Income Tax Appellate Tribunal - Cochin
Assistant Commissioner Of Income Tax vs Herbal Isolates (P) Ltd. on 10 October, 2001
Equivalent citations: [2002]83ITD310(COCH), (2003)79TTJ(COCH)328
ORDER
O.K. Narayanan, A.M.
1. This appeal relating to the asst. yr. 1993-94 is filed at the instance of the Revenue. The appeal is filed against the order of the CIT(A), Kochi, dt. 15th Oct., 1997, and arises out of the regular assessment completed under s, 143(3) of the IT Act, 1961 (hereinafter referred to as the Act).
2. The respondent-assessee is a company engaged in the business of manufacturing spices products, such as oleoresins, essence and other items and exporting them to outside India. The assessee-company also supplies such manufactured products to other companies on a job work basis. The assessee belongs to the Synthite Group of Companies, who are one of the largest exporters of spices products in the country. It is also said that the assessee has received certificate of honour from the Spices Board for its export performance and holds the quality assurance mark of ISO 9002.
3. As the assessee is an exporter of spices products as stated above, it has been claiming the benefits available under Section 80HHC of the Act on a regular basis from year to year. The claim of the assessee has been consistently accepted and allowed by the Department. For the impugned asst. yr. 1993-94, the assessee has claimed a deduction of Rs. 5,83,375 by way of such benefits available under Section 80HHC of the Act. The profit of the business carried on by the assessee was Rs. 10,22,835 as per its P&L a/c. The adjusted profit worked out by the assessee for income-tax purpose was Rs. 10,70,012. In the course of carrying on of the business, the assessee also received a sum of Rs. 19,90,260.40 in the nature of drying/grinding/distillation charges collected from other companies for undertaking job work production. While examining the claim of the assessee towards the deduction of benefit available under Section 80HHC, the AO made a reference to Clause (baa) of Explanation given to Section 80HHC. Particularly referring to Sub-clause (i) of the above Clause (baa), the AO observed that the drying/grinding/distillation charges credited in the trading account of the assessee had to be deleted from the profit of the assessee computed under the head "profits and gains of business or profession" for the purpose of working out the "profits of business". He pointed out that the deduction has to be made to the extent of 90 per cent of such receipts. The AO held that this has become necessary for the reason that any amount received by the assessee by way of "charges" need to be reduced to the extent of its 90 per cent from the profit of the assessee-company. The AO pointed out that the reduction of such charges is provided by the Act for the purpose of eliminating non-business receipts from the computation of the profits of the business entitled for the benefits under Section 80HHC.
4. Sub-section (3) of Section 80HHC fixes the quantum of deduction on the basis of a proportion of the profits of the business under the head "profits and gains of business or profession". The formula to arrive at the proportion is :
Profits of business X Export turnover/Total turnover
5. Therefore, to work out the quantum of deduction under Section 80HHC, it is necessary to work out the "profits of the business" of the assessee. The "profits of business" has been explained in Clause (baa) of the Explanation given under Section 80HHC of the Act. It is in these circumstances that the AO had to first quantify the profits of the assessee's business as defined in the Explanation, for the purpose of computing the quantum of benefit under s, 80HHG.
6. The AO pointed out that as the sum of Rs. 19,90,260.40 was in the nature of "charges" (by way of drying/grinding/distillation) as explained in Sub-clause (i) of Clause (baa), 90 per cent of the said sum has to be deducted from the profits of the business as worked out by the assessee. The profits of the business was worked out by the assessee at Rs. 10,70,012 as already noted above. The 90 per cent deductible amount of Rs. 19,90,260.40 is worked out at Rs. 17,91,234. When the deduction is made, the net result was a negative figure of Rs, 7,21,222, As "the profits of business" as explained in Clause (baa) has been worked out at a negative figure, the AO held that there was no profit in the hands of the assessee-company wherefrom deduction under Section 80HHC could be given. Accordingly, he negatived the contention of the assessee towards the claim of deduction of Rs. 5,83,375 made under Section 80HHC of the Act.
7. This issue was taken in first appeal before the CIT(A). The assessee-company raised detailed contentions before the CIT(A):
(a) Section 80HHC provides for "deduction in respect of the profits retained for export" vide the handnote.
