Karnataka H.C : In order to ascertain deduction under section 80HHC, profit derived from all businesses should be taken into consideration and not only profit from eligible business

High Court Of Karnataka

G.J. Fernandez vs. ACIT

Assessment Year : 2003-04

Section : 80HHC

Kumar And Subhash B. Adi, JJ.

IT APPEAL Nos. 798 And 799 Of 2009

October 29, 2010

JUDGMENT

1.Kumar, J. – The appeal—IT Appeal No. 798 of 2009 is preferred by the assessee against the order passed by the Tribunal which held that, for the purpose of deduction under s. 80HHC, if separate accounts are maintained for such eligible business, then deduction under s. 80HHC is to be computed on the basis of profit from such eligible business and the export turnover and total turnover of such business.

2. The subject matter of these proceedings arise out of the asst. yr. 2003-04. The assessee is carrying on four different businesses. Out of the four businesses which he is carrying on, the business carried on under the name M/s Esmario Export Enterprises, dealing with sea foods and marine products is an export business. Therefore, the assessee claimed deduction under s. 80HHC by treating the profit of business as defined in Expln. (baa) of s. 80HHC as per the profits of all businesses and computed deduction under s. 80HHC in the proportion of export turnover to the total turnover of the business. The AO noticed that the total profit disclosed by the assessee from Raichur Thermal Power Station is Rs. 21,96,543 as against total turnover of Rs. 17,87,36,113. Abnormality of profit is on account of receipt of roughly about Rs. 12,00,000 on account of civil construction work at Raichur Thermal Power Station before the stipulated time. The assessee while claiming deduction under s. 80HHC has considered the profits of all other businesses run by the assessee besides M/s Esmario Export Enterprises. According to the AO, the eligible business for deduction under s. 80HHC was only in respect of M/s Esmario Export Enterprises. Therefore, the AO restricted the deduction under s. 80HHC on the basis of the turnover and profit of the unit, namely M/s Esmario Export Enterprises, which is only eligible for deduction under s. 80HHC.

3. Aggrieved by the said assessment order, the assessee preferred an appeal before the CIT(A). The CIT(A) upholding the order of the AO held that, only the profit and turnover of the business conducted by M/s Esmario Export Enterprises was eligible for consideration under s. 80HHC. The global profits were not at all subject-matter of the deduction under s. 80HHC.

4. Aggrieved by the same, the assessee preferred an appeal to the Tribunal. The Tribunal held that, when the assessee has maintained separate accounts for different units and the assessee is having a number of businesses, then the deduction under s. 80HHC is to be ascertained in respect of the eligible business and if separate accounts are maintained for such eligible business then deduction under s. 80HHC is to be computed on the basis of profit from such eligible business and the export turnover and total turnover of such business. Therefore, they upheld the order passed by the appellate authority and dismissed the appeal. Aggrieved by the same, the assessee is before this Court.

5. After passing of the order, the assessee filed an application for rectification of the said order relying on a judgment of the Division Bench of this Court in the case of the CIT vs. Rajesh Art Jewellers in ITRC Nos. 29-30 of 2002 disposed of on 7th April, 2005, on the ground that though the said judgment was cited, the said judgment is not referred to. The said rectification application also came to be dismissed. Aggrieved by this order, appeal—IT Appeal No. 799 of 2009 is filed.

6.The substantial question of law that arises for consideration in these two appeals is as under :

“Whether the Tribunal was justified in deleting, in order to ascertain deduction under s. 80HHC, the profit derived from all the businesses cannot be taken into consideration and it is only the profit from eligible business, i.e., export business alone should be taken into consideration ?”

7. We have heard the learned counsel for the parties.

8. In order to appreciate and answer the substantial question of law, it is necessary to look into the statutory provisions first. Sec. 80HHC(1) reads as under :

“80HHC. Deduction in respect of profits retained for export business.—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 profits referred to in sub-s. (1B) derived by the assessee from the export of such goods or merchandise.”

Sub-s. (3) of s. 80HHC deals with how the profit derived from such export business has to be computed. Clause (a) of sub-s. (3) reads as under :

“3. For the purposes of sub-s. (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;”

Explanation to the section defines what is convertible foreign exchange, export out of India, export turnover and total turnover and profits of the business. Profits of the business is defined in Expln. (baa) as under :

“‘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 cls. (iiia), (iiib) ,(iiic), (iiid) and (iiie) of s. 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;”

9. The CBDT has issued clarifications regarding the aforesaid provisions in Circular No. 564, dt. 5th July, 1990 [(1990) 85 CTR (St) 53]. The relevant portion reads as under :

“The essential ingredients of s. 80HHC are as follows :

(ii) He should be engaged in the business of export out of India of any goods or merchandise (other than mineral oils, minerals and ores);

(v) The deduction shall be of the profits derived by the assessee from the export of goods or mercnandise. What constitutes ‘profits derived from the export of goods or merchandise out of India’, has been defined in sub-s. (3) of s. 80HHC. This sub-s. (3) lays down that the profits derived from the export of goods or merchandise shall be the amount which bears to the profits of the assessee 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.

