Supreme Court denies export deduction under Section 80HHC (of Income Tax Act, 1961) for company with losses in export business despite profits from domestic operations.

Case Name:

Jeyar Consultant & Investment Pvt. Ltd. vs Commissioner of Income Tax

Civil Appeal No. 8912 of 2003

Key Takeaways:

- The court upheld the principle that deduction under Section 80HHC (of Income Tax Act, 1961) is available only if there are profits from the export business.

- Profits from domestic business cannot be combined with export losses to claim the deduction.

- The court clarified the application of its earlier judgments in IPCA Laboratory Ltd. v. Deputy Commissioner of Income Tax, Mumbai and A.M. Moosa v. Commissioner of Income Tax, Trivandrum.

Issue:

Whether a company that incurred losses in its export business but earned profits from its domestic operations is eligible for deduction under Section 80HHC (of Income Tax Act, 1961).

Facts:

Jeyar Consultant & Investment Pvt. Ltd. was engaged in the business of exporting marine products and providing financial consultancy and trading in equity shares. For the assessment year 1989-1990, the company claimed deduction under Section 80HHC (of Income Tax Act, 1961). However, the Assessing Officer denied the deduction on the ground that the company had incurred losses in its export business, despite earning profits from its domestic operations.

Arguments:

- Jeyar Consultant argued that even if there were losses in the export business, the deduction under Section 80HHC (of Income Tax Act, 1961) should be allowed if the profits from the domestic business outweighed the export losses, resulting in an overall net profit. The company relied on Section 80HHC(3)(b) (of Income Tax Act, 1961) to contend that profits from domestic operations should be considered.

- The Revenue argued that the deduction under Section 80HHC (of Income Tax Act, 1961) is available only if there are profits from the export business. The Revenue cited the Supreme Court's judgments in IPCA Laboratory Ltd. v. Deputy Commissioner of Income Tax, Mumbai and A.M. Moosa v. Commissioner of Income Tax, Trivandrum to support its position.

Key Legal Precedents:

- IPCA Laboratory Ltd. v. Deputy Commissioner of Income Tax, Mumbai:

The Supreme Court held that the benefit of Section 80HHC (of Income Tax Act, 1961) shall not be given in cases where there was a loss in the export business.

- A.M. Moosa v. Commissioner of Income Tax, Trivandrum:

The Supreme Court clarified that in arriving at profits earned from the export of both self-manufactured goods and trading goods, the profits and losses in both trades have to be taken into consideration.

Judgement:

The Supreme Court ruled in favor of the Revenue and dismissed Jeyar Consultant's appeal. The court held that the deduction under Section 80HHC (of Income Tax Act, 1961) is available only if there are profits from the export business, as per the scheme of Section 80HHC(1) (of Income Tax Act, 1961). The court clarified that even if there are losses in the export business but profits from domestic operations outweigh those losses, the benefit under Section 80HHC (of Income Tax Act, 1961) would not be available. The court also agreed with the approach of the Income Tax Appellate Tribunal (ITAT) in determining the components of "total turnover" for computing the deduction.

FAQs:

Q1: What is the significance of the court's decision in this case?

A1: The court's decision clarifies the application of Section 80HHC (of Income Tax Act, 1961) and upholds the principle that the deduction is available only if there are profits from the export business. It also provides guidance on the computation of the deduction, specifically regarding the components of "total turnover."

Q2: Can a company claim the deduction under Section 80HHC (of Income Tax Act, 1961) if it has losses in its export business but profits from domestic operations?

A2: No, according to this judgment, a company cannot claim the deduction under Section 80HHC (of Income Tax Act, 1961) if it has incurred losses in its export business, even if it has profits from its domestic operations.

Q3: How did the court interpret its earlier judgments in IPCA Laboratory Ltd. and A.M. Moosa?

A3: The court distinguished the present case from IPCA Laboratory Ltd. and A.M. Moosa, which dealt with situations where the company had two export-related business activities. In the present case, the company had losses in its export business and profits from domestic operations, which the court held did not qualify for the deduction under Section 80HHC (of Income Tax Act, 1961).

