Bombay High Court
M/S. Seven Stars vs Dy. Comm. Of Income-Tax Spl. Range-48, ... on 13 January, 2020
Author: Nitin Jamdar
Bench: Nitin Jamdar, M.S.Karnik
36. itxa 781-2002-judg..doc
DDR
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
INCOME TAX APPEAL NO. 781 OF 2002
M/s. Seven Stars
a registered partnership firm
having its registered office
at 117, Prasad Chambers,
Opera House, Bombay-400 004. ..Appellant
vs.
1. Deputy Commissioner of Income
Tax, Special Range-48, having his
office at Matru Mandir, Tardeo Road,
Bombay - 400 007.
2. Union of India
through Ministry of Law,
Ayakar Bhavan, Maharshi Karve
Marg, Bombay - 400 020. ..Respondents
...........
Ms. A. Vissanji for appellant.
Mr. Suresh Kumar for respondents.
...........
CORAM : NITIN JAMDAR &
M.S.KARNIK, JJ.
DATE : 13 JANUARY 2020
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36. itxa 781-2002-judg..doc
ORAL JUDGMENT (PER NITIN JAMDAR, J.) :-
The Appellant carried on business of exports of cut and polished diamonds. The Appellant, apart from the work of cutting and polishing diamonds, also undertook work of other exporters on contract basis. By the Assessment Year 1991-92, period relevant for this appeal, the Appellant received an amount of Rs.10,67,350/- which was credited by the Appellant under the head "Reassortment Charges". The Appellant also received an amount of Rs.1,48,909/- as "Labour Commission Charges" since the Appellant had given a work of cutting and polishing diamonds on sub-contracts.
2. The Appellant filed the return of income on 7 October 1991 declaring income of Rs.1,57,660/- after claiming deduction of Rs.30,43,279/- under Section 80 HHC of the Income Tax Act, 1961. The Assessing Officer by order dated 28 August 1992 excluded the amount of Reassortment Charges and Labour Commission Charges. Having restricted the deduction under Section 80 HHC to Rs.19,96,710/-, the Assessing Officer passed the order on 28 August 1992.
3. The Appellant filed an appeal with the Commissioner of Income Tax (Appeals), which was allowed in favour of the Appellant by order dated 22 June 1994. The Respondent-Revenue filed Income Tax Appeal bearing No.4971/Bom/94 before the 2/8
36. itxa 781-2002-judg..doc Income Tax Appellate Tribunal and the Tribunal allowed the Appeal of the Revenue by order dated 6 May 2002. Hence, the present Appeal is filed by the Appellant-Assesssee.
4. The Appeal was admitted on the following substantial question of law :-
"Whether on the facts and circumstances of the case the Respondent No.1 is justified in excluding from the total business income the Re-assortment charges amounting to Rs.10,67,350/- and Labour Commission of Rs.1,48,809 for the purpose of calculating deduction under Section 80 HHC of the Act ?"
5. We have heard Ms. A. Vissanji for the Appellant and Mr. Suresh Kumar for Respondents.
6. We have perused the order of the Tribunal. The Tribunal firstly recorded that Reassortment charges are nothing but a commission received from diamond traders when the assessee facilitated sale of their goods to foreign buyers. The labour commission was also received by the assessee from other diamond dealers for cutting and polishing the diamonds. Then the Tribunal followed the decision of this Court wherein it was held that such charges are not includeble in business profits for the purpose of computation of special deduction under Section 80HHC of the Act. Accordingly the Appeal was allowed.
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7. The Assessment Year in question is of importance. The Assessment Year is 1991-92. The Section 80 HHC of the Act was amended with effect from 1 April 1992 and explanation was brought in the same. In the case of K.K. Doshi and Co. v. Commissioner of Income-Tax1, an issue arose before this Court whether the service charges constitute business income for the purposes of computing export profits under Section 80HHC. While deciding the question, the Court made the following observations :-
" The object of section 80HHC is to ascertain the export profits. It may be mentioned that in this case we are concerned with the law prior to the assessment year 1992-
93. Under section 80HHC(3), as it stood before April 1, 1992, profits derived from exports were computed in the following manner :
Export turnover Business profits X --------------------
Total turnover The said formula, however, gave a distorted figure of export profits when receipts like interest, commission, etc., which do not have an element of turnover came to be included in the profit and loss account. Every assessee tries to inflate, in the above formula, the business profits and correspondingly, he tries to reduce the denominator, viz., total turnover. It is for this reason that the Legislature amended the above formula by amending the law from the assessment year 1992-93 by clarifying that in the above formula the business profits will not include receipts by way of brokerage, commission, interest, rent charges or any 1 245 ITR 849 4/8
36. itxa 781-2002-judg..doc other receipt of a similar nature. However, as some expenditure might be incurred in earning the above income by way of brokerage, commission, etc., an ad hoc 10 percent deduction from such income was provided for to account for the expenses. Similarly, under Explanation (ba) to Section 80 HHC, the Legislature has explained that the words "total turnover" shall not include freight or insurance. On the other hand, vide clause (b) to the Explanation to section 80HHC, the Legislature has defined the words "export turnover" to mean the sale proceeds, but not freight or insurance. The combined meaning of clauses (b) and (ba) to the Explanation shows that the business profits in the above formula shall not include receipts by way of brokerage, commission, interest, rent charges or any other receipt of a similar nature as they do not have any nexus with the sale proceeds from export activities. Therefore, the service charges cannot be considered as part of the business profits while working out deductions under section 80HHC. The judgment of the Supreme Court in the case of CIT v. Sterling Foods (1999) 237 ITR 579, dealt with the provisions of section 80HH.
