M/S. Shivani Exports A Registered Partnership Firm v. Assistant Commissioner Of Income Tax Circle 19(1) Having Office At Aayakar Bhavan, Maharshi Karve Marg, Bombay-400 020

Pradnya Bhogale IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTIONINCOME TAX APPEAL NO. 761 OF 2002 M/s. Shivani Exportsa registered partnershipfirm having its registeredoffice at 705, MagesticShopping Centre, 144 Girgaum,Bombay-400 004.vs. ..Appellant 1. Assistant Commissioner of Income Tax Circle 19(1) having office at Aayakar Bhavan, Maharshi Karve Marg, Bombay-400 020 2. Union of India, through Ministry of Law, Aayakar Bhavan, Maharshi Karve Marg, Bombay-400 020 ..Respondents …........ Ms. A. Vissanji for Appellant.Mr. A.R. Malhotra for Respondents. …........ CORAM : NITIN JAMDAR & M.S.KARNIK, JJ. DATE : 8 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 of This judgment has been corrected pursuant to the order dated 21/01/2020. 1/9 202 itxa 761-02 (modified).doc cutting 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.22,48,436/- which was credited by the Appellant under thehead “Factory labour charges”. The Appellant also received anamount of Rs.73,078/- as “Labour charges commission” since theAppellant had given a work of cutting and polishing diamonds onsub-contracts. 2.The Appellant filed the return of income on31 October, 1991 declaring income of Rs.2,23,810/- after claimingdeduction of Rs.14,60,274/- under Section 80 HHC of theIncome Tax Act, 1961. The Assessing Officer by order dated 18March, 1993 excluded the amount of Factory Labour Charges andLabour Charges Commission totaling Rs.23,01,514/-. Havingrestricted the deduction under Section 80 HHC to Rs.11,18,588/-,the Assessing Officer passed the order on 18 March, 1993. 3.The Appellant filed an appeal with the Commissionerof Income Tax (Appeals), which was allowed in favour of theAppellant by order dated 25 October, 1994. The Respondent-Revenue filed I.T.A. No.293/B/1995 before the Income TaxAppellate Tribunal and the Tribunal allowed the Appeal of theRevenue by order dated 23 April, 2002. Hence, the presentAppeal is filed by the Appellant-Assesssee. This judgment has been corrected pursuant to the order dated 21/01/2020. 2/9 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 labour charges amounting toRs.22,28,436/- and Labour Commission of Rs.73,078/-for the purpose of calculating deductions under Section80 HHC of the Act ?” 5.We have heard Ms. A. Vissanji for the Appellant andMr. A.R. Malhotra for Respondents. 6.For the sake of convenience we have reproduced theimpugned order which reads thus : “Revenue is in appeal arising out of the order of CIT(A) dated 25.10.1994 and the only ground raised is asunder. “On the facts and in the circumstances in the case, theCIT(A) has erred in allowing the Assessee’s claim fordeduction U/s 80 HHC on the Labour Charges andLabour Commission totaling to Rs.23,01,514/- received bythem from local parties”. 2.As per A.O.’s Order U/s 143(3) dated 18.3.1993, theLabour Commission and Labour Charges received by theAssessee of Rs.23,01,514/- had no connection with theexport business, therefore, while calculating deduction U/s80 HHC, it was held that the assessee was not entitled forthe said claim. The assessee has claimed the deduction U/s80 HHC at Rs.14,18,224/- against which the AssessingOfficer has allowed the deduction at Rs.11,18,580/-. “Revenue is in appeal arising out of the order of CIT(A) dated 25.10.1994 and the only ground raised is asunder. “On the facts and in the circumstances in the case, theCIT(A) has erred in allowing the Assessee’s claim fordeduction U/s 80 HHC on the Labour Charges andLabour Commission totaling to Rs.23,01,514/- received bythem from local parties”. 2.As per A.O.’s Order U/s 143(3) dated 18.3.1993, theLabour Commission and Labour Charges received by theAssessee of Rs.23,01,514/- had no connection with theexport business, therefore, while calculating deduction U/s80 HHC, it was held that the assessee was not entitled forthe said claim. The assessee has claimed the deduction U/s80 HHC at Rs.14,18,224/- against which the AssessingOfficer has allowed the deduction at Rs.11,18,580/-. 