Income Tax Appellate Tribunal - Mumbai
Mangalya Trading And Investment Ltd. vs Deputy Commissioner Of Income Tax on 23 April, 2004
Equivalent citations: (2005)94TTJ(MUM)526
ORDER
D.K. Srivastava, A.M.
1. The assessee is in appeal against the Order of the learned Commr. of Income-tax (Appeals) ("CIT(A)" in short) on the following grounds :
"1. The learned CIT(A) erred in not entirely deleting the disallowance of Rs. 3,67,818 under Section 37(4) r/w Section 37(5) in respect of Ahmedabad bungalow expenses. The CIT(A) ought to have appreciated that the said accommodation was not in the nature of a guest-house and that, therefore, the provisions of Section 37(4) were not attracted.
2. The learned CIT(A) erred in rejecting the appellant's claim for deduction of the amount of Rs. 22,34,456 under Section 80HHC on the basis of an audit certificate.
3. The learned CIT(A) erred in holding that for the purpose of computation of the deduction under Section 80HHC, the loss on export of trading goods is to be reduced from the deduction available in respect of export benefits under the provisions of Section 80HHC(3).
4. As the appellant had incurred loss from export of trading goods, the learned CIT(A) ought to have held that the profit from export of trading goods for the purpose of Section 80HHC(3)(b) is to be taken at Rs. Nil. The CIT(A) ought to have directed the Dy. GIT to allow deduction under the proviso."
2. From the aforesaid, it is clear that the appeal filed by the assessee raises two issues. The first issue deals with the allowability of Rs. 3,67,818 under Section 37(4) r/w Section 37(5) in respect of Ahmedabad bungalow expenses. The second issue relates to the allowability of claim of the assessee for deduction of Rs. 22,34,456 under Section 80HHC of the IT Act, 1961 (TTA in short).
Ground No. 1 :
3. As regards ground No. 1, it was fairly conceded by the learned Authorised Representative for the assessee ("AR" in short) that the ground is covered against the assessee by the orders of the Tribunal in assessee's own case for earlier years as also by a Special Bench decision of the Tribunal reported in Eicher Tractors Ltd., v. Dy. CIT (2002) 77 TTJ (Del)(SB) 681 : (2003) 84 ITD 49 (Del)(SB). Respectfully following the same, we decide ground No. 1 against the assessee and in favour of the Revenue.
Ground Nos. 2 to 4 :
4. Briefly stated, the facts of the case are that the return of income for the asst. yr. 1995-96, was filed by the assessee on 28th Nov., 1995, returning the net taxable income of Rs. 67,45,260. At the assessment stage, the assessee's representative filed a letter dt. 12th Sept., 1997, along with Form No. 10CCAC, dt. 11th Sept., 1997, claiming deduction of Rs, 22,34,456 under Section 80HHC which was considered by the AO but rejected by him with the following observations :
"3. Deduction under Section 80HHC :
The assessee's representative have, vide letter No, 1/591 5976, dt. 12th Sept., 1997, filed Form No. 10CCAC, dt. 11th Sept., 1997, claiming a deduction under Section 80HHC, amounting to Rs. 22,34,456. The assessee had not filed the Form 10CCAC along with the return of income filed on 28th Nov., 1995, as the Form No. 10CCAC was obtained by it only on 11th Sept., 1997. The assessee has thereby failed to comply with the provisions of Section 80HHC(4) of the IT Act, 1961, which states that :
"The deduction under Sub-section (1) shall not be admissible unless the assessee furnishes in the prescribed form, along with the return of income, the report of an accountant, as defined in the Explanation below Sub-section (2) of Section 288, certifying that the deduction has been correctly claimed (in accordance with the provisions of this section)."
Therefore, in view of the above stated facts, it is very evident that the assessee is not entitled to the claimed deduction under Section 80HHC of the IT Act, 1961, and is accordingly rejected.