(b) Section 80HHC(i) allows deduction of "the profits derived by the assessee from the export of goods or merchandise" where the assessee is engaged in the business of export out of India of any goods or merchandise.
(c) Clause (baa) of the Explanation to Section 80HHC defines the words "profits of the business" and provides that 90 per cent of various receipts such as profits on sale of import licences, cash assistance for exports, customs and excise duty drawback, brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits should be deducted.
(d) Section 80HHC(3)(a) provides that for purposes of Sub-section (1) of Section 80HHC the profits derived from exports 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.
(e) Inasmuch as the hire charges received by the appellants from the aforementioned job work is part of the total turnover the profits from these hire charges gets excluded from the profits of the business in the application of the formula provided for in Section 80HHC(3)(a). Clause (baa) of the Explanation to Section 80HHC provided that 90 per cent of various items of income or receipts included in such profits should be deducted- Once the formula provided for in Section 80HHC(3)(a) is applied it cannot be said that the hire charges are included in the profits of the business any longer. If it is not so, it will amount to a double deduction of the same amount from the profits of the business.
(f) The scheme of Section 80HHC is to arrive first at the profits derived from the export of goods or merchandise and reduce it further by those items of income or receipts, which, although derived from exports, is nevertheless regarded as being disentitled to the deduction.
8. On examining the arguments advanced by the assessee, the CIT(A) found that the purpose of Section 80HHC is satisfied while computing the quantum of deduction available under that section by applying the formula of proportionate deduction provided in Section 80HHC(3) of the Act. He found that the division of the profits computed under the head "profits and gains of business or profession" in the case of a composite business consisting of both export business and domestic business on the basis of total turnover would rationally determine the extent of eligible profit vis-a-vis non-eligible profit and therefore a further disallowance of any part of the profits over and above the amount arrived at on application of the formula provided in Sub-section (3) would amount to double disallowance. The CIT(A) held that the drying/grinding/distillation charges received by the assessee represented its domestic business and while the profit is arrived at as per Section 80HHC(3)(c) by apportioning the total profit in proportion to the export turnover and total turnover, the profit element embedded in the domestic business gets excluded from the export profit and there is no justification in further making a deduction of 90 per cent of those receipts from such export profit already arrived at by applying the turnover formula. The CIT(A) pointed out that the Board Circular No. 621 dt. 19th Dec., 1991, made this position clear by explaining that Expln, (baa) was inserted only to check the distortion of export profit by including receipts like interest, commission, etc., which do not have any element of turnover. The CIT(A) held that the drying/grinding/distillation charges accounted by the assessee were purely business turnover and they were directly taken into the trading account of the assessee-company. The CIT(A) pointed out that the word "charges" is a part and parcel of the expression "any receipts by way of brokerage, commission, interest, rent, charges, etc.". The word is to be understood in the context in which the expression in its totality is used and that does not visualise a receipt by way of distillation charges, which are clearly of a turnover nature. Finally, the CIT(A) came to a finding that the receipts which form part of the day-today business turnover of the assessee could not be considered as that kind of receipts enumerated in Expln. (baa). Those receipts are in the nature of receipts for manufacturing activity carried on by the assessee-company. There is no difference between the activities relating to export business carried on by the assessee-company and the processes carried on for drying/grinding/ distillation of spices undertaken for job works. He, therefore, held that those receipts are in the nature of business receipts and contribute for the income computed under the head "profits and gains of business or profession". The CIT(A) further relied on the decision of the Supreme Court in CIT v. Gwalior Rayon Silk Mfg. Co. Ltd. (1992) 196 ITR 149 (SC) and held that the reading of Expln. (baa) for the purpose of Section 80HHC should be construed reasonably and in favour of the assessee. On the basis of the above, the CIT(A) allowed the claim of the assessee and directed the AO to work out the deduction available under Section 80HHC without reducing 90 per cent of the receipts by way of drying/grinding/distillation charges from the profit of the assessee-company. It is against this direction given by the CIT(A) that the Revenue has come in second appeal before us,
9. The Revenue has raised the following ground in its grounds of appeal before us:
"The learned CIT(A) erred in holding that the assessee is entitled to claim deduction under Section 80HHC without deducting 90 per cent of the receipts by way of drying, grinding and distillation charges and directing to recompute deduction under Section 80HHC as per the above direction. He ought not to have held that the receipts under the head "drying, grinding and distillation charges" are not receipts coming under Expln. (baa) of Section 80HHC(4A). The learned appellate authority ought not to have followed the decision of the Supreme Court in CIT v. Gwalior Rayon Silk Manufacturing Co. (1992) 196 ITR 149 (SC) since the Act clearly provides that 90 per cent of any receipts in the nature of 'charges' received has to be excluded for the purpose of computation of deduction under Section 80HHC."