3.In first appeal, learned CIT(A) has referred a Board’scircular No.564.571 and 621 and observed that as persection 80(II)C(3), the profit derived from export of goodsor merchandise outside India is to be the amount whichbears to the profits and gains of the business the sameproportion as the export turnover bears to the totalturnover of the business. Accordingly, she has held thatthe profit of a business have to be computed on theproportion of a business have to be computed on theproportion of the expert turnover and total turnover withreference to that profit as would be computed under thehead “Profit and Gains of Business or Profession”. She hasconcluded that there was no jurisdiction for excluding suchancillary receipts and directed to allow deduction to theassessee. 4.On the date of hearing i.e. on 15.4.2002, anapplication for adjournment was moved from the side ofthe assessee, which was rejected on the ground that theonly issue as per ground taken is covered by the decisionsof jurisdictional high court, therefore, no point in keepingthis appeal pending. 5.On behalf of Revenue Ld. DR Mr. Joe Sebastinappeared and cited two decisions of Bombay High Court infavour of Revenue, firstly, K.K. Doshi and Company 245ITR 849 and secondly. S.G. Jhaveri Consultancy 248 ITR854. 6.In view of the facts referred in above paras, we havefound that the issue is directly covered in favour ofRevenue by the decisions of jurisdictional High Court inthe case of K.K. Doshi and Company (Supra) and S.G.Jhaveri Consultancy (Supra). Respectfully following thesaid decisions, we hereby reverse the finding of CIT(A) andallow the ground of 415the Revenue. 7.In the result, the appeal of the revenue is allowed.” This judgment has been corrected pursuant to the order dated 21/01/2020. 4/9 7.The order passed by the Tribunal is based on thedecisions rendered by this Court in the case of K.K. Doshi and Co.v. Commissioner of Income-Tax [1] and S.G. JhaveriConsultancy v.Commissioner of Income-Tax [2]. Thus that is the foundation of theorder. 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. (supra),an issue arose whether the service charges constitute businessincome for the purposes of computing export profits underSection 80HHC. While deciding the question, the Division Benchmade the following observations :- “ 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 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., 1245 ITR 8492248 ITR 8542248 ITR 854 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 anyother 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 the import 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 asbusiness 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. ” 202 itxa 761-02 (modified).doc Thus, the Division Bench observing as above opined that thoughprior to the amendment export profits included interest,commission, etc., which did not have element of turnover came tobe included in the profit and loss account. By way of amendedprovisions in the Explanation (ba) to Section 80HHC of theIncome Tax Act, 1961 it was no longer permissible to do so.The Division Bench opined that there was no nexus between theprofits on the one hand and the export activity on the other hand,which was necessary. 8. The question of retrospective operation of the 1991 amendment to Section 80HHC arose for consideration of theSupreme Court in the case of P.R. Prabhakar v. Commissioner ofIncome-Tax. 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 the amendment tosection 80HHC of the Income-tax Act, 1961, brought about bythe Finance (No.2) Act, 1991, with effect from April 1, 1992, isprospective in nature or is retrospective. This court in the case of P.R. Prabhakar v. CIT [2006] 284 ITR548, relying upon Circular No.621 dated December 19, 1991, issued by the Central Board of Direct Taxes (CBDT), has held thatthe amendment in question is prospective in nature and the sameis binding on the Revenue. In view of Circular No.621 dated December 19, 1991 issued bythe Central Board of Direct Taxes and the aforesaid judgment ofthis court, these appeals are accepted and the orders passed by theHigh Court of Bombay are set aside leaving the parties to beartheir own 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. issued by the Central Board of Direct Taxes (CBDT), has held thatthe amendment in question is prospective in nature and the sameis binding on the Revenue. In view of Circular No.621 dated December 19, 1991 issued bythe Central Board of Direct Taxes and the aforesaid judgment ofthis court, these appeals are accepted and the orders passed by theHigh Court of Bombay are set aside leaving the parties to beartheir own 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.)