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CASE NO.: Appeal (civil)  4144 of 2007

PETITIONER: A.M. MOOSA

RESPONDENT: COMMISSIONER OF INCOME TAX, TRIVANDRUM

DATE OF JUDGMENT: 10/09/2007

BENCH: Dr. ARIJIT PASAYAT & D.K. JAIN

JUDGMENT: J U D G M E N T

CIVIL APPEAL NO.  4144 OF 2007 [Arising out of SLP(C) No. 11814 of 2006]

Dr. ARIJIT PASAYAT

1.              Leave granted. 2.              Challenge in this appeal is to the legality of order passed  by a Division Bench of Kerala High Court answering the reference  made to it in favour of the department and against the assessee  appellant. 3.              Background facts in a nutshell are as follows.                 For the assessment year 1992-93, the assessee appellant  had claimed deduction under Section 80-HHC of the Income Tax  Act, 1961, (in short, ’the Act’).  The assessing officer disallowed the  claim on the ground that the ’profits of the business’ computed  under Section 80-HHC indicated a negative figure.  An appeal was  preferred before Commissioner of Income-Tax (Appeals), Cochin  Bench, hereinafter, referred to as ’the CIT(A)’.  The said appellate  authority also was of the same view and dismissed the appeal.  The  assessee appellant preferred an appeal before the Income Tax  Appellate Tribunal, Cochin Bench, in short ’the ITAT’. By Order  dated 14th September, 1995 in ITA No. 498 (Coch)/1995, the view of  the assessing officer as well as of CIT(A) was affirmed.  On being  moved for reference, ITAT referred the following questions for  adjudication by the High Court: "(1)    Whether, on the facts and circumstances of  the case, the Tribunal was justified in entertaining  the additional ground raised by the assessee  on an  issue which had not been disputed earlier before the  assessing officer or the first appellate authority?

(2)     Whether, on the facts and circumstances of  the case, the Tribunal is right in law in holding that  the payment received from the export houses under  the agreements could not partake the nature of  receipt towards "charges" mentioned in clause (baa) of  Explanation to Sec.80HHC?

(3)     Whether, on the facts and in the  circumstances of the case, and on an interpretation of  Sec. 8OHHC(3) would the assessee be entitled to the  deduction in an amount equal to 90% of the sums  referred to in clause (iiia) (not being profits on sale of  a licence acquired from any other person) and clause  (iiib) and clause (iiic) of section 28, the same  proportion as the export turnover bears to the total

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turnover to the business carried on by the assessee?

(4)     Whether, on the facts and in the  circumstances of the case, the Tribunal is right in its  interpretation of the term ’profits of business’?

(5)     Whether, on the facts and in the  circumstances of the case, the assessee is entitled to  the benefits of sec. 80HHC of the Income Tax Act?

4.      By the impugned Judgment, the High Court held that the view  taken by the assessing officer, CIT(A) and ITAT was in order.  Accordingly,  as noted above, the reference was answered in favour  of the department and against the assessee.

5.      In support of the appeal, learned counsel for the appellant  submitted that the view taken by the High Court is clearly  untenable and does not reflect a true interpretation of the provision,  that is, Section 80-HHC of the Act.  Learned counsel for the  Revenue on the other hand supported the orders stating that the  view taken is  unexceptional.  At this juncture, it should be  appropriate to take note of the relevant provision. Same reads as  follows: "80-HHC.  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 (1-B) derived by the  assessee from the export of such goods or merchandise:

       Provided that if the assessee, being a holder of  an Export House Certificate or a Trading House  Certificate (hereafter in this section referred to as an  export house or a trading house, as the case may  be,) issues a certificate referred to in clause (b) of  sub-section (4-A), 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.

(1-A) 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 (1-B) 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.

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(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,-   (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;

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(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."