Q4: What is the significance of Section 80HHC(3)(b) (of Income Tax Act, 1961) in this case?

A4: The court clarified that Section 80HHC(3)(b) (of Income Tax Act, 1961) comes into play only for the purpose of computing the deduction, and not for determining eligibility for the deduction. The court held that the formula under Section 80HHC(3)(b) (of Income Tax Act, 1961) was not applicable in this case since the company did not have profits from its export business.

1) What is the correct method of computation of deductions under Section 80HHC(3) (of Income Tax Act, 1961), in the given facts and circumstances, is the question which needs an answer in the present appeal.

2) The given facts and circumstances, as they appear on record, are stated

in the summary form herein below:

Finance Act of 1983 introduced Section 80HHC (of Income Tax Act, 1961), providing incentives to exporters and deductions for persons

involved in the export business. Section 80HHC(3)(b) (of Income Tax Act, 1961) provided the

formula for the computation of deduction for persons who do not have

business exclusively of export out of India, that is to say, in cases where

the assessee is having turnover and income from business in India as

well as from the export business. For the sake of convenience, relevant

portions of Section 80HHC (of Income Tax Act, 1961) are extracted hereinbelow:

“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 export out of India of any goods or merchandise to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of the profits derived by the assessee from the export of such goods or merchandise:

Provided that if the assessee, being a holder of an Export House Certificate or a Trading House Certificate (hereinafter in this section referred to as an Export 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 of the export business of the assessee the same proportion as the amount of export turnover specified in the said

certificate bears to the total export turnover of the assessee.

3) For the purposes of sub-section (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) in a case where the business carried on by the assessee does not consist exclusively of the export out of India of the goods or merchandise to which this section applies, the amount which bears to the profits of the business (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) On 05.07.1990, the Central Board of Direct Taxes (CBDT) issued Circular No.564 dated 05.07.1990 giving detailed guidelines as to how the deductions under Section 80HHC (of Income Tax Act, 1961) are to be calculated. The formula prescribed by CBDT circular is as follows:

Profit of the Business X

Export Turnover

Total Turnover

4) The appellant company is engaged in the business of export of Marine

products and also financial consultancy and trading in equity shares. Its

total business does not consist purely of exports but includes business

within the country as well which situation is covered by Section

80HHC(3)(b), noted hereinabove.

5) The Assessing Officer while dealing with the assessments of the

appellant in respect of the Assessment Year 1989-1990 took the view

that the deduction was not allowable on the ground that there is no

relationship between the Assessee Company and the Processors. The

appellant carried the said order in appeal. The appeal against the

assessment order was dismissed by the Commissioner of Income Tax

(Appeals), Madras vide order dated 17.08.1991. The appellant filed an

appeal before the Income Tax Appellate Tribunal. By its judgment dated

24.04.1992, the Appellate Tribunal set aside the order of the Assessing

Officer and came to a conclusion that the appellant was entitled to full

relief under Section 80HHC (of Income Tax Act, 1961) and directed the Assessing Officer to grant

relief to the assessee.

6) On remand, the Assessing Officer passed fresh order dated 28.05.1992

giving effect to the orders of the ITAT. While giving the effect, the

Assessing Officer found that the appellant had not earned any profits

from the export of Marine products and in fact, from the said export

business, it had suffered a loss. Therefore, according to the Assessing

Officer, as per Section 80AB (of Income Tax Act, 1961), the deduction under Section 80HHC (of Income Tax Act, 1961) could

not exceed the amount of income included in the total income. He found

that as the income from export of Marine product business was in the

negative i.e. there was a loss, the deduction under Section 80HHC (of Income Tax Act, 1961)

would be nil, even when the assessee is entitled to deduction under the

said provision. With this order, second round of litigation started. The

assessee challenged the order passed by the Assessing Officer before

the Commissioner (Appeals) contending that the formula which was

applied by the Assessing Officer was different from the formula

prescribed under Section 80HHC (of Income Tax Act, 1961) and it was also in direct

