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CASE NO.: Appeal (civil)  1697 of 2003

PETITIONER: IPCA Laboratory Ltd.                                             

RESPONDENT: Deputy Commissioner of Income Tax, Mumbai        

DATE OF JUDGMENT: 11/03/2004

BENCH: S. N. Variava & H. K. Sema  

JUDGMENT: J U D G M E N T

S. N. VARIAVA, J.

       This Appeal is against a Judgment dated 2nd July, 2001 passed  by the Bombay High Court.         Briefly stated the facts are as follows: The Appellants are a Export House.  They hold a certificate issued by  the Chief Controller of Imports and Exports.  For the Assessment Year  1996-97 the Appellants filed a return of income declaring Nil income.   It is an admitted position that the taxable income, before the  deductions under Chapter VIA, was Rs. 4.39 crores.  However, against  this taxable income the Appellants claimed various deductions.  One  such deduction was under Section 80 HHC for Rs. 3.78 crores.  During  the assessment proceedings it was found that the Appellants were  exporting goods which were self manufactured as well as goods  manufactured by supporting manufacturers i.e. trading goods.  It was  found that the sum of Rs. 3.78 crores, which had been claimed as a  deduction, was the profit from exports of self manufactured goods.  It  was found that from the exports of trading goods there was a loss of  Rs. 6.86 crores.  It was found that the Appellants had issued  certificates of disclaimer in favour of the supporting manufacturers in  respect of the entire export of trading goods.  The Assessing Officer  therefore held that there was a net loss from export of goods and  disallowed the deduction of Rs. 3.78 crores.  The Commissioner  (Appeals) dismissed the Appeal filed by the Appellants on 11th October,  1999.  On 29th December, 2000 the Income Tax Appellate Tribunal  dismissed the Second Appeal.  By the impugned Judgment the  Bombay High Court has dismissed the Appeal filed under Section 260A  of the Income Tax Act.     The question for consideration is whether the Appellants are  entitled to deduction under Section 80HHC in respect of the sum of Rs.  3.78 crores by ignoring the loss of Rs. 6.86 crores.  It therefore  becomes necessary to look at Section 80HHC of the Income Tax Act.   The relevant portions of Section 80HHC reads 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 to the extent of profits, referred to  in sub-section (1B)] 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

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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 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.]   (1A) Where the assessee, being a supporting  manufacturer, has during the previous year, sold goods or  merchandise to any Export House or Trading House in  respect of which the Export House or Trading House has  issued a certificate under the proviso to sub-section (1),  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-section (1B)],  derived by the  assessee from the sale of goods or merchandise to the  Export House or Trading House in respect of which the  certificate has been issued by the Export House or Trading  House.  

       xxx             xxx             xxx         xxx             xxx             xxx              (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  (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 :  Provided that the profits computed under clause (a) or  clause (b) or clause (c) of this sub-section shall be further  increased by the amount which bears to ninety per cent of  any sum referred to in clause (iiia) (not being profits on  sale of a licence acquired from any other person), and  clauses (iiib) and (iiic), of section 28, the same proportion  as the export turnover bears to the total turnover of  business carried on by the assessee.  Explanation : For the purposes of this sub-section, -

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(a) "adjusted export turnover" means the export  turnover as reduced by the export turnover in  respect of trading goods;  (b) "adjusted profits of the business" means the  profits of the business as reduced by the profits  derived from the business of export out of India of  trading goods as computed in the manner provided  in clause (b) of sub-section (3);  (c) "adjusted total turnover" means the total  turnover of the business as reduced by the export  turnover in respect of trading goods;  (d) "direct costs" means costs directly attributable to  the trading goods exported out of India including the  purchase price of such goods;  (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;  (f) "trading goods" means goods which are not  manufactured or processed by the assessee.  (3A) For the purposes of sub-section (1A), profits derived  by a supporting manufacturer from the sale of goods or  merchandise shall be, -  (a) in a case where the business carried on by the  supporting manufacturer consists exclusively of  sale of goods or merchandise to one or more  Export Houses or Trading Houses, the profits of  the business;  (b) in a case where the business carried on by the  supporting manufacturer does not consist  exclusively of sale of goods or merchandise to one  or more Export Houses or Trading Houses, the  amount which bears to the profits of the business  the same proportion as the turnover in respect of  sale to the respective Export House or Trading  House bears to the total turnover of the business  carried on by the assessee.   (4) The deduction under sub-section (1) shall not be  admissible unless the assessee furnishes in the prescribed  form, along with the return of income, the report of an  accountant, as defined in the Explanation below sub- section (2) of section 288, certifying that the deduction  has been correctly claimed in accordance with the  provisions of this section."

