income. For example, in the case of s. 80HH, the section starts by reciting that “Where the gross total income includes any profits derived from an industrial undertaking” which expression is not there in s. 80HHC which provides also its own independent formula to work out profits for the purposes of deduction under s. 80HHC(3) r/w cl. (baa) of the Explanation. Further, as stated hereinabove, in the same volume, another Bench of Kerala High Court in the case of CIT vs. A.V. Thomas & Co. Ltd. (supra) has taken the view, with respect, rightly, that s. 80AB refers to computation based on income whereas s. 80HHC refers to computation based on export turnover. Therefore, with respect, we do not agree with the judgment of the Kerala High Court in the case of CIT vs. Joseph (supra). We, however, agree with the ratio of the judgment of the same Court in CIT vs. A.V. Thomas & Co. Ltd. (supra). Mr. Desai has placed reliance on the judgment of the Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. vs. CIT (supra). In that matter, the apex Court was required to construe the expression “profits and gains of business” as computed in accordance with other provisions of the Act. The apex Court laid down that in view of the above language of s. 80E (1), while computing the profits for the purposes of special deduction, the assessee was required to take into account the balancing charge, the carried forward depreciation, the carried forward development rebate and also the brought forward business losses of the earlier years. As stated hereinabove, there is no dispute on the above proposition. The only point is that when it comes to export profits, the legislature has clearly indicated that in applying the artificial formula under s. 80HHC(3), the business profits shall be computed with reference to ss. 28 to s. 44D. In the circumstances, the judgment of Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. (supra), has no application to the facts of the present case. In the case of Distributors (Baroda) (P) Ltd. vs. Union of India & Ors. (1985) 47 CTR (SC) 349 : (1985) 155 ITR 120 (SC) : TC 24R.516, the Supreme Court laid down that as far as s. 80M of the IT Act is concerned, the deduction required to be allowed under that provision had to be calculated with reference to the amount of dividend computed in accordance with the provisions of the Act and as forming part of the gross total income and not with reference to the full amount of dividend received by the assessee. This was in view of the specific language of s. 80M which opened with the words, viz. “Where the gross total income of an assessee includes any income by way of dividends from a domestic company”. Therefore, a condition was prescribed which was required to be fulfilled to attract s. 80M. The condition was that in the gross total income the assessee should include income by way of dividends from the domestic company. Gross total income has been defined under s. 80B (5) to mean income computed in accordance with the provisions of the Act, before making any deduction under Chapter VI-A. Hence, the Supreme Court held that income by way of dividends from a domestic company included in the gross total income, would be income computed in accordance with the provisions of the Act, i.e., after deducting the interest on moneys borrowed for earning such income. The Supreme Court laid down in view of the above words of s. 80M that what is included in the gross total income is a particular quantum of income belonging to the specified category. Therefore, the words “income by way of dividends” referred to not only the category of income included in the gross total income but also to the quantum of income so included. Therefore, the Supreme Court laid down that the income by way of dividends was required to be computed in accordance with the provisions of the Act. However, as stated hereinabove, the opening words of s. 80M, viz., “Where the gross total income of an assessee includes any income by way of dividends from a domestic company” do not find place in s. 80HHC. Therefore, the condition for claiming deduction which is there in other sections like ss. 80P, 80HH, 80M (as it stood) is not there in s. 80HHC. Therefore, the judgment of the Supreme Court in the case of Distributors (Baroda) (P) Ltd. (supra) has no application to the facts of this case.

7. Accordingly, appeal is dismissed with no order as to costs.

[Citation :246 ITR 429]

Malcare WordPress Security