violation of CBDT Circular dated 05.07.1990. The Commissioner (Appeals), however, dismissed the appeal of the assessee principally on the ground that under Section 246 (of Income Tax Act, 1961), an order of the Assessing Officer giving effect to the order of the ITAT is not an appealable order. The assessee approached the ITAT questioning the validity of the orders passed by the Assessing Officer and Commissioner (Appeals). However, ITAT also dismissed the appeal of the assessee vide its order dated 31.03.1993 and upheld the order of the Assessing Officer. Challenging the order of the ITAT, the assessee approached the High Court, under Section 256(2) (of Income Tax Act, 1961) seeking reference to it. Order dated 03.02.1994 was passed by the High Court directing ITAT to frame the reference and place the same before the High Court. On this direction of the High Court, the ITAT referred the following question to the High Court:

“Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the deduction admissible to the assessee under Section 80HHC (of Income Tax Act, 1961) is nil?”

7) The High Court has now pronounced on the aforesaid question referred to it by the impugned judgment dated 20.08.2002 answering this question against the assessee holding as under:

“5. In this case, the assessment admittedly had not earned any profits from the export of the Marine products. On the other hand, it had suffered a loss. The deduction permissible under Section 80HHC (of Income Tax Act, 1961) is only a deduction of the profits of the assessee from the export of the goods or merchandise. By the very terms of Section 80HHC (of Income Tax Act, 1961), it is clear that the assessee was not entitled to any benefit thereunder in the absence of any profits.

The question referred to us therefore is answered against the assessee and in favour of the revenue.”

8) Special leave petition was filed against the judgment of the High Court in which leave was granted on 10.11.2003. This is how the appeal has

come up for hearing.

9) Mr. Nikhil Nayyar, learned counsel appearing for the assessee, submitted that the aforesaid reasoning of the High Court is palpably wrong in holding that when there are losses suffered in the export business, no deduction under Section 80HHC (of Income Tax Act, 1961) is permissible. According to him, while forming this opinion the High Court looked into sub-section (1) of Section 80HHC (of Income Tax Act, 1961) alone as is clear from the order of the High Court, and did not take into consideration provisions of sub-section (3) thereof. His submission was that no doubt, this Court in the case of IPCA Laboratory Ltd. v. Deputy Commissioner of Income Tax, Mumbai1 held that the benefit of Section 80HHC (of Income Tax Act, 1961) shall not be given in cases where there was loss. He, however, pointed out that the judgment in IPCA Laboratory Ltd. (supra) was explained and clarified subsequently bythis Court in A.M. Moosa v. Commissioner of Income Tax, Trivandrum wherein it was made 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(1) (of Income Tax Act, 1961) and if there is a loss, he

will not be entitled to any deduction. He, thus, submitted that the term

“profit of business” would not confine to profit from export business but

income both from export business as well as from domestic business,

had to be taken into consideration. Therefore, even if there was a loss

from the export business, but there was profit from the business done

within the country and on adjustment of loss from the export business

against the profits from the business in India, in the balance sheet, it was

still profit resulting into positive income, the benefit of Section 80HHC (of Income Tax Act, 1961)

was admissible.

10) He further argued that the objective behind Section 80HHC (of Income Tax Act, 1961) was to give

incentive to those export houses who were earning foreign exchange.

Even if there was loss from the export business, assessee had earned

the foreign exchange and once it was found that overall there were

profits, the following formula contained in Section 80HHC (of Income Tax Act, 1961) became

applicable:

Profit of the Business X

Export Turnover

Total Turnover

11) He also referred to the “Provisions Relating To Direct Taxes” stated in

the Finance (No.2) Bill, 1991 presented in the Budget of 1991-1992 and

referred to the provisions contained therein which relates to incentives

for earning foreign exchange. It makes the following reading:

“20. Under the existing provisions of Section 80HHC (of Income Tax Act, 1961), exporters are allowed. In the computation of their total income, a deduction of the entire profits derived from export of goods or merchandise other than mineral oil, minerals and ores. The deduction is subject to the condition that the sale proceeds of such goods or merchandise are received in, or brought into, India in convertible foreign exchange.

