Bombay High Court

Behram Dubash Properties (P) Ltd. vs Dy. Cit on 22 April, 2004

Equivalent citations: (2004) 90 TTJ Mumbai 1086

ORDER

Dr. O.K. Narayanan, A.M.:

There are two appeals. The common assessment year is 1991-92. ITA No. 2744/Bom/1994 is filed by the assessee and ITA No. 3391/Bom/1994 is filed by the revenue.

2. These cross-appeals are filed against the order of the Commissioner (Appeals)-VII at Mumbai, dated 18-3-1994 and arise out of the assessment completed under section 143(3) of the Income Tax Act, 1961.

3. The assessee is a company, earning income from different sources. The different sources of income included speculation profit on purchase and sale of shares, hiring charges of trucks and trailors, trading of stationery, dividend income, export of rice bran extraction, etc.

4. The assessee-company filed its return declaring the total income of Rs. 11,72,440. In its computation of income, the assessee has claimed deduction under section 80HHC. The deduction claimed by the assessee was Rs. 24,69,589. The assessee has worked out quantum of deduction under section 80HHC on the proportionate basis of its profit in relation with the export turnover to the total turnover. But the assessing officer did not accept the above computation made by the assessee-company. According to the assessing officer the profit and loss and the turnover, etc., with reference to section 80HHC need to be confined exclusively to export activities. Therefore, the assessing officer recast the different base of P&L a/c with reference to the export business of the assessee. Export sales, CCA, miscellaneous income have been credited in the account. Purchase of goods, export expenses, etc., were debited in the account. Regarding other expenses,, the assessing officer worked out the expenditure relating to the export business on the proportion of export turnover to total turnover. The final result was a loss of Rs. 2,80.156. According to the assessing officer as the result of export activity was loss, the question allowing any deduction under section 80HHC did not arise. Therefore, he disallowed the claim made by the assessee- company.

5. The matter was taken in first appeal. The Commissioner (Appeals) approved the method of computing the deduction available under section 80HHC on the basis of the ratio of export turnover to total turnover on the overall profit of the business. But at the same time the Commissioner (Appeals) also held that the assessee cannot claim any such proportiondte deduction on that part of the profit of the business which related to speculation business. The assessee has in fact declared the speculation profit of Rs. 30,72,500. The Commissioner (Appeals) held that this amount should not form part of the profit as well as the turnover. Therefore he deleted the said amount both from the turnover and from the income and worked out the deduction to a sum of Rs. 4,81,150. The assessee is not satisfied by the above partial grant by the Commissioner (Appeals). Therefore, it has come in for second appeal before the Tribunal.

6. The only ground raised by the assessee is that the Commissioner (Appeals) has erred in holding that the speculation profit need to be excluded both from the "profit of the business" qualifying for deduction under section 80HHC as also from "total turnover".

7. The revenue, on the other hand, is aggrieved on the finding of the Commissioner (Appeals) that there is still residual positive profit on which the assessee could claim deduction under section 80HHC. The relevant grounds raised by the revenue read as below :

"(i) On the facts and in the circumstances of the case and in law the learned Commissioner (Appeals) failed to appreciate that there is no link of export business profit as total turnover includes speculation profit, income from hiring charges, trading of stationary, dividend income and sale proceeds of export of rice bran extraction and since export business is treated as separate business and also allocated expenditure an pro rata business, which has resulted in loss and as such no deduction under section 80HHC is allowable.

(ii) On the facts and in the circumstances of the case and in law the learned Commissioner (Appeals) himself admitted in the order itself that technically there is no profit derived from the export of goods or merchandise or even the local sales, which is one of the essential event in granting relief under section 80HHC(3)(b) of the IT Act, and thereby learned Commissioner (Appeals) has erred in directing to allow deduction under section 80HHC(3)(b) to the extent of Rs. 4,81,150 which are not in conformity of the principle of granting relief on export profits only."