Without prejudice to the above, from the Form 10CCAC filed by the assessee, it is seen that the assessee has incurred a loss on exports of Rs. 25,92,183 [16,55,93,559 - (14,85,54,350 + 1,96,31,392)] and the deduction under s, 80HHC is computed taking the profit from export of trading goods at nil instead of loss of Rs. 25,92,183 and adding 90 per cent of export incentives/benefits amounting to Rs. 22,34,456. However, what is important to consider here is that Section 80HHC grants a deduction in respect of profit derived by assessees from the export of specified goods and merchandise out of India. Therefore, the assessee should earn a profit from exporting goods out of India in Order to claim deduction under Section 80HHC of the IT Act, 1961. In the present case, from the following facts, it is very clear that the assessee has not earned any profit but instead has incurred a loss from exporting of goods :
"Total export turnover 16,55,93,559
Less; Direct cost 14,85,54,350
Indirect cost 1,96,31,392 16,81,85,742
____________ ____________
Loss 25,92,183
Add : Export incentives received 25,03,760
Loss 88,423
Therefore, even on this count, the assessee is not entitled to claim deduction under Section 80HHC of the IT Act, 1961, and the same is rejected by me."
5. From the assessment order, as extracted above, it is clear that the assessee was denied deduction under Section 80HHC on three grounds :
a. The assessee has failed to comply with the provisions of Section 80HHC(4) of the Act inasmuch as he has failed to furnish the report of the accountant in the prescribed form along with the return of income.
b. The assessee has suffered loss from export of goods whereas the condition precedent for availing the deduction under Section 80HHC(1) was that the assessee must have derived profit from the export of specified goods and merchandise out of India.
c. Even if the losses shown by the assessee from export of specified goods were adjusted against export incentives received by the assessee, the net result was loss and hence, the assessee, even on this count, was not entitled to claim deduction under Section 80HHC of the Act.
6. Aggrieved by the Order of the AO, the assessee carried the matter in appeal.
7. As regards the denial of deduction on the ground of non-filing of the audit report in terms of Section 80HHC(4) along with the return, the CIT(A) has held that the requirement of furnishing the said report along with the return of income was a procedural requirement and hence, it was not fatal to the claim of the assessee. He considered the filing of the said audit report during the course of the assessment proceedings is sufficient compliance with the requirements of Section 80HHC(4). This aspect of the matter has thus been decided in favour of the assessee and has not been disputed by the Revenue before us.
8. Appearing for the assessee, the learned Authorised Representative submitted, at the outset, that the issue was covered in favour of the assessee by a decision of the Hon'ble Special Bench "E", New Delhi, of the Tribunal in Lalsons Enterprises v. Dy. CIT (2004) 82 TTJ (Del)(SB) 1048 : (2004) 89 ITD 25 (Del)(SB) ('Lalsons' in short). His attention was thereupon, invited to the judgment of the Hon'ble Supreme Court in IPCA Laboratories Ltd. v. Dy. CIT (2004) 266 ITR 521 (SC) ('IPCA' in short). Accordingly, the learned Authorised Representative made his submissions as under :
9. His first argument was that the issue raised in the appeal revolves around the interpretation of the proviso to Sub-section (3) of Section 80HHC ('proviso' in short) which has been elaborately considered and decided by the Special Bench of the Tribunal in Lalsons (supra). Referring to the said decision, he submitted that if there are no profits under Clause (a) or Clause (b) or Clause (c) of Sub-section (3) of Section 80HHC, the same was required to be ignored or treated as nil and the deduction granted with reference to the amount of export incentives, e.g., profits on sale of exim scrips, receipts by way of duty drawback or payments under the International Price Reimbursement Scheme. In other words, his submission was that losses from the export should be ignored while computing the deduction in terms of the proviso to Sub-section (3) of Section 80HHC.
10. His second submission was that the Hon'ble Supreme Court was not concerned in IPCA (supra) with the interpretation of the proviso to Sub-section (3) of Section 80HHC and hence, its decision would not affect or dilute the decision of the Special Bench in Lalsons (supra) with reference to the scope of the proviso.
11. Elaborating his arguments, the learned Authorised Representative took us through the question referred to the Special Bench for decision by the Hon'ble President of the Tribunal under Section 255(3) of the IT Act as also the various paragraphs in the said Order to which references shall be made at appropriate places in this order.
12. The learned Authorised Representative further submitted that the Special Bench in Lalsons (supra) has categorically held that the intention behind enacting the proviso to Sub-section (3) of Section 80HHC was to compensate the exporter for the disadvantage that he suffered on account of international competition and, therefore, there was no logic in saying that if an exporter incurred a loss in the export business on account of such competition, he should also be denied the deduction with reference to export incentives or that it should be reduced by the amount of the loss.