In view of the fact that significant value addition is achieved when a mineral is processed or when a stone is cut and polished, it is desirable to encourage their export. It is, therefore, proposed to extend the benefit

of deduction under Section 80HHC (of Income Tax Act, 1961) to exporters of processed minerals. The list of processed minerals, in respect of which this concession is being extended, is being provided in a new schedule to the Income-Tax Act.

The proposed amendment will take effect from the 1st day of April, 1991 and will, accordingly, apply in relation to the assessment year 1991-1992 and subsequent years.”

12) Mr. Neeraj Kaul, ASG and Mr. Gupta, the learned senior counsel, appearing for the Revenue, on the other hand, supported the view taken

by the High Court. He also specifically referred to the conclusion arrived

at by the Tribunal in support of his plea that in the instant case, formula

sought to be involved would not apply. He pointed out that in the present

case, there was no income from indigenous business but it was only in

the form of brokerage, dividend, interest etc. which, in no case, be

described as “turnover” and be part of “total turnover”. He referred to the

same document viz. “Provisions Relating to Direct Taxes” where following clarification also appears:

“It is, therefore, proposed to clarify that “profits of the business” for the purpose of Section 80HHC (of Income Tax Act, 1961) will not include receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar

nature. As some expenditure might be incurred in earning these incomes, which in the generality of cases is part of common expenses, it is proposed to provide ad hoc 10 per cent deduction from such incomes to account for these expenses.”

13) We have considered the submissions of counsel appearing on both sides.

14) There are two facets of this case which need to be looked into. In the

first instance, we have to consider as to whether view of the High Court

that the deduction is permissible under Section 80HHC (of Income Tax Act, 1961) only when there

are profits from the exports of the goods or merchandise is correct or it

would be open to the assessee to club the income from export business

as well as domestic business and even if there are losses in the export

business but after setting off those losses against the income/profits

from the business in India, still there is net-profit of the business, the

benefit under Section 80HHC (of Income Tax Act, 1961) will be available? The second question

would arise is as to whether formula applied by the fora below is correct?

In other words, while applying the formula, we have to see what would

comprise “total turnover”?

15) Before we provide the answer to the first question, it would be

appropriate to take note of the judgments in IPCA Laboratory as well as

A.M. Moosa. In IPCA Laboratory, the appellant was a holder of an Export House certificate issued by CCI&E. It exported self-manufactured goods as well as goods manufactured by supporting manufacturers i.e. trading goods. In the previous year relevant to AY 1996-97 its taxable income, before the deductions under Chapter VI-A, IT Act was Rs.4.39 crores. It had earned a profit of Rs. 3.78 crores from the export of self-manufactured goods. However, from the exports of trading goods there was a loss of Rs.6.86 crores. The appellant issued certificates of disclaimer in favour of supporting manufacturers in respect of the entire export of the trading goods. In its return for AY 1996-97, it claimed deduction under Section 80-HHC (of Income Tax Act, 1961) in the sum of Rs. 3.78 crores. But, holding that there was a net loss from export of goods, the Assessing Officer disallowed the deduction. This order of the Assessing Officer was unsuccessfully challenged by the appellant as all the authorities upto the High Court upheld that order. This Court also, in the aforesaid judgment, concurred with the view taken by the courts below. Before this Court, specific reliance was placed on sub-section (3) of Section 80HHC (of Income Tax Act, 1961) and on that basis, it was contended that in a case where the assessee exported goods manufactured by himself as well as trading

goods, profits from the two types of exports were to be considered separately and the profit in respect of one could not be negated or set off

against the loss from the other. It was pleaded that when the main

purpose behind that Section was to given incentive for earning for an

exchange, the Section must be given an interpretation which would

further that object. It was also argued that the expression “profit”

occurring under Section 80HHC(1) (of Income Tax Act, 1961), so also in Section 80HHC(3) (of Income Tax Act, 1961), should

be construed to mean positive profit and, therefore, in Section 80HHC(3) (of Income Tax Act, 1961)

