Gujarat High Court
Dy C I T - Central Circle vs Rubamin Limited....Opponent(S) on 19 August, 2016
Author: Ks Jhaveri
Bench: Ks Jhaveri, G.R.Udhwani
O/TAXAP/1684/2008 JUDGMENT
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
TAX APPEAL NO. 1684 of 2008
FOR APPROVAL AND SIGNATURE:
HONOURABLE MR.JUSTICE KS JHAVERI sd/-
and
HONOURABLE MR.JUSTICE G.R.UDHWANI sd/-
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1 Whether Reporters of Local Papers may be allowed YES
to see the judgment ?
2 To be referred to the Reporter or not ? NO
3 Whether their Lordships wish to see the fair copy of NO
the judgment ?
4 Whether this case involves a substantial question of NO
law as to the interpretation of the Constitution of
India or any order made thereunder ?
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DY C I T - CENTRAL CIRCLE....Appellant(s)
Versus
RUBAMIN LIMITED....Opponent(s)
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Appearance:
MR KM PARIKH, ADVOCATE for the Appellant(s) No. 1
RULE SERVED for the Opponent(s) No. 1
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CORAM: HONOURABLE MR.JUSTICE KS JHAVERI
and
HONOURABLE MR.JUSTICE G.R.UDHWANI
Date : 19/08/2016
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ORAL JUDGMENT
(PER : HONOURABLE MR.JUSTICE KS JHAVERI) Though served, none appears for the assesseerespondent.
2. By way of this appeal, the department has challenged the order dated 28/09/2007 passed by the ITAT in ITA No.1881/Ahd/2001 for assessment year 1998 99 and came to be admitted on the following question of law:
"Whether the ITAT was right in law and on facts in restoring the matter back to the file of the Assessing Officer to consider deduction u/S.80HHC of the Act though there was negative profit ?
3. Learned Counsel for the Department has contended that the issue raised in this appeal is decided by this Court in Tax Appeal No.1682 of 2008 and allied matters dated 27/07/2016 wherein this Hon'ble Court has considered the decision in case of IPCA Laboratory Ltd. v. Deputy Commissioner of IncomeTax reported in [2004] 266 ITR 520 (SC) and he has placed reliance upon following paragraphs:
"4. At the time of hearing of present appeals, learned advocate for the appellant submitted that the issues involved in these appeals are covered by various decisions of the Honourable Apex Court as well as different High Courts. He submitted that present appeals may be disposed of as per the observations made in the following decisions.
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(i) IPCA Laboratory Ltd. v. Deputy Commissioner of Income-Tax reported in [2004] 266 ITR 520 (SC).
(ii) ACG Associated Capsules Pvt. Ltd. v. Commissioner of Income-Tax reported in [2012] 343 ITR 89 (SC).
(iii) Commissioner of Income-Tax v. Packworth Udhyog Ltd. reported in [2011] 331 ITR 416 (Ker) [FB].
(iv) Pandian Chemicals Ltd. v. Commissioner of Income Tax reported in [2003] 262 ITR 278 (SC).
(v) Commissioner of Income Tax v. Gaskets and Radiators Distributors reported in [2008] 296 ITR 440 (Guj).
