Shri.gerard Perira v. The Income-Tax Officer,Range Xv(1), Chennai

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 30.08.2016 CORAM: THE HONOURABLE MR.JUSTICE S.MANIKUMARand THE HONOURABLE MR.JUSTICE D.KRISHNA KUMAR T.C.A.No.1121 of 2007 Shri.Gerard Perira .. Appellant versus The Income-Tax Officer,Range XV(1), Chennai... Respondent Prayer: Tax Case Appeal filed under Section 260A of the Income Tax Act, 1961, against the order made in I.T.A.No.3094/Mds/2004, dated 21.09.2006. For Appellant:Ms.Sushma Harinifor Ms.Dr.Anita Sumanth For Respondent :Mr.S.Rajesh,Standing Counsel for Income-Tax Dept., COMMON ORDER (Order of the Court was made by S.MANIKUMAR, J.) Tax Case Appeal is directed against the order made in I.T.A.No.3094/Mds/2004, dated 21.09.2006, on the file of the Income Tax Appellate Tribunal, 'A' Bench, Chennai, for the assessment year 1999-2000. 2.Short facts leading to the appeal are that the appellant is engaged in the manufacture and export of fabrics. For the assessment year 1999-2000, the appellant has filed return of income on 24.12.1999, wherein, he had adjusted the gross total income of Rs.25,51,237/-, against deductions of Rs.26,01,894/- and Rs.12,000/-, under Sections 80HHC and 80L of the Income Tax Act, 1961, respectively. The claim of Rs.26,01,894/-, also included deduction, under Section 80HHC of the Act, in respect of interest income of Rs.20,58,049/-, which the appellant treated, as business income. 3.The assessing officer issued notice, under Section 148 of the Act, followed by notices, under Sections 142(1) and 143(2) of the Act and after considering the material on record, and the submissions of the appellant's representative, passed an order, dated 13.01.2004, under Section 143(3) of the Act, determining the taxable income at Rs.21,78,049/- and allowed deduction, under Section 80HHC of the Act, to an extent of Rs.4,93,188/- only. While arriving at the taxable income, the assessing officer subjected to tax, interest income of Rs.20,58,049/-, under the head, "Other Sources", and also denied the benefit of deduction, under Section 80HHC, on the said sum. 3 4.Being aggrieved by the same, the appellant/assessee filed an appeal, in I.T.A.No.28/2004-05, before the Commissioner of Income-Tax (Appeal), Chennai. Contention has been made that the appellant was enjoying credit facilities towards working capital, from State Bank of India, for which, the appellant had to make certain deposits, out of realisation of sale proceeds of the exports made, and the interest earned on such deposits, which accumulated over a period of four years, had to be treated as "business income" only, and not as income from "other sources". The appellant has also contended that the Bankers would not have sanctioned any loan facility, without such deposits and therefore, income from such deposits, had a close link with the business of export activity. 5.Before the appellate authority, a further contention has also been made that when the assessing officer allowed interest expenditure on credit facilities, given by the bank, as "business expenditure", he was not correct, in taking the interest income, under the head, "other sources". Therefore, it was submitted that the assessing officer ought to have treated interest income, on the deposits as business income, because credit facility could not have been extended to the appellant, without maintenance of such deposits, with the said Bank. 4 6.The appellant has further contended that a distinction has to be made between the interest earned on such deposit and interest earned on other deposits, with the bankers, which represented surplus deposits, and therefore, it has been contended that the interest income of Rs.20,58,049/-, should be added as "business income" only and not "other sources". To substantiate that the State Bank of India has extended credit facility of Rs.1.70 Crores, a letter has been produced. 4 6.The appellant has further contended that a distinction has to be made between the interest earned on such deposit and interest earned on other deposits, with the bankers, which represented surplus deposits, and therefore, it has been contended that the interest income of Rs.20,58,049/-, should be added as "business income" only and not "other sources". To substantiate that the State Bank of India has extended credit facility of Rs.1.70 Crores, a letter has been produced. 7.After considering the rival submissions and taking note of the decision of this Court in CIT v. Nizar Ahmed & Co., reported in 259 ITR 244 and rejecting the decision of the Special Bench (Delhi) of the ITAT in Lalsons Enterprises v. DCIT (89 ITD 25), relied on by the appellant, vide order, dated 20.08.2004, in I.T.A.No.28/2004-05, the Commissioner of Income Tax (Appeals)-XII, Chennai, dismissed the appeal as hereunder: "Further, Their Lordships have held that the Bank's decision to extend credit facilities was linked more to the business prospects of the assessee and the confidence the bank had in the integrity and the entrepreneurial capacity of the partners who run the business. Hence, interest income, has to be excluded for the purpose of allowing special deduction u/s.80HHC. So, in view of