Tc/134/2003 Of Commissioner Of Income Tax v. Sterling Foods

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED : 01.11.2006 THE HONOURABLE MR.JUSTICE R.BALASUBRAMANIANANDTHE HONOURABLE MR.JUSTICE P.P.S.JANARTHANA RAJA Tax Case (Appeal) No.134 of 2003 Appeal under Section 260A of the Income Tax Act, 1961 againstthe order of the Income Tax Appellate Tribunal, Madras, 'A'Bench dated 06.02.2003 in I.T.A. No.2320/Mds/94 for theassessment year 1991-92. against the order dated 22.08.1994 inI.T. Appeal No. 349-C/94-95 on the file of the Commissioner ofIncome (Appeals) Coimbatore against the order dated 23.03.1994and amde in PAN/GIR NO. Ward- I (7) Salem - 7 on the file of theIncome Tax Officer W-I (7) Salem - 7. This appeal is filed under Section 260A of the Income Tax Act,1961 by the Revenue against the order of the Income TaxAppellate Tribunal, Madras, 'A' Bench dated 06.02.2003 passed inI.T.A. No.2320/Mds/94. On 15.10.2003, this Court admitted theappeal and formulated the following substantial question oflaw. "Whether in the facts and circumstances of the case the Tribunalwas right in holding that the deduction under section 80HHC inrespect of the duty drawback and the cash compensatory supportis allowable even though no export was done by the assessee?" 2.The facts leading to the above substantial question of laware as under: The assessee is an 100% Export Oriented Unit. The relevantassessment year is 1991-92 and the corresponding accounting yearended on 31.03.1991. The assessee filed Return of income on30.11.1992 admitting a total income of Rs.1,50,860/-. TheReturn was processed under Section 143(1)(a) of the Income-taxAct (hereinafter referred to as the "Act"), after making primafacie adjustment and rejecting the assessee's claim of deductionunder Section 80HHC of the Act. Later, assessment was taken upfor scrutiny and the assessment was completed under Section 143(3) of the Act determining a total income of Rs.9,27,500/-.While completing the assessment, the Assessing Officer was ofthe view that the assessee is not entitled to deduction underSection 80HHC of the Act, on the ground that there was no exportduring the year. Aggrieved by the order, the assessee filed anappeal to the Commissioner of Income-tax (Appeals). The C.I.T.(A) allowed the appeal and set aside the order of the lowerauthority. Aggrieved, the Revenue filed an appeal to theIncome-tax Appellate Tribunal (hereinafter referred to as the"Tribunal"). The Tribunal dismissed the Revenue's appeal andconfirmed the order of the C.I.T.(A). 3.Learned Standing Counsel appearing for the Revenuesubmitted that the assessee had not done any export andtherefore, the assessee is not entitled for deduction. Hefurther submitted that on a mere receipt of the duty drawbackand cash compensatory support during the accounting year doesnot entitle the assessee for deduction as there was no exportmade by the assessee during the accounting year. Further it issubmitted that the amounts received could not be considered asprofit derived from export. He relied on the Supreme Courtjudgment reported in 237 ITR 579, in the case of Commissioner ofIncome-tax Vs. Sterling Foods. 4.Learned counsel appearing for the assessee submitted thatthe assessee is an 100% export unit. During the relevant year ofaccount, the assessee received the cash compensatory support tothe tune of Rs.7,74,868/- and duty drawback amount ofRs.34,565/- for the export made during the year ending31.03.1990, relevant to the assessment year 1990-91. During theyear under consideration, the assessee was right in claimingdeduction under Section 80HHC of the Act in respect of theincentive amounts pertaining to duty drawback and cashcompensatory support, actually received during the year, as itis connected with the export transaction only. He furthersubmitted that cash compensatory support as well as dutydrawback were granted to the assessee only because of the export made and hence it is a profit derived from export. The learnedcounsel also contended that the said incentives received earlierto which export was made, are certainly entitled to relief andbecause of the belated receipt of the incentives, the assesseecould not be denied the benefit. It is also further submittedthat Section 80HHC of the Act is to provide certain incentive toexport houses and hence, the exempted provisions are to beconstrued liberally. He also relied on the Supreme Courtjudgment reported in 284 ITR 548 in the case of P.R.PrabhakarVs. Commissioner of Income-tax to support his contention. 