Though Three Substantial Questions Of Law Have Beenframed, Substantial Questions Of Law 1 And 2 Are Interconnected.the Case Of The Revenue Rests Upon The Decisi v. M/S Ayshwarya Sea Food Pvt Ltd

IN THE HIGH COURT OF JUDICATURE AT MADRAS CORAM : THE HON'BLE MR.JUSTICE T.S.SIVAGNANAMAND THE HON'BLE MR.JUSTICE SATHI KUMAR SUKUMARA KURUP T.C.A. No.438 of 2010 Commissioner of Income Tax,Chennai.... Appellant/AppellantVs. M/s.Ayshwarya Sea Food Pvt. Ltd.,4/364, Anna Rd., Palavakkam,Chennai – 600 041.... Respondent/RespondentTax Case Appeal preferred under Section 260A of the IncomeTax Act, 1961, against the order of the Income Tax AppellateTribunal,Madras,“A”Bench,dated06.11.2009inI.T.A.No.47/Mds/2009, Assessment Year 2002-2003 against theorder of the Commissioner of Income Tax Appeals III, Chennai-34.Dated 10/09/2008 in I.T.A.No.214/2007-2008/AIII in theAssessment year 2002-2003. Against the order of the Assistant Commissioner of IncomeTax Company Circle 1(1), Chennai, dated 26/10/2007 PA/GIRNo.AADCA0634L/A6-485 in the Assessment year 2002-2003. This appeal by the Revenue, filed under Section 260-A of theIncome Tax Act, 1961 (“the Act”), is directed against the orderpassed by the Income Tax Appellate Tribunal, Chennai, “A” Bench,in I.T.A.No.47/Mds/2009, for the Assessment Year 2002-03. 2.The appeal was admitted on 14.06.2010 on the followingsubstantial questions of law : https://hcservices.ecourts.gov.in/hcservices/ “1.Whether on the facts and circumstances of thecase, the Tribunal was right in holding that theassessee is entitled for deduction under Section 80HHC where separate books of account are maintainedwith respect to export and other units? 2.Whether on the facts and circumstances of thecase, the Tribunal was right in holding that theassessee is entitled for deduction under Section 80HHC by reckoning with the profit of the export unitalone and ignoring the losses of the other unitswithout considering the decision of the Apex Court inthe case of Ipca Laboratories 266 ITR 521. 3.Whether on the facts and circumstances of thecase, the Tribunal was right in holding thatdisallowance under Section 40-A(3) cannot be made onthe assessee with respect to the cash payments madetowards the purchase of shrimp feed?” 3.We have elaborately heard Mrs.R.Hemalatha, learned SeniorStanding Counsel for the appellant/Revenue and Mr.M.P.SenthilKumar, learned counsel appearing for the respondent/assessee. 4.The assessee filed its return of income for the AssessmentYear under consideration, AY 2002-03, disclosing a total incomeof Rs.10,17,233/-. The assessee is engaged in the business ofprocessing seafood and trading in shrimp food. The assesseeclaimed deduction under Section 80HHC and the claim wasnegatived by the Assessing Officer on the ground that theassessee had ignored the losses made by it in its tradingdivision and started its computation with the figure of profitsmade by the manufacturing division. Thus, the Assessing Officerheld that, in terms of Section 80HHC(1), the deduction is to begiven in computing the total income of the assessee, and indoing so, the total income of the assessee, both profits as wellas losses, will have to be taken into consideration. The otherissue which arose for consideration was whether the paymentsmade by the assessee in cash to the account ofM/s.C.P.Aquaculture (India) Pvt. Ltd. should be hit by theprovisions of Section 40A(3) of the Act. An explanation wasoffered by the assessee, which did not find favour with theAssessing Officer. Accordingly, assessment was completed byrejecting the claim of deduction under Section 80HHC of the Actand disallowance of 20% was made with regard to the cashpayments. 5.Aggrieved by the same, the assessee preferred an appealbefore the Commissioner of Income Tax (Appeals)-III, Chennai.The appeal was allowed by order dated 10.09.2008 on both grounds. Aggrieved by the same, the Revenue preferred an appealbefore the Tribunal, which has been dismissed by the impugnedorder. 5.Aggrieved by the same, the assessee preferred an appealbefore the Commissioner of Income Tax (Appeals)-III, Chennai.The appeal was allowed by order dated 10.09.2008 on both grounds. Aggrieved by the same, the Revenue preferred an appealbefore the Tribunal, which has been dismissed by the impugnedorder. 6.Though three substantial questions of law have beenframed, substantial questions of law 1 and 2 are interconnected.The case of the Revenue rests upon the decision of the Hon'bleApex Court in the case of Ipca Laboratories Ltd. v. DeputyCommissioner of Income Tax, Mumbai reported in (2004) 12 SCC742, wherein, it was held that, in case of export of both typesof goods, namely, self manufactured goods as well as tradinggoods, the loss from export of trading goods exceeded the profitof the total exports, then, disclaimer by the exporter-assesseein favour of supporting manufacturer in terms of the proviso toSection 80-HHC(1) would not have such effect as to entitle theexporter to deduction. The case of the assessee is by placingreliance on the decision of the Hon'ble Division Bench of thisCourt in Chamundi Textiles (Silk Mills) Ltd. v. Commissioner ofIncome Tax reported in (2012) 20 taxmann.com 514 (Madras).Thus, we are required to consider as to whether the decision inthe case of Ipca Laboratories Ltd. relied on by the Revenuewould be applicable to the facts and circumstances of the caseon hand. In fact, the Hon'ble Division Bench in the case ofChamundi Textiles (Silk Mills) Ltd. has taken note of the factsin Ipca Laboratories Ltd. and considered as to whether it couldbe made applicable to the said case. 7.At this juncture, it will be relevant to take note of thedistinguishing features between the facts in Ipca LaboratoriesLtd. and that of Chamundi Textiles (Silk Mills) Ltd. and therelevant paragraphs of the judgment in Chamundi Textiles (SilkMills) Ltd. are extracted hereunder: “16. Thus, the consistent view of this court isthat even in cases where the assessee had differentunits of business, so long as there is nointermingling of expenditure or interlacing of fundsof any kind whatsoever and that the assessee hadmaintained accounts separately which revealed theexport business and that the claim was supported by achartered accountant certificate in compliance withthe statutory provisions, the claim of the assesseeunder section 80HHC to have deductions at 100 percent. on the export made by the unit, engaged 100 percent. in exports, could not be denied merely on thescore that the assessee had various units, some ofwhich had export and some had export as well as localsales. 17. As far as the decision of the apex court IPCALaboratory Ltd.'s case (supra) is concerned, we do not find that the statement of law declared by theapex court could, in any way stand, in the way of thiscourt accepting the plea of the assessee herein thatthe claim in respect of 100 per cent. export unitmerited to be considered, independent of other unitsin terms of section 80HHC(3). Before considering thedecision herein, the provisions of section 80HHC(3)merit to be seen, which read as follows : ... 17. As far as the decision of the apex court IPCALaboratory Ltd.'s case (supra) is concerned, we do not find that the statement of law declared by theapex court could, in any way stand, in the way of thiscourt accepting the plea of the assessee herein thatthe claim in respect of 100 per cent. export unitmerited to be considered, independent of other unitsin terms of section 80HHC(3). Before considering thedecision herein, the provisions of section 80HHC(3)merit to be seen, which read as follows : ... 18. Referring to the provisions, the apex courtpointed out that sub-section (3)(a) deals with thecase where the export is only of self-manufacturedgoods, sub-section (3)(b) deals with the case wherethe export is only of trading goods, and sub-section(3)(c) deals with the cases where the export is ofboth self-manufactured goods as well as trading goods.The only condition that governs the grant of reliefunder section 80HHC is that the assessee havingpositive profit alone would be entitled to have thededuction under section 80HHC. In other words, ifthere is a loss then no deductions could be claimedunder the provisions of section 80HHC in arriving atthe positive profit. The apex court held that profitsand loss of the business have to be considered inarriving at the gross total income, and income fromvarious units have to be calculated and if one of theunits indicated a loss, then going by the saidprovisions available, the gross total income will haveto be arrived at and ultimately if the net figure isalso a loss, the claim of the assessee for deductionswould be rejected. The apex court further pointed outthat section 80HHC(3) provides for working out thecomputation of total income and for the purpose ofsuch computation, both profits and loss have to betaken into account. Thus, section 80HHC, both in sub-section (1) and in sub-section (3), means a positiveprofit worked out after taking into consideration thelosses, if any. Dealing with the meaning of grosstotal income, in the decisions Synco Industries Ltd.'scase (supra), the apex court pointed out that grosstotal income would be arrived after making thecomputation as follows (headnote) : i. making deductions under the appropriate computation provisions ; ii. including the incomes, if any, under sections 60 to 64 in the total income of the individual ; iii. adjusting intra-head and/or inter-head losses ; and iv. setting off brought forward unabsorbed lossesand unabsorbed depreciation, etc. Only if the gross total income so determined is positive the question of allowing the deductions under ChapterVI-A would arise, not otherwise." i. making deductions under the appropriate computation provisions ; ii. including the incomes, if any, under sections 60 to 64 in the total income of the individual ; iii. adjusting intra-head and/or inter-head losses ; and iv. setting off brought forward unabsorbed lossesand unabsorbed depreciation, etc. Only if the gross total income so determined is positive the question of allowing the deductions under ChapterVI-A would arise, not otherwise." 