6.      Learned counsel for the appellant submitted that a reading of  Section 80-HHC would show that where the assessee exports goods  manufactured by him, he would be covered by sub-section (3) (a)  and only the profits of such business would be taken into account.   Where the assessee exports only trading goods then the profits of  those goods only would be taken into account in sub-section (3)(b).   Sub-section (3)(c) dealt with a case where the assessee exported  goods manufactured by him as well as trading goods.  In such a  case profits from export of goods manufactured by the assessee  were to be considered separately and the profits from export of  trading goods were to be considered separately. If there were profits  from both then both the profits would be taken into consideration.   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.  The word "and" in Section 80-HHC (3)(c) has to be  liberally construed and cannot be taken to mean that both the  profits have to be clubbed or considered together. 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.  The fact that  the word "and" does not mean that sub-clauses (3) (c)(i) and (ii) have

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to be taken together is clear from the fact that in other sections,  such as Section 80-HHD, the legislature has used the words  "aggregate of".  Wherever the legislature intended that both were to  be taken together it has used words like "aggregate of".  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.  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.   

7.      The stand needs careful consideration.  Undoubtedly, Section  80-HHC 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 80-HHC.  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-sections (3)(a) and (3)(b). It would not be denied  that the word "profit" in Section 80-HHC (1) and Sections 80- HHC(3)(a) or (3)(b)means a positive profit.  In other words, if there is  a loss then no deduction would be available under Section 80-HHC  (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 follow clauses (i) and (ii).  Between  clauses (i) and (ii) the word "and" appears.  A plain reading of sub- section (3)(c) shows that "profits from such exports" has to be  profits from exports of self-manufactured goods plus profits from  exports of trading goods.  The profit is to be calculated in the  manner laid down in Sections (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 80-HHC(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.

8.      Under Section 80-HHC(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 80-AB is relevant.  It reads as  follows: "80-AB. 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

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deduction under that section, the amount of  income of that nature as computed in  accordance with the provision 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."  (emphasis in original)

9.      Section 80-B(5) is also relevant.  Section 80-B(5) provides that  "gross total income" means total income computed in accordance  with the provisions of the Income Tax Act.

10.     Section 80-AB is also in Chapter VI-A.  It starts with the words  "where any deduction is required to be made or allowed under any  section included in this Chapter".  This would include Section 80- HHC.  Section 80-AB further provides that "notwithstanding  anything contained in that section".  Thus Section 80-AB has been  given an overriding effect over all other sections in Chapter VI-A.   Section 80-HHC does not provide that its provisions are to prevail  over Section 80-AB or over any other provision of the Act.  Section  80-HHC would thus be governed by Section 80-AB.  Decisions of  the Bombay High Court  in CIT v. Shirke Construction Equipment  Ltd. (2000 (246) ITR 429) and the Kerala High Court in CIT v. T.C.  Usha (2003 (132) Taxman 297) to the contrary cannot be said to be  the correct law.  Section 80-AB 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.

11.     Even under Section 80-HHC (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 sub-section (3)(c)(i) one necessarily has to reduce  profits under sub-section (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.  A plain reading of Section 80-HHC 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 80-HHC(1).  If there is a loss he will not be entitled to  any deduction.

12.     It was submitted that the word "profit" in Section 80-HHC  must have the same meaning in the entire section, and that as the  word profit in Section 80-HHC(1) means only positive profit, it will  have the same meaning in Section 80-HHC(3)(c).  It is submitted  that thus the word profit in Section 80-HHC(3)(c) would not include  losses and if there are any losses, they are to be ignored.  The plea  is clearly without substance.  Firstly, it is not necessary that the  word "profit" must have the same meaning.  The meaning of the  word "profit" will depend  on the context in which it is used.  In  Section 80-HHC (1) it is admittedly used to indicate positive "profit"  because the deduction will only be of a positive profit.  Section 80- HHC(3) is the sub-section which provides how profits are to be  worked out in computing total income.  For purposes of such  computation both profits and losses have to be taken into account.   Thus the word "profit" in Section 80-HHC(3) will mean profits after  taking into account losses, if any.  More importantly, in our view,

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the term "profit" in Section 80-HHC 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 Sections 80-HHC(1) and (3).

13.     In IPCA Laboratory Ltd. Vs. Dy. Commissioner of Income Tax,  Mumbai, (2004) 12 SCC 742), after analyzing the position in the  manner done above, it was held that the profit as contemplated  under Section 80-HHC (1) and Section 80-HHC (3) means positive  profit.  Said view was reiterated in Income Tax Officer, Bangalore  Vs. Induflex Products (P) Ltd., (2006 (1) SCC 458).  We are in  respectful agreement with the view.

14.     Above being the position, there is no merit in this appeal and  is dismissed accordingly with no order as to costs.