(c) it would not include losses and if there were any losses, they were to

be ignored. Another submission was that even when the profits were to

be reduced by the losses, in cases of disclaimer of its turnover by an

assessee export house in favour of a supporting manufacturer, the

turnover of the export house got reduced to that extent. Therefore, it

could not be taken into consideration for the purposes of computing

profits under Section 80HHC(3)(c)(ii) (of Income Tax Act, 1961). Reliance was also placed on

Circular No.421 dated 12.06.1985 of the CBDT to show that Section

80HHC was incorporated with a view to providing incentives to its

exporters with requisite resources of modernization, technological

upgradation, product development and other activities.

16) None of the aforesaid arguments weighed with this Court. While

dismissing the appeal of the appellant, the Court laid down the following

law:

“Although Section 80-HHC (of Income Tax Act, 1961) has been incorporated with a view to provide incentive to export houses and a liberal interpretation has to be given to such a provision, the interpretation has to be as per the wordings of that

section. 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). The word “profit” in Section 80-HHC(1) (of Income Tax Act, 1961)

and Sections 80-HHC(3)(a) and (b) means a positive profit. In other words, if there is a loss then no deduction would be available under Section 80-HHC(1) (of Income Tax Act, 1961) 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 loss then the assessee will not be entitled to a deduction. The opening words “profit derived from such exports” occurring in Section 80-HHC(3) (of Income Tax Act, 1961) together with the work “and” occurring between clauses (i) and (ii) thereof clearly indicate that the profits have to be calculated by counting both the exports. Under Section 80-HHC(1) (of Income Tax Act, 1961), 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. Sections 80-AB and 80-B(5) are relevant.

Section 80-AB (of Income Tax Act, 1961) has been given an overriding effect over all other sections in Chapter VI-A. Section 80-HHC (of Income Tax Act, 1961) would thus be governed by Section 80-AB (of Income Tax Act, 1961) which makes it clear that the computation of income has to be in accordance with the provisions of the Act. Moreover, even under Section 80-HHC(3)(c)(i) (of Income Tax Act, 1961) the

profit is to be adjusted profit of business which 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) (of Income Tax Act, 1961), one necessarily has to reduce the profits under Section 3(c)(ii) (of Income Tax Act, 1961). 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(i) (of Income Tax Act, 1961). If there is a loss he will not be entitled to any deduction.

In Section 80-HHC (of Income Tax Act, 1961), the word “profit” is admittedly

used to indicate positive “profit” because the deduction

will only be of a positive profit. Section 80-HHC(3) (of Income Tax Act, 1961)

provides how profits are to be worked out in computing

total income. For the purposes of such computation

both profits and losses have to be taken into account.

Thus the word “profit” in Section 80-HHC(3) (of Income Tax Act, 1961) will mean

profits after taking into account losses, if any. The term

“profit” in both Sections 80-HHC(1) and 80-HHC(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).

The proviso to sub-section (1) of Section 80-HHC (of Income Tax Act, 1961)

enables a disclaimer only to enable the export house to

pass on deductions. It in no way reduces the turnover of

the export house. 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.

The Board circular also shows that only positive profits can be considered for purposes of deduction.”

17) We find that in A.M. Moosa, this Court, in fact, reiterated IPCA principles, as noted above. That was a case where Assessing Officer

had disallowed the deduction claim of the assessee under Section

80HHC of the Act on the ground that the 'profits of the business

computed under Section 80HHC (of Income Tax Act, 1961) indicated a negative figure'. This view

was accepted by all the Courts and affirmed by this Court in the

aforesaid judgment. Before this Court, submission of the appellant/ assessee was that a reading of Section 80HHC (of Income Tax Act, 1961) 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 other than profits of these goods only would be taken into account of sub-section (3)(b). It was submitted that 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 only in respect of one type of exports then this profit could not be negatived or set off from the loss from the other export. This contention was, obviously, not accepted and brushed aside in the following manner:

