Commissioner Of Income Tax-Iii,Chennai v. M/S.sharon Vaneers P. Ltd., Chennai

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 26.02.2007 CORAM THE HON'BLE MR.JUSTICE P.D.DINAKARANANDTHE HON'BLE MRS.JUSTICE CHITRA VENKATARAMAN T.C.(A).No.62 of 2004 Commissioner of Income Tax-III,Chennai...Appellant Vs. M/s.Sharon Vaneers P. Ltd., Chennai ..Respondent Appeal under Section 260A of the Income Tax Act, 1961 against theorder of the Income Tax Appellate Tribunal, 'A' Bench, Chennai dated30.5.2003 in ITA No.641/Mds/2002 for the assessment year 1994-95 andagainst the order of the Commissioner of Income Tax Appeal inITA.No.366/2001-02 dated 12.03.2002. For Appellant :Mrs. Pushya Sitaraman, Sr.SC for ITFor Respondent :Mr.K.Ravi J U D G M E N T (Delivered by P.D.DINAKARAN,J.) The above tax case appeal is directed against the order of theIncome-tax Appellate Tribunal in ITA No.641/Mds/2002 dated 30.5.2003,raising the following substantial questions of law. 1. Whether in the facts and circumstances of the case,the Tribunal was right in allowing the set off of theunabsorbed business losses, unabsorbed depreciation,etc. while determination of business profits undersection 80HHC? 2. Whether in the facts and circumstances of the case,the Tribunal was right in holding that the provisionsof section 80AB cannot be applied while determining thebusiness profits under section 80HHC? 2. At the outset, we find that 1[st] question of law is not happilyworded and we reframe the same as under: "Whether in the facts and circumstances of the case, theTribunal was right in holding that the unabsorbed depreciation,unabsorbed business loss and unabsorbed investment allowance ofthe earlier years cannot be deducted before granting deductionunder section 80HHC?" 3.1. The assessment year involved in this appeal is 1994-95. Theassessee computed the deduction under section 80HHC of the Income-taxAct, 1961 (in short, 'the Act') before setting off of the unabsorbeddepreciation, business loss and investment allowance. But,the assessingofficer computed the deduction under section 80HHC of the Act afterreducing the unabsorbed business loss, unabsorbed depreciation andunabsorbed investment allowance from the profit of the business. 3.2. On appeal by the assessee, the Commissioner of Income-tax(Appeals) confirmed the order of the assessing officer. 3.3. On further appeal by the assessee, the Appellate Tribunal heldthat the unabsorbed depreciation, unabsorbed business loss and unabsorbedinvestment allowance of the earlier years cannot be deducted beforegranting deduction under section 80HHC of the Act, and allowed the appeal.Hence, the present appeal raising the substantial questions of lawreferred supra. 4. According to the Revenue, the provisions of section 80AB of theAct should be applied while determining the business profits undersection 80HHC of the Act. On the other hand, the assessee contends thatsection 80HHC is a self-contained provision and for the purpose ofdeduction under section 80HHC, the computation should be made undersection 80HHC(3) and section 80AB of the Act would not control section80HHC of the Act. 5. Before proceeding further, it is apt to refer the relevantprovisions of sections 80AB and 80HHC of the Act. "80AB. Deductions to be made with reference to the incomeincluded in the gross total income.--Where any deduction isrequired to be made or allowed under any section (except section80M) included in this Chapter under the heading "C--Deductionsin respect of certain incomes" in respect of any income of thenature specified in that section which is included in the grosstotal income of the assessee, then, notwithstanding anythingcontained in that section, for the purpose of computing thededuction under that section, the amount of income of that 5. Before proceeding further, it is apt to refer the relevantprovisions of sections 80AB and 80HHC of the Act. "80AB. Deductions to be made with reference to the incomeincluded in the gross total income.--Where any deduction isrequired to be made or allowed under any section (except section80M) included in this Chapter under the heading "C--Deductionsin respect of certain incomes" in respect of any income of thenature specified in that section which is included in the grosstotal income of the assessee, then, notwithstanding anythingcontained in that section, for the purpose of computing thededuction under that section, the amount of income of that nature as computed in accordance with the provisions of this Act(before making any deduction under this Chapter) shall alone bedeemed to be the amount of income of that nature which isderived or received by the assessee and which is included in hisgross total income." "Section.80HHC. Deduction in respect of profits retained for exportbusiness.