10. We heard Shri P.I. John, the learned Senior Departmental Representative appearing for the Revenue. The learned Departmental Representative submitted that one should apply the provisions of law as it emerges out of a plain reading. The deduction available under Section 80HHC is to be worked out on the basis of this formula:
Profits of business X Export turnover/Total turnover There is no ambiguity in this. For the purpose of the above formula, "profits of business" is explained in Clause (baa) of the Explanation provided under Section 80HHC. Clause (baa) stipulates that profits of the business means, the profits of the business as computed under the head "profits and gains of business or profession". The above exposition is subject to a condition that certain items which are not in the nature of regular business carried on by the assessee has to be reduced from the income computed under the head "profits and gains of business or profession". Sub-els, (i) and (ii) of Clause (baa) provides for such adjustment factors. As per Sub-clause (i), one of such items which has to be reduced from the profit is "charges". The term "charges" has to be construed in its normal and reasonable meaning. The sum of Rs. 19,90,260.40 credited by the assessee-company in its trading account related to drying/grinding/distillation charges received by the assessee-company. They are charges and not business profits of the assessee-company. If the normal and plain meaning of the term "charges" is applied to examine the nature of drying/grinding/distillation charges received by the assessee-company, it is obvious that those receipts are covered by the term "charges" provided in Sub-clause (i) of Clause (baa). In these circumstances, the AO was fully justified in law to reduce 90 per cent of such charges received by the assesses-company from the business profits, which in turn resulted in a negative figure and therefore in holding that the assessee-company was not entitled for claiming deduction under Section 80HHC. The CIT(A) has allowed the claim of the assessee without going into the circumstances stated above and therefore his order need to be set aside. The learned Departmental Representative submitted that when the provisions contained in the Act are very clear and unambiguous in regard to the method of computing a particular benefit, then there is no requirement of interpreting it in such a way so that a benefit is extended to the assessee in spite of the provision contained in the- Act, which is contrary to extending such a benefit. In these circumstances, he submitted that the order of the CIT(A) may be set aside and the appeal of the Revenue may be allowed.
11. Shri C.B.M. Warrier, the learned Chartered Accountant appearing for the assessee-company summarised his arguments in the following lines :
(1) The company received Rs. 19,90,260 as processing charges from another company and credited in the P&L a/c. The company is engaged in the manufacture of oleoresins and extracts from various spices, chillies etc. and exporting the products. The job work for the receipt of Rs. 19,90,260 is also received for doing the same manufacturing job for another party. The processing charges of Rs. 19,90,260 is earned for the manufacturing and processing using the entire undertaking of the company and by incurring all the expenditure of the factory like wages, electricity charges, depreciation and all the other items of expenditure debited in the P&L a/c. For processing under job work all expenditure incurred for manufacturing is involved other than the cost of the raw materials.
(2) The income of Rs. 19,90,260 is only an income from business of the company. The expenditure for earning this amount is included in the several items of expenditure debited in P&L a/c since all the expenditure for running the company are totally reflected in P&L a/c and there is no segregation of the expenditure for the job work and for own processing.
(3) For the exemption under Section 80HHC, to arrive at the 'profits of the business', 90 per cent of items under Sections 28(iiia), (iiib) and (iiic) and any receipt by way of brokerage, commission, interest, charges or any other receipt of a similar nature is to be reduced from the profit.
(4) Item in (iiia), (iiib) and (iiic) are profits on the sale of import licence, cash incentive and duty drawback which are in the nature of business income, but 90 per cent of these items are to be excluded since a further benefit of income-tax exemption is not intended to be given on those amounts which are already incentive from export. These items of business income are excluded only because these items are specifically mentioned in the section and a double advantage is not intended under Section 80HHC.