5. So far as issue with regard to negative profit is concerned, it has been observed by the Supreme Court in the case of IPCA Laboratory Ltd. (supra), as under:-
It was next submitted that even when the profits are to be reduced by the losses in cases where an export house has disclaimed its turn over in favour of a supporting manufacturer, the turn over of the exporter gets reduced to the extent disclaimed. It is submitted that as the turnover, which is disclaimed, is reduced it cannot then be taken into consideration for the purposes of computing profits under sub-section 3(c)(ii). In our view this is an argument which merely needs to be stated to be rejected. If such an argument is accepted it would lead to an absurd result. It would mean when if there was no disclaimer the export house would not be entitled to any deduction in cases where there is a loss but because disclaimer has been made both the export house and the supporting manufacturer would become entitled to deductions. The proviso to sub-section (i) of Section 80HHC enables a disclaimer only to enable the export house to pass on deductions. It in no way reduces the turnover of the export house. In computing total income, the entire turnover is taken into account even though there is a disclaimer. Thus even though the disclaimer is made the taxable income of Rs. 4.39 crores has been arrived at by the Appellants after taking into account the entire turnover from export of trading goods. In arriving at the figure of Rs. 4.39 crores admittedly the loss of Rs. 6.86 crores has been taken into account. Even after disclaimer the turnover has remained the turnover of the Export House i.e. the Appellants. The disclaimer is Page 3 of 10 HC-NIC Page 3 of 10 Created On Tue Aug 23 02:28:27 IST 2016 O/TAXAP/1684/2008 JUDGMENT only for purposes of enabling the export house to pass on the deduction which it would have got to the supporting manufacturer. It follows that if no deduction is available, because there is a loss, then the export house cannot pass on or give credit of such non-existing deduction to a supporting manufacturer.
Faced with this situation, it was submitted that even a loss is a negative profit. In support of the submission, reliance was placed upon the authority of this Court in the case of Commissioner of Income-Tax(Central), Delhi vs. Harprasad & Co. P. Ltd. reported in 1975 (Vol. 99) ITR 118. In this case the meaning of loss was being considered in the context of capital gains made from sale of shares. The question was whether the loss could be carried forward and set off against capital gains in a subsequent year. While considering this question, it was held as follows:
"From the charging provision of the Act, it is discernible that the words "income" or "profits and gains" should be understood as including losses also, so that, in one sense "profits and gains" represent "plus income" whereas losses represent "minus income". In other words, loss is negative profit. Both positive and negative profits are of a revenue character. Both must enter into computation, wherever it becomes material, in the same mode of the taxable income of the assessee."
In our view, the above observations are against the Appellants. They show that in computing income profits and gains, losses must also be taken into consideration.
Mr. Dastur relied on a format of Form No. 10CCAC and a Circular of the Board wherein it is stated as follows:
"With the adoption of the dual system for computing export profit, the computation of the disclaimed export turnover also required modification. The Finance Act has therefore amended section 80HHC in order to provide that, where the Export or Trading House disclaims the tax concession in favour of the supporting manufacturer, the concession to the Export or Trading House will be reduced by the amount which bears to the total export profits of trading goods the same proportion as the disclaimed export turnover bears to the total export turnover of trading goods. The formula in such cases will now be -
80HHC concession = export profit - [export profits on trading goods x disclaimed export turnover ] total export turnover "
Mr. Dastur submitted that if even both profits and losses are to be taken into account the, on a disclaimer the losses will also have to be considered as negative profits and as per the Board Circular the calculation would be as follows:
"80HHC Concession = *Export Profits - [Export Profits on Trading Page 4 of 10 HC-NIC Page 4 of 10 Created On Tue Aug 23 02:28:27 IST 2016 O/TAXAP/1684/2008 JUDGMENT Goods x Disclaimed Export Turnover] Total Export Turnover of Trading Goods = * (-3,07,84,867) - (-6,86,65,804) x 18,53,53,371 18,53,53,371 = (-3,07,84,867) - (-6,86,65,804) = (-3,07,84,867) + 6,86,65,804 = 3,78,80,937"
He submitted that even on this calculation the Appellants are entitled to deduction of Rs. 3,78,80,937/-. We are unable to accept this submission. The calculation as per the Board Circular would not be as claimed. The Board Circular nowhere provides for negative profits. The Board Circular also shows that only positive profits can be considered for purposes of deduction.
We, therefore, see no substance in the Appeal. The same stands dismissed. There shall be no order as to costs.
5.1 In view of above, it is clear that deduction under Section 80 HHC cannot be permitted in case of loss or negative profit. In that view of the matter, the contention raised by the revenue is required to be accepted. Accordingly, question No.(A) in Tax Appeal No.1682 of 2008 and the question posed in Tax Appeal No.2451 of 2009 are answered in favour of the revenue and against the assessee.
