Supreme Court Dismisses Appeal Challenging Legality of High Court Order on Deduction under Section 80-HHC (of Income Tax Act, 1961).

The case involves a challenge to the legality of an order passed by the Kerala High Court in favor of the department and against the appellant (assessee). The appellant had claimed a deduction under Section 80-HHC (of Income Tax Act, 1961) for the assessment year 1992-93. The assessing officer disallowed the claim, and this decision was upheld by the Commissioner of Income-Tax (Appeals) and the Income Tax Appellate Tribunal. The case was then referred to the High Court for adjudication on several questions.

The High Court, in its judgment, affirmed the view taken by the assessing officer, Commissioner of Income-Tax (Appeals), and Income Tax Appellate Tribunal, ruling in favor of the department and against the assessee. The appellant appealed against this decision to the Supreme Court.

The appellant argued that the interpretation adopted by the High Court is incorrect and does not reflect the true interpretation of Section 80-HHC (of Income Tax Act, 1961). The appellant contended that the profits from the export of self-manufactured goods and trading goods should be considered separately, and if there is a profit in either category, a deduction should be allowed, regardless of the losses in the other category.

The Supreme Court carefully considered the arguments and analyzed the relevant provisions of Section 80-HHC (of Income Tax Act, 1961). It concluded that the wordings of sub-section (3)(c) indicate that profits from both the export of self-manufactured goods and trading goods should be taken into account. The Court emphasized that the term "profit" in Section 80-HHC (of Income Tax Act, 1961) means a positive profit, and if there are losses, they should be considered in the computation of profits.

The Court further clarified that Section 80-HHC (of Income Tax Act, 1961) should be interpreted in conjunction with Section 80-AB (of Income Tax Act, 1961), which governs the computation of income for the purpose of deductions. Section 80-AB (of Income Tax Act, 1961) states that both profits and losses should be taken into account while computing income. Therefore, the Court held that losses in the export of trading goods cannot be ignored, and if there is a net positive profit after considering both categories, the assessee would be entitled to a deduction.

In light of the above interpretation, the Supreme Court found no merit in the appeal and dismissed it accordingly, with no order as to costs.

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 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 (of Income Tax Act, 1961) 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 (of Income Tax Act, 1961)?

(3) Whether, on the facts and in the

circumstances of the case, and on an interpretation of

Sec. 8OHHC(3) (of Income Tax Act, 1961) 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 (of Income Tax Act, 1961), the same

proportion as the export turnover bears to the total

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 Income Tax Act, 1961)?

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 Income Tax Act, 1961). 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.

(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 (of Income Tax Act, 1961),

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;

(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 (of Income Tax Act, 1961),

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 (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 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) (of Income Tax Act, 1961) 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

to be taken together is clear from the fact that in other sections,

such as Section 80-HHD (of Income Tax Act, 1961), 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 (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 (of Income Tax Act, 1961)

(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) (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 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) (of Income Tax Act, 1961) 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) (of Income Tax Act, 1961) 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.

14. Above being the position, there is no merit in this appeal and

is dismissed accordingly with no order as to costs.