Income Tax Appellate Tribunal - Cochin
A. M. Moosa vs Assistant Commissioner Of Income Tax. on 14 September, 1995
Equivalent citations: (1996)54TTJ(COCH)193
ORDER
G. SANTHANAM, A. M. :
This is an appeal by the assessee.
2. The assessee is a sea food exporter. Originally he filed a return of income showing income of Rs. 7,14,090 and agricultural income of Rs. 26,000. Subsequently, the assessee filed a revised return on 29th Dec., 1992 wherein the total income returned was Rs. 6,47,326 with agricultural income of Rs. 26,000 as before. The returns were processed under s. 143(1)(a) of the IT Act, 1961. The Assessing Officer (AO) noticed that in the original return the assessee had worked out the deduction under s. 80HHC of the IT Act at Rs. 14,98,583, limiting, however, the deduction to Rs. 11,29,813, being the income from export business. He further noticed that in the revised return, the assessee had claimed deduction under s. 80HHC at Rs. 24,41,266, but again limiting the claim of deduction to Rs. 11,29,813. This was allowed under s. 143(1)(a) of the Act. However, by order dt. 17th Feb., 1994 under s. 154, the AO recomputed the deduction under s. 80HHC as follows :
Rs.
(i) Under s. 80HHC(3) (-) 15,26,085
(ii) Under s. 80HHC(3A) (-) 31,24,496
(iii) Under the proviso to sub-s. 80HHC(3) (+) 8,01,100 Since the net result was a minus figure, the AO held that the assessee was not eligible for deduction under s. 80HHC. On appeal, the learned CIT(A) held that the adjustments made by the AO partook of the nature of debatable issues and, therefore, deleted the disallowance. Thereupon, the case was taken up for scrutiny under s. 143(3) of the IT Act. The assessee had originally computed the deduction in the following terms :
Deduction under s. 80HHC Rs.
1. Total turnover 7,54,66,221 Less : freight 54,11,239 FOB value 7,00,54,982
2. Export turnover
(a) Direct export - BSF 1,39,14,089 Yempee Sea Foods 30,37,245 1,69,51,334 Rs.
Less : Freight BSF 6,89,903 Yempee Sea Foods 2,33,239 9,23,142 1,60,28,192
(b) Exports through export house for which Disclaimer certificates obtained -
Tata 73,49,786 2,33,77,978 Escorts 1,06,06,805 FOB value 3,39,84,783
3. Profits of the Business :
Income from business as computed 11,29,813 Less :
(a) Export house premium 44,82,664
(b) Import licence premium 21,21,220
(c) Cash assistance (OCS) 17,69,226
(d) Freezing & cold storage charges 1,81,458
(e) Chitty profit 74,709
(f) Interest on investment 36,217
(g) Misc. income 1,104 86,66,588 90% thereof 77,99,929 Profits of the business :
(-) 66,70,116
4. Deduction under s. 80HHC :
(a) Since profits of the business is a negative figure, no deduction is allowable on that.
(b) 90% of export incentives comes to Rs. 35,01,396 (90% of 21,21,220 + 17,69,226) on this deduction under s. 80HHC is allowable.
Rs.
i.e., 35,01,396 x 33984783 = 16,98,583 70054982 This is limited to income from export business 11,29,813 As seen earlier, the assessee revised this computation as follows :
1. Total turnover as before 7,00,54,982
2. Export turnover : As in original computation 3,39,84,783 Add : Disclaimer certificate received :
(a) J. K. Industries Ltd.
1,01,34,737
(b) National Organic Chemical Industries Ltd.
47,24,674 1,48,59,411 4,88,44,194
3. Profits of the business (-) 66,70,116 as before
4. Deduction under s. 80HHC :
Export incentives x Export Turnover Total Turnover Rs.