5.Heard the counsel. During the year ended 31.03.1990, theassessee did export business for a turnover of Rs.38,72,885/-and a profit to the tune of Rs.37,583/- was earned. Therelevant assessment year in the present case is 1991-92 andduring the year, the assessee not made any export, but receivedcash compensatory support to the tune of Rs.7,74,868/- and dutydrawback of Rs.34,565/-. Eventhough the said amounts arerelating to the export made in the immediate preceding year, theCentral Government quantified the incentive amounts later andthe quantified amounts were received by the assessee only duringthe year. The assessee is following the cash system and hencethe incentive amounts received, was treated as income on receiptbasis during the assessment year. The undisputed fact is thatthe assessee has not made any export during the relevantassessment year 1991-92. Because of the amendment of Section 28of the Act, by the Finance Act, 1990 by inserting Clauses(iiia) (iiib) and (iiic) with retrospective effect with a viewto ensure that cash compensatory support, duty drawback andprofit on sale of import entitlement licenses shall be taxableunder the head "Profits and gains of business or profession",the said amounts received could not be considered as exportprofit. Section 80HHC of the Act deals with granting deduction,which reads as under: "80HHC. Deduction in respect of profits retained for exportbusiness. - (1) Where an assessee, being an Indian company or a person (otherthan a company) resident in India, is engaged in the business ofexport out of India of any goods or merchandise to which thissection applies, there shall, in accordance with and subject tothe provisions of this section, be allowed, in computing thetotal income of the assessee, a deduction of the profits derivedby the assessee from the export of such goods or merchandise: .... (1A) .... (2)(a) This section applies to all goods or merchandise, otherthan those specified in clause (b), if the sale proceeds of suchgoods or merchandise exported out of India are received in, orbrought into, India by the assessee (other than the supportingmanufacturer) in convertible foreign exchange, within a periodof six months from the end of the previous year, or, where the https://hcservices.ecourts.gov.in/hcservices/ Chief Commissioner or Commissioner is satisfied (for reasons tobe recorded in writing) that the assessee is, for reasons beyondhis control, unable to do so within the said period of sixmonths, within such further period as the Chief Commissioner orCommissioner may allow in this behalf. (b) .... (3) For the purposes of sub-section(1), profits derived from theexport of goods or merchandise out of India shall be the amountwhich bears to the profits of the business (as computed underthe head "Profits and gains of business or profession"), thesame proportion as the export turnover bears to the totalturnover of the business carried on by the assessee." https://hcservices.ecourts.gov.in/hcservices/ Chief Commissioner or Commissioner is satisfied (for reasons tobe recorded in writing) that the assessee is, for reasons beyondhis control, unable to do so within the said period of sixmonths, within such further period as the Chief Commissioner orCommissioner may allow in this behalf. (b) .... (3) For the purposes of sub-section(1), profits derived from theexport of goods or merchandise out of India shall be the amountwhich bears to the profits of the business (as computed underthe head "Profits and gains of business or profession"), thesame proportion as the export turnover bears to the totalturnover of the business carried on by the assessee." Under Section 80HHC of the Act, where an assessee, being anIndian company or a person (other than a company) resident inIndia, is engaged in the business of export out of India of anygoods or merchandise to which this section applies, there shall,in accordance with and subject to the provisions of thissection, be allowed, in computing the total income of theassessee, a deduction of the profits derived by the assesseefrom the export of such goods or merchandise. A tax concessionwas given under Section 80HHC of the Act, in order to compensatethe exporter for the comparative disadvantage faced by him inthe international market. As in this case, what we have to seeis, whether there is a profit derived by the assessee from theexport business or not. The undisputed fact is that, during therelevant year of account, the assessee received cashcompensatory support to the tune of Rs.7,74,868/- and dutydrawback of Rs.34,565/- for the export made in the immediatepreceding year. The said two amounts could not be