M/S. Seven Stars A Registered Partnership Firm v. Deputy Commissioner Of Income Tax, Special Range

DDR IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO. 781 OF 2002 M/s. Seven Starsa registered partnership firm having its registered office at 117, Prasad Chambers, Opera House, Bombay-400 004.vs.1. Deputy Commissioner of IncomeTax, Special Range-48, having hisoffice at Matru Mandir, Tardeo Road,Bombay – 400 007. ..Appellant 2. Union of Indiathrough Ministry of Law,Ayakar Bhavan, Maharshi KarveMarg, Bombay – 400 020. ..Respondents …........ Ms. A. Vissanji for appellant.Mr. Suresh Kumar for respondents. …........ CORAM : NITIN JAMDAR &M.S.KARNIK, JJ. DATE : 13 JANUARY 2020 -ORAL JUDGMENT (PER NITIN JAMDAR, J.) : The Appellant carried on business of exports of cutand polished diamonds. The Appellant, apart from the work ofcutting and polishing diamonds, also undertook work of otherexporters on contract basis. By the Assessment Year 1991-92,period relevant for this appeal, the Appellant received an amountof Rs.10,67,350/- which was credited by the Appellant under thehead “Reassortment Charges”. The Appellant also received anamount of Rs.1,48,909/- as “Labour Commission Charges” sincethe Appellant had given a work of cutting and polishingdiamonds on sub-contracts. 2.The Appellant filed the return of income on7 October 1991 declaring income of Rs.1,57,660/- after claimingdeduction of Rs.30,43,279/- under Section 80 HHC of theIncome Tax Act, 1961. The Assessing Officer by order dated 28August 1992 excluded the amount of Reassortment Charges andLabour Commission Charges. Having restricted the deductionunder Section 80 HHC to Rs.19,96,710/-, the Assessing Officerpassed the order on 28 August 1992. 3.The Appellant filed an appeal with the Commissionerof Income Tax (Appeals), which was allowed in favour of theAppellant by order dated 22 June 1994. The Respondent-Revenuefiled Income Tax Appeal bearing No.4971/Bom/94 before the 36. itxa 781-2002-judg..docIncome Tax Appellate Tribunal and the Tribunal allowed theAppeal of the Revenue by order dated 6 May 2002. Hence, thepresent Appeal is filed by the Appellant-Assesssee. 4.The Appeal was admitted on the following substantialquestion of law :- “Whether on the facts and circumstances of the case theRespondent No.1 is justified in excluding from the totalbusiness income the Re-assortment charges amountingto Rs.10,67,350/- and Labour Commission ofRs.1,48,809 for the purpose of calculating deductionunder Section 80 HHC of the Act ?” 5.We have heard Ms. A. Vissanji for the Appellant andMr. Suresh Kumar for Respondents. 6.We have perused the order of the Tribunal. TheTribunal firstly recorded that Reassortment charges are nothingbut a commission received from diamond traders when theassessee facilitated sale of their goods to foreign buyers. The labourcommission was also received by the assessee from other diamonddealers for cutting and polishing the diamonds. Then the Tribunalfollowed the decision of this Court wherein it was held that suchcharges are not includeble in business profits for the purpose ofcomputation of special deduction under Section 80HHC of theAct. Accordingly the Appeal was allowed. 36. itxa 781-2002-judg..doc 7.The Assessment Year in question is of importance.The Assessment Year is 1991-92. The Section 80 HHC of the Actwas amended with effect from 1 April 1992 and explanation wasbrought in the same. In the case of K.K. Doshi and Co. v.Commissioner of Income-Tax[1], an issue arose before this Courtwhether the service charges constitute business income for thepurposes of computing export profits under Section 80HHC.While deciding the question, the Court made the followingobservations :- 36. itxa 781-2002-judg..doc 7.The Assessment Year in question is of importance.The Assessment Year is 1991-92. The Section 80 HHC of the Actwas amended with effect from 1 April 1992 and explanation wasbrought in the same. In the case of K.K. Doshi and Co. v.Commissioner of Income-Tax[1], an issue arose before this Courtwhether the service charges constitute business income for thepurposes of computing export profits under Section 80HHC.While deciding the question, the Court made the followingobservations :- “ The object of section 80HHC is to ascertain the exportprofits. It may be mentioned that in this case we areconcerned with the law prior to the assessment year 1992-93. Under section 80HHC(3), as it stood before April 1,1992, profits derived from exports were computed in thefollowing manner : Export turnover Business profits X -------------------- Total turnover The said formula, however, gave a distorted figure ofexport profits when receipts like interest, commission, etc.,which do not have an element of turnover came to beincluded in the profit and loss account. Every assessee triesto inflate, in the above formula, the business profits andcorrespondingly, he tries to reduce the denominator, viz.,total turnover. It is for this reason that the Legislatureamended the above formula by amending the law from theassessment year 1992-93 by clarifying that in the aboveformula the business profits will not include receipts byway of brokerage, commission, interest, rent charges or any other receipt of a similar nature. However, as someexpenditure might be incurred in earning the aboveincome by way of brokerage, commission, etc., an ad hoc10 percent deduction from such income was provided forto account for the expenses. Similarly, under Explanation(ba) to Section 80 HHC, the Legislature has explained thatthe words “total turnover” shall not include freight orinsurance. On the other hand, vide clause (b) to theExplanation to section 80HHC, the Legislature hasdefined the words “export turnover” to mean the saleproceeds, but not freight or insurance. The combinedmeaning of clauses (b) and (ba) to the Explanation showsthat the business profits in the above formula shall notinclude receipts by way of brokerage, commission, interest,rent