13. His last submission was that the observations made by the Hon'ble Supreme Court in IPCA (supra) were in the nature of obiter dicta and, therefore, this Bench was not bound to be guided by them. His case was that the decision of the Special Bench in Lalsons (supra) was directly on the point under appeal and the same would not stand eroded by some passing observations made by the Hon'ble Supreme Court in IPCA (supra).
14. In reply, the learned Departmental Representative ("DR" in short) heavily relied upon the observations made by the Hon'ble Supreme Court in IPCA Laboratories (supra) and submitted two propositions for our consideration.:
(i) His first proposition was that no deduction was permissible under Section 80HHC(1) of the Act if there was a loss from the export of specified goods or merchandise. According to the learned Departmental Representative, Sub-section (1) of Section 80HHC makes the deduction available to an assessee who has derived the profit from the export of specified goods or merchandise and to none else. Inviting our attention to IPCA (supra), he submitted that the. term "profit" as used in Sub-section (1) of Section 80HHC has been interpreted by, the Hon'ble Supreme Court to mean a "positive profit". The learned Departmental Representative contended that this positive profit must be shown by the assessee, in the first instance, to have been derived by him from the export of the specified goods or merchandise. He submitted that the export incentives received by the assessee were not profits derived by the assessee from export of goods but is a benefit given by the Government after the export has been made. He, thus, sought to make a distinction/between the profits directly derived from the export of goods and the export incentives which follow the export of goods. According to him, the profit derived from export of goods is one thing and the export incentive received from the Government is quite a different thing. The learned Departmental Representative argued that once the assessee shows that he has derived a positive profit from the export of goods then only such a profit is required to be increased by the export incentives as per the formula given in the proviso. His submission, in brief, was that an assessee showing losses from exports would not satisfy the statutory requirement of the profits having been derived from the export and hence, he would not be eligible for deduction under Section 80HHC(1).
(ii) His alternative proposition, which was without prejudice to the first proposition, was that since Sub-section (1) of Section 80HHC granted deduction on the positive profits derived from the export, as held by the Hon'ble Supreme Court, in IPCA (supra), both the profits and losses would have to be considered in Order to work out the positive profit. He submitted that the question of adjustment of losses against the profits was very much under the consideration of the Hon'ble Supreme Court which fact is evident from the question taken up by the Hon'ble Court for consideration as also from the reproduction of the provisions of Sub-section (1) and Sub-section (3) of Section 80HHC including the proviso to sub-Section (3) of Section 80HHC in the judgment in IPCA (supra). He submitted that the law laid down by the Hon'ble Supreme Court in IPCA (supra) was clear in that it was the net profit after adjustment of loss that was liable to be considered for deduction under Section 80HHC(l) of the Act. According to the learned Departmental Representative, the decision of the Hon'ble Special Bench in Lalsons (supra) that loss suffered by the assessee from the export should be ignored for the purposes of the proviso to Sub-section (3) of Section 80HHC stands completely overruled by the decision of the Hon'ble Supreme Court in IPCA (supra) that both the profits and losses are now required to be considered in Order to arrive at the positive figure on which alone the deduction is allowable.
15. The learned Departmental Representative further submitted that the phraseology of the proviso was very important in that it provided for the computation of the profits under Clause (a) or Clause (b) or Clause (c) of Sub-section (3) of Section 80HHC to be made first and only thereafter it required the same to be further increased by the amount of export incentives as per the formula given in the said proviso. He submitted that the proviso cannot be interpreted in a manner that renders the words used therein as otiose or redundant.
16. We have heard' both the parties, perused the papers and all the judgments/orders placed before us and carefully considered them.
17. Before proceeding further, it may be relevant to reproduce Sub-sections (1) and (3) of Section 80HHC which have the material bearing on the issues under appeal. At the material point of time, the aforesaid provisions stood as under ;
"80HHC, (1) Where an assessee, being an Indian company or a person (other than a company) resident in India, is engaged in the business of export out of India of any goods or merchandise to which this Section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of the profits derived by the assessee from the export of such goods or merchandise. Provided that if the assessee, being a holder of an Export House Certificate or Trading House Certificate (hereinafter in this Section referred to as an Export House or a Trading House, as the case may be), issues a certificate referred to in Clause (b) of Sub-section (4A), that in respect of the amount of the export turnover specified therein, the deduction under this Sub-section is to be allowed to a supporting manufacturer, then the amount of deduction in the case of the assessee shall be reduced by such amount which bears to the total profits derived by the assessee from the export of trading goods, the same proportion as the amount of export turnover specified in the said certificate bears to the total export turnover of the assessee in respect of such trading goods."
xxx xxx xxx (3) For the purposes of Sub-section (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, be 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 Clause (a) or Clause (b) or Clause (c) of this Sub-section shall be further increased by the amount which bears to ninety per cent of any sum referred to in Clause (iiia) (not being profits on sale of a licence acquired from any other person), and Clauses. (iiib) and (iiic) of Section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee.