(5) Any receipt by way of brokerages, commission, interest, rent, charges or any other receipt of a similar nature are also to be deducted to the extent of 90 per cent At this juncture, a reference to the CBDT Circular No. 621, dt. 19th Dec., 1991 is relevant [(1992) 195 TTR (St) 178).
"32.11. It has, therefore, been clarified that 'profits of the business' for purpose of Section 80HHC will not include receipts by way of brokerage, commission, interest, rent, charges or any other receipts of a similar nature. As some expenditure might be incurred in earning these income, which in the generality of cases is part of common expenses, ad hoc 10 per cent deduction from such income is provided to account for these expenses."
(6) As per the above circular, there are certain items of income credited in P&L a/c for which separate expenditure not incurred and hence 10 per cent expenditure is allowable on ad hoc basis.
(7) The processing charges received has incurred an expenditure of nearly 90 per cent of the gross income and approximately 10 per cent is only the net income whereas the items of brokerages, commission, interest, rent charges etc. are subject to only 10 per cent of expenditure and 90 per cent on net income as per the provisions of Section 80HHC(4A) Expln. (baa). The processing charges received and the items specified in the sections are totally opposite from the point of view of net income and so it will not be correct to include the processing charges within the meaning of "charges" as mentioned in the section.
(8) Charges is mentioned along with interest and immediately after rent, in the sub-section. The items mentioned are various types of income credited in P&L a/c, which are not having any nexus with business income. The word "charges" is appearing in Section 24(1)(iv) of the Act in the computation of income from house property. Similar to this, in the Companies Act also under Section 124 the word "charge" is applied in regard to immovable property. Charge includes a lien and an equitable charge whether created or evidenced by an instrument in writing or by deposit of title deed or by an agreement to deposit [Refer Guide to Companies Act, A. Ramaya (11th Edn.) p. 427].
(9) In view of the above, the usage "charge" should definitely mean some income relatable to an immovable property or some charges received by the company which is not a business income.
(10) The exempted income under Section 80HHC is calculated by the following formula:
Profits of business X Export turnover/Total turnover.
The processing charges Rs. 19,90,260 received is having an expenditure of nearly 90 per cent (by taking income/expenditure ratio as per P&L a/c). The net income of approximate Rs. 2 lakhs is included in the income in the P&L a/c and forming part of domestic business income. When the deduction is decided by the above formula, by dividing the export turnover by the total turnover and multiplying the profit of the business, the exemption will be only for the income from the proportionate export turnover.
12. We heard both sides in detail. We have gone through the detailed orders passed by the lower authorities. We have also perused the argument note filed by the learned Chartered Accountant accompanied by written submissions filed by the respondent-assessee. Section 80HHC of the Act provides for deduction in respect of profits retained for export business. The computation of that deduction is provided in Sub-section (3) of Section 80HHC. It is to be worked out on the basis of the following formula :
Export turnover X Profits of business/Total turnover.
What is arrived at by applying the above formula is the profit retained by the assessee from the export of goods and merchandise.
13. Even if the benefit of deduction worked out on the basis of the above formula provided in Section 80HHC(3) is meant for the profits from export business, the quantum of deduction is not strictly confined to the profits derived from the export of goods or merchandise. This is because of the mathematics of this formula. The export profit is worked out as a part of the composite profits of the business. The profits of the business is the profits computed under the head "profits and gains of business or profession". The profits and gains of business or profession of an assessee may be derived from various businesses carried on by the assessee including export business as well as domestic business. But while w6rking out the export profit on the basis of the above formula, the export profit is not singled out from the total profit of the business of the assessee by deducting proportionate business expenditure from the export receipts derived by the assessee-company. Instead of that, the export profit is worked out as a portion of the overall business profits of the assessee in proportion of the export turnover to the total turnover. In other words, there is no. occasion to examine the result of export business and domestic business independently so as to come to' a conclusion that whether the export business as such has resulted in a profit or loss or the domestic business as such has resulted in profit or loss. Such a functional division of the business profits of an assessee is not contemplated in the above formula. The export profit is worked out as an integral part of the total business profit of the assessee. The composition or the genesis of the profits of the business is not examined while applying the formula provided in Section 80HHC. This position is summarised by Chaturvedi and Pithisaria in their Commentary on Income-tax Law, 5th Edition (January, 1999) in p. 3547 of Vol. II. It reads as :
"Sub-section (3) of Section 80HHC statutorily fixes the quantum of deduction on the basis of a proportion of the profits of the business under the head "profits and gains of business or profession" irrespective of what could strictly be described as profits derived from the export of goods or merchandise out of India. The deduction is computed in the following manner:
Profits of business X Export turnover/Total turnover."