--(1) Where an assessee, being an Indian company or aperson (other than a company) resident in India, is engaged in thebusiness of export out of India of any goods or merchandise towhich this section applies, there shall, in accordance with andsubject to the provisions of this section, be allowed, in computingthe total income of the assessee, a deduction of the profitsderived by the assessee from the export of such goods ormerchandise: ..... (2)(a) This section applies to all goods or merchandise, other thanthose specified in clause (b), if the sale proceeds of such goodsor merchandise exported out of India are received in, or broughtinto, India by the assessee (other than the supportingmanufacturer) in convertible foreign exchange, within a period ofsix months from the end of the previous year or, ~within suchfurther period as the competent authority may allow in this behalf. Explanation.--For the purposes of this clause, the expression"competent authority" means the Reserve Bank of India or such otherauthority as is authorised under any law for the time being inforce for regulating payments and dealings in foreign exchange. (b) This section does not apply to the following goods ormerchandise, namely:-- (i) mineral oil; and (ii) minerals and ores (other than processed minerals andores specified in the Twelfth Schedule). Explanation 1.--The sale proceeds referred to in clause (a) shallbe deemed to have been received in India where such sale proceedsare credited to a separate account maintained for the purpose bythe assessee with any bank outside India with the approval of theReserve Bank of India. Explanation 2.--For the removal of doubts, it is hereby declaredthat where any goods or merchandise are transferred by an assesseeto branch, office, warehouse or any other establishment of theassessee situate outside India and such goods or merchandise are sold from such branch, office, warehouse or establishment, then,such transfer shall be deemed to be export out of India of suchgoods and merchandise and the value of such goods or merchandisedeclared in the shipping bill or bill of export as referred to insub-section (1) of section 50 of the Customs Act, 1962 (52 of1962), shall, for the purposes of this section, be deemed to be thesale proceeds thereof. (3) For the purposes of sub-section (1),-- (a) where the export out of India is of goods or merchandisemanufactured or processed by the assessee, the profits derived fromsuch export shall be the amount which bears to the profits of thebusiness, the same proportion as the export turnover in respect ofsuch goods bears to the total turnover of the business carried onby the assessee ; (b) where the export out of India is of trading goods, theprofits derived from such export shall be the export turnover inrespect of such trading goods as reduced by the direct costs andindirect costs attributable to such export ; (3) For the purposes of sub-section (1),-- (a) where the export out of India is of goods or merchandisemanufactured or processed by the assessee, the profits derived fromsuch export shall be the amount which bears to the profits of thebusiness, the same proportion as the export turnover in respect ofsuch goods bears to the total turnover of the business carried onby the assessee ; (b) where the export out of India is of trading goods, theprofits derived from such export shall be the export turnover inrespect of such trading goods as reduced by the direct costs andindirect costs attributable to such export ; (c) where the export out of India is of goods or merchandisemanufactured or processed by the assessee and of trading goods, theprofits derived from such export shall,-- (i) in respect of the goods or merchandise manufacturedor processed by the assessee, be the amount which bears to theadjusted profits of the business, the same proportion as theadjusted export turnover in respect of such goods bears to theadjusted total turnover of the business carried on by theassessee ; and (ii) in respect of trading goods, be the export turnoverin respect of such trading goods as reduced by the direct andindirect 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 theamount which bears to ninety per cent of any sum referred to inclause (iiia) (not being profits on sale of a licence acquired fromany other person), and clauses (iiib) and (iiic) of section 28, thesame proportion as the export turnover bears to the total turnoverof the business carried on by the assessee. Provided further that in the case of an assessee having exportturnover not exceeding rupees ten crores during the previous year,the profits computed under clause (a) or clause (b) or clause (c)of this sub-section or after giving effect to the first proviso, as the case may be, shall be further increased by the amount whichbears to ninety per cent. of any sum referred to in clause (iiid)or clause (iiie), as the case may be, of section 28, the sameproportion as the export turnover bears to the total turnover ofthe business carried on by the assessee : Provided also that in the case of an assessee having exportturnover exceeding rupees ten crores during the previous year, theprofits computed under clause (a) or clause (b) or clause (c) ofthis sub-section or after giving effect to the first proviso, asthe case may be, shall be further increased by the amount whichbears to ninety per cent. of any sum referred to in clause (iiid)of section 28, the same proportion as the export turnover bears tothe total turnover of the business carried on by the assessee, ifthe assessee has necessary and sufficient evidence to prove that, - (a) he had an option to choose either the duty drawback or theDuty Entitlement Pass Book Scheme, being the Duty Remission Scheme;and (b) the rate of drawback credit attributable to the customsduty was higher than the rate of credit allowable under the DutyEntitlement Pass Book Scheme, being Duty Remission Scheme : Provided also that in the case of an assessee having exportturnover exceeding rupees ten crores during the previous year, theprofits computed under clause (a) or clause (b) or clause (c) ofthis sub-section or after giving effect to the first proviso, asthe case may be, shall be further increased by the amount whichbears to ninety per cent. of any sum referred to in clause (iiie)of section 28, the same proportion as the export turnover bears tothe total turnover of the business carried on by the assessee, ifthe assessee has necessary and sufficient evidence to prove that, - (a) he had an option to choose either the duty drawback or theDuty Free Replenishment Certificate, being Duty Remission Scheme;and Provided also that in the case of an assessee having exportturnover exceeding rupees ten crores during the previous year, theprofits computed under clause (a) or clause (b) or clause (c) ofthis sub-section or after giving effect to the first proviso, asthe case may be, shall be further increased by the amount whichbears to ninety per cent. of any sum referred to in clause (iiie)of section 28, the same proportion as the export turnover bears tothe total turnover of the business carried on by the assessee, ifthe assessee has necessary and sufficient evidence to prove that, - (a) he had an option to choose either the duty drawback or theDuty Free Replenishment Certificate, being Duty Remission Scheme;and (b) the rate of drawback credit attributable to the customsduty was higher than the rate of credit allowance under the dutyFree Replenishment Certificate, being Duty Remission Scheme. Explanation. - For the purposes of this clause, "rate of creditallowable" means the rate of credit allowable under the Duty Freereplenishment Certificate, being the Duty Remission Schemecalculated in the manner as may be notified by the CentralGovernment. Explanation.--For the purposes of this sub-section,-- (a) "adjusted export turnover" means the export turnover asreduced by the export turnover in respect of trading goods ; (b) "adjusted profits of the business" means the profits ofthe business as reduced by the profits derived from the business ofexport out of India of trading goods as computed in the mannerprovided in clause (b) of sub-section (3) ; (c) "adjusted total turnover" means the total turnover of thebusiness as reduced by the export turnover in respect of tradinggoods ; (d) "direct costs" means costs directly attributable to thetrading goods exported out of India including the purchase price ofsuch goods ; (e) "indirect costs" means costs, not being direct costs,allocated in the ratio of the export turnover in respect of tradinggoods to the total turnover ; (f) "trading goods" means goods which are not manufactured orprocessed by the assessee. (3A) For the purposes of sub-section (1A), profits derived by asupporting manufacturer from the sale of goods or merchandise shallbe,-- (a) in a case where the business carried on by the supportingmanufacturer consists exclusively of sale of goods or merchandiseto one or more Export Houses or Trading Houses, the profits of thebusiness; (b) in a case where the business carried on by the supportingmanufacturer does not consist exclusively of sale of goods ormerchandise to one or more Export Houses or Trading Houses, theamount which bears to the profits of the business the sameproportion as the turnover in respect of sale to the respectiveExport House