19. The apex court pointed out that in arrivingat a figure of positive profit, both the profits andloss have to be considered. If the net figure is apositive profit, then the assessee would be entitledto a deduction, but if the net figure is a loss, thenthe assessee would not be entitled to a deduction. Areading of the judgment of the apex court reported inSynco Industries Ltd.'s case (supra) shows that theassessee therein had more than one unit. The claim ofthe assessee is that each unit should be treatedseparately and the losses suffered in the earlieryears were not adjustable against the profits of theother unit. But since the gross total income was nil,the Assessing Officer rejected the plea of theassessee for the benefit of deductions under ChapterVI-A. The Appellate Tribunal and the High Courtaffirmed the view of the officer. On further appeal,the apex court held that in determining the grosstotal income, the assessee has to compute the incomefrom each one of the units. When one unit sufferedloss and other unit earned profit, after setting offloss, if the gross total income worked out showsprofit, the assessee would be entitled to deductionunder Chapter VI-A. On the other hand, if the grosstotal income is a negative income, then the claim ofthe assessee could not be considered for any benefitunder Chapter VI-A. In the light of the law thus laiddown by the apex court, it is clear that only in thecase of gross total income being a profit, the claimof the assessee for deduction merited to beconsidered. 20. Coming to the facts herein, it is notdisputed by the Revenue that both the units of theassessee are profit-making units and the gross totalincome was computed in the manner as given under theAct and that there was a positive income of profit.Going by the decisions referred to above and the samewhen applied to the facts of the case herein, theassessee would be entitled to deduction under ChapterVI-A. In the light of this fact, we do not find any justification in the view of the Tribunal, rejectingthe plea of the assessee for deduction under ChapterVI-A. 20. Coming to the facts herein, it is notdisputed by the Revenue that both the units of theassessee are profit-making units and the gross totalincome was computed in the manner as given under theAct and that there was a positive income of profit.Going by the decisions referred to above and the samewhen applied to the facts of the case herein, theassessee would be entitled to deduction under ChapterVI-A. In the light of this fact, we do not find any justification in the view of the Tribunal, rejectingthe plea of the assessee for deduction under ChapterVI-A. 21. A reading of the order of the Tribunal showsthat it misconstrued the decision of the apex courtreported in IPCA Laboratory Ltd. case (supra), toreject the case of the assessee. Applying the saiddecision and the decision Synco Industries Ltd.'s case(supra), to the facts herein that the assessee hadprofit and the decisions of this court cited supra,viz., Macmillan India Ltd.'s (supra), RathoreBrothers (supra), Suresh B. Mehta (supra) and M. Ganiand Co.'s case (supra), as regards the grant of 100per cent. relief to the unit engaged in exportactivity and the books of account maintained by theassessee for the export unit to other units areindependent, we have no hesitation in holding that theassessee's unit at Bangalore, being 100 per cent.export unit, is entitled to have the deduction interms of section 80HHC(3). Quite apart from that,following the decisions of this court on the aspect ofgrant of relief, it is relevant to note here thatsection 80HHC contemplates three situations, viz.,sub-section (3)(a) dealing with the case where theexport is only of self-manufactured goods, sub-section(3)(b) dealing with the case where the export is onlyof trading goods, and sub-section (3)(c) dealing withthe cases where the export is of both self-manufactured goods as well as trading goods. Apartfrom this, the section nowhere deals with thesituation of an assessee having more than one unit ofbusiness and one of the units being purely 100 percent. export oriented unit and the other unit, apartially export unit. Even though the Act does notprovide for dealing with such a situation, yet, beinga beneficial provision, we feel that, in fitness ofthings, the assessee is entitled to the relief inrespect of 100 per cent. export oriented unit.Consequently, even in respect of the computation asgiven in Explanation (baa) to section 80HHC, theconsideration for grant of relief must follow thedecisions of the apex court L.M. Chhabda and Sons aswell as Waterfall Estates Ltd. case (supra). The caseof each of the units have to be consideredindependently for the purpose of working out therelief under section 80HHC. This would depend upon thefacts to show that each of the unit had maintainedtheir accounts independently and there was nointerdependency or interlacing of funds to treat them as one consolidated unit. Going by the facts recordedtherein, we have no hesitation in accepting the pleaof the assessee that the income earned from the exportgoods from the Bangalore unit merited to be consideredfor 100 per cent. relief, as one falling under section80HHC(3)(a) of the Act.” as one consolidated unit. Going by the facts recordedtherein, we have no hesitation in accepting the pleaof the assessee that the income earned from the exportgoods from the Bangalore