Explanation : For the purpose of this Sub-section,--
(a) "adjusted export turnover" means the export turnover as reduced by the export turnover in respect of trading goods;
(b) "adjusted profits of the business" means the profits of the business as reduced by the profits derived from the business of export out of India of trading goods as computed in the manner provided in Clause (b) of Sub-section (3);
(c) "adjusted total turnover" means the total turnover of the business as reduced by the export turnover in respect of trading goods;
(d) "direct costs" means costs directly attributable to the trading goods exported out of India including the purchase price of such goods;
(e) "indirect costs" means costs, not being direct costs, allocated in the ratio of the export turnover in respect of trading goods to the total turnover.
(f) "trading goods" means goods which are not manufactured or processed by the assessee."
18. After going through the grounds of appeal, as also the submissions made by the parties, we feel that three distinct issues arise for consideration and adjudication in the present appeal. These are as under :
(i) Whether deduction under Section 80HHC(1) is available to an assessee who has derived a positive profit from the export of specified goods or merchandise or also to an assessee who has suffered a loss from the export or, in other words, not derived a positive profit from the export.
(ii) Whether deduction under Section 80HHC(1) is available on positive profit alone after adjusting the losses or losses suffered by the assessee from the export of specified goods or merchandise can be ignored or treated as nil for computation of the deduction under Section 80HHC.
(iii) Whether the export incentives alone are sufficient to form the basis for deduction under Section 80HHC(1) without there being any positive profit by which they are required to be further increased, in terms of the proviso thereto.
19. At the time of hearing, the learned Authorised Representative has strongly relied upon the decision of the Hon'ble Special Bench in Lalsons (supra) and argued that the case of the assessee is squarely covered by the said decision inasmuch as the Special Bench in the aforesaid case has held that the losses incurred by the assessee should be ignored and deduction under Section 80HHC should be allowed with reference to the export incentives alone. Perusal of the Order of the Special Bench in Lalsons (supra) shows that the following question was considered by the Special Bench :
"(iii) Whether the proviso to Section 80HHC(3) can be applied in a case where the export profit computed as per Clause (a), (b) or (c) of Sub-section (3) or aggregate hereof, is a negative profit (loss) and if so whether the said negative profit (loss) has to be adjusted/set off against the amount of deduction allowable under the proviso to Section 80HHC(3) or the loss computed under all or any of the Clauses (a), (b) or (c) of Section 80HHC(3) has to be ignored and deduction under Section 80HHC is required to be allowed on the amounts computed under proviso to Section 80HHC(3) of the IT Act?"
20. In its Order dealing with the aforesaid question, the Special Bench of the Tribunal has laid down the following propositions in Lalsons (supra) :
(i) The proviso deals with the export incentives and envisages additional deduction for export incentives. The export incentives are first excluded from the profits of the business by Expln. (baa) to Section 80HHC which only shows that export incentives cannot be treated as part of the profits of the business. In the main provisions of Sub-section (3) what is dealt with is only the result of export business or businesses, but the proviso goes on to enlarge the scope of the deduction by including the export incentives. The Special Bench of the Tribunal, therefore, has come to the conclusion that the proviso stands on its own and has to be interpreted as if it is an independent provision.