the Madras High Court decision cited above which has been rendered in a case with simular situation which is against the appellant, it is clear that the Special Bench decision of the ITAT, Delhi relied upon by the appellant will not be applicable to his case. It may also be of significance to cite the Madras High Court decision in the case of K.S.Subbiah Pillai & Co., (India) Pvt. Ltd., v. CIT (260 ITR 304), wherein, it has been clearly held that interest paid and claimed as deduction in computing business income cannot be set off against interest receipt and computed as income from 'Other Sources'. In view of the categorical finding given by the Madras High Court also, it has to be held that the Special Bench decision relied upon by the appellant will not be applicable to his case. 8. Thus, the assessing officer's action of assessing the interest income from Fixed Deposits under the head, 'Other Sources' is upheld and therefore that interest income would not be eligible for any deduction, u/s. 80HHC. In the result, the appeal is dismissed." 8.Being aggrieved by the order, the assessee has filed an appeal in I.T.A.No.3094/Mds/2004, before the Income-Tax Appellate Tribunal, 'A' Bench, Chennai, contending inter alia, that both the assessing officer, as well as the Commissioner of Income Tax (Appeals), have failed to consider the plea putforth by them that, the interest earnings constituted "business income" and the deposit was required to be maintained, as a part of terms of sanction, for the credit facilities. In other words, contention has been made before the Tribunal that the deposits were not made voluntarily by the appellant, as investment, but it was a requirement, to carry on the business activity, and thus, "business income". 9.Before the Tribunal, a further contention has been made that the appellate authority has failed to consider the evidence adduced by the appellant that the abovesaid interest earning was on the deposits generated by withholding a portion of the export earning, over the years and such withholding was an integral part of the terms of sanction, for the credit facilities to them, by the bankers. Contention has also been made that reliance on the decision of CIT v. Nizar Ahmed & Co., reported in 259 ITR 244, was misplaced. 10.After hearing both parties, vide order, dated 21.09.2006, in I.T.A.No.3094/Mds/2004, the Income Tax Appellate Tribunal, 'A' Bench, Chennai, at Paragraphs 3 and 4, held as follows: 9.Before the Tribunal, a further contention has been made that the appellate authority has failed to consider the evidence adduced by the appellant that the abovesaid interest earning was on the deposits generated by withholding a portion of the export earning, over the years and such withholding was an integral part of the terms of sanction, for the credit facilities to them, by the bankers. Contention has also been made that reliance on the decision of CIT v. Nizar Ahmed & Co., reported in 259 ITR 244, was misplaced. 10.After hearing both parties, vide order, dated 21.09.2006, in I.T.A.No.3094/Mds/2004, the Income Tax Appellate Tribunal, 'A' Bench, Chennai, at Paragraphs 3 and 4, held as follows: "3.Before us also the assessee's counsel reiterated the same arguments. He further replying on the decision of the Hon'ble Delhi High Court in the case of CIT v. Koshika Telecom Ltd., (2006) 203 CTR 99, vehemently argued that this interest income accrued on margin money deposit with the bank which was inextricably linked to the furnishing of bank guarantee by the assessee and hence, it is to be treated as business income and should have been included in the business profits which will qualify for deduction u/s. 80HHC. On the other hand, the ld. DR supported the orders of the authorities below and further relied on the recent decision of the Hon'ble Madras High Court in the case of CIT vs. Chinnapandi (2006) 282 ITR 389 and contended that any receipts including the interest receipts are applicable to the Explanation (baa) and hence, 90% of the same have to be excluded. 4. Having considered the rival submissions, we are of the view that the decision of the Hon'ble jurisdictional High Court cited by the ld. DR is squarely applicable to the facts of the assessee's case. We therefore, see no merit in the ground urged by the assessee before us and we reject the same." 11.Aggrieved by the said decision, instant tax case appeal has been filed and record of proceedings shows that appeal has been admitted on 08.08.2007, on the following substantial question of law, "Whether on the facts and in the circumstances of the case, the Tribunal is right in law in not holding that the interest from fixed deposits formed out of compulsory retention and transfer of export realisation is income from business liable for inclusion as business profit for computation of deduction under Section 80HHC of the Income Tax Act?" 12.Assailing the correctness of the order of the Tribunal and seeking for an answer, in favour of the assessee/appellant, on the above substantial question of law, Ms.Sushma Harini, learned counsel appearing for the appellant reiterated the submissions. Added further, she submitted that the decision rendered in CIT v. Nizar Ahmed & Co., reported in 259 ITR 244, has been misapplied by the appellate authority and that the Tribunal has also committed a mistake, in rejecting the case of the appellant/assessee, by relying on the decision of this Court in CIT vs. Chinnapandi reported in (2006) 282 ITR 389, which according to her, is not applicable to the case on hand. 13.Harping on the letter, extending credit facilities of Rs.1.70 Crores, learned counsel for the appellant further contended that the appellant was required to make certain deposits, out of realisation of the sale proceeds of the exports, made and interest earned on such deposits, has to be treated as "business income" only, and not as income from "other sources". 