unit merited to be consideredfor 100 per cent. relief, as one falling under section80HHC(3)(a) of the Act.” 8.As pointed out in the above decision, the facts of thecase in Ipca Laboratories Ltd. were entirely different andcouched in a different manner and there was no separate accountmaintained as in the case on hand. This factual position hasbeen clearly brought out by the Commissioner of Income Tax(Appeals) in the order dated 10.09.2008 and the fact that theassessee was maintaining separate Books of Accounts for theexport unit and the trading division, has not been disputed bythe Assessing Officer. In such circumstances, the decision inthe case of Chamundi Textiles (Silk Mills) Ltd. would clearlyapply to the facts and circumstances of the case on hand.Therefore, the substantial questions of law 1 and 2 are to beanswered against the Revenue. 9.With regard to the third substantial question of law, onfacts, the Commissioner of Income Tax (Appeals) and the Tribunalheld that the assessee had purchased shrimp products from asupplier at Nellore and the explanation given by them at thefirst instance before the Assessing Officer is that they aredoing shrimp feed trading business and they have purchasedshrimp feed from a company at Chennai and the invoice isdirectly raised locally at Chennai and they have sold the shrimpfeed at Nellore and Ongole Districts of Andhra Pradesh and theyhave sold the feed to the shrimps farmers and deposited the cashdirectly to M/s.C.P.Aquaculture (India) Pvt. Ltd.'s Bankaccount. Further, it is stated that it is an usual procedurethat all the dealers/farmers use to deposit the amount into theBank account of M/s.C.P.Aquaculture (India) Pvt. Ltd. and faxthe deposit slip to the said company as proof of deposit andbased on the deposit slip, the said company will dispatch theshrimp feed and it also offers cash discount if payment is madein advance. Due to such compelling reasons, they had to depositcash directly into the Bank account of M/s.C.P.Aquaculture(India) Pvt. Ltd. Further, they stated that there is a risk ofcarrying cash to various places and by issuance of cheque, therewill be a time delay and the assessee will be prejudiced. Theexplanation offered was not found to be false but not acceptedby the Assessing Officer on the ground that the said companyM/s.C.P.Aquaculture (India) Pvt. Ltd. had a huge turnover andthey have been importing shrimp food from abroad and there wasno necessity for the assessee to make payments in cash to thesaid company. The question would be as to whether such a presumption or adverse inference could be drawn. 10.Be that as it may, the Commissioner of Income Tax(Appeals) considered the legal issue and found that, what waspurchased was undoubtedly a fish or fish product, which willfall within the scope of Rule 6DD(f)(iii) and if it is so, nodisallowance under Clause (a) of Sub-Section (3) of Section 40Ashall be made and no payment shall be deemed to be the profitsand gains of business or profession under Clause (b) of Sub-Section (3) of Section 40A. This aspect has been factuallybrought out by the Commissioner of Income Tax (Appeals) as wellas the Tribunal. presumption or adverse inference could be drawn. 10.Be that as it may, the Commissioner of Income Tax(Appeals) considered the legal issue and found that, what waspurchased was undoubtedly a fish or fish product, which willfall within the scope of Rule 6DD(f)(iii) and if it is so, nodisallowance under Clause (a) of Sub-Section (3) of Section 40Ashall be made and no payment shall be deemed to be the profitsand gains of business or profession under Clause (b) of Sub-Section (3) of Section 40A. This aspect has been factuallybrought out by the Commissioner of Income Tax (Appeals) as wellas the Tribunal. 11.Mrs.R.Hemalatha, learned Standing Counsel for theappellant/Revenue would place reliance on the decision of theDivision Bench of this Court in the case of Vaduganathan Talkiesv. Income Tax Officer, Non-Corporate Ward 20(5), Chennai-34reported in [2020] 428 ITR 224 (Madras). The facts in the saidcase were entirely different, where the assessee company madecash payment for the purpose of acquiring rights to screenmovies in theatres to various parties and their case was decidedagainst the assessee on the ground that the assessee hadmiserably failed to bring their cases within any one of theexceptions covered under Rule 6DD. Thus, the said decisioncannot be applied to the facts and circumstances of the case onhand. 12.For all the above reasons, the substantial questions oflaw framed for consideration are decided against the Revenue andthe appeal filed by the Revenue is dismissed. No costs. Sd/- Assistant Registrar(CJ-CONF) //True Copy// Sub Assistant Registrar mkn To 1. The Assistant Registrar Income Tax Appellate Tribunal, Rajaji Bhavan, Besant Nagar, Chennai. 2. The Commissioner of Income Tax, Appeals III, Chennai-34. Appeals III, Chennai-34. 3. The Assistant Commissioner of Income Tax, Company Circle 1(1), Chennai. 4. The Income Tax Appellate Tribunal, A Bench, Chennai. +1cc to Mr.T.Ravikumar, Advocate, S.R.No.37565+1cc to Mr.G.Baskar, Advocate, S.R.No.37494 Tax Case Appeal No.438 of 2010 MG(CO)HS(26/08/2021)