       Mr. Dastur submitted that Section 80 HHC appears in Chapter  VIA of the Income Tax Act.  He submitted that Chapter VIA provides  for deduction to be made in computing the total income.   He took us  through the various provisions of Chapter VIA and submitted that  these provisions were enacted for encouraging business out of India so  that foreign exchange is earned.   He submitted that these provisions  are meant to be an incentive for earning foreign exchange.  He  submitted that with this aim in mind deductions were given (a) under  Section 80 HHB for profits from projects outside India; (b) under  Section 80 HHC for profits from exports; (c) under Section 80 HHD for  hotels and tour operators; (d) under Section 80 HHE from exports of  computer software; (e) under Section 80 HHF from exports or transfer  of film software; (f) under Section 80-O for royalties etc. from foreign  enterprises; (g) under Section 80R for deduction of remuneration from  foreign sources of professors, teachers etc.; (h) under Section 80RR  for deduction of professional income from foreign sources and (i)  under Section 80RRA for remuneration received for services rendered  outside India.   He submitted that these incentives were given as the  Parliament considered earning of foreign exchange to be in national  interest and in the interest of our society.  Mr. Dastur submitted that  as the Appellants were exporting goods manufactured by them as well

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as trading goods the deduction under Section 80HHC had to be  computed in the manner set out in Sub-section (3)(c).  He submitted  that the provision having been enacted to give an incentive for earning  foreign exchange the Section must be given an interpretation which  would further that object.  He pointed out that from the export trade  the Appellants had brought in foreign exchange to the tune of  approximately Rs. 81,62,49,276/-.    Mr. Dastur relied upon the case of Sea Pearl Industries vs.  Commissioner of Income Tax reported in (2001) Vol. 247 ITR 578.  In  this case the Appellant (therein) was not an export house and  therefore could not avail of special facilities granted to export houses.   The Appellant however entered into an agreement with an export  house under which the Appellant exported sea food in the name of the  export house against Purchase Orders placed on the export house by  foreign buyers.  The question was whether the Appellant (therein)  could claim deduction under Section 80HHC in respect of exports made  by them on account of the export house.   This Court held that the  object of Section 80HHC was to grant an incentive to the earners of  foreign exchange and that the matter therefore had to be considered  with reference to this object.   Section 80HHC at the relevant time  read as follows: "80HHC. (1) Where the assessee, being an Indian  company or a person (other than a company), who is  resident in India, exports out of India during the previous  year relevant to an assessment year 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, the following deductions, namely:-

       (a) a deduction of an amount equal to one per cent  of the export turnover of such goods or merchandise  during the previous year; and  

       (b) a deduction of an amount equal to five per cent  of the amount by which the export turnover of such goods  or merchandise during the previous year exceeds the  export turnover of such goods or merchandise during the  immediately preceding previous year.

       (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."

This Court negatived the argument that, because the Appellant  (therein) received commission on the sales, the words "sale proceeds  of such goods" were to be construed to mean sale proceeds ultimately  received.    On a construction of Section 80HHC this Court held that if  the contention of the Appellant (therein) were to be upheld, it would  mean that not only the export house but also the Appellant could claim  deduction under Section 80HHC in respect of same amount.   It was  held that such an outcome would be contrary to the language of the  Section itself.  This Court therefore dismissed the claim of the  Appellant (therein) and held that the Appellant was not entitled to the  benefits of Section 80HHC.  In our view, far from assisting the  Appellants, this case is against them.  It shows that even though  Section 80HHC has to be construed in the light of the object of giving  incentives, it still has to be interpreted as per its language.  An  interpretation which leads to an absurd result or a result not  contemplated by its language cannot be given.   Mr. Dastur also relied upon the case of Commissioner of Income  Tax vs. Shirke Construction Equipments Ltd. reported in (2000) Vol.  246 ITR 429.   In this case the Bombay High Court has held that