or Trading House bears to the total turnover of thebusiness carried on by the assessee. (4) The deduction under sub-section (1) shall not be admissibleunless the assessee furnishes in the prescribed form along with thereturn of income, the report of an accountant, as defined in theExplanation below sub-section (2) of section 288, certifying thatthe deduction has been correctly claimed in accordance with theprovisions of this section. (4A) The deduction under sub-section (1A) shall not be admissibleunless the supporting manufacturer furnishes in the prescribed formalong with his return of income,-- (a) the report of an accountant, as defined in the Explanationbelow sub-section (2) of section 288, certifying that the deductionhas been correctly claimed on the basis of the profits of thesupporting manufacturer in respect of his sale of goods ormerchandise to the Export House or Trading House; and (b) a certificate from the Export House or Trading Housecontaining such particulars as may be prescribed and verified inthe manner prescribed that in respect of the export turnovermentioned in the certificate, the Export House or Trading House hasnot claimed the deduction under this section: (4A) The deduction under sub-section (1A) shall not be admissibleunless the supporting manufacturer furnishes in the prescribed formalong with his return of income,-- (a) the report of an accountant, as defined in the Explanationbelow sub-section (2) of section 288, certifying that the deductionhas been correctly claimed on the basis of the profits of thesupporting manufacturer in respect of his sale of goods ormerchandise to the Export House or Trading House; and (b) a certificate from the Export House or Trading Housecontaining such particulars as may be prescribed and verified inthe manner prescribed that in respect of the export turnovermentioned in the certificate, the Export House or Trading House hasnot claimed the deduction under this section: Provided that the certificate specified in clause (b) shall be dulycertified by the auditor auditing the accounts of the Export Houseor Trading House under the provisions of this Act or under anyother law. (4B) For the purposes of computing the total income under sub-section (1) or sub-section (1A), any income not charged to taxunder this Act shall be excluded. Explanation.--For the purposes of this section,-- (a) "convertible foreign exchange" means foreign exchangewhich is for the time being treated by the Reserve Bank of India asconvertible foreign exchange for the purposes of the ForeignExchange Regulation Act, 1973 (46 of 1973), and any rules madethereunder; (aa) "export out of India" shall not include any transactionby way of sale or otherwise, in a shop, emporium or any otherestablishment situate in India, not involving clearance at anycustoms station as defined in the Customs Act, 1962 (52 of 1962) ; (b) "export turnover" means the sale proceeds received in, orbrought into, India by the assessee in convertible foreign exchangein accordance with clause (a) of sub-section (2) of any goods ormerchandise to which this section applies and which are exportedout of India, but does not include freight or insuranceattributable to the transport of the goods or merchandise beyondthe customs station as defined in the Customs Act, 1962 (52 of1962). (ba) "total turnover" shall not include freight or insuranceattributable to the transport of the goods or merchandise beyondthe customs station as defined in the Customs Act, 1962 (52 of1962): Provided that in relation to any assessment year commencing on orafter the 1st day of April, 1991, the expression "total turnover"shall have effect as if it also excluded any sum referred to inclauses (iiia), (iiib) and (iiic) of section 28 ; (baa) "profits of the business" means the profits of thebusiness as computed under the head "Profits and gains of businessor profession" as reduced by-- (1) ninety per cent. of any sum referred to in clauses(iiia), (iiib) and (iiic) of section 28 or of any receipts by wayof brokerage, commission, interest, rent, charges or any otherreceipt of a similar nature included in such profits ; and (2) the profits of any branch, office, warehouse or anyother establishment of the assessee situate outside India ; (c) "Export House Certificate" or "Trading House Certificate"means a valid Export House Certificate or Trading HouseCertificate, as the case may be, issued by the Chief Controller ofImports and Exports, Government of India; (d) "supporting manufacturer" means a person being an Indiancompany or a person (other than a company) resident in India,manufacturing (including processing) goods or merchandise andselling such goods or merchandise to an Export House or a TradingHouse for the purposes of export. (2) the profits of any branch, office, warehouse or anyother establishment of the assessee situate outside India ; (c) "Export House Certificate" or "Trading House Certificate"means a valid Export House Certificate or Trading HouseCertificate, as the case may be, issued by the Chief Controller ofImports and Exports, Government of India; (d) "supporting manufacturer" means a person being an Indiancompany or a person (other than a company) resident in India,manufacturing (including processing) goods or merchandise andselling such goods or merchandise to an Export House or a TradingHouse for the purposes of export. 