(ii) The Special Bench referred to para 32.7 of Circular No. 621, dt. 19th Dec., 1991 [(1992) 195 ITR (St) 154], issued by the Central Board of Direct Taxes in which it is stated that "the tax concession under Section is intended to compensate an exporter for the comparative disadvantage faced by him in the international market. With a view to ensuring that the tax concession is not misused, Sub-section (3) of Section 80HHC of the IT Act has been amended." The Special Bench held that if the intention was to compensate the exporter for the disadvantage, he suffered on account of international competition, there was no logic in saying that if he incurred a loss in the export business on account of such competition, he would either be denied the deduction with reference to the export incentives or it would be reduced by the amount of the loss. A loss-making exporter, in terms of the said decision, needed more encouragement. Whether the exporter makes profit or suffers loss in the export business because of the method of computation prescribed in Sub-section (3), it cannot be overlooked that he does bring in precious foreign exchange and hence, the proviso cannot be interpreted in a manner that would result in such injustice.
(iii) The intention behind enacting the proviso is to reward profit-making exporters by a further deduction, but at the same time not to punish or discourage loss-making exporters by reducing the deduction in respect of the export incentives.
(iv) It would be inappropriate to extend the area of an adjustment of a positive figure and a negative figure, inter se, beyond Clause (c) of Sub-section (3).
21. The propositions laid down by the Special Bench in Lalsons (supra) revolve around the adjustment of losses against export incentives under the proviso to Sub-section (3). The Hon'ble Special Bench has stated in para 25 of its Order that it was not the case of the Revenue in Lalsons (supra) that in case of a loss in the export business under any of the three Clauses of the Sub-section, the proviso would not be attracted at all and that the assessee would not be eligible for any deduction in respect of the export incentive. In the present appeal before us, it is very much the case of the Revenue that in case of a loss in export business, the proviso would not be attracted at all and the assessee would not be eligible for any deduction in respect of the export incentives. Thus, the first issue which has been specifically raised and urged by the Revenue before us was neither before the Hon'ble Special Bench nor considered and adjudicated by it. The Special Bench has considered only issue .No. 2 raised by the Revenue before us. It is, however, the contention of the Revenue before us that even the decision on the second issue in Lalsons (supra) is no longer valid in view of the recent judgment of the Hon'ble Supreme Court in IPCA (supra) which was delivered after the Special Bench had passed its Order in Lalsons (supra) and was thus not before the Special Bench.
22. We have perused the judgment of the Hon'ble Supreme Court in IPCA (supra) in which the Hon'ble Court has laid down the following propositions :
(i) If, after the adjustment of losses against profits, there is a positive profit, the assessee would be entitled to deduction under Section 80HHC(1). If the net result is a loss, the assessee would not be entitled to deduction under Section 80HHC(1).
(ii) The word "profit" in Sub-section (1) and Clauses (a) to (c) of Sub-section (3) of Section 80HHC means a positive profit. If there is a loss, no deduction is available to the assessee.
(iii) In arriving at the figure of positive profit in terms of Sub-sections (1) and (3), both the profits and losses will have to be considered. If after adjusting the loss against the profit, there is a positive profit, then the assessee will be entitled to deduction; if the net figure is a loss then the assessee will not be entitled to deduction.
(iv) Referring to Section 80AB of the IT Act, the Hon'ble Court held that if the income has to be computed in accordance with the provisions of the IT Act then not only profit but also losses will have to be taken into account.
23. We shall now take up the issue as to whether an assessee suffering loss from the export business would at all be eligible to claim deduction under the provisions of Sub-section (1) of Section 80HHC ignoring the fact that the said provisions are statutorily intended to apply to the assessees having income derived from the export of goods or merchandise.
24. At this stage, it deserves to be noted that there are two distinct phrases used in Section 80HHC. First phrase is the "profits derived from the export of such goods or merchandise" used in Sub-section (1) of Section 80HHC. Somewhat similar phrase, i.e., "profits derived from such export" has been used in Clauses (a) to (c) of Sub-section (3) of Section 80HHC. The first limb of the proviso also uses the words "profits computed under Clause (a) or Clause (b) or Clause (c) of this Sub-section". Thus, the phrase "profits derived from the export" has been distinctly used in Sub-sections (1) and (3) of Section 80HHC. The third limb of the proviso, however, refers to the export incentives in the nature of any sum referred to in Clauses (iiia), (iiib) and (iiic) of Section 28. Thus, the third limb of the proviso refers to the export incentives whereas the first limb of the proviso refers to the profits derived from the export. While both, i.e., the profits derived from the export and the export incentives are assessed as income from business under Section 28, they are, in fact, altogether different species of income; The profits derived from export arise directly on account of the difference in the cost price and sale price of the goods exported whereas the export incentives arise as a result of the Governmental measure to enable the exporters to compete effectively in the international market. Export incentives follow the export and hence can at the most be treated as attributable to the export but not derived from the exports. Likewise, income by way of profits derived from the export accrues at the time when exports are made, but in case of export incentives the point of time at which they accrue is when the claims are made before the concerned authorities. In CIT v. Punjab Bone Mills (1998) 232 ITR 795 (P&H), the Hon'ble High Court has held that the right to receive cash incentive accrues to the assessee on filing the claim and that export by itself would not give rise to the income by way of cash incentive. In Metal Rolling Works (P) Ltd. v. CIT (1983) 142 ITR 170 (Bom), the Hon'ble jurisdictional High Court has held that the amounts received by the assessee on the sale of import entitlements were not export profits. In the proviso also, the profits derived from the export and export incentives have been distinctly used in its first and third limb respectively, meaning thereby that they are not one and the same thing. We are, therefore, of the considered view that the profits deilved from the export and the export incentives are two different species of income. The profits derived from export will not, therefore, include export incentives except to the extent and for the limited purposes specifically indicated in the said proviso.