i.e., Rs. 35,01,396 x 4,88,44,194 = 24,41,266.20 7,00,54,982 Thus, between these two computations, there is no change in the total turnover on which there is no dispute. There is no change in the figure of loss shown under the caption "profits of business". There is change in the amount of export turnover between the original computation and the revised computation because after the submission of the original computation the assessee had received two more disclaimer certificates from export house pertaining to s. 80HHC and the figures mentioned in these two certificates had to be included in the amount of export turnover. There is no dispute on the revised quantum of export turnover. The quantum of deduction under s. 80HHC as per the original computation was quantified at Rs. 16,98,583 though the claim was restricted to Rs. 11,29,813. However, the quantum of deduction as per the revised computation is Rs. 24,41,266 though in this case also the claim was restricted to Rs. 11,29,813 as before. The difference in the gross quantum is due to the change in the amount of export turnover used as numerator of the formula. There is no dispute on this aspect of the matter. In other words, the numerator of the formula as stated in the revised computation is not disputed by the assessing authority. The AO held that even though the assessee had manufactured and processed and had also exported through export houses as a supporting manufacturer, as there was no "profit of the business", but was only a loss, the assessee will not be entitled to any deduction under s. 80HHC of the IT Act. According to him, the assessee would be eligible for deduction only if there was a positive figure of profit in terms of sub-s. (3) r/w the Expln. (baa) to s. 80HHC. As the computation in terms of the Explanation had resulted in loss the assessee is not entitled to get deduction under sub-s. (3) of s. 80HHC. He further noticed that sub-s. (3) has a proviso thereto to the effect that the profit computed under sub-cl. (3) should be "increased by the amount which bears to 90% of any sum referred to in cl. (iiia) and cl. (iiib) and cl. (iiic) of s. 28, the same proportion as the export turnover bears to the total turnover to the business carried on by the assessee". As there was no profit in the computation under sub-s. (3) itself, there is no question of increasing it under the proviso thereto. Hence, he held that the assessee cannot be granted any deduction under s. 80HHC of the IT Act. The assessee appealed.
3. The learned CIT(A) held that the assessee had exported directly and also through the export houses and, hence, entitled to the deduction under s. 80HHC(1) and also under s. 80HHC(1A). He held that deduction under sub-s. (1) has to be computed as provided for in sub-s. (3) while deduction under sub-s. (1A) has to be computed under sub-s. (3A). He further noticed that the profit of the business was a negative figure of Rs. 66,70,116. Because of this negative figure, the deduction under sub-s. (1A) as computed under sub-s. (3A) is also a negative figure and there was no dispute about that aspect of the matter. The dispute centred round the interpretation of sub-s. (3) of s. 80HHC. Clause (a) of sub-s. (3) of s. 80HHC states that where the assessee exports manufactured goods or merchandise, the profit derived from such export shall be at a proportion of the export turnover to the total turnover. He further noticed that the amount of profit arrived at under the main provisions of sub-s. (3) read with the Explanation should be increased by an amount which bears to 90% of the sums referred to in cl. (iiia), cl. (iiib) and cl. (iiic) of s. 28 at a proportion of the export turnover to the total turnover. After noticing the above provisions he held that admittedly the profit derived from export business under the main provisions of sub-s. (3) r/w the Explanation was a negative figure of Rs. 66,70,116. To this must be added the positive figure computed under the proviso to sub-s. (3). The net resultant figure is again a negative figure and, therefore, the assessee was not entitled to get any deduction under s. 80HHC. He rejected the assessees contention that if the profit derived from export under sub-s. (3) is a negative figure, such a negative figure should be ignored and the positive figure computed under the proviso to sub-s. (3) must be allowed as a deduction. Aggrieved, the assessee is in second appeal.