“7. The stand needs careful consideration. Undoubtedly, Section 80-HHC (of Income Tax Act, 1961) 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 (of Income Tax Act, 1961). 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) (of Income Tax Act, 1961) 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) (of Income Tax Act, 1961) 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) (of Income Tax Act, 1961) 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) (of Income Tax Act, 1961), 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 (of Income Tax Act, 1961) 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 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) (of Income Tax Act, 1961) is also relevant. Section 80-B(5) (of Income Tax Act, 1961) provides that "gross total income" means total income computed in accordance with the provisions of the Income Tax Act.

10. Section 80-AB (of Income Tax Act, 1961) 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 (of Income Tax Act, 1961)- HHC. Section 80-AB (of Income Tax Act, 1961)

further provides that "notwithstanding anything contained in that section". Thus Section 80-AB (of Income Tax Act, 1961) has been given an overriding effect over all other sections in Chapter VI-A. Section 80-HHC (of Income Tax Act, 1961) does not provide that its

provisions are to prevail over Section 80-AB (of Income Tax Act, 1961) or over any other provision of the Act. Section 80-HHC (of Income Tax Act, 1961) would thus be governed by Section 80-AB (of Income Tax Act, 1961). 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 (of Income Tax Act, 1961) 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) (of Income Tax Act, 1961) 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 (of Income Tax Act, 1961) 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) (of Income Tax Act, 1961). 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 (of Income Tax Act, 1961) 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) (of Income Tax Act, 1961). It is submitted that thus the word profit in Section 80-HHC(3)(c) (of Income Tax Act, 1961) 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) (of Income Tax Act, 1961) it is admittedly used to indicate positive "profit" because the deduction will only be of a positive profit. Section 80 (of Income Tax Act, 1961)- 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, the term "profit" in Section 80-HHC (of Income Tax Act, 1961) 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) (of Income Tax Act, 1961) and Section 80-HHC(3) (of Income Tax Act, 1961) 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.”

18) It stands settled, on the co-joint reading of IPCA and A.M. Moosa, that

where there are losses in the export of one type of goods (for example

self-manufactured goods) and profits from the export of other type of

goods (for example trading goods) then both are to be clubbed together

to arrive at net-profits or losses for the purpose of applying the

provisions of Section 80HHC (of Income Tax Act, 1961). If the net result was loss from

the export business, then the deduction under the aforesaid Act is not

permissible. As a fortiori, if there is net profit from the export business,

after adjusting the losses from one type of export business from other

type of export business, the benefit of the said provision would be

granted.

19) It is also to be borne in mind that in both the aforesaid cases namely

IPCA and A.M. Moosa, the Court was concerned with two business activities, both of which related to export, one from export of self manufactured goods and other in respect of trading goods i.e. those which are manufactured by others. In other words, the Court was concerned only with the income from exports. In the present case, however, the fact situation is somewhat different. Here, in so far as export business is concerned, there are losses. However, the appellant-assessee relies upon Section 80HHC(3)(b) (of Income Tax Act, 1961), as existed at the relevant time, to contend that the profits of the business as a whole i.e. including profits earned from the goods or merchandise within India will also be taken into consideration. In this manner, argues the appellant, even if there are losses in the export business, but profits of indigenous business outweigh those losses and the net result is that there is profit of the business, then the deduction under Section 80HHC (of Income Tax Act, 1961) should be given. However, having regard to the law laid down in IPCA and A.M. Moosa,

we cannot agree with the learned counsel for the appellant. From the

scheme of Section 80HHC (of Income Tax Act, 1961), it is clear that deduction is to be provided

under sub-section (1) thereof which is “in respect of profits retained for

export business”. Therefore, in the first instance, it has to be satisfied

that there are profits from the export business. That is the pre-requisite

as held in IPCA and A.M. Moosa as well. Sub-section (3) comes into

picture only for the purpose of computation of deduction. For such an

eventuality, while computing the “total turnover”, one may apply the

formula stated in clause (b) of sub-section (3) of Section 80HHC (of Income Tax Act, 1961).