8. Shri Sanjeev Shah appearing for the assessee contended that there is no provision in the scheme of the Act pertaining to the deduction under section 80HHC, as it stood relevant for the assessment year 1991-92, to exclude any part of the income from the ambit of the computation of deduction. The learned counsel explained that for the assessment year 1991-92 there was no such bisect of the income earned by the assessee under different circumstances of export as was later on brought by the amendment. As far as assessment year 1991-92 is concerned the computation is to be made on a proportionate basis on the overall profit of the assessee. The assessing officer has no jurisdiction to divide the profit into different segments and exclude some segment treating them as not relating to export activities. The learned counsel therefore submitted that the Commissioner (Appeals) went wrong in excluding the speculation profit in computing the deduction available under section 80HHC. The learned counsel submitted that the assessing officer was not justified in recasting the trading and P&L a/c of the assessee-company and apportioning the indirect expenditure on the basis of the total turnover. He has pointed out that the maintenance of even separate accounts is not found necessary by the Hon'ble Kerala High Court in the case of CIT v. Parry Agro Industries Ltd. (2002) 69 257 ITR 41 (Ker). The learned counsel further relied on the Special Bench decision of Tribunal, Delhi Bench 'D' in the case of International Research Park Laboratories Ltd. v. Assistant Commissioner (1994) 50 ITD 37 (Del)(SB) wherein the Special Bench has held that business for the purpose of section 80HHC included not only the turnover of exports but also the domestic turnover and profits and gains of business or profession are to be computed in the same manner in which the profit is computed under the specific head and the profit must be apportioned in proportion which the export turnover bears to the total turnover. In the light of the above decision it is the argument of the learned counsel that the order of the assessing officer is grossly erroneous and the order of the Commissioner (Appeals) is partly erroneous. The learned counsel also relied on another Special Bench decision of Tribunal, Delhi Bench 'A' in Pearl Polymers Ltd. v. Dy. CIT (2002) 80 ITD 1 (Del)(SB).

9. Therefore it is the contention of the learned counsel that the deduction worked out by the assessee under section 80HHC need to be allowed without excluding any part of the profit either in the nature of speculation profit or otherwise.

10. Shri D.R. Sindhal the learned Departmental Representative appearing for the revenue on the other hand relied on the recent decision of the Hon'ble Supreme Court in IPCA Laboratory Ltd. v. Dy. CIT (2004) 266 ITR 521 (SC) and argued that the result of the export activities carried on by the assessee-company as worked out by the assessing officer resulted in loss and therefore there could not be any question of deduction available under section 80HHC. Therefore it is the contention of the learned Departmental Representative that the order of the Commissioner (Appeals) is erroneous inasmuch as the Commissioner (Appeals) has accepted the contention of the assessee that the profit other than speculation profit is entitled for considering into computation of deduction available under section 80HHC. With reference to the appeal of the assessee it is the case of the learned Departmental Representative that speculation profit cannot be considered as part of the business activity carried on by the assessee in the normal course and therefore that part of the profit cannot be considered for the purpose of deduction available under section 80HHC. The learned Departmental Representative relied on the following decisions in support of his contention

(i) CIT v. Sterling Foods (1999) 237 ITR 579 (SC)

(ii) Hindustan Lever Ltd. v. CIT (1999) 239 ITR 297 (SC)

11. The learned Departmental Representative submitted that exemption under section 80HHC as it stood for the assessment year 1991-92 is to be deduced from the profits "derived by the assessee from the export of goods or merchandise". The learned Departmental Representative contended that the Hon'ble Supreme Court has explained the meaning of the term "derived" in (1999) 239 ITR 297 (SC) (supra).

12. We considered the rival contentions and considered the issue in depth. In this case we are concerned with the assessment year 1991-92. As rightly pointed out by the learned counsel appearing for the assessee, the law applicable to the assessment year 1991-92 is the pre-amended law. The present law relating to computation of deduction available under section 80HHC have bisected the different segments of export activities in clauses (a), (b) and (c) of section 80HHC(3). There was no such bisect in the law as it stood prior to the amendment and relevant for the assessment year 1991-92. As per section 80HHC(1), an assessee engaged in the business of export out of India of any goods or merchandise shall be entitled for the deduction of the profits derived by the assessee from the export. The profit derived from the export of goods or merchandise out of India has been further defined in sub-section (3) of section 80HHC in clauses (a) and (b). If the assessee's business is exclusively that of export the profits of the business means the profits computed under the head profits and gains of business or profession". This is what clause (a) of sub-section (3) says. In a case where the business carried on by the assessee does not consist exclusively of the export out of India, the profits derived from the export of goods means 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 an export turnover bears to the total turnover of the business carried on by the assessee.