6. So far as issue as to whether net interest or gross interest should be considered while computing deduction under Section 80 HHC of the Act, the same is stated to have been covered by the decision in the case of ACG Associated Capsules Pvt. Ltd. v. Commissioner of Income-Tax reported in [2012] 343 ITR 89 (SC), wherein it is observed as under:-
2. The facts of this case very briefly are that Bharat Rasayan Limited (for short `the assessee') filed a return of income tax claiming a deduction of Rs.72,76,405/- under Section 80HHC of the Act. In the assessment order, the Assessing Officer held that ninety per cent of the gross interest has to be excluded from the profits of the business Of the assessee under Explanation (baa) to Section 80HHC of the Act and deducted ninety per cent of the gross interest of Rs.50,26,284/-
from the profits of the business of the assessee. The assessee preferred an appeal contending that only ninety per cent of the net interest should have been deducted from the profits of the business of the assessee under Explanation (baa) to Section 80HHC, but the Commissioner of Income Tax (Appeals) rejected this contention of the assessee. Aggrieved, the assessee filed an appeal before the Income Tax Appellate Tribunal (for short `the Tribunal') and the Tribunal allowed the appeal of the assessee and held that the Page 5 of 10 HC-NIC Page 5 of 10 Created On Tue Aug 23 02:28:27 IST 2016 O/TAXAP/1684/2008 JUDGMENT assessee was entitled to deduct the expenses from the interest received and only ninety per cent of the net amount of interest could be excluded under Explanation (baa) to Section 80HHC and remitted the matter to the Assessing Officer to examine whether there is factually an excess between the interest paid and interest received and take a fresh decision. The Revenue filed an appeal against the order of the Tribunal before the High Court, but by the impugned order the High Court following its decision in Commissioner of Income-Tax v. Shri Ram Honda Power Equip (supra) sustained the order of the Tribunal and dismissed the appeal.
3. We have held in our judgment in the case of M/s ACG Associated Capsules Pvt. Ltd. v. Commissioner of Income Tax that ninety per cent of not the gross interest but only the net interest, which has been included in the profits of the business of the assessee as computed under the heads `Profits and Gains of Business or Profession' is to be deducted under clause (1) of Explanation (baa) to Section 80HHC for determining the profits of the business. Since, the view taken by the High Court in the impugned order is consistent with our aforesaid view, we find no merit in this appeal and we accordingly dismiss the same. There shall be no order as to costs.
6.1 Accordingly, it is held that the Tribunal was right in law and on facts in holding that net interest should be considered instead of gross interest while computing the deduction u/s.80HHC of the Act.
Accordingly, question no.(B) in Tax Appeal Nos.1682 and 1683 of 2008 is answered in favour of the assessee and against the revenue.
7. So far as question (C) of Tax Appeal No.1682 of 2008 and question (A) of Tax Appeal No.1683 of 2008 is concerned, the same is stated to have been covered by the decision in the case of Commissioner of Income-Tax v. Packworth Udhyog Ltd. reported in [2011] 331 ITR 416 (Ker) [FB], wherein it is observed as under:-
5. After hearing both sides and after going through the decisions above referred, particularly that of the Supreme Court, we feel that assessees are entitled to deduction under Section 80HHC computed in accordance with sub-section (3) and (3A) of Section 80HHC of the Act because it is expressly so provided under clause (iv) of Section 115JB (2) of the Act. All what the Supreme Court has held is that the ceiling contained in Section 80HHC (1B) is not applicable for the purpose of granting deduction under clause (iv) above in the computation of book profit. However, there is nothing to indicate in the Supreme Court decision that eligible deduction of export profit under clause (iv) above in the computation of book profit can be computed in any other manner other than what is provided in sub-Page 6 of 10