considered asprofits derived by the assessee from the export business. TheSupreme Court in the case of Commissioner of Income-tax Vs.Sterling Foods reported in 237 ITR 579, held as follows: "We do not think that the source of the importentitlements can be said to be the industrial undertaking of theassessee. The source of the import entitlements can, in thecircumstances, only be said to be the Export Promotion Scheme ofthe Central Government whereunder the export entitlements becomeavailable. There must be, for the application of the words"derived from", a direct nexus between the profits and gains andthe industrial undertaking. In the instant case, the nexus isnot direct but only incidental. The industrial undertakingexports processed sea food. By reason of such export, theExport Promotion Scheme applies. Thereunder, the assessee isentitled to import entitlements, which it can sell. The saleconsideration therefrom cannot, in our view, be held toconstitute a profit and gain derived from the assessee'sindustrial undertaking." Following the above Supreme Court judgment, it is evident thatthe cash compensatory support and duty drawback amounts could https://hcservices.ecourts.gov.in/hcservices/ not be held as profits derived from export. Sub-section(3) of Section 80HHC of the Act, deals with the formula forcomputing the profit derived from the export of goods for thepurpose of sub-section (1) of the Act. The formula is as under: Export turnover (sale proceeds actually received in foreignProfit of the business X exchange(including export -------------------------------incentives) Total turnover (excluding exportincentives). Following the above Supreme Court judgment, it is evident thatthe cash compensatory support and duty drawback amounts could https://hcservices.ecourts.gov.in/hcservices/ not be held as profits derived from export. Sub-section(3) of Section 80HHC of the Act, deals with the formula forcomputing the profit derived from the export of goods for thepurpose of sub-section (1) of the Act. The formula is as under: Export turnover (sale proceeds actually received in foreignProfit of the business X exchange(including export -------------------------------incentives) Total turnover (excluding exportincentives). In the present case, the export turnover and the total turnoverduring the year ended 31.03.1991 are nil and therefore, theassessee is not entitled to deduction under Section 80HHC of theAct. Further it is seen that the wording mentioned in thesection is "profits derived by the assessee from the export ofsuch goods or merchandise". The expression used in the Sectionis "derived from". Whenever the said expression is used, theLegislature wanted to give a restricted meaning. If theexpression "attributable to" is used, it means the Legislaturewanted to give wider meaning, than the expression "derivedfrom". If the expression "attributable to" is used, theintention is to cover receipts from sources other than actualconduct. Here, the expression used is "derived from" and hence,we have to give restricted meaning only. Hence, there should bedirect nexus between profit and export. These incentives couldnot be profit derived from the export business, because it isgiven only after export by the Government of India as incentivesto the exporter. The cumulative effect of the followingfactors, namely - a) No export made during the year;b) Only incentives are received during the year;c) The said incentives are not profit derived from export;d) Non-compliance of the formula, as contemplated under Section80HHC(3) of the Act, will certainly disentitle the assessee to claim relief underSection 80HHC of the Act. The other argument of the assesseeis, if the assessee follows mercantile system of accounting,these incentives will go into the computation for the purposeof relief under Section 80HHC of the Act. Because the assesseeis following the cash system, Revenue denied the benefit on thesole ground that there was no export during the year. Merereceiving incentives during the year alone will not entitle theassessee to relief under Section 80HHC of the Act. It isevident from the fact that the assessee is still in the exportbusiness, but there was no actual export during the year.Merely continuing the business is not sufficient to get thebenefit provided under Section 80HHC of the Act, unless there is https://hcservices.ecourts.gov.in/hcservices/ actual export made during the year. https://hcservices.ecourts.gov.in/hcservices/ actual export made during the year. 6.In the case of P.R.Prabhakar Vs. Commissioner of Income-tax(SC), cited