13. The reading of sub-sections (1) and (3) of section 80HHC as it stood for the assessment year 1991-92 clearly support the legal frame proposed by the learned counsel and accepted by the Commissioner (Appeals). The assessing officer is not justified in recasting the P&L a/c and apportioning the indirect expenditure on a pro rata basis. The scheme does not envisage any such revision. As rightly argued by the learned counsel for the assessee the decision of the Hon'ble Supreme Court in the recent decision of IPCA Laboratory Ltd.'s case will not apply here. The Supreme Court has considered in the case of IPCA Laboratories Ltd. the scheme of section 80HHC available in the law as amended by the Finance Act, 1990 with effect from 1-4-1991. The decision does not apply to a case under the law prevailed before the said amendment which is applicable to impugned assessment year 1991-92.

14. Therefore we agree with the finding of the Commissioner (Appeals) that the assessee is entitled for deduction under section 80HHC on the overall profit of the assessee bifurcated on a proportionate basis with reference to total turnover and export turnover. In view of the above finding the appeal filed by the revenue is liable to be dismissed.

15. Next we have to consider the appeal of the assessee with reference to the question of excluding speculation profit from the computation of section 80HHC deduction. The Commissioner (Appeals) has excluded the speculation profit from the computation. An assessee is entitled to benefit under section 80HHC on the profits derived out of export activities. The Hon'ble Supreme Court has held in Hindustan Lever Ltd. v. CIT (supra) that "derived" is not a term of art. Its use in the definition indeed demands an enquiry into the genealogy of the product. In that case the assessee exported groundnut oil which resulted in a loss. However, for the exports made at a loss, the assessee was rewarded with import entitlements. The assessee utilized the import entitlements in purchasing palm oil from foreign countries. The imported palm oil was consumed internally by the assessee for manufacturing other products. The contention of the assessee was that the oil which was purchased by the assessee from foreign countries on the strength of the import entitlement was at a rate much lower than the rate obtaining in the Indian market for similar products. Since the assessee paid a lower price for the imported palm oil, the assessee made a larger profit than it would have made had it purchased palm oil locally at a higher rate. The assessee therefore claimed that it would be entitled to the benefit of section 2(5)(i) of the Act in respect of the amount of profit it made in excess of what it would have otherwise made, if it had purchased palm oil locally. Dismissing the plea of the assessee the court held that in the instant case the immediate source of the profit was sale of goods. The export of other goods was not even the second degree but it had to be traced to an even more remote degree. The assessee's profit from the sale of its goods could not be said to have been derived from export sales. Similarly in the case of CIT v. Sterling Foods (supra) the Hon'ble Supreme Court held that the income "derived from" means to arise from, originate in, show the origin or formation of. In that case also the Hon'ble court was examining a case of import entitlements. The source of import entitlements could not be said to be the industrial undertaking of the assessee. There must be, for the application of the words "derived from", a direct nexus between the profits andjains and the industrial undertaking. In that case, the nexus was only incidental.

16. We find that the ratio declared by the Hon'ble Supreme Court in the two cases cited by the learned Departmental Representative support the finding of the Commissioner (Appeals). The speculation business carried on by the assessee does not have any intimate nexus with the trading and exporting activities carried on by the assessee- company. Therefore the speculation profit carried by the assesseecompany did not have any direct nexus with the export activities of the assessee- company. Therefore it is not possible to hold that the speculation profit was derived from the export activities carried on by the assessee-company. Even though the computation of the deduction available under section 80HHC is to be considered with reference to the overall profit of an assessee, we cannot exclude the expression. "derived from" from the scheme of section 80HHC and hold that every sort of income credited in the P&L a/c of the assessee-company should form part of its business profit for the purpose of section 80HHC. The speculation income earned by the assessee did not have any direct connection with the core activities carried on by the assessee- company including that of export activity. Therefore in view of the matter we hold that the Commissioner (Appeals) is justified in excluding the speculation profit from the ambit of section 80HHC.

17. In the circumstances we find that the appeal filed by the assessee too is liable to be dismissed.

18. We confirm the order passed by the Commissioner (Appeals). The appeal filed by the assessee as well as revenue are dismissed. Order accordingly.