14.Per contra, Mr.S.Rajesh, learned standing counsel for the Income- Tax Department submitted that the case of the assessee is squarely covered by the decision of this Court in CIT v. Nizar Ahmed & Co., reported in 259 ITR 244. He also submitted that similar issue has been considered by the Kerala High Court in Ravindranathan Nair v. Deputy Commissioner of Income-Tax (Assessment) reported in 2003 (262) ITR 669 (Ker.), wherein, the Kerala High Court held that, 14.Per contra, Mr.S.Rajesh, learned standing counsel for the Income- Tax Department submitted that the case of the assessee is squarely covered by the decision of this Court in CIT v. Nizar Ahmed & Co., reported in 259 ITR 244. He also submitted that similar issue has been considered by the Kerala High Court in Ravindranathan Nair v. Deputy Commissioner of Income-Tax (Assessment) reported in 2003 (262) ITR 669 (Ker.), wherein, the Kerala High Court held that, "As already noted, the interest from short-term deposits received by the appellant therein is not the direct result of any export of any goods or merchandise. The fixed deposit was made only for the purpose of opening letter of credit and for getting other benefits which are necessary requirements to enable the appellant to make the export. From the above it is clear that the interest income received on the short-term deposits though it can be attributed to the export business cannot be treated as income which is derived from the export business. In the above circumstances, even assuming that the bank had insisted for making short-term deposits for opening letter of credit and for other facilities, it cannot be said that the income is derived from the export business. That apart, the very question as to whether the income derived from deposits made with the bank is entitled to the relief under Section 80HHC was considered by this Court in Nanji Topanbhai & Co. v. Asstt. CIT and Ors. [(2000) 243 ITR 192 (Ker.)], CIT v. Jose Thomas [(2002) 253 ITR 553 (Ker.)] and also in Abad Enterprise v. CTT [(2002) 253 ITR 319 (Ker.)], where it was categorically held that such interest income is not entitled to the relief under Section 80HHC of the Act." 15.Learned standing counsel for the Income-Tax Department submitted that decision of the Kerala High Court in Ravindranathan Nair's case (cited supra), has been upheld by the Hon'ble Supreme Court in S.L.P.(C) No.9557 of 2003. Decision of this Court in Dollar Apparels v. Income Tax Officer reported in 2007 (294) ITR 484 (Mad.), was also pressed into service by the Revenue, which considered the decision in CIT v. Nizar Ahmed & Co., reported in 259 ITR 244. 16.Referring to Section 80HHC of the Income Tax Act, 1961, learned standing counsel for the Income Tax Department submitted that if the Company is engaged in the business of export, income earned out of exports of any goods or merchandise, deduction to the extent of profits, referred to in sub-Section (1B) alone would be allowed, if only the income is derived by the assessee, from the export of such goods or merchandise, and not from any other source. He further submitted that on the facts and circumstances of the case, interest income has been derived, not from the export of goods or merchandise, but derived from the deposits made by the appellant and therefore, interest income, earned by the assessee, cannot be treated as "business income", liable for deduction. According to him, interest income earned from the deposits, should be treated only as "other source" and therefore, both the appellate authority, as well as the Tribunal, have rightly decided the issue, in favour of the Revenue. 17.Inviting the attention of this Court to Explanation (baa) to sub-Section 4(c) of Section 80HHC of the Income Tax Act, 1961, learned standing counsel for the Income-Tax Department submitted that "profits of business" means, profits of the business, as computed under the head, "Profits and gains of business or profession", as stated therein. Reiterating that, in computing the total income of the assessee, deduction of the profits, referred to in sub-Section (1B) of Section 80HHC, has to be derived by the assessee only, from the export of goods or merchandise and not otherwise, he submitted that the impugned order passed in accordance with law the statutory provisions, does not warrant interference. 