14. The above formula presupposes that if there is an overall profit for the business carried on by the assessee during the relevant previous year and the assessee has also export turnover, a portion of the overall profit relates to export business and the balance profit relates to domestic business. The division is made in the ratio of export business to total turnover. This statutory proposition has created certain distorted circumstances, inasmuch as the formula gives a distorted figure of export profits when receipts like interest, commission, etc. which do not have an element of turnover are included in the P&L a/c. It is to aEeviate such a situation that Clause (baa) of Explanation to Section 80HHC has been inserted in the Act by Finance (No. 2) Act, 1991 w.e.f. 1st April, 1992. The object of inserting Clause (baa) has been stated in the Circular No. 621, dt, 19th Dec., 1991, issued by the CBDT. The relevant portion of the said circular in paras 32.10 and 32.11 read as follows :
"32.10. The existing formula often gives a distorted figure of export profits when receipts like interest, commission, etc. which do not have element of turnover are included in the P&L a/c.
32.11. It has, therefore, been clarified that "profits of the business" for the purpose of Section 80HHC will not include receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature. As some expenditure might be incurred in earning these incomes, which in the generality of cases is part of common expenses, ad hoc 10 per cent deduction from such income is provided to account for these expenses."
15. It is in the above overall scheme of deduction provided in Section 80HHC that we have to examine the case of the assessee. The claim of the assessee is negatived by the AO on the ground that drying/grinding/distillation charges accounted by the assessee were in the nature of charges mentioned in Sub-clause (i) of Clause (baa) of Explanation given under Section 80HHC, which reads as below :
"(baa), "profits of the business" means the profits of the business as computed under the head "profits and gains of business or profession" as reduced by--
(1) ninety per cent of any sum referred to in Clauses (iiia), (iiib) and (me) of Section 28 or of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt 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."
16. The question, therefore, to be decided is whether those receipts accounted by the assessee were in the nature of "charges" or not. The business carried on by the assessee is the business of manufacturing various spices products, such as oleoresins, essences, etc. The entire manufacturing and processing activity carried on by the assessee is meant for producing those products. When the assessee-company is producing those items tor itself, those items are exported. So also the assessee is undertaking the manufacturing and processing of those items for other companies, where the taw materials are supplied by those other companies. In such cases, instead of receiving sale proceeds of those products as such, the assessee-company is receiving charges towards drying/grinding/distilling involved in the process of its manufacture. The manufacturing process carried on by the assessee is a sophisticated one. The procedures are highly automated and complicated. The extracting of spices products is mainly meant for export and extraction process and its quality control demand a high level of expertise, Whether for its own export or for processing of raw materials of other companies, the core manufacturing activity carried on by the assessee is one and the same. The activities necessary for exporting assessee's own merchandise and the activities necessary for carrying out the job works are one and the same as far as its processing and manufacturing part is concerned. Therefore, one cannot say that the job works undertaken by the assessee-company is not an integral part of the business carried on by the assessee-company. When the manufacturing process carried on by the assessee-company to execute the job works undertaken by it forms part of the core business of the assessee, then the corresponding receipts obtained by the assessee-company against such processing are in the nature of business receipts of the assesses-company. They form part of the business turnover of the assessee-company.