3. Several doubts have been expressed about how the deduction under s. 80HHC is to be allowed. Representations received by the Board show that there is lack of uniformity amongst authorities in respect of allowing the aforesaid deduction.

4. Sub-s. (3) of s. 80HHC statutorily fixes the quantum of deduction on the basis of a proportion of the profits of business under the head ‘Profits and gains of business’ irrespective of what could strictly be described as ‘profits derived from the export of goods or merchandise out of India’. The deduction is computed in the following manner :

Profit of the business x Export turnover
Total turnover

7. ‘Total turnover’ was not defined earlier. There has been lack of uniformity amongst the assessing authorities and many assessing authorities are treating export incentives to be a part of the total turnover. The Finance Act, 1990, has therefore, clarified the position by inserting a definition for the term ‘total turnover’ in the Explanation below s. 80HHC. According to this definition, ‘total turnover’ shall exclude cash compensatory support duty drawback and profit on sale of import entitlement licences.

8. To sum up, the deduction shall be allowed in the following manner :

Profit of the business (including export incentives) x Export turnover (sale proceeds actually received in foreign exchange)
Total turnover (excluding export incentives)

9. Thus, in the case of an assessee who is doing export business exclusively, ‘export turnover’ and ‘total turnover’ would be identical, if the entire sale proceeds are brought into India in convertible foreign exchange within the prescribed time-limit. In that case, the entire profit under the head ‘Profits and gains of business or profession’ (which will include the three export incentives) will be deductible under s. 80HHC. However, in order to arrive at the amount deductible under s. 80HHC in the case of an assessee doing export business as well as some other domestic business, the fraction of ‘export turnover’ to ‘total turnover’ will be applied to his profits computed under the head ‘Profits and gains of business or profession’ (which again will include the three export incentives).”

10. This provision fell for consideration by the apex Court in the case of CIT v. K. Ravindranathan Nair [2007] 213 CTR (SC) 227 : [2007] 295 ITR 228 (SC). After noticing the aforesaid provisions, the apex Court held that : “Sec. 80HHC of the IT Act is not a charging section. It was an incentive provision. Its object was not to ascertain the real income. Sec. 80HHC(3) provided for the following formula :

Profits of the business x Export turnover
Total turnover

Sec. 80HHC had a headnote. That headnote said “Deduction in respect of profits retained for export business”. The said headnote was inserted by the Finance Act, 1985 w.e.f. 1st April, 1986. Under the original section as inserted by the Finance Act, 1983, the headnote stated “Deduction in respect of export turnover”. Therefore, the very basis shifted from “export turnover” to “retention of profits for export business”. By the Finance Act (No. 2) Act, 1991 w.e.f. 1st April, 1992 for the first time, the expression “profits of the business” stood defined to mean the “profits of the business” as computed under the head “Profits and gains of business” under ss. 28 to 44D of the IT Act. Therefore, before giving deduction under s. 80HHC(3)(a), (b) or (c) of the IT Act, the gross total income of the assessee being profits from business had to be arrived at in terms of cl. (baa) of the said Explanation. While calculating “business profits” the same had to be done in terms of s. 28 to s. 44D of the IT Act alone. Other provisions like ss. 70 and 71 of the IT Act were excluded. During asst. yr. 1993-94 s. 80HHC(3) of the IT Act constituted a code by itself. Subsequent amendments have imposed restrictions/qualifications by which the said provision has ceased to be a code by itself. In the above formula there existed four variables, namely, business profits, export turnover, total turnover and 90 per cent of the sums referred to in cl. (baa) to the said Explanation. In the computation of deduction under s. 80HHC all four variables had to be taken into account. All four variables were required to be given weightage. The substitution of s. 80HHC(3) secures profits derived from the exports of eligible goods. Therefore, if all the four variables are kept in mind, it becomes clear that every receipt is not income and every income would not necessarily include element of export turnover. This aspect needs to be kept in mind while interpreting cl. (baa) to the said Explanation. A bare reading of cl. (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 at the export profits, cl. (baa) stood inserted to say that although incentive profits and “independent incomes” constituted part of gross total income, they had to be excluded from gross total income because such receipts had no nexus with the export turnover. Therefore, in the above formula, we have to read all the four variables. On reading all the variables it becomes clear that every receipt may not constitute sale proceeds from exports. That, every receipt is not income under the IT Act and every income may not be attributable to exports. This was the reason for this Court to hold that indirect taxes like excise duty which are recovered by the taxpayers for and on behalf of the Government, shall not be included in the total turnover in the above formula.”