17.Inviting the attention of this Court to Explanation (baa) to sub-Section 4(c) of Section 80HHC of the Income Tax Act, 1961, learned standing counsel for the Income-Tax Department submitted that "profits of business" means, profits of the business, as computed under the head, "Profits and gains of business or profession", as stated therein. Reiterating that, in computing the total income of the assessee, deduction of the profits, referred to in sub-Section (1B) of Section 80HHC, has to be derived by the assessee only, from the export of goods or merchandise and not otherwise, he submitted that the impugned order passed in accordance with law the statutory provisions, does not warrant interference. 18.Learned standing counsel appearing for Income-Tax Department submitted that one of the conditions for allowing deduction is that the sale proceeds should be in a convertible foreign exchange and in such circumstances only, deduction can be allowed. Whereas, the assessee is trying to enlarge the scope of the Section, by bringing in interest income, earned out of deposits. He further submitted that there is no illegality or irregularity, in the order of the Tribunal, warranting interference, and for the abovesaid reasons, prayed for dismissal of the appeal. 19.By way of reply, Ms.Sushma Harini, learned counsel appearing for the appellant submitted that the question of law framed in Chinnapandi's case (cited supra), and the answer of this Court, is not related to deduction under Section 80HHC of the Act, on other sources and therefore, the said decision, cannot be made applicable to the case on hand. At this juncture, this Court deems it fit to extract the substantial question of law, raised in Chinnapandi's case (cited supra), "Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the assesses is eligible for full deduction under Section 80HHC without restricting to the amount received by way of interest were incidental to the exportbusiness as fixed deposits is valid in law?" 20.Learned counsel for the appellant further submitted that in Nizar Ahmed's case (cited supra), the decision of this Court rendered on the facts situation therein, was not a case of deposit made pursuant to any requirement imposed by the bank, at the time of sanctioning of facilities, whereas, in the case on hand, when the assessee had produced a letter from the State Bank of India, stating that for extention of credit facility, deposit had to be made and when such deposit was made, from the business profits, interest income earned from such deposit, cannot be excluded from "business income" and be termed as income from "other sources". She reiterated that there is certainly a nexus between the export earning deposit a requirement for the credit facility and thus, interest income, has to be necessarily treated as "business income" and not from "other source". Decision in Premier Enterprises v. Deputy Commissioner of Income-Tax reported in 2015 (370) ITR 465 (MAD.), rendered in favour of the assessee therein, on the facts that case, wherein, the assessee therein had deposited amounts for the purpose of availing credit facilities, has also been pressed into service. Heard the learned counsel appearing for the parties and perused the materials available on record. 21. Before adverting to the rival submissions, let us have a cursory look at the provisions in the Income Tax Act, 1961. Section 28 of the said Act deals with profits and gains of business or profession, and the said Section is extracted hereunder: 'The following income shall be chargeable to income-tax under the head "Profits and gains of business or profession",— (i) the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year; (ii) any compensation or other payment due to or received by,— Heard the learned counsel appearing for the parties and perused the materials available on record. 21. Before adverting to the rival submissions, let us have a cursory look at the provisions in the Income Tax Act, 1961. Section 28 of the said Act deals with profits and gains of business or profession, and the said Section is extracted hereunder: 'The following income shall be chargeable to income-tax under the head "Profits and gains of business or profession",— (i) the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year; (ii) any compensation or other payment due to or received by,— (a) any person, by whatever name called, managing the whole or substantially the whole of the affairs of an Indian company, at or in connection with the termination of his management or the modification of the terms and conditions relating thereto; (b) any person, by whatever name called, managing the whole or substantially the whole of the affairs in India of any other company, at or in connection with the termination of his office or the modification of the terms and conditions relating thereto ; (c) any person, by whatever name called, holding an agency in India for any part of the activities relating to the business of any other person, at or in connection with the termination of the agency or the modification of the terms and conditions relating thereto ; (d) any person, for or in connection with the vesting in the Government, or in any corporation owned or controlled by the Government, under any law for the time being in force, of the