However, that would not mean that even if there are losses in the export

business but the profits in respect of business carried out within India are

more than the export losses, benefit under Section 80HHC (of Income Tax Act, 1961) would still be

available. In the present case, since there are losses in the export

business, question of providing deduction under Section 80HHC (of Income Tax Act, 1961) does

not arise and as a consequence, there is no question of computation of

any such deduction in the manner provided under sub-section (3).

20) Therefore, we are of the opinion that the view taken by the High Court is correct on the facts of this case. With this, there may not be need to

answer the second facet of the problem as the question of computation

of deduction does not arise. However, we find that even here, the

approach of the ITAT is correct.

21) In the present case, the domestic income in respect of which benefit is

sought is from dividend income, interest income, profit or sale of shares

and fees received from arranging finance for the assessee's clients. The

Tribunal has recorded this aspect as under:

13. It is, however, seen from the assessee's Profit & Loss Account for the year of account ending on 31.03.1989 that the aggregate sum of Rs.26,04,477 (which the assessee has labeled as total turnover) comprised not only export turnover of Rs.16,67,084 but also the following items which cannot properly be regarded as turnover:

(1) Brokerage received for arranging Finance for the assessee's claims:

Rs.8,50,321

(2) Dividend : Rs. 5,247

(3) Interest : Rs. 7,212

(4) Profit on sale of shares : Rs. 74,913

Rs.9,37,693

22) The Tribunal observed that aforesaid four items are income simplicitor

and cannot be covered by the expression “total turnover”. Following

discussion of the Tribunal in this behalf needs to be quoted:

“17. Now the mode and mechanics of computing the deduction admissible to an assessee falling under Section 80HHC(3)(b) (of Income Tax Act, 1961) clearly proceeds on the basis that in trading transactions profit, or, as the case may be, loss is embedded in the gross turnover. The most significant conclusion that flows from the said provision is that when Section 80HHC(3) (of Income Tax Act, 1961) talks of turnover, it talks of trading receipts and not of receipts which are of the nature of income to start with. It should, therefore, follow that the aggregate sum of Rs.9,37,693/- referred to supra cannot be regarded as turnover, and that by

the same token, it should be left out of reckoning for purposes of computing deduction admissible to the assessee under Section 80HHC (of Income Tax Act, 1961). If this exercise is done, we are back to Proposition No.1. This would mean that the deduction admissible to the assessee under Section 80HHC (of Income Tax Act, 1961) would be nil, especially in view of the fact that the export business of the assessee has resulted in a loss.

19. But a manufacturer may not invariably be able to export, in their entirety, the goods or merchandise manufactured. He may export a part of them and sell the rest in India. Given the paramount need to give fillip

to exports, Parliament clearly intended that the benefit of Section 80HHC (of Income Tax Act, 1961) should not be denied in such cases. But the difficulty in such cases is that the profits attributable to exports cannot be ascertain with precision. This is because not only the manufacturing activities but also the selling activities (including the activities connected with exports) from a continuous, integrated whole. Even so, the intention of Parliament,

was to extend the benefit of Section 80HHC (of Income Tax Act, 1961) to the extent of the profits generated by exports. With this end in view, Parliament incorporated a rule of thumb in Section 80HHC(3)(b) (of Income Tax Act, 1961). As long as the assessee has cleared profits in a particular year of account, export profits are computed by applying to total profits the ratio which export turnover bears to total turnover.”

23) We are in agreement with the aforesaid view of the Tribunal. Therefore,

even otherwise, the formula as sought to be applied by the appellant

does not become applicable on the facts of this case.

24) Thus, from every angle the matter is to be looked into, the appeal lacks

merit. Same is, accordingly, dismissed with costs.

(A.K. SIKRI)

(ROHINTON FALI NARIMAN)

NEW DELHI;

APRIL 01, 2015.