charges or any other receipt of a similar nature as theydo not have any nexus with the sale proceeds from exportactivities. Therefore, the service charges cannot beconsidered as part of the business profits while working outdeductions under section 80HHC. The judgment of theSupreme Court in the case of CIT v. Sterling Foods (1999)237 ITR 579, dealt with the provisions of section 80HH.In that judgment, the Supreme Court was required toconstrue the expression “derived from” in section 80HH.In that manner, the assessee was engaged in processingprawns. It earned import entitlements from the CentralGovernment under an Export Promotion Scheme. Theassessee was entitled to sell the same. The assessee sold thesaid entitlements. In its total income for the assessmentyear 1979-80, the assessee included the sale proceeds andclaimed relief under section 80HH. The High Court heldthat the income which the assessee made by selling theimport entitlements was not a profit and gain which theassessee had derived from industrial undertaking. TheDivision Bench held in favour of the assessee on the basisof the retrospective amendment to section 28 of the Act bythe Finance Act, 1990, making such receipts taxable as business profits. It was held by the Supreme Court that theword “derived” is followed by the word “from” whichmeant arising from a source. The Supreme Court held onthe facts of that case that import entitlements did notoriginate from the industrial undertaking of the assessee,but it came from the Export Promotion Scheme of theGovernment. The Supreme Court held that the words“derived from” indicated a direct nexus between the profitsand gains on the one hand and the industrial undertakingon the other hand since under section 80HH theexpression used is “derived from the industrialundertaking”. In that matter, on the facts, the SupremeCourt held that since the export entitlements were madeavailable under the Scheme of the Government the nexusbetween the profits and the industrial undertaking wasonly incidental and not direct. Accordingly, the SupremeCourt allowed the appeal of the Department. Thisjudgment helps the case of the Department in this matter.Section 80HHC(1) clearly states that in computing thetotal income of the assessee, there shall be a deduction ofthe profits derived by the assessee from the export of goods.In other words, there should be a direct nexus between theprofits on the one hand and the export activity on the otherhand. Applying the ratio of the judgment of the SupremeCourt to the facts of our case, the profits earned by theassessee on account of service charges cannot be said tohave a direct nexus with the export activities of theassessee. Hence, to that extent, the assessee was notentitled to claim deduction under section 80HHC. ” Thus, the Court observing as above opined that though prior tothe amendment export profits included interest, commission, etc.,which did not have element of turnover came to be included in theprofit and loss account. By way of amended provisions in the 36. itxa 781-2002-judg..doc Explanation (ba) to Section 80HHC of the Income Tax Act, 1961it was no longer permissible to do so. The Court opined that therewas no nexus between the profits on the one hand and the exportactivity on the other hand, which was necessary. 8.The question of retrospective operation of the 1991amendment to Section 80HHC arose for consideration of theSupreme Court in the case of P.R. Prabhakar v. Commissioner ofIncome-Tax[2]. The Supreme Court held that the amendment couldnot be considered as retrospective. 9.Thereafter when the challenge of the Respondent-Revenue to the decision of this Court in K.K. Doshi and Co.(supra) consideration of the Supreme Court. The Supreme Courtdisposed of the said appeal by observing thus :- “The main point in this appeal is as to whether theamendment to section 80HHC of the Income-tax Act,1961, brought about by the Finance (No.2) Act, 1991,with effect from April 1, 1992, is prospective in natureor is retrospective.amendment to section 80HHC of the Income-tax Act,1961, brought about by the Finance (No.2) Act, 1991,with effect from April 1, 1992, is prospective in natureor is retrospective. This court in the case of P.R. Prabhakar v. CIT [2006]284 ITR 548, relying upon Circular No.621 datedDecember 19, 1991, issued by the Central Board ofDirect Taxes (CBDT), has held that the amendment inquestion is prospective in nature and the same isbinding on the Revenue. In view of Circular No.621 dated December 19, 1991issued by the Central Board of Direct Taxes and theaforesaid judgment of this court, these appeals areaccepted and the orders passed by the High Court ofBombay are set aside leaving the parties to bear theirown costs. The appeals stand allowed in the above terms.” The Supreme Court thus noted the decision in the case of P.R.Prabhakar (supra) and disposed of the Appeal setting aside theorder passed in K.K. Doshi (supra) holding that the amendment of1 April 1992 is prospective in nature. In view of Circular No.621 dated December 19, 1991issued by the Central Board of Direct Taxes and theaforesaid judgment of this court, these appeals areaccepted and the orders passed by the High Court ofBombay are set aside leaving the parties to bear theirown costs. The appeals stand allowed in the above terms.” The Supreme Court thus noted the decision in the case of P.R.Prabhakar (supra) and disposed of the Appeal setting aside theorder passed in K.K. Doshi (supra) holding that the amendment of1 April 1992 is prospective in nature. 10.In view of this dicta of the Supreme Court in the caseof P.R. Prabhakar (supra) and K.K. Doshi (supra), the foundationof the decision of the Tribunal does not survive and the questionof law as framed will have to be answered against the Revenue. 11.In the circumstances, declaring thus, the Appeal isdisposed of. (M.S.KARNIK, J.) (NITIN JAMDAR, J.) Digitallysigned byDikshaDikshaRaneRaneDate:2020.01.2115:37:33+0530