4. Sri R. Srinivasan, the learned chartered accountant, submitted that the deduction under s. 80HHC is an incentive given to the exporters who earn precious foreign exchange. Therefore, the section should receive a liberal construction in order to give effect to the benefit intended to be conferred on the exporters. That the assessee has exported goods during the relevant previous year on his own account and also through export houses are indisputed facts. Prima facie, the assessee is eligible for deduction under s. 80HHC. The first dispute in this appeal is regarding the interpretation of the term "profit" as occurring in sub-s. (3) of s. 80HHC. In other words, whether the expression "profit" will include losses also. The second dispute is in a case, where the assessee had only loss in the computation under sub-s. (3), whether such loss must be ignored while giving effect to the provisions of the proviso to sub-s. (3). In other words, where the computation results in loss under the main provisions of sub-s. (3), whether such loss should be set off against the profit computed under the proviso to sub-s. (3). The answer to the second question will depend upon the answer to the first question. An allied question which is not in the grounds of appeal, but which is relevant to decide the issue and which is raised before the Tribunal is, whether the computation as done by the assessee and as accepted by the AO in respect of the "profits of business", is in accordance with the provisions of cl. (baa) of Expln. to s. 80HHC. The learned chartered accountant submitted that the AO erred in holding that the assessee is not entitled to any deduction under s. 80HHC and not even under the proviso to sub-s. (3) of the said section, since the computation under the main provisions of sub-s. (3) had resulted in loss rather than profit. He further submitted that even though the learned CIT(A) did not subscribe to such a view, he erred in holding that the loss computed under sub-s. (3) of s. 80HHC should be set off against the profit computed under the proviso to sub-s. (3) of that section. According to Sri Srinivasan, sub-s. (3) provided for deduction in respect of the "profits of the business" as defined in the Expln. (baa) to s. 80HHC. The proviso to sub-s. (3) was intended to give further benefit by an amount to be computed in the manner prescribed in the said proviso. The interpretation placed by the learned CIT(A) has the effect of negating the additional benefit granted by the proviso to sub-s. (3). Thus, both the authorities erred in putting a narrow construction on the provisions of sub-s. (3) and the proviso thereto of s. 80HHC. Sec. 80HHC grants a fillip to the exporters and is given by way of deduction from the total income in specified circumstances and, therefore, the section should receive a liberal construction in order to advance the relief intended for the exporters rather than to defeat the same. It was his further submission that the computation of "profits of the business" as defined in the clauses to the Expln. (baa) to s. 80HHC was not correctly made by the assessee. He submitted that the export house premium of Rs. 44,82,654 and chitty profit should not have been deducted in arriving at the profits of the business. In fact, the error was committed by the assessee and remains uncured till this stage. In support of his stand he submitted copies of the agreements between the assessee and the export houses to say that the payments were not in the nature of receipts towards "charges" incurred by the assessee and also filed additional grounds of appeal.
5. Sri T. John George, the learned Departmental Representative, submitted that the assessee has now only filed additional ground before the Tribunal in respect of the computation of the "profits of the business" under Expln. (baa) of s. 80HHC. Though the assessee had filed the documents in support of his stand, the documents did not stand the scrutiny of the authorities. Therefore, the question of quantification of the profits of business in accordance with the Explanation should be restored to the file of the AO. The learned Departmental Representative next submitted that there was no warrant for excluding the export house premium, chitty profit and miscellaneous income from the deductions envisaged under Expln. (baa) to s. 80HHC. They are receipts in the nature of "charges". He further submitted that even if these items are not deducted from the profit, the resultant figure would still be a loss, but not profit and, therefore, the assessee would not be eligible for any deduction under sub-s. (3) of s. 80HHC. The only difference will be that the loss of Rs. 66,70,116 will stand greatly reduced. Thus, there was no profit for deduction to be allowed under sub-s. (3). Only if there was profit to be allowed under sub-s. (3), the proviso would come into operation for increasing such profit by further sums computed in the manner laid down in the proviso to sub-s. (3). This is one view and that is the view adopted by the AO. Another view could be that the loss computed under sub-s. (3) of s. 80HHC should be adjusted against the profit available under the proviso to the said sub-section. This is the view of the learned CIT(A). In either event, in the facts of the case of the assessee, there should be only loss from the business. Therefore, the assessee is not entitled to any deduction whatsoever under s. 80HHC of the IT Act. Addressing himself to the arguments of Sri Srinivasan, that the expression "profit" will not include loss, the learned Departmental Representative submitted that the term "profit" would normally include losses also. This is evident from the fact that while the head of income captioned "profits and gains of business", the Act permits computation of losses also under that head. The proviso is always subservient to the main enactment and it cannot be considered de hors the main enactment. Thus, he supported the order of the learned CIT(A).
6. We have thus heard rival submissions and perused the records. First we take up the dispute over the computation of "profits of business" in terms of cl. (baa) of Expln. to s. 80HHC. Though this was not a point of dispute in the earlier stages, the assessee has questioned the correctness of its own computation in the course of the arguments before us, and has furnished copies of the agreements in support of his stand. A point not raised before the assessing authorities can certainly be entertained by the Tribunal on the basis of evidence furnished even if it is raised for the first time before it. In such a situation, the Tribunal can proceed to decide the issue on the basis of the available records, if no further enquiry is considered necessary in this behalf, or else it can admit the evidence and the plea raised before it and restore the issue to the file of the AO for examination and disposal in accordance with law. Further, the issue raised by the learned chartered accountant is relevant for deciding the appeal. Therefore, we admit the plea and the evidence and proceed to deal with the same. Clause (baa) of Expln. to s. 80HHC is as follows :
"(baa) "Profits of the business" means the profits as computed under the head "profits and gains of business or profession" as reduced by -
(1) ninety percent of any sum referred to in cls. (iiia), (iiib) and (iiic) of s. 28 or of any receipts by way of brokerage, commission, interest, rent, charges or any other receipts of a similar nature included in such profits; and (2) the profits of any branch, office, warehouse or any other establishment of the assessee situate outside India."