25. Sub-section (1) of Section 80HHC provides for the deduction of profits derived by the assessee from the export of goods or merchandise. It is the soul and substance of Section 80HHC. Sub-section (1) contains substantive provisions and enables the assessee to claim the deduction, Sub-section (1) is somewhat akin to a charging section. The mandatory requirements of Sub-section (1) cannot, therefore, be ignored. Main provisions of Sub-section (1) have two parts. In its first part, the Sub-section specifies the mandatory conditions which must be fulfilled by an assessee in Order to claim the deduction under Section 80HHC. They are : (1) The assessee must be an Indian company or a person {other than a company) resident in India; and (2) The assessee must be engaged in the business of export out of India of any goods or merchandise to which Section 80HHC applies. In its second part, the Sub-section specifies a particular class of the assessees to whom the benefit of deduction under Section 80HHC is required to be extended and that class is of the assessees deriving profits from the export. What is, therefore, required to be seen is whether the assessee has derived profits from the export. In Order to avail the deduction under Section 80HHC, the assessee must, in the first instance, establish that his case falls under Sub-section (1). It is only after an assessee has fulfilled the mandatory conditions of Sub-section (1) that the doors of Sub-section {3} will open and enable the assessee to compute the profits in the manner laid down therein including the proviso thereto. In the appeal before us, it is not in dispute that the assessee satisfies the requirements of the first part of Sub-section (1) but does not satisfy the requirement of the second part in that the assessee has not derived any positive profit from the export. In IPCA (supra), the Hon'ble Supreme Court has interpreted the term "profits" used in Sub-section (1) as a positive profit. The deduction required to be made by the substantive provisions of Sub-section (1) of Section 80HHC is, therefore, dependent upon the positive profits derived by the assessee from the export and not upon the export turnover or upon the earnings of foreign exchange or upon the income of the assessee under Section 28. Once he establishes that he has a positive profit derived from the export within the meaning of Sub-section (1) and Clauses. (a) to (c) of Sub-section (3), he can move over to the proviso to Sub-section (3) for further increasing the said profits by the export incentives. Thus, the export incentives enter into calculation by way of further increasing the profits derived from the export and not by way of replacing or substituting the profits derived from the export within the meaning of Sub-section (1). The assessee is entitled to deduction under Section 80HHC only when he establishes that he has derived a positive profit from the export and not in a case where he suffers loss from the export or where he fails to establish that he has a positive profit derived from the export. If the intention of the legislature was to allow the deduction under Section 80HHC with reference to the export incentives, alone by ignoring the losses from export, nothing prevented it to say so. On the contrary, the focus of Sub-section (1) of Section 80HHC is that it should be allowed to those who derive the profits from the export.
26. A bare perusal of the proviso to Sub-section (3) of Section 80HHC shows that it has three important limbs : first limb requires that the profit should be computed under Clauses (a), (b) or (c) of Sub-section (3) of Section 80HHC; second limb requires that the aforesaid profits "shall be further increased by"; and, the third limb provides that the aforesaid profits shall be further increased by the export incentives of the nature described and as per the formula given therein. It is, therefore, necessary to examine the scope and effect of all the three limbs of the proviso.
