Madras High Court
Krislar Diesel Engines (P) Ltd. vs Assistant Commissioner Of Income Tax on 4 June, 1999
Equivalent citations: [2001]74ITD414(MAD)
ORDER
Kalsian, A.M. The only ground raised by the assessee in this appeal relating to the assessment year 1986-87 is that the Commissioner (Appeals) erred in holding that the assessee is not entitled to deduction under section 80HHC of the Act in respect of the premium on export licence, export subsidy and duty draw back.
2. The assessee claimed deduction of 50 per cent of the export profits (Rs. 36,131 which is 50 per cent of Rs. 72,262) under section 80HHC of the Income Tax Act, 1961. The profit of Rs. 72,262 was arrived at after including the premium on export licence at Rs. 1,73,428 export subsidy of Rs. 4,70,426 and draw back Rs. 82,950. The assessing officer considered that the premium on export licence, duty draw back and export subsidy cannot be considered as profit derived from export in view of the decision of the Karnataka High Court in the case of Sterling Foods v. CIT (1984) 150 ITR 292/(1985) 20 Taxman 55 (Karn). The assessing officer therefore, excluded the income from premium on export licence, export subsidy and duty draw back for the purpose of determining the profit from export business. He found that if the income from these three items are excluded, the result from export is a negative figure i.e. loss. The assessing officer therefore, concluded that the assessee is not entitled to deduction under section 80HHC of the Act.
3. In first appeal, the assessee's counsel relied on the decision of the Karnataka High Court in Sterling Foods v. CIT (1991) 190 ITR 275 (Karn). But this decision was distinguished by the Commissioner (Appeals) who passed a lengthy speaking order. The Commissioner (Appeals) came to the conclusion that the amounts qualifying for deduction under section 80HHC must be the sale proceeds of the goods exported and such sale proceeds must have either been received or brought into India by the assessee himself in convertible foreign exchange as defined in section 80HHC(2)(a) of the Act. According to the Commissioner (Appeals) the receipts which are eligible for consideration under section 80HHC have essentially got to be the sale proceeds and not the profits of eligible unit for such consideration. The Commissioner (Appeals) held that the assessee is not entitled to deduction under section 80HHC because the assessee does not satisfy the conditions namely; (1) the amount in question representing to be the profits should also be the sale proceeds, and (ii) that it should have been brought into India or received in India in convertible foreign exchange. Since none of these conditions are satisfied by the assessee company in respect of profit from import entitlement, duty draw and export subsidy, the Commissioner (Appeals) confirmed the order of the assessing officer refusing deduction under section 80HHC. Aggrieved by the said order of the Commissioner (Appeals) the assessee is in further appeal before the Tribunal.
4. During the course of hearing the assessee's counsel relied on the decision of the Karnataka High Court in the case of Sterling Foods (supra). But it was pointed out to him at the time of hearing that the said decision of the Karnataka High Court has not been approved by the Hon'ble Supreme Court in CIT v. Sterling Foods (1999) 237 ITR 579 (SC). The learned counsel for the assessee stated that the decision of the Hon'ble Supreme Court in Sterling Foods' case (supra) supports the case of the assessee. The learned counsel relied on the decision of the Supreme Court in Sterling Food's case (supra).
5. The learned Departmental Representative, on the other hand, supported the orders of the authorities below and emphasised that deduction under section 80HHC is admissible on the profits derived by an assessee from the export of goods or merchandise. He referred to the provisions of section 80HHC and relied on the order of the Commissioner (Appeals).
6. We have carefully considered the rival submissions and perused the material on record. The provisions of section 80HHC as applicable to the assessment year 1986-87 are reproduced below :
"80HHC(I). 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 of which this section applies, there shall, in accordance with and subject to the provision of this section, be allowed, in computing the total income of the assessee, a deduction equal to the aggregate of-
(a) four per cent of the net foreign exchange realisation; and
(b) fifty per cent of so much of the profits derived by the assessee from the export of such goods or merchandise as exceeds the amount referred to in clause (a) :
Provided that the deduction under this sub-section shall not exceed the profits derived by the assessee from the export of such goods or merchandise."