The sums referred to in cls. (iiia), (iiib) and (iiic) of s. 28 are as follows :
(1) profits on sale of licence granted under the Imports (Control) Order, 1955, made under the Imports and Exports (Control) Act, 1947 (18 of 1947)(cl. iiia) (2) cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of the Government of India (cl. iiib) (3) any duty of customs or excise repaid or repayable as drawback to any person against exports under the Customs and Central Excise Duties Drawback Rules, 1971 (cl. iiic).
The dispute is whether the impugned sum of Rs. 44,82,654 [vide item (a) in para 3 of page 2 above] can be described as "any receipt by way of brokerage, commission, interest, rent, charges or other receipt of a similar nature included in such profit". It is the admitted position before us that the impugned sum does not represent brokerage, commission, interest or rent. The controversy before us is whether it can be said to represent "charges" mentioned in sub-cl. (1) of cl. (baa) of the Expln. to s. 80HHC. The learned chartered accountant has referred to different clauses of the agreements between the Export Houses and the assessee, filed before us, in support of his arguments that the amount received was only a benefit conferred on the assessee in the form of service charges in cases where the cash incentive, REP Licence and duty drawback were put to the account of the Export Houses. It was not a compensation for services rendered and, therefore, it was not a receipt by way of charges. The learned Departmental Representative, on the other hand, contended that in many cases the agreement has described the payment as service charges and in the light of the decision of the Tribunal in the case of G. Gangadharan Nair vs. ITO (ITA No. 610/Coch/94 and CO No. 17/Coch/1994) [ [reported at (1994) 54 ITD 15 (Coch)] the impugned amount should be construed as a receipt by way of charges and, therefore, they were rightly deducted by the assessee himself from the profits and gains of business in terms of the Explanation. We have considered the submissions very carefully. There are several agreements between the assessee and the export houses. In the case of the agreement with M/s Nocil Ltd., the following clauses are relevant :
"5. NOCIL shall advise processors bankers to credit the entire proceeds of exports to the account of processor on realisation.
6. The benefits of cash incentive, if any, REP Licence, duty drawback on the exports will be to the account of NOCIL.
7. NOCIL shall pay to the processor service charges at 8.70% on the FOB value of the exports on presentation of debit notes by the processor after all the shipments and negotiations of documents."
In the case of the agreement with M/s Indo Java & Co., cl. 7 is relevant :
"7. In consideration of the processors exporting Frozen Marine Products on behalf of the Export House, the Export House hereby agree to pay to the processors an incentive 4.5% (four point five per cent only) premium on the FOB value of the said Frozen Marine Products exported by the processors. The cash assistance and import replenishment licence available as per policy will be claimed by the processors. The Export House hereby agree to issue necessary disclaimers to the processors for claiming import replenishment licence and cash compensatory support. These disclaimers will be issued promptly since processors has SPS facility."
In the case of the agreement with M/s Rossel Industries Ltd., paras 10 and 11 are relevant :
"10. In consideration of the processor processing the Frozen Marine Products for export by the company and rendering service in connection therewith and in consideration of the various liabilities and obligations undertaken by the processor, the company hereby agrees to pay to the processor, a premium of 7.5% on FOB basis.
The processor also agrees that if they do not fulfil the contracted amount of exports of Rupees 50.00 lacs, they shall compensate the company adequately for the non-fulfilment of the contract.
11. The company will be entitled to claim from the Joint Chief Controller of Imports & Exports, all Replenishment Licence and Cash Assistance, if any applicable, that may be available on export of Frozen Marine Products under this Agreement, as provided by the Import Trade Control Policy announced by the Government of India every year and amended from time to time. Cash assistance, will, however, be paid back to the processor on realisation. The company will be entitled to all other benefits in respect of export of the Frozen Marine Products covered under this agreement. Income-tax benefits under s. 80HHC on the exports will be to the account for the company and the processor agrees to give disclaimers in the prescribed formats.