27. Closer scrutiny of the proviso brings into sharp focus the following :
(i) Words "profits computed under Clause (a) or Clause (b) or Clause (c) of this Sub-section" used in its first limb meaning thereby that the profits derived from the export must be computed in the first instance are quite significant. Proviso is a part of Sub-section (3) of Section 80HHC. In IPCA (supra), the Hon'ble Supreme Court has interpreted the term "profits" in Sub-section (3) as positive profit- Therefore, the term "profits" in the proviso, which is a part of Sub-section (3), shall also mean positive profit derived by the assessee from the export. There is thus no ambiguity insofar as the meaning of the language employed in the first limb of the proviso is concerned.
(ii) Words "further increased" in the second limb of the proviso are also significant inasmuch as they denote and require that a positive profit alone as computed in terms of the first limb shall be further increased by the export incentives as per the prescription of the proviso. The word "increased" which is prefixed by the word "further" is also significant. The words "increase", "adjustment" and "aggregate" carry precise meanings. According to the Black's Law Dictionary-- Seventh Edn., the term "adjusted" has been defined under the head "basis" and sub-head' "adjusted basis" as follows : "It is well to consider the word "adjusted" in the term 'adjusted basis'. Often, after property is acquired, certain adjustments (increases or decreases to the dollar amount of the original basis) must be made. After these adjustments, the property then has an 'adjusted basis'. Michael D Rose & John C Chommie, Federal Income Taxation 6.04, at 300 (3rd Edn., 1988)." Under the head "income", the same dictionary defines "adjusted gross income" to mean "gross income minus allowable deductions specified in the tax code, Abbr. AGI," Under the head "income", the same dictionary defines "aggregate income" to mean "the combined income of the husband and wife who file a joint tax return". The term "aggregate" is defined by the same dictionary as meaning "formed by combining into a single whole or total." The word "increase", according to the Shorter Oxford Dictionary, means, inter alia, "the action, process, or fact of making or becoming greater, growth, enlargement, expansion, the result of increasing, amount by which something is increased, and addition." The term "increase", according to the said Law Dictionary, means "1. The extent of growth or enlargement," The term "further" prefixing the word "increased" qualifies the positive profits meaning thereby that it is only the positive profit derived by the assessee from export which can be further increased by the export incentives. In view of such clear and unambiguous words used in the second limb of the proviso, it is difficult to come to a conclusion that the export incentives can be treated in any other way than by way of further increasing the positive profit derived from the export. The export incentives are thus in the nature of additional benefits conferred by the statute. If there is no profit derived from the export, there is nothing that can be further increased by the export incentives. Added to this is the proposition laid down by the Hon'ble Supreme Court in IPCA Laboratories Ltd. (supra) that losses cannot be ignored while granting the benefit of deduction under Section 80HHC. We are, therefore, unable to agree with the view that the losses suffered by the assessee from the export should be ignored and the benefit of deduction under Section 80HHC given with reference to the export incentives alone. In our view, the assessee must have a positive profit derived from the export as in that case alone the said profits can be further increased by the export incentives in terms of the proviso. Export incentives are not by themselves the basis for deduction under Section 80HHC(1). The basis for deduction is the positive profit derived from export. Export incentives are, therefore, capable of further increasing the positive profit but, are not capable of substituting the positive profit which is statutorily required to be derived by the assessee from the export and hence they cannot by themselves and on their own become the basis for deduction as they cannot be treated to be the profits derived from the export.
(iii) The use of the word "shall" in the phrase "shall be further increased" makes it all the more clear that nobody has the discretion to treat the export incentives in any other manner other than by way of further increasing the profits derived from the export.
(iv) If the assessee does not have a positive profit derived from the export, there remains nothing which can be further increased by the export incentives. Losses derived from the export as computed under Clauses (a) to (c) of Sub-section (3) cannot be further increased by the export incentives as losses can be further increased by losses or negative figures only and not by positive figures. In view of the judgment in IPCA (supra), the first limb of the proviso can also not be interpreted to mean that the losses incurred by the assessee from the export should be ignored or treated as 'nil' as against the use of clear and unambiguous words that it is the profit (i.e., positive profit) derived from export which is to be further increased by the export incentives. Such an interpretation will make the first limb of the proviso and the provisions of Sub-section (1) and (3) of Section 80HHC otiose and redundant and will be inconsistent with the observations made in IPCA (supra).