17. As explained in the circular of the CBDT cited supra, the purpose of excluding receipts like interest, commission, etc. from the ambit of the profits of the business is to exclude such receipts which do not have an element of turnover. If we examine the genesis of the job works undertaken by the assessee-company, it could be seen that the activities of drying/grinding/distilling are essentially an integral part of the manufacturing or processing activities regularly carried on by the assessee, but for the contribution of raw materials. The factory and the manufacturing system installed by the assessee-company is a common platform for carrying on of the manufacturing and processing activities of the assessee-company, culminating in export as well as in job works. Therefore, it cannot be said that the profits reported by the assessee-company was generated exclusively from the job work activities and not from the export activities. When we find that the drying/grinding/distilling charges received by the assessee are in the nature of its usual business turnover, there is no justification in excluding those receipts in computing the profits of the business.
18. When we find that the drying/grinding/distillation activities carried on by the assessee are in the nature of its manufacturing and processing activities and the charges received from such services are in the nature of normal business turnover, then we do not find that they are hit by the term "charges" provided in Sub-clause (i) of Clause (baa). As explained in the Board circular, and rightly observed by the CIT(A), what is not included in the profits of the business for the purpose of Section 80HHC are receipts by way of brokerage, commission, rent, interest or any other receipt of a similar nature. Such receipts do not have any corresponding expenditure to be incurred. It is for that purpose an ad hoc deduction of 10 per cent is given for some probable expenditure that might be incurred to earn such different types of receipts. But in the case of the assessee, as rightly observed by the CIT(A), these drying/grinding/distillation charges are not earned at a nominal cost of 10 per cent of such receipts. The assessee is receiving such charges by utilising the entire factory and production system of the assessee. Such charges are earned by the assessee after incurring all expenditure pertaining to a normal business in the form of wages, energy, rent, rates, depreciation, etc. There is no basis to presume that the impugned charges are received by the assessee after incurring "a marginal rate of 10 per cent thereof. These charges are received by the assessee by incurring all expenditure as good as its own manufacturing activities, except the raw material costs. So, the term "charges" provided in Sub-clause (i) of Clause (baa) is nowhere similar or comparable to the charges received by the assessee-company in the nature of drying/grinding/distillation charges. They are functionally quite different in character.
19. The word "charges" used in Sub-clause (i) of Clause (baa) is found in the company of expressions like "brokerage", "commission", "interest", "rent". If we apply the principle of "ejusdem generis", the term "charges" has to be read in the company of the preceding words, such as brokerage, commission, interest, rent, etc. The brokerage or commission or interest, or rent does not have any nexus with any manufacturing or processing or the core business activity that could be carried on by the assessee. Similarly, the word "charges" appearing in the company of those words also will not have any nexus with manufacturing or processing or core business activity of an assessee. The word "charges" appearing in the company of brokerage, commission, interest, rent, etc. cannot be singled out and imputed with a different meaning alleging a nexus with manufacturing or processing or core business activities. Ejusdem generis rule is the rule of generic words following more specific ones. The rule is that when general words follow specific words of the same nature, the general words must be confined to the things of the same kind as those specified. The specified words must form a distinct genesis or category. This rule reflects an attempt to reconcile incompatibility between specific and general words, In Sub-clause (i) of Clause (baa), the word "charges" are preceded by words of specific nature, such as brokerage, commission, interest, rent, etc. These specific words form a distinct genesis or category, inasmuch as all those items relate to receipts earned by an assessee other than for its regular and principal business activity. In such circumstances, the word "charges" also should be read along with the meaning of those specific words forming themselves into a special category. If so, the word "charges" should be confined to those charges which do not have anything to do with the business and the related activities carried on by the assessee. In the present case, the charges credited by the assessee in its trading account are the proceeds of the manufacturing and processing activities carried on by the assessee and forming part of its principal business. Therefore, the charges received by the assessee-company for the job works undertaken as in the nature understood in this case cannot be held as similar to the word "charges" provided in Sub-clause (i) of Clause (baa) of the Explanation given under Section 80HHC of the Act, In our opinion, the word "charges" appearing in Clause (baa) of Explanation given under Section 80HHC need to be read as charges similar to receipts in the nature of brokerage, commission, interest, rent, etc.
20. If we also attempt an interpretation of the word "charges" appearing in Clause (baa) by reference, we may make a better look into the scheme of deduction provided in Section 80HHE of the Act. The said section is provided for deduction in respect of export of computer software and providing technical services outside India. Explanation (d) to Section 80HHE is exactly similar to Clause (baa) of Explanation to Section 80HHC. In the case of an assessee claiming exemption under Section 80HHE and the income of the assessee consisted only of charges received from technical services from outside India, and if the view adopted by the AO is taken, then that assessee might not be entitled to any deduction at all, when in fact the purpose of Section 80HHE is to provide deduction in such cases.