supra, the assessee carried on business of export ofhis own products and also procured export contracts for otherexporters on commission. He derived income of Rs.56,69,321/- byway of commission, whereas as an exporter of goods, he incurreda loss of Rs.6,372/-. The value of the total exported goodsoutside India, by the assessee, during the relevant assessmentyear was Rs.3,67,600/-. The assessee claimed deduction underSection 80HHC of the Act. The said exemption claimed wasdisallowed by the Assessing Officer on the ground that theassessee had incurred loss in respect the export business.Aggrieved by the same, the assessee filed an appeal before theCommissioner of Income-tax (Appeals) and the same was dismissed.Aggrieved, the assessee filed appeal before the Income-taxAppellate Tribunal. The Income-tax Appellate Tribunal was ofthe view that the commission received from other exporters hasto be taken into consideration in computing the relief underSection 80HHC of the Act. Aggrieved by the order, the Revenuefiled an appeal before the High Court and the High Courtreversed the order of the Tribunal. Aggrieved, the assesseetook up the matter to the Supreme Court. The Supreme Courtreversed the order of the High Court and held that the earningof commission, being part of the export business, the incomederived therefrom also to be taken into consideration forgranting relief under Section 80HHC of the Act. Because of theloss as exporter of goods, the assessee should not be deniedexemption under Section 80HHC of the Act. The distinct factor inthe Supreme Court judgment is, there was export by the assesseeduring the year. But, in the present case, the facts aredifferent, because there was no export during the year. Hence,the Supreme Court judgment is distinguishable and hence it willnot help the assessee's case. 7.In the case of Sanjeev Malhotra Vs. Commissioner of Income-tax, reported in 286 ITR 364, the Delhi High Court consideredthe scope of Section 80HHC of the Income-tax Act and held thatthere should be actual export during the year for the purpose ofavailing benefit under Section 80HHC of the Act. In that case,the assessment year was 1998-99 and the assessee filed Returndeclaring an income of Rs.11,56,780/- after claiming deductionof Rs.31,97,357/- under Section 80HHC of the Act. The assesseehad, for that year, shown export sales of Rs.24,822/- and profiton sale of import entitlements of Rs.35,46,150/-. The AssessingOfficer came to the conclusion that no exports had been made bythe assessee and also found that the import entitlements sold bythe assessee related to exports made in the assessment year1995-96. As regards the export sale of Rs.24,822/- theAssessing Officer held that the same represented the price ofgift samples and not trade samples as contended by the assessee.Hence, there was no export sale during the year under https://hcservices.ecourts.gov.in/hcservices/ consideration and the Assessing Officer disallowed the claim.Aggrieved by the order, the assessee filed an appeal to theC.I.T.(A), who confirmed the said order. The assessee tookfurther appeal before the Tribunal and the Tribunal also heldthat no deduction under Section 80HHC was permissible unlessthere was actual export in the year under consideration.Against that, the assessee filed an appeal to the High Court andthe High Court also confirmed the order of the Tribunal and wasof the view that the export of goods was a condition precedentfor claiming deduction under Section 80HHC of the Act. We alsoagree with the view taken by the Delhi High Court that, for thepurpose of claiming deduction under Section 80HHC of the Act,there should be actual export during the year. 8.In view of the foregoing reasons, we are of the view thatmere receipt of amounts for duty drawback and cash compensatorysupport during the accounting year, does not entitle theassessee for deduction under Section 80HHC of the Act, as theassessee had not made any export during the accounting year.Under these circumstances, we answer the question in favour ofthe Revenue and against the assessee. No costs.km Sd/Asst.Registrar /true copy/ Sub Asst.Registrar To1. THE ASSISTANT REGISTRARINCOME TAX APPELLATE TRIBUNALRAJAJI BHAVANIII FLOOR BESANT NAGARCHENNAI 90 2. THE INCOME TAX APPELLATETRIBUNAL MADRAS A BENCHMADRAS 3. THE COMMISSIONER OF INCOMETAX, SALEM 4. THE COMMISSIONER OF INCOMETAX, (APPEALS) COIMBATORE 5. THE INCOME TAX OFFICERWARD - I (7) SALEM 7 + one cc to Mr. V.S. Jayakumar, Advocate sr no. 51393 + one cc to Mr. N. Muralikumaran, Advocate sr no. 51644 GM(Co) NM(20.11.2006) T.C.(A) No.134 of 2003