HC-NIC Page 6 of 10 Created On Tue Aug 23 02:28:27 IST 2016 O/TAXAP/1684/2008 JUDGMENT section (3) and (3A) of Section 80HHC of the Act. What is clearly stated in clause (iv) is that deduction of export profit in the computation of book profit is the same "amount of profit eligible for deduction under Section 80HHC" computed under clause (a) or clause (b) or clause ) of sub-section (3) or sub-section (3A) of the said section. So much so, computation of export profit has to be done only in accordance with the method provided under Section 80HHC which is in fact done in the computation of business profit if the assessment was on the total income computed under the other provisions of the Act. MAT assessment is only an alternative scheme of assessment and what is clear from clause (iv) above is that even in the alternative scheme of assessment under Section 115JB assessee is entitled to deduction of export profit under Section 80HHC. In other words, export profit eligible for deduction under Section 80HHC is allowable under both the scheme of assessment. So much so, assessees are certainly entitled to deduction under Section 80HHC but it is only by following the method provided under sub-section (3) and (3A) of Section 80HHC. However, by virtue of the decision of the Supreme Court above referred, we feel the restriction contained in Section 80AB or Section 80B(5) could not be applied inasmuch as carry forward of business loss or depreciation should not be first set-off leaving gross total income nil, which disentitles the assessee for deduction under other provisions of Chapter VIA-C which includes Section 80HHC also. But assessees' contention that export profit has to be computed with reference to the Profit and Loss Account prepared under the Companies Act is equally unacceptable because there is no such provision in Section 80HHC to determine export profit with reference to Profit and Loss Account maintained under the Companies Act. Consistent with the decision of the Supreme Court, we hold that assessees are entitled to deduction of export profit under Section 80HHC and the relief is to be granted in terms of sub-section (3) and (3A) of the said section.
We therefore dispose of the appeals by vacating the orders of the lower authorities with direction to the assessing officer to recompute the book profit by granting deduction under Section 80HHC in terms of above findings and the decision of the Supreme Court in Ajanta Pharma Ltd's case referred above.
7.1 In view of above observations, this question is answered in favour of the assessee and against the revenue.
8. So far as question (C) of Tax Appeal No.1683 of 2008 as to whether the ITAT was right in law and on facts in directing the A.O. to include interest income in the eligible profits for computing the deduction u/S.80HH & 80IA of the Act of 1961 though there is no immediate and direct nexus with the industrial activities of the Page 7 of 10 HC-NIC Page 7 of 10 Created On Tue Aug 23 02:28:27 IST 2016 O/TAXAP/1684/2008 JUDGMENT assessee is concerned, the same is stated to have been covered by the decision of the Supreme Court in the case of Pandian Chemicals Ltd. v. Commissioner of Income Tax reported in [2003] 262 ITR 278 (SC) and a decision of this Court in Commissioner of Income Tax v. Gaskets and Radiators Distributors reported in [2008] 296 ITR 440 (Guj). In the case Gasket and Radiators Distributors, this Court observed as under:-
7. Identical question came to be considered by the Hon'ble Supreme Court in Pandian Chemicals Ltd. vs. Commissioner of Income-
Tax, [supra] and the question, which was posed for consideration before the Apex Court was whether the interest on deposits with Tamil Nadu Electricity Board should be treated as income derived by the industrial undertaking for the purpose of Section 80HH or not, and the Hon'ble Supreme Court has observed that Section 80HH of the Income Tax Act grants deduction in respect of profits and gains derived from an industrial undertaking and the words derived from in Section 80HH of Income Tax Act, 1961 must be understood as something which has a direct or immediate nexus with the assessee's industrial undertaking. The Supreme Court held that interest derived by the industrial undertaking of the assessee on deposits made with the Electricity Board for the supply of electricity for running the industrial undertaking could not be said to flow directly from the industrial undertaking itself and was not profits or gains derived by the undertaking for the purpose of the said deduction under Section 80HH. In G.T.N. Textiles Ltd., vs. Deputy Commissioner of Income-Tax (Assessment) And Another, [supra], the Kerala High Court held that interest on Bank deposits was not profit derived from export of goods. The Kerala High Court has further held that the interest earned by the assessee on fixed deposits, commission received on sale of machinery, etc., were not business income and consequently the assessee was not entitled to computation of eligible deduction under Section 80HHC of the Act by including those receipts under business income. Therefore, considering the aforesaid two decisions, we must hold that the Tribunal as well as the Commissioner of Income Tax (Appeals), both committed an error in treating the interest on deposits as 'business income' and granting the assessee the deduction under Section 80HHC of the Act.