It is clear from the provisions of section 80HHC(I) that the assessee it entitled to 50 per cent of so much of the profits derived by it from the export of such goods or merchandise as exceeds the amount referred to in clause (a). It is seen that clause (a) is not applicable to the present assessee's case. The issue to be considered in this case is whether the premium on export licence, duty draw back and export subsidy are profit derived from the business of export. The Hon'ble Supreme Court in the case of Sterling Foods (supra) reversed the Karnataka High Court's decision in the case of Sterling Foods (supra) and approved the decision of the Karnataka High Court in Sterling Foods' case (supra). Their Lordships of the Supreme Court at page 585 observed as under:
"We do not think that the source of the import entitlements can be said to be the industrial undertaking of the assessee. The source of the import entitlements can, in the circumstances, only be said to be the Export Promotion Scheme of the Central Government where under the export entitlements become available. There must be, for the application of the words 'derived from', a direct nexus between the profits and gains and the industrial undertaking. In the instant case, the nexus in not direct but only incidental. The industrial undertaking exports processed sea food. By reason of such export, the Export Promotion Scheme applies. Thereunder, the assessee is entitled to import entitlements, which it can sell. The sale consideration therefrom cannot, in our view, be held to constitute a profit and gain derived from the assessee's industrial undertaking."
7. In the case of Sterling Foods (supra) at page 298, their Lordships of the Karnataka High Court also held as under:
If that is the concept of the 'source', can we legitimately say that the profits and gains derived by the sale proceeds of the import entitlements must be held to have been derived from the industrial undertaking- of the assessee. For from it, the import entitlements were awarded by the Central Government under a scheme to encourage exports. The source referable to the profits and gains arising out of the sale proceeds of the import entitlements would, therefore, be the scheme of the Central Government and not the industrial undertaking of the assessee."
Our view finds support from the decision of the Kerala High Court in Cochin Company v. CIT (1978) 114 ITR 822 (Ker). Balakrishna Eradi J. (as he then was), speaking for the Bench, observed at page 830 thus :
"The argument advanced on behalf of the assessee is that since the assessee had become eligible for the import entitlements only on account of its having exported goods out of India, the income derived by conversion of the import entitlements into money by a process of sale should be regarded as profits or gains derived from the said activity of the export of goods. We are unable to accept this contention. Profit or gain can be said to have been 'derived' from an activity carried on by a person only if the said activity is the immediate and effective source of the said profit of gain. There must be a direct nexus between the activity and the earning of the profit or gain. The income, profit or gain cannot be said to have been 'derived' from an activity merely by reason of the fact that the said activity may have helped to earn the said income or profit in an indirect or remote manner-See CIT v. Raja Bahadur Kamakhaya Narayan Singh (1948) 16 ITR 325 (PC) and Mrs. Bacha F. Tuzdar v. CIT (1955) 27 ITR 1 (SC)"
It is clear from the aforesaid decision of the Supreme Court in Sterling Foods' case (supra) and decision of the Karnataka High Court in Sterling Foods' case (supra) as well as the Kerala High Court's decision in Cochin Co. v. CIT (1978) 114 ITR 822 (Ker) considered by the Hon'ble Karnataka High Court in Sterling foods' case (supra) that the source referable to the profit and gains arising from the sale proceeds of import entitlements is the scheme of the Central Government and not the business of export. Similarly duty draw back and export subsidy are received by the assessee under the scheme of the Central Government and cannot be considered as profit derived from the export business. Therefore, the assessee is not entitled to deduction under section 80HHC in respect of the premium on export licence, export subsidy and duty draw back, because the export licence is received by the assessee under the scheme of the Central Government and amount of export subsidy and duty draw back are similarly, received by the assessee under the scheme of the Central Government and the source of these amounts received under the head "export subsidy, duty draw back and premium on export licence" is not the profits and gains derived by the assessee from the export of goods. The assessee is therefore, not entitled to deduction under section 80HHC on premium on export licence, export subsidy and duty draw back. We, therefore, confirm the order of the Commissioner (Appeals) and reject the grounds raised by the assessee.
8. It may be pointed out that as laid down in the proviso to section 80HHC, deduction under section 80HHC shall not exceed the profit derived by an assessee from the export of goods. The assessing officer has given a finding that if duty draw back, premium on export licence and export subsidy is excluded from the profits, then the profit from export business would be a negative figure, which means after excluding the premium on export licence, export subsidy and duty draw back there is no profit from export business. If there is no profit derived by the assessee from the export of goods, then the assessee is not entitled to deduction under section 80HHC.
9. In the case of CIT v. V. T. Joseph (1997) 225 ITR 731/91 Taxman 311 (Ker) the Kerala High Court has also held that deduction under section 80HHC is to be allowed only to the extent of the income from export business included in the gross total income. Since no income from export business is included in the gross total income of the assessee, the assessee is not entitled to deduction under section 80HHC.
10. In the result, the appeal of the assessee is dismissed.