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Section 80HHC is a complete code in itself and that it is not controlled  by Section 80AB.   It was held that profits had to be computed under  Section 29 and Section 72 was not applicable. It was held that carry  forward losses could not be set off for computing profits for the  purpose of Section 80HHC.  In this case it was also noticed that the  object was to encourage exports.   Mr. Dastur also relied upon the case of Bajaj Tempo Ltd. vs.  Commissioner of Income Tax reported in (1992) Vol. 196 ITR 188. In  this case it has been held that provisions granting incentive should be  construed liberally and that if a literal construction would defeat the  purpose of the section then it becomes necessary to resort to a  construction which is reasonable and purposeful to make the provision  meaningful.    Mr. Dastur also relied upon a Circular issued by the Board  bearing No. 421 dated 12th June, 1985 wherein it has been mentioned  that Section 80HHC is a provision relating to incentives for exporters  and has been incorporated with a view to providing its exporters with  requisite resources for modernization, technological upgradation,  product development and other activities.         Mr. Dastur also relied upon a Judgment in the case of  Commissioner of Income-tax vs. Smt. T.C. Usha, reported in  2003(137) Taxman 297.  In this case the Kerala High Court was  considering an identical question i.e. whether the profits earned from  export of self manufactured goods were to be set off against loss  incurred in export of trading goods.  The Kerala High Court has  accepted arguments similar to those made by Mr. Dastur and has  concluded that the losses were not to be set off against the profits  earned from export of own manufactured goods.  In coming to this  conclusion the Kerala High Court has proceeded on the footing that  Section 80HHC is a self contained code and the proceeds have to be  worked out strictly in accordance with the provisions.   Mr. Dastur submitted that a reading of Section 80HHC would  show that where the assessee exports goods manufactured by him he  would be covered by sub-clause (3)(a) and only the profits of such  business would be taken into account.  He submitted that where the  assessee exports only trading goods then the profits of those goods  only would be taken into account in sub-clause (3)(b).  He submitted  that sub-clause (3)(c) dealt with a case where the assessee exported  goods manufactured by him as well as trading goods.  He submitted  that in such a case profits from export of goods manufactured by the  assessee were to be considered separately and the profits from  exports of trading goods were to be considered separately.  He  submitted that if there were profits from both then both the profits  would be taken into consideration.  He submitted that if there were  profits only in respect of one type of exports then those profits could  not be negatived or set off against the loss from the other export.  He  submitted that the word "and" in Section 80HHC(3)(c) has to be  liberally construed and cannot to be taken to mean that both the  profits have to be clubbed or considered together.   He submitted that  persons who earn valuable foreign exchange cannot be deprived of the  benefits of his export by adopting a construction which would defeat  the very purpose for which the provision has been enacted.  He  submitted that the fact that the word "and" does not mean that sub- clauses 3(c)(i) and (ii) have to be taken together is clear from the fact  that in other Sections, such as Section 80HHD, the Legislature has  used the words "aggregate of".   He submitted that wherever the  Legislature intended that both were to be taken together it has used  words like "aggregate of".  He submitted that when the Legislature has  not used such words it necessarily meant that the intention of the  Legislature was that the two are not to be taken together, but that  each has to be considered separately and on its own.   He submitted  that the aim being to give an incentive for earning foreign exchange,  so long as there was a profit from export either of self manufactured  goods or from export of trading goods deduction has to be given for  that profit by ignoring a loss in respect of other export.   He submitted