8. In Commissioner of Income-Tax vs. Sterling Foods, [supra], the assessee was engaged in processing prawns and other sea food, which it exported, and it also earned some import entitlements granted by the Central Government under an Export Promotion Scheme. The assessee claimed the deduction of such receipt under Section 80HH of the I.T. Act by contending that the said income of import entitlements be treated as a business income. The Supreme Court held as under;
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.....The source of import entitlements could not be said to be the industrial undertaking of the assessee. The source of the import entitlements could only be said to be the Export Promotion Scheme of the Central Government whereunder the export entitlements became 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 was not direct but only incidental. The industrial undertaking exported processed sea foods. By reason of such export, the Export Promotion Scheme applied. Thereunder, the assessee was entitled to import entitlements, which it could sell. The sale consideration therefrom could not be held to constitute a profit and gain derived from the assessee's industrial undertaking. The receipts from the sale of import entitlements could not be included in the income of the assessee for the purpose of computing the relief under section 80HH of the Income-tax Act, 1961.
In Commissioner of Income Tax vs. Himalaya Cutlery Works, [supra], the question before the Allahabad High Court was whether the incentives received by the assessee are part of export turnover and therefore entitled to relief under Section 80HHC or not, and the Allahabad High Court has held that, amount received as duty drawback, cash incentive and on transfer of import licence do not form part of export turnover and, therefore, not entitled to relief under Sec. 80HHC. Considering the aforesaid two decisions, one of the Apex Court and another of Allahabad High Court, we hold that the Tribunal as well as the C.I.T. (A) has committed an error in holding export incentive and octroi refund as business income and eligible for deduction under Section 80HHC of the I.T. Act.
9. So far as the amount received by the assessee for sales in India, and the claim of the assessee for that amount under Section 80HHC of the Income Tax Act is concerned, it is required to be noted that for claiming deduction under Section 80HHC of the Income Tax Act only an assessee being an Indian Company or a person resident in India can claim the benefit/deduction under Section 80HHC. Admittedly, the assessee, in the present case, is not an 'Indian Company'. Under the circumstances, for the sales in India by the assessee and the income earned by the assessee for sales in India, the assessee would not be entitled to deduction under Section 80HHC of the Act. Under the circumstances, the Tribunal committed an error in holding that the income from sales in India by the assessee are forming part of the total profits to work out the total turnover and qualifying profit. Therefore the assessee would not be entitled to the deduction under Section 80HHC of the I.T. Act for the income earned by it by sales in India.
10. Thus, considering the aforesaid decisions and Section 80HHC of the Income Tax Act, the Tribunal as well as the C.I.T. (Appeals) both have committed an error in treating the income of interest on deposits, export incentive, octroi refund and sales in India to be part Page 9 of 10 HC-NIC Page 9 of 10 Created On Tue Aug 23 02:28:27 IST 2016 O/TAXAP/1684/2008 JUDGMENT of the total profits to work out total turnover and qualifying profit and treating the same as business income, and the Income Tax Appellate Tribunal was not right in allowing the assessee's claim regarding rebate under Section 80HHC of the Act by holding that the receipts such as interest on deposits, export incentive, octroi refund, and sales in India would form part of the total profits and to work out the total turnover and qualifying profits.
11. For the reasons aforesaid, the Reference is answered in favour of the Revenue and against the assessee. The Reference is accordingly disposed of.
8.1 In view of above observations, this question is answered in favour of the Revenue and against the assessee."
4. In view of the above, since the issue is now decided, this Court while adopting the reasons assigned therein, does not give any further reasons and answer the question in favour of the department and against the assessee.
(K.S.JHAVERI, J.) (G.R.UDHWANI, J.) sompura Page 10 of 10 HC-NIC Page 10 of 10 Created On Tue Aug 23 02:28:27 IST 2016