In the case of the second agreement with M/s NOCIL Ltd., cls. 6 and 7 are relevant :
"6. The benefits of cash incentive, if any, income-tax benefits, duty drawback and exim scrip on the exports will be to the account of the processors. NOCIL shall give necessary disclaimers to enable the processors to claim these benefits. All other benefits as a result of these exports shall be to the account of NOCIL.
7. NOCIL shall pay to the processor service charges at 2.25% on the FOB value of the exports on presentation of debit notes by the processor after all the shipments and negotiations of documents, and after all documents have duly been forwarded to NOCIL."
In the case of the agreement with M/s Jeet Machine Tools Ltd. cls. 7 and 8 are relevant :
"7. In consideration of the manufacturer/shipper exporting frozen shrimps on behalf of the Exporters, the Exporters hereby agree to pay to the manufacturer/shipper an incentive of 4% (four per cent only) premium on the total FOB value of the said exports made by the manufacturer/shipper and the relevant import licence benefits available as per the policy will be claimed by the manufacturer/shipper.
8. In respect of the exports made by the manufacturer/shipper under the terms of this agreement, the Exporters will be entitled to claim the benefits accruing to the exporters under the terms of the present import Trade Control Policy."
In the case of the agreement with M/s MRF Ltd., cls. 6 and 7 are relevant :
"6. In respect of exports made by the manufacturer/shipper under the terms of this agreement, the trading house will be entitled to claim all the benefits accruing to trading houses under the terms of the present import trade control policy.
7. The trading house hereby agree to pay the manufacturer/shipper a premium of 5.50% as premium on the FOB value of the said Frozen Marine Products exported by the manufacturer/shipper. This premium of 5.50% will be paid to the manufacturer/shipper in batches, immediately after completion of exports to a value of Rs. 25 lacs (twenty five lacs only) FOB and after submission of all copies of documents as required by the trading house."
In the case of the agreement with M/s J. K. Industries Ltd., para 16 is relevant :
"16. In consideration of the processor exporting Frozen Marine Products on behalf of the Export House and issuing the disclaimer certificates and other documents as required in favour of the Export House for receiving the Export House benefits, the Export House hereby agree to pay the processor an incentive of 8% (eight per cent only) as premium on the FOB value excluding overseas commission of the said Frozen Marine Products exports by the processor. The said premium of 8% will be paid after submission of all bank certified documents."
From the terms of the above agreements, which are extracted by us, it will be clear that the assessee is given a percentage on the FOB value not in reimbursement of any of the expenses or charges incurred by him. It was just a payment in consideration of the services rendered and is unrelated to the charges incurred by him. In other words, the payments as a certain percentage of the FOB value of exports, received by the assessee from the above Export Houses or Trading Houses cannot partake of the nature of receipt towards "charges". The nomenclature given to it is of no consequence. However, from the documents produced we also come across another type of agreement between the parties. In the case of M/s Sun Export Corporation, cls. 7 and 8 of the agreement are as follows :
"7. In order to subsidise the exports and to help the manufacturer/shipper to recover the part of their cost, the Exporters have agreed to pay an incentive of 3.50% (three point five zero per cent only) by way of premium on full value exports made by the manufacturer/shipper. But in lieu of the same, the Exporter agrees that benefits of REP Licence shall be exclusive property of the manufacturer/shipper only.
8. In respect of the exports made by the manufacturer/shipper under the terms of this agreement, the Exporters will be entitled to claim all the benefits accruing to the exporters under the terms of the present import trade control policy."
In the case of M/s Jeet Machine Tools Ltd., cls. 7 and 8 of the agreement are as follows :
"7. In order to subsidise the exports and to help the manufacturer/shipper to recover the part of their cost, the Exporters have agreed to pay an incentive of 5% (five per cent only) by way of premium on the FOB value of exports made by the manufacturer/shipper. The Exporters agree that benefits of REP licence shall be exclusive property of the manufacturer/shipper only.
8. In respect of the exports made by the manufacturer/shipper under the terms of this agreement, the Exporters will be entitled to claim all the benefits accruing to the Exporters under the terms of the present Import Trade Control Policy."