management of any property or business ; (iii) income derived by a trade, professional or similar association from specific services performed for its members ; (iiia) profits on sale of a licence granted under the Imports (Control) Order, 1955, made under the Imports and Exports (Control) Act, 1947 (18 of 1947) ; (iiib) cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of the Government of India ; (iiic) any duty of customs or excise re-paid or re-payable as drawback to any person against exports under the Customs and Central Excise Duties Drawback Rules, 1971 ; (iiid) any profit on the transfer of the Duty Entitlement Pass Book Scheme, being the Duty Remission Scheme under the export and import policy formulated and announced under section 5 of the Foreign Trade (Development and Regulation) Act, 1992 (22 of 1992); (iiie) any profit on the transfer of the Duty Free Replenishment Certificate, being the Duty Remission Scheme under the export and import policy formulated and announced under section 5 of the Foreign Trade (Development and Regulation) Act, 1992 (22 of 1992) ; (iv) the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession ; (v) any interest, salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from such firm : Provided that where any interest, salary, bonus, commission or remuneration, by whatever name called, or any part thereof has not been allowed to be deducted under clause (b) of Section 40, the income under this clause shall be adjusted to the extent of the amount not so allowed to be deducted ; (va) any sum, whether received or receivable, in cash or kind, under an agreement for— (a) not carrying out any activity in relation to any business [or profession]; or (b) not sharing any know-how, patent, copyright, trade-mark, licence, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision for services: Provided that sub-clause (a) shall not apply to— (i) any sum, whether received or receivable, in cash or kind, or remuneration, by whatever name called, or any part thereof has not been allowed to be deducted under clause (b) of Section 40, the income under this clause shall be adjusted to the extent of the amount not so allowed to be deducted ; (va) any sum, whether received or receivable, in cash or kind, under an agreement for— (a) not carrying out any activity in relation to any business [or profession]; or (b) not sharing any know-how, patent, copyright, trade-mark, licence, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision for services: Provided that sub-clause (a) shall not apply to— (i) any sum, whether received or receivable, in cash or kind, on account of transfer of the right to manufacture, produce or process any article or thing or right to carry on any business[or profession], which is chargeable under the head "Capital gains"; (ii) any sum received as compensation, from the multi-lateral fund of the Montreal Protocol on Substances that Deplete the Ozone layer under the United Nations Environment Programme, in accordance with the terms of agreement entered into with the Government of India. Explanation.—For the purposes of this clause,— (i) "agreement" includes any arrangement or understanding or action in concert,— (A) whether or not such arrangement, understanding or action is formal or in writing; or (B) whether or not such arrangement, understanding or action is intended to be enforceable by legal proceedings; (ii) "service" means service of any description which is made available to potential users and includes the provision of services in connection with business of any industrial or commercial nature such as accounting, banking, communication, conveying of news or information, advertising, entertainment, amusement, education, financing, insurance, chit funds, real estate, construction, transport, storage, processing, supply of electrical or other energy, boarding and lodging; (vi) any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy. Explanation.—For the purposes of this clause, the expression "Keyman insurance policy" shall have the meaning assigned to it in clause (10D) of Section 10; (vii) any sum, whether received or receivable, in cash or kind, on account of any capital asset (other than land or goodwill or financial instrument) being demolished, destroyed, discarded or transferred, if the whole of the expenditure on such capital asset has been allowed as a deduction under Section 35AD. Explanation 1.—[Omitted by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1989.] Explanation 2.—Where speculative transactions carried on by an assessee are of such a nature as to constitute a business, the business (hereinafter referred to as "speculation business") shall be deemed to be distinct and separate from any other business.' 