11. From the aforesaid statutory provisions, the clarification issued by the Board of Direct Taxes and the judgment of the Apex Court it is clear that, in computing the deduction in respect of profits retained for export business all the four variables should be kept in mind. As the total turnover is defined for the purposes of this section alone, which means it shall not include the following receipts :

(a)freight and insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act, 1962

(b)indirect taxes as held by the apex Court in the case of CIT v. Madras Motors Ltd. [2002] 174 CTR (Mad) 221 : [2002] 257 ITR 60 (Mad)

(c)what is excluded under cl. (baa).

All other incomes are included in the total turnover. Therefore, if the assessee is having several units dealing with several goods, for the purpose of assessment, the income from all these businesses is to be taken into consideration, excluding only what is stated above. In order to attract s. 80HHC he must be in the business of export which in turn brings foreign exchange to the country. In order to determine what is the business profit out of that export income, the formula is provided in sub-s. (3). The said formula has now been explained by the circular as well as by the Apex Court. The said formula is as under :

Profit of the business x Export turnover
Total turnover

In fact in the circular it has been specifically stated at para 4 that, sub-s. (3) of s. 80HHC statutorily fixes the quantum of deduction on the basis of proportion of the profits of business under the head “Profits and gains of business” irrespective of what could strictly be described as “profits derived from the export of goods or merchandise out of India”. Therefore, even the profit derived in a business which is not part of export business is to be taken into consideration. In other words, when all the income derived from the business is included in the turnover correspondingly, all the profits from such businesses also should form part of the profit of the business. In fact this could be squarely gathered if we look into the law prior to 1992. Sec. 80HHC(3)(a) reads as under :

“80HHC. Deduction in respect of profits retained for export business.—

(3) For the purposes of sub-s. (1) profits derived from the export of goods or merchandise out of India shall be—

(a)in a case 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’;

(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;”

12. A perusal of the said provision makes it very clear that s. 3(1)(a) dealt with a case where a business carried on by the assessee consisted exclusively of the export business. Clause (b) dealt with business carried on by the assessee which is not exclusively of the export business. Now, the said provision is substituted by Finance (No. 2) Act, 1991 w.e.f. 1st April, 1992 deleting cl. (a) which dealt exclusively with export business only. In addition to that cl. (baa) expressly states what are the incomes which do not form part of the total turnover for the purpose of computing profits of business. Therefore, the intention is very clear. It is not to take into consideration only the profits derived from export business. When once the incomes from all the businesses are included in the total turnover, the profit derived from all those businesses should form part of the profits of business for the purpose of computing the deduction under s. 80HHC. It is to be kept in mind that this provision is not a charging section, but an incentive provision. That is the reason why the apex Court in unequivocal terms held in the aforesaid Ravindranathan Nair’s case (supra) that, every receipt may not constitute sale proceeds from exports. Every receipt is not income under the IT Act and every income may not be attributable to exports.

13. Therefore, the finding of the Tribunal that for the purpose of calculating deduction under s. 80HHC, it is only the profits from the eligible business, the turnover of the eligible business is to be taken into consideration is contrary to the scheme of s. 80HHC and the circular. The finding is when the assessee has maintained separate accounts for different units and the assessee is having a number of businesses, then deduction is to be ascertained in respect of eligible business and if separate accounts for such eligible business then deduction is to be computed on the basis of profit from such eligible business and export turnover and total turnover of such business. This finding is ex facie contrary to the definition clause contained in the Explanation where the total turnover is explicitly defined for the purposes of this section. In law there is no distinction between an assessee maintaining separate accounts in respect of each business or the assessee maintaining one account. Whether he maintains one account or separate accounts, for the purposes of the Act, the income of the business is calculated on the total turnover and he is assessed on that basis. When once the income from all the businesses is pooled together and constitutes a total income, only the profits derived from all those businesses also should form the components of the profits of business. In fact that is the view taken by the Division Bench of this Court in Rajesh Art Jeweller’s case (supra) which is not properly appreciated by the Tribunal even though it was pointed to them and they committed a serious error in ignoring the same and interpreting the provisions contrary to the intent and purport of the said section. The Tribunal seems to have been very much carried away by the fact that the assessee has maintained separate accounts for his each business which in law makes no difference. Hence, the impugned order cannot be sustained. Accordingly, we pass the following order :

(a)Appeals are allowed.

(b)The impugned orders passed by the Tribunal, appellate authority and the AO are hereby set aside.

(c)The substantial question of law is answered in favour of the assessee and against the Revenue.

(d)No costs.

[Citation : 344 ITR 222]

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