Certainly the service charges received by the assessee in terms of the above two agreements would form part of the receipts towards charges and will fall within the sub-cl. (1) of cl. (baa) of the Expln. to s. 80HHC. It represents receipts in reimbursement, partially or totally, of the charges incurred by the assessee falling under the second limb of sub-cl. (1) of cl. (baa) of the Explanation. In fact, it is such type of receipts towards charges that were held to be within the meaning of the Explanation in the case of G. Gangadharan Nair vs. ITO (supra). The Tribunal in is order dt. 21st Dec., 1994 in the case cited supra held as follows :
"One of the items found in this clause is receipts towards "any charge". From the agreement it is seen that the assessee has been given an incentive or subsidy sat 3.5% or 2% or whatever it is, to cover the cost of charges incurred by it. So the export premium receipts is only a subsidy received by the assessee to cover the cost. Certainly it will fall within the meaning of the term any receipt towards "charges" that entered the profits of the business."
Thus, we uphold the contention of the learned Departmental Representative in respect of the receipts from M/s Sun Export Corpn. and M/s Jeet Machine Tools Ltd. In our considered opinion the charges received from others mentioned above cannot be considered as falling within the purview of sub-cl. (1) of cl. (baa) of the Expln. to s. 80HHC. It is too obvious to require reiteration that the profit from chitty business cannot be considered under the kind of receipts mentioned in sub-cl. (1) of cl. (baa) of the Explanation. Therefore, such profit cannot be deducted from the profits of the business in a computation under the Explanation. We direct the AO to quantify the "profits of the business" in terms of the Explanation keeping in view our observations.
7. It is admitted on both sides that even if the impugned amount of Rs. 44,82,654 and the chitty profit of Rs. 74,709 are not deducted from the profits and gains of business, the computation would still result in a loss rather than profit. Thus, we are faced with the main question as to the interpretation of sub-s. (3) of s. 80HHC and the proviso thereunder. The relevant provisions are as follows :
"(3) For the purposes of sub-s. (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, by 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 cl. (a) or cl. (b) or cl. (c) of this sub-section shall be further increased by the amount which bears to 90% of any sum referred to in cl. (iiia)(not being profits on sale of licence acquired from any other person), and cl. (iiib) and cl. (iiic), of s. 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee."
Under the main provision of sub-s. (3), the computation results in loss. The AOs view is that the proviso to sub-s. (3) can come into operation only if there is profit and not loss. The view of the learned CIT(A) is that if there was any loss under the provisions of sub-s. (3) and if there was any profit under the proviso thereto, the former must be adjusted against the latter and if there remained any profit after such adjustment, the assessee would be entitled to the deduction in terms of s. 80HHC to the extent of such profit. The contention of Sri Srinivasan, the learned chartered accountant, is that sub-s. (3) of s. 80HHC envisaged relief in two stages, (i) under the main provision and (ii) under the proviso thereto. Even if the assessee is not entitled to deduction under s. 80HHC in terms of sub-s. (3) de hors the proviso thereto, the benefit available under the proviso must be extended to it, particularly when in point of fact the assessee had exported goods and is found otherwise eligible for the deduction and, hence, a liberal construction should be placed on the provisions of sub-s. (3) of s. 80HHC. Having regard to these contentions, we are inclined to place a liberal construction on the provisions of s. 80HHC. The Supreme Court in the case of Broach Distt. Co-operative Cotton Sales Ginning & Processing Society Ltd. vs. CIT AIR 1989 SC 1493 - held, "The object of s. 81(i) was to encourage and promote the growth of co-operative society and consequently a liberal construction must be given to the operation of that section."
So the Court ruled that the entire activities of marketing and processing and ginning are to enjoy the exemption from income-tax, thus, adopting a liberal interpretation of the provisions of s. 81(i)(c). The Madras High Court in the case of CIT vs. Simpson & Co. (1980) 122 ITR 283 (Mad) held that "a provision for exemption conceived in the interests of advancing the progress of industrialization to subserve the economic well-being of the country at large cannot be whittled down by judicial interpretation". In the case of CIT vs. Strawboard Manufacturing Co. Ltd. (1989) Supp. (2) SCC 523, the apex Court observed that, -
"It is necessary to remember that when a provision is made in the context of a law providing for concessional rates of tax for the purpose of encouraging an industrial activity, a liberal construction should be put upon the language of the statute."