22.Section 80HHC of the Income Tax Act, deals with deduction in respect of profits retained for export business and the same is extracted hereunder: "(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 (1B), derived by the assessee from the export of such goods or merchandise : 22.Section 80HHC of the Income Tax Act, deals with deduction in respect of profits retained for export business and the same is extracted hereunder: "(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 (1B), 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 (4A), 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. (1A) 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 (1B), 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. (1B) For the purposes of sub-sections (1) and (1A), the extent of deduction of the profits shall be an amount equal to— (i) eighty per cent thereof for an assessment year beginning on the 1st day of April, 2001; (ii) seventy per cent thereof for an assessment year beginning on the 1st day of April, 2002; (iii) fifty per cent thereof for an assessment year beginning on the 1st day of April, 2003; (iv) thirty per cent thereof for an assessment year beginning on the 1st day of April, 2004, and no deduction shall be allowed in respect of the assessment year beginning on the 1st day of April, 2005 and any subsequent assessment year. (2)(a) This section applies to all goods or merchandise, other than those specified in clause (b), if the sale proceeds of such goods or merchandise exported out of India are received in, or brought into, India by the assessee (other than the supporting manufacturer) in convertible foreign exchange, within a period of six months from the end of the previous year or, within such further 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 other authority as is authorised under any law for the time being in force for regulating payments and dealings in foreign exchange. (b) This section does not apply to the following goods or merchandise, namely :— (i) mineral oil ; and (ii) minerals and ores (other than processed minerals and ores specified in the Twelfth Schedule). Explanation 1.—The sale proceeds referred to in clause (a) shall be deemed to have been received in India where such sale proceeds are credited to a separate account maintained for the purpose by the assessee with any bank outside India with the approval of the Reserve Bank of India. Explanation.—For the purposes of this clause, the expression "competent authority" means the Reserve Bank of India or such other authority as is authorised under any law for the time being in force for regulating payments and dealings in foreign exchange. (b) This section does not apply to the following goods or merchandise, namely :— (i) mineral oil ; and (ii) minerals and ores (other than processed minerals and ores specified in the Twelfth Schedule). Explanation 1.—The sale proceeds referred to in clause (a) shall be deemed to have been received in India where such sale proceeds are credited to a separate account maintained for the purpose by the assessee with any bank outside India with the approval of the Reserve Bank of India. Explanation 2.—For the removal of doubts, it is hereby declared that where any goods or merchandise are transferred by an assessee to a branch, office, warehouse or any other establishment of the assessee 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 such goods and merchandise and the value of such goods or merchandise declared in the shipping bill or bill of export as referred to in sub-section (1) of section 50 of the Customs Act, 1962 (52 of 1962), shall, for the purposes of this section, be deemed to be the sale proceeds thereof. (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, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee : Provided further that in the case of an assessee having export turnover 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 which bears to ninety per cent of any sum referred to in clause (iiid) or clause (iiie), as the case may be, of Section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee : Section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee : Provided further that in the case of an assessee having export turnover 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 which bears to ninety per cent of any sum referred to in clause (iiid) or clause (iiie), as the case may be, of Section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee : Provided also that in the case of an assessee having export turnover 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 which bears to ninety per cent of any sum referred to in clause (iiid) of Section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee, if the assessee has necessary and sufficient evidence to prove that,— (a) he had an option to choose either the duty drawback or the Duty Entitlement Pass Book Scheme, being the Duty Remission Scheme; and (b) the rate of drawback credit attributable to the customs duty was higher than the rate of credit allowable under the Duty Entitlement Pass Book Scheme, being the Duty Remission Scheme :Provided also that in the case of an assessee having export turnover 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 which bears to ninety per cent of any sum referred to in clause (iiie) of Section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee, if the assessee has necessary and sufficient evidence to prove that,— (a) he had an option to choose either the duty drawback or the Duty Free Replenishment Certificate, being the Duty Remission Scheme; and (b) the rate of drawback credit attributable to the customs duty was higher than the rate of credit allowable under the Duty Free Replenishment Certificate, being the Duty Remission Scheme. Explanation.