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that a party who has earned valuable foreign exchange cannot be  deprived of the benefit on an interpretation which defeats the very  purpose of the enactment.  We are unable to accept the submission of Mr. Dastur.   Undoubtedly Section 80HHC has been incorporated with a view to  providing incentive to export houses.  Even though a liberal  interpretation has to be given to such a provision the interpretation  has to be as per the wordings of this Section.  If the wordings of the  Section are clear then benefits, which are not available under the  Section, cannot be conferred by ignoring or misinterpreting words in  the Section.  In this case we are concerned with the wordings of sub- section 3(c) of Section 80HHC.  As noted earlier sub-Section 3(a) deals  with the case where the export is only of self manufactured goods.   Sub-section 3(b) deals with the case where the export is only of  trading goods.  Thus when the Legislature wanted to take exports from  self manufactured goods or trading goods separately, it has already so  provided in sub-section (3)(a) and (3)(b).   It would not be denied that  the word "profit" in Section 80HHC(1) and Sections 80HHC (3)(a) and  3(b) means a positive profit.  In other words if there is a loss then no  deduction would be available under Section 80HHC (1) or (3)(a) or  (3)(b).  In arriving at the figure of positive profit, both the profits and  the losses will have to be considered.  If the net figure is a positive  profit then the assessee will be entitled to a deduction.  If the net  figure is a loss then the assessee will not be entitled to a deduction.     Sub-section 3(c) deals with cases where the export is of both self  manufactured goods as well as trading goods.  The opening part of  sub-section 3(c) states "profits derived from such export shall".  Then  follows (i) and (ii).   Between (i) and (ii) the word "and" appears.   A  plain reading of sub-section (c) shows that "profits from such exports"  has to be profits of exports of self manufactured goods plus profits of  exports of trading goods.  The profit is to be calculated in the manner  laid down in 3(c)(i) and (ii).  The opening words "profit derived from  such exports" together with the word "and" clearly indicate that the  profits have to be calculated by counting both the exports.  It is clear  from a reading of Sub-section (1) of Section 80HHC(3) that a  deduction can be permitted only if there is a positive profit in the  exports of both self manufactured goods as well as trading goods.  If  there is a loss in either of the two then that loss has to be taken into  account for the purposes of computing profits. Under Section 80HHC(1) the deduction is to be given in  computing the total income of the assessee.  In computing the total  income of the assessee both profits as well as losses will have to be  taken into consideration.  Section 80AB is relevant.  It reads as  follows:   "80AB.  Where any deduction is required to be made or  allowed under any section included in this Chapter under  the heading "C-Deductions in respect of certain incomes"  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 purpose of computing the deduction under  that section, the amount of income of that nature as  computed in accordance with the provisions of this Act  (before making any deduction under this Chapter) shall  alone be deemed to be the amount of income of that  nature which is derived or received by the assessee and  which is included in his gross total income."

Section 80B(5) is also relevant.  Section 80B(5) provides that "gross  total income" means total income computed in accordance with the  provisions of the Income Tax Act.           Section 80AB is also in Chapter VI-A.  It starts with the words  "where any deduction is required to be made or allowed under any  Section of this Chapter".  This would include Section 80HHC.  Section  80AB further provides that "notwithstanding anything contained in that

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Section".   Thus Section 80AB has been given an overriding effect over  all other Sections in Chapter VIA.  Section 80HHC does not provide  that its provisions are to prevail over Section 80AB or over any other  provision of the Act.  Section 80HHC would thus be governed by  Section 80AB.  Decisions of the Bombay High Court and the Kerala  High Court to the contrary cannot be said to be the correct law.   Section 80AB makes it clear that the computation of income has to be  in accordance with the provisions of the Act.  If the income has to be  computed in accordance with the provisions of the Act, then not only  profits but also losses have to be taken into consideration.   Another reason why the argument of Mr. Dastur cannot be  accepted is that even under Section 80HHC (3)(c)(i) the profit is to be  adjusted profit of business.  The adjusted profit of the business means  a profit as reduced by the profit derived from business of exports out  of India of trading goods. Thus in calculating the profits, under Section  3(c)(i), one necessarily has to reduce by profits under 3(c)(ii).  As  seen above the term "profit" means positive profit.  Thus if there is  loss then those losses in export of trading goods have to be adjusted.   They cannot be ignored.         We, therefore, hold that a plain reading  of Section 80HHC makes it clear that in arriving at profits earned from  export of both self manufactured goods and trading goods, the profits  and losses in both the trades have to be taken into consideration.  If  after such adjustments there is a positive profit the assessee would be  entitled to deduction under Section 80HHC(i).  If there is a loss he will  not be entitled to any deduction.         Mr. Dastur submitted that the word "profit" in Section 80 HHC  must have the same meaning in the entire Section.   He submitted  that as the word profit in Section 80HHC (1) means only positive  profit, it will have the same meaning in Section 80HHC (3)(c).   He  submitted that thus the word profit in Section 80HHC (3)(c) would not  include losses and if there are any losses they are to be ignored.  We  are unable to accept this submission for more than one reason.  Firstly  it is not necessary that the word "profit" must have the same meaning.   The meaning that the word "profit" will depend on the context in which  it is used.  In Section 80HHC (1) it is admittedly used to indicate  positive "profit" because the deduction will only be of a positive profit.   Section 80HHC(3) is the sub-section which provides how profits are to  be worked out in computing total income.  For purposes of such  computation both profit and losses have to be taken into account.   Thus the word "profit" in Section 80HHC(3) will mean profits after  taking into account losses, if any.  More importantly, in our view, the  term "profit" in Section 80HHC both in Sub-section (1) and in sub- section (3) means a positive profit worked out after taking into  consideration the losses, if any.  Thus the word "profit" has the same  meaning in Section 80HHC (1) and (3).          It was next submitted that even when the profits are to be  reduced by the losses in cases where an export house has disclaimed  its turn over in favour of a supporting manufacturer, the turn over of  the exporter gets reduced to the extent disclaimed.   It is submitted  that as the turnover, which is disclaimed, is reduced it cannot then be  taken into consideration for the purposes of computing profits under  sub-section 3(c)(ii).  In our view this is an argument which merely  needs to be stated to be rejected.  If such an argument is accepted it  would lead to an absurd result.  It would mean when if there was no  disclaimer the export house would not be entitled to any deduction in  cases where there is a loss but because disclaimer has been made  both the export house and the supporting manufacturer would become  entitled to deductions.   The proviso to sub-section (i) of Section  80HHC enables a disclaimer only to enable the export house to pass  on deductions.  It in no way reduces the turnover of the export house.    In computing total income, the entire turnover is taken into account  even though there is a disclaimer.     Thus even though the disclaimer  is made the taxable income of Rs. 4.39 crores has been arrived at by  the Appellants after taking into account the entire turnover from  export of trading goods. In arriving at the figure of Rs. 4.39 crores