Thus, in the above case, strawboard was taken as paper. In the light of the pronouncements of the apex Court and other judicial pronouncements, we feel it our bounden duty to liberally construe the provisions of sub-s. (3) and the proviso thereunder of s. 80HHC as the section was enacted to give a fillip to the exporters who earned precious foreign exchange. In addition to this strand of thought, we hold that cl. (baa) of the Explanation has given a statutory definition of "profit of the business". According to the Explanation, in order to arrive at the "profits of the business", the profit as computed in terms of the provisions of the IT Act should be reduced by certain sums specified in the Explanation. In our considered view, as the exercise is only to quantify the "profits of the business" in terms of the definition given, one is not empowered to arrive at a loss in such an exercise. If loss is confronted with as a result of the exercise, the same should be ignored and should not merit consideration. In the light of the discussions we hold that the assessee did not have the statutory "profit of business" as defined in the Explanation and, therefore, in terms of the main provisions of sub-s. (3) he is not entitled to the deduction of such profit (which is nil) there being no profit. The learned Chartered Accountant concedes this point before us. However, he urges that the assessee would be entitled to the deduction of an amount as provided for in the proviso to sub-s. (3). In a case where there are no "profits of business" for deduction under sub-s. (3) of s. 80HHC, the question is whether the assessee would be entitled to the deduction in terms of the proviso under sub-s. (3) ? That would depend upon the construction of the proviso in the context and setting of the enactment and the objects for which the section was enacted. We have already stated in the earlier part of our order that s. 80HHC is a benevolent section conferring benefit on the exporters who earned precious foreign exchange so vital for the economic well being of the nation. We have also seen that the provisions of a section designed to subserve laudable objectives should receive liberal construction. There could be also doubt as to whether "profit" as defined in the Explanation should include "losses" though, in our opinion, profit means profit only. Therefore, in the context and setting of the enactment and the objects of the section, the proviso should be read as an independent provision to advance the cause rather than to defeat it. Thus construing the proviso to sub-s. (3) of s. 80HHC as an independent provision, we hold that the assessee would be entitled to the deduction in an amount equal to 90% of the sums referred to in cl. (iiia) (not being profits on sale of a licence acquired from any other person), and cl. (iiib) and cl. (iiic) of s. 28, the same proportion as the export turnover bears to the total turnover to the business carried on by the assessee.
8. From another point of view even if the proviso to sub-s. (3) of s. 80HHC is viewed only as a proviso, still in our opinion, the assessee cannot be denied the deduction. This is because under the main provisions of sub-s. (3) the statutory profit of business is to be taken as Nil there being no profit. This should be increased by the amount specified in the proviso to sub-s. (3). As a result, a positive figure will emerge. Thus from any point of view the assessee succeeds. The AO is directed to quantify the amount of deduction and allow the same subject to the availability of total income.
9. Sri John George, the learned Departmental Representative, vehemently contended that s. 80HHC(1) grants deduction of the profits derived by the assessee and in a case where there was no profit, the assessee is not entitled to any deduction at all. In fact, this is the view taken by the AO. We are not persuaded by his arguments because sub-s. (1) of s. 80HHC is subject to the other sub-sections of s. 80HHC. Some of the relevant provisions are sub-s. (3), the proviso thereto and the definition of "profits of the business" as given in the Explanation to s. 80HHC. We have dealt with each of those items and since the deduction itself is made subject to the above provisions, it cannot be straightaway stated that no deduction is allowable to the assessee in terms of the s. 80HHC. Thus, we reject the contention of the Revenue.
10. Sri John George submitted that the Form 10 CCAC furnished by the assessee was defective as certain columns were not filled up and, therefore, the assessee should not be allowed any deduction. In our considered opinion, if the Form has been furnished with defects therein, in the interests of substantial justice, an opportunity should be given to the assessee to cure the defects in the Form. Thus we reject the contention of the Revenue.
11. Sri Srinivasan vehemently contested the quantification of Rs. 8,01,100 under the proviso to s. 80HHC(3) as made by the AO. According to him, the correct amount should be in a sum of Rs. 24,41,266 as given in the statements furnished before the assessing authority, copies of which have been furnished before us and extracted in para 2 of our order at page 3. From the assessment order it is not clear how the AO has arrived at the sum of Rs. 8,01,100. This requires verification and proper quantification. In the light of our discussions, we restore the case to the file of the AO with a direction to quantify the amount of deduction to be allowed.
12. The appeal is allowed for statistical purposes.