—For the purposes of this clause, "rate of credit allowable" means the rate of credit allowable under the Duty Free Replenishment Certificate, being the Duty Remission Scheme calculated in the manner as may be notified by the Central Government : Provided also that in case the computation under clause (a) or clause (b) or clause (c) of this sub-section is a loss, such loss shall be set off against the amount which bears to ninety per cent of— (a) any sum referred to in clause (iiia) or clause (iiib) or clause (iiic), as the case may be, or (b) any sum referred to in clause (iiid) or clause (iiie), as the case may be, of section 28, as applicable in the case of an assessee referred to in the second or the third or the fourth proviso, as the case may be, the same proportion as the export turnover bears to the total turnover of the 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 ; case may be, of section 28, as applicable in the case of an assessee referred to in the second or the third or the fourth proviso, as the case may be, the same proportion as the export turnover bears to the total turnover of the 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, certifying that the deduction has been correctly claimed in accordance with the provisions of this section: Provided that in the case of an undertaking referred to in sub-section (4C), the assessee shall also furnish along with the return of income, a certificate from the undertaking in the special economic zone containing such particulars as may be prescribed, duly certified by the auditor auditing the accounts of the undertaking in the special economic zone under the provisions of this Act or under any other law for the time being in force. (4A) The deduction under sub-section (1A) shall not be admissible unless the supporting manufacturer furnishes in the prescribed form along with his return of income,—` (a) the report of an accountant, as defined in the Explanation below sub-section (2) of Section 288, certifying that the deduction has been correctly claimed on the basis of the profits of the supporting manufacturer in respect of his sale of goods or merchandise to the Export House or Trading House; and (b) a certificate from the Export House or Trading House containing such particulars as may be prescribed and verified in the manner prescribed that in respect of the export turnover mentioned in the certificate, the Export House or Trading House has not claimed the deduction under this section : Provided that the certificate specified in clause (b) shall be duly certified by the auditor auditing the accounts of the Export House or Trading House under the provisions of this Act or under any other law. (4B) For the purposes of computing the total income under sub-section (1) or sub-section (1A), any income not charged to tax under this Act shall be excluded. (4C) The provisions of this section shall apply to an assessee- (b) a certificate from the Export House or Trading House containing such particulars as may be prescribed and verified in the manner prescribed that in respect of the export turnover mentioned in the certificate, the Export House or Trading House has not claimed the deduction under this section : Provided that the certificate specified in clause (b) shall be duly certified by the auditor auditing the accounts of the Export House or Trading House under the provisions of this Act or under any other law. (4B) For the purposes of computing the total income under sub-section (1) or sub-section (1A), any income not charged to tax under this Act shall be excluded. (4C) The provisions of this section shall apply to an assessee- (a) for an assessment year beginning after the 31st day of March, 2004 and ending before the 1st day of April, 2005; (b) who owns any undertaking which manufactures or produces goods or merchandise anywhere in India (outside any special economic zone) and sells the same to any undertaking situated in a special economic zone which is eligible for deduction under Section 10A and such sale shall be deemed to be export out of India for the purposes of this section. Explanation.—For the purposes of this section,— (a) "convertible foreign exchange" means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange Management Act, 1999 (42 of 1999), and any rules made thereunder ; (aa) "export out of India" shall not include any transaction by way of sale or otherwise, in a shop, emporium or any other establishment situate in India, not involving clearance at any customs station as defined in the Customs Act, 1962 (52 of 1962) ; (b) "export turnover" means the sale proceeds, received in, or brought into, India by the assessee in convertible foreign exchange in accordance with clause (a) of sub-section (2) of any goods or merchandise to which this section applies and which are exported out of India, but does not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act, 1962 (52 of 1962); (ba) "total turnover" shall not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act