21. We find that it would give rise to an absurd result if the interpretation given by the AO in this case is applied to a situation arising out of Section 80HHE, The interpretation given by the AO creates an anomaly in the application of Section 80HHC itself. The formula prescribed by the statute in computing the deduction available under Section 80HHC provides for an eligible deduction if the assessee has derived profit from the business carried on by it which included export turnover also. The nexus of the export turnover for the purpose of computing the deduction is directly with the composite profit of the business carried on by the assessee. In the present case, the result of the business carried on by the assessee is a positive income. The assessee has carried on export business. All the three factors necessary to fill up the formula, such as profit of the business, export turnover and total turnover are present in the case of the assessee. In spite of the fact that the result of the business carried on by the assessee was profit, and the assessee was also having export turnover, the assessee did not get the deduction provided under Section 80HHC by virtue of the anomaly created by the interpretation given by the AO to the word "charges" appearing in Clause (baa) of Explanation given under Section 80HHC of the Act.
22. The Supreme Court has held in Gwalior Rayon Silk Mfg. Co. Ltd.'s case (supra) that the tax laws have to be interpreted reasonably and in consonance with justice adopting a purposive approach, that the contextual meaning has to be ascertained and given effect to and that a provision for deduction, exemption or relief should be construed reasonably and in favour of the assessee. If the above position is applied in this case, one has to see that the assessee having made exports of goods outside India and also having earned profits from its business activities, was legitimately entitled for claiming the deduction available under Section 80HHC. As we have already seen, the term "charges" used in Expln. (baa) of Section 80HHC is to be read together with the words preceding it by applying the rule of interpretation of "ejusdem generis". The preceding words are receipts in the nature of brokerage, commission, interest and rent. All these are items in respect of which no manufacturing or processing activities are involved. No expenditure is to be incurred for earning those receipts, or otherwise an expenditure at the maximum of estimated 10 per cent provided in Clause (baa). But as far as the assessee is concerned, the drying/grinding/distillation charges received involves manufacturing and processing activities, for which the entire expenditure are to be borne by the assessee itself. Therefore, it does not have even a distant comparison with the contextual meaning given to the word "charges" appearing in Sub-clause (i) of Clause (baa) to the Explanation under Section 80HHC of the Act.
23. This Tribunal had an occasion to consider the meaning of the word "charges" used in Clause (baa) of the Explanation at A.M. Moosa v. Asstt. CIT (1996) 54 TTJ (Coch) 193. It has been held by the Tribunal that the provisions, being incentive provisions, should be construed liberally. In that case the assessee entered into agreements with export houses whereunder he received a percentage of f.o.b. value; not as a reimbursement of expenses incurred by him, These were not held as receipts covered by the term "charges". Likewise, in the present case also the drying/grinding/distillation charges were not received by the assessee as reimbursement of any expenses incurred by it. On the other hand, the assessee had incurred substantial expenditure in earning such charges by way of undertaking job works as an integral part of the core business carried on by it.
24. In the circumstances, the drying/grinding/distillation charges received by the assessee were to be treated as part of its business turnover. Those business receipts do not come under Sub-clause (i) of Clause (baa) of Explanation to Section 80HHC. The word "charges" appearing in Sub-clause (i) of Clause (baa) are charges similar to receipts in the nature of brokerage, commission, interest, rent, etc. which are not earned out of the business carried on by an assessee, but that may be obtained in the course of carrying on of that business. Therefore, the AO was not justified in making a further reduction of 90 per cent of the sum of drying/grinding/distillation charges accounted by the assessee-company. As rightly pointed out by the CIT(A), once the formula in s, 80HHC(3) is applied and the division of profit is made proportionately, there is no need of further deduction, as the formula takes care of the exclusion of non-export profits from the quantum of profit eligible for deduction.
25. In the facts and circumstances of the case, we are of the view that the CIT(A) was justified in accepting the claim of the assessee. Therefore his order is confirmed, and the appeal is dismissed.