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admittedly the loss of Rs. 6.86 crores has been taken into account.     Even after disclaimer the turnover has remained the turnover of the  Export House i.e. the Appellants.  The disclaimer is only for purposes  of enabling the export house to pass on the deduction which it would  have got to the supporting manufacturer.  It follows that if no  deduction is available, because there is a loss, then the export house  cannot pass on or give credit of such non-existing deduction to a  supporting manufacturer.             Faced with this situation, it was submitted that even a loss is a  negative profit.  In support of the submission, reliance was placed  upon the authority of this Court in the case of Commissioner of  Income-Tax(Central), Delhi   vs.  Harprasad & Co. P. Ltd.  reported in  1975 (Vol. 99) ITR 118.  In this case the meaning of loss was being  considered in the context of capital gains made from sale of shares.  The question was whether the loss could be carried forward and set off  against capital gains in a subsequent year. While considering this  question, it was held as follows:

       "From the charging provision of the Act, it is  discernible that the words "income" or "profits and gains"  should be understood as including losses also, so that, in  one sense "profits and gains" represent "plus income"  whereas losses represent "minus income".  In other words,  loss is negative profit.  Both positive and negative profits  are of a revenue character.  Both must enter into  computation, wherever it becomes material, in the same  mode of the taxable income of the assessee."

                In our view, the above observations are against the Appellants.   They show that in computing income profits and gains, losses must  also be taken into consideration.         Mr. Dastur relied on a format of Form No. 10CCAC and a Circular  of the Board wherein it is stated as follows: "With the adoption of the dual system for computing  export profit, the computation of the disclaimed export  turnover also required modification.  The Finance Act has  therefore amended section 80HHC in order to provide that,  where the Export or Trading House disclaims the tax  concession in favour of the supporting manufacturer, the  concession to the Export or Trading House will be reduced  by the amount which bears to the total export profits of  trading goods the same proportion as the disclaimed  export turnover bears to the total export turnover of  trading goods.  The formula in such cases will now be -

80HHC concession = export profit

-       [export profits on trading goods x  

disclaimed export turnover ] total export turnover               "

Mr. Dastur submitted that if even both profits and losses are to be  taken into account the, on a disclaimer the losses will also have to be  considered as negative profits and as per the Board Circular the  calculation would be as follows: "80HHC Concession = *Export Profits - [Export Profits on Trading Goods x Disclaimed Export Turnover] Total Export Turnover of Trading Goods

=  * (-3,07,84,867) - (-6,86,65,804)   x    18,53,53,371                                                           18,53,53,371

= (-3,07,84,867) - (-6,86,65,804)

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= (-3,07,84,867) + 6,86,65,804

= 3,78,80,937"

He submitted that even on this calculation the Appellants are entitled  to deduction of Rs. 3,78,80,937/-.      We are unable to accept this  submission.  The calculation as per the Board Circular would not be as  claimed.  The Board Circular nowhere provides for negative profits.   The Board Circular also shows that only positive profits can be  considered for purposes of deduction.           We, therefore, see no substance in the Appeal.  The same stands  dismissed.  There shall be no order as to costs.