6. It is not in dispute that section 80HHC of the Act, whichprovides for deduction in respect of profits retained for export business,has been incorporated in the Income-tax Act, 1961, with a view toproviding incentive for earning foreign exchange. A plain reading ofsection 80HHC makes it clear that in arriving at profits earned fromexport of both self manufactured goods and trading goods, the profits andlosses in both trades have to be taken into consideration. If, after suchadjustments, there is a positive profit the assessee would be entitled todeduction under section 80HHC(1) of the Act and if there is a loss theassessee would not be entitled to deduction. In arriving at the figure ofpositive profit, both the profits and the losses will have to beconsidered. If the net figure is a positive profit then the assessee willbe entitled to deduction and if the net figure is a loss then theassessee will not be entitled to deduction. A plain reading of sub-section(3)(c) shows that “profits from such exports” has to be profits of exports of self-manufactured goods plus profits of exports of trading goods. Theopening words “profit derived from such exports” together with the word“and” clearly indicate that the profits have to be calculated by countingboth the exports. Deduction can be permitted under section 80HHC(1) onlyif there is a positive profit in the exports of both self-manufacturedgoods as well as trading goods. If there is a loss in either of the two,then the loss has to be taken into account for the purposes of computingthe profits. On the other hand, the Section 80AB of the Act, which is alsoin Chapter VI-A, starting with the words “where any deduction is requiredto be made or allowed under any section of this Chapter” would includesection 80HHC also. Further, section 80AB of the Act provides that“notwithstanding anything contained in that section”. Thus section 80AB ofthe Act has been given an overriding effect over all other sections inChapter VI-A. But, section 80HHC does not provide that its provisions areto prevail over section 80AB of the Act or over any other provision of theAct. Section 80HHC of the Act would thus be governed by section 80AB ofthe Act. [vide: IPCA Laboratory Ltd. v. Deputy Commissioner of Income-tax,266 ITR (SC) 521]. 7. In this view of the matter, we are of the view that it is notcorrect to say that section 80HHC of the Act is a self-contained provisionand section 80 AB of the Act cannot be applied to section 80 HHC of theAct. In other words, section 80AB of the Act will prevail over any otherprovision in Chapter VIA of the Act and Section 80HHC of the Act wouldthus be governed by section 80AB of the Act. We therefore hold that theunabsorbed business losses, unabsorbed depreciation, etc. should be takeninto account while computing income for the purpose of deduction undersection 80HHC of the Act. The Appellate Tribunal is not correct in holdingthat the unabsorbed depreciation, unabsorbed business loss and unabsorbedinvestment allowance of earlier years cannot be deducted before grantingdeduction under section 80 HHC of the Act and that the provisions ofsection 80AB of the Act cannot be applied while determining the businessprofits under section 80HHC. 8. Accordingly, we answer the 1[st] question as reframed and also the 2[nd]question in the negative, against the assessee and in favour of theRevenue. The appeal stands allowed. No costs. Sd/Asst.Registrar /true copy/ na. Sub Asst.Registrar https://hcservices.ecourts.gov.in/hcservices/ To 1.The Assistant Registrar,Income Tax Appellate Tribunal,Rajaji Bhavan,Besant Nagar, Chennai - 90.Income Tax Appellate Tribunal,Rajaji Bhavan,Besant Nagar, Chennai - 90. 2.The Secretary, Central Board of Direct Taxes, New Delhi.of Direct Taxes, New Delhi. 3.The Commissioner of Income-Tax (Appeals-V), Madras.Tax (Appeals-V), Madras. 4.The Deputy Commr. of Income-tax,Company Circle IV(6), Madras. Company Circle IV(6), Madras. 1 cc To Mr.Pushya Sitaraman, Advocate, SR.11544. T.C.(A).No.62 of 2004 SGL(CO)RVL 16.03.2007