In that judgment, the Supreme Court was required to construe the expression "derived from" in section 80HH. In that manner, the assessee was engaged in processing prawns. It earned import entitlements from the Central Government under an Export Promotion Scheme. The assessee was entitled to sell the same. The assessee sold the said entitlements. In its total income for the assessment year 1979-80, the assessee included the sale proceeds and claimed relief under section 80HH. The High Court held that the income which the assessee made by selling the import entitlements was not a profit and gain which the assessee had derived from industrial undertaking. The Division Bench held in favour of the assessee on the basis of the retrospective amendment to section 28 of the Act by the Finance Act, 1990, making such receipts taxable as 5/8
36. itxa 781-2002-judg..doc business profits. It was held by the Supreme Court that the word "derived" is followed by the word "from" which meant arising from a source. The Supreme Court held on the facts of that case that import entitlements did not originate from the industrial undertaking of the assessee, but it came from the Export Promotion Scheme of the Government. The Supreme Court held that the words "derived from" indicated a direct nexus between the profits and gains on the one hand and the industrial undertaking on the other hand since under section 80HH the expression used is "derived from the industrial undertaking". In that matter, on the facts, the Supreme Court held that since the export entitlements were made available under the Scheme of the Government the nexus between the profits and the industrial undertaking was only incidental and not direct. Accordingly, the Supreme Court allowed the appeal of the Department. This judgment helps the case of the Department in this matter. Section 80HHC(1) clearly states that in computing the total income of the assessee, there shall be a deduction of the profits derived by the assessee from the export of goods. In other words, there should be a direct nexus between the profits on the one hand and the export activity on the other hand. Applying the ratio of the judgment of the Supreme Court to the facts of our case, the profits earned by the assessee on account of service charges cannot be said to have a direct nexus with the export activities of the assessee. Hence, to that extent, the assessee was not entitled to claim deduction under section 80HHC. "
Thus, the Court observing as above opined that though prior to the amendment export profits included interest, commission, etc., which did not have element of turnover came to be included in the profit and loss account. By way of amended provisions in the 6/8
36. itxa 781-2002-judg..doc Explanation (ba) to Section 80HHC of the Income Tax Act, 1961 it was no longer permissible to do so. The Court opined that there was no nexus between the profits on the one hand and the export activity on the other hand, which was necessary.
8. The question of retrospective operation of the 1991 amendment to Section 80HHC arose for consideration of the Supreme Court in the case of P.R. Prabhakar v. Commissioner of Income-Tax2. The Supreme Court held that the amendment could not be considered as retrospective.
9. Thereafter when the challenge of the Respondent- Revenue to the decision of this Court in K.K. Doshi and Co. (supra) consideration of the Supreme Court. The Supreme Court disposed of the said appeal by observing thus :-
"The main point in this appeal is as to whether the amendment to section 80HHC of the Income-tax Act, 1961, brought about by the Finance (No.2) Act, 1991, with effect from April 1, 1992, is prospective in nature or is retrospective.
This court in the case of P.R. Prabhakar v. CIT [2006] 284 ITR 548, relying upon Circular No.621 dated December 19, 1991, issued by the Central Board of Direct Taxes (CBDT), has held that the amendment in question is prospective in nature and the same is binding on the Revenue.
2 [2006] 284 ITR 548 (SC) 7/8
36. itxa 781-2002-judg..doc In view of Circular No.621 dated December 19, 1991 issued by the Central Board of Direct Taxes and the aforesaid judgment of this court, these appeals are accepted and the orders passed by the High Court of Bombay are set aside leaving the parties to bear their own costs.
The appeals stand allowed in the above terms."
The Supreme Court thus noted the decision in the case of P.R. Prabhakar (supra) and disposed of the Appeal setting aside the order passed in K.K. Doshi (supra) holding that the amendment of 1 April 1992 is prospective in nature.
10. In view of this dicta of the Supreme Court in the case of P.R. Prabhakar (supra) and K.K. Doshi (supra), the foundation of the decision of the Tribunal does not survive and the question of law as framed will have to be answered against the Revenue.
11. In the circumstances, declaring thus, the Appeal is disposed of.
(M.S.KARNIK, J.) (NITIN JAMDAR, J.)
Digitally
signed by
Diksha
Diksha Rane
Rane Date:
2020.01.21
15:37:33
+0530
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