28. The contention of the learned Authorised Representative is that the purpose of the proviso is to extend the benefit of deduction with reference to the export incentives and hence, the applicability of the proviso deserves to be extended accordingly even to those assessees who do not derive a positive profit from the export. We are unable to agree with the submission of the learned Authorised Representative. In our view, the proviso cannot be read independently of Sub-section (3). It is not only a part of Sub-section (3) in the sense that it is a proviso to it but also its first limb derives its sustenance from Clauses (a) to (c) of Sub-section (3). If there had been no proviso, the assessee would have been entitled to deduction on the positive profits derived from the export alone in terms of Sub-section (1) and Clauses (a) to (c) of Sub-section (3) of Section 80HHC and thus would not have been able to claim any deduction with reference to the export incentives. Hence, the proviso has the effect of altering the basis for computation of profits but such alteration is possible by way of further increasing the profits derived from the export and in no other way. Except as to the matters dealt with by the proviso, the proviso cannot exclude something by implication which is expressed by clear wordings in the enactment, i.e., Section (1). So when, on a fair construction, the principal provision, i.e., Sub-section (1) is clear, the proviso cannot be interpreted in a manner repugnant to the main provisions. Hence, it is not possible to ignore Sub-section (1) of Section 80HHC or the first two limbs of the proviso and extend the benefit of deduction with reference to the export incentives alone ignoring, in that process, the statutory requirement of Sub-section (1) and Sub-section (3) that the deduction is meant for the assessee's deriving positive profit from the export. Even if it is assumed for a while that the proviso stands as a substantive clause, yet it cannot be divorced from the provisions to which it stands as a proviso--CIT v. Ajax Products Ltd. {1965) 55 ITR 741 (SC). The text of the proviso and the context in which it is provided cannot be ignored even if the proviso is to be read as an independent provision.
29. It has been made amply clear in Sub-section (1) of Section 80HHC that the provisions thereof are meant to apply to a particular class of the assessees and that class consists of those who derive the profits from export and to no other class. It is only this class which is entitled to the additional benefit contemplated by the proviso by further increasing the profits derived from the export by export incentives. This position is again reiterated through the first and second limbs of the proviso.- The substantive part of Sub-section (1) and the computation part laid down in Clauses (a) to (c) of Sub-section (3) cannot, therefore, be made applicable to an assessee who has not derived the profit from the export and in such a case, and, consequently the proviso would not apply either. In Juvvi Subbaramaiah & Co. v. CIT (1964) 51 ITR 742 (AP), the Hon'ble High Court has held, in the context of the first proviso to Section 24(1} of the Indian IT Act, 1922, that when the substantive part of Sub-section (1) itself was not applicable, the proviso thereto would not apply either. The applicability of Section 80HHC is restricted, in terms of the provisions of Sub-section (1), to the assessees deriving profits from export. The proviso is neither capable of enlarging that field of application as mandated by the main provisions of Sub-section (1) nor has it altered the same either expressly or impliedly. Please see CIT v. Madurai Mills (1973) 89 ITR 45 (SC); CIT v. Ajax Products Ltd. (supra); CIT v. Indo Mercantile Bank (1959) 36 ITR 1 (SC). Similar position will exist even if the proviso is treated as independent provision.
30. In our view, the language employed in Sub-section (1) and Clauses (a) to (c) of Sub-section (3) including the proviso thereto is consistently uniform, unambiguous and clear in that the applicability of the main provisions of Sub-section (1) of Section 80HHC by which the deduction is made available is restricted to the assessee's deriving profits from the export. We are, therefore, unable to ignore the specific and plain words or interpret the provisions in a manner that renders them otiose or redundant. Sub-section (1), being the main provision by which the benefit of deduction is extended, will have primacy over the machinery and computational provisions particularly when the words used therein are also not susceptible to any other interpretation. Unless the case of the assessee falls under Sub-section (1) of Section 80HHC, the benefit of the proviso cannot be extended.
31. In CIT v. Madurai Mills Co. Ltd. (supra), the Hon'ble Supreme Court has held that a proviso cannot be construed as enlarging the scope of an enactment when it can be fairly and properly construed without attributing to it that effect. It is further held that if the language of the enacting part of the statute is plain and unambiguous and does not contain the provisions which are said to occur in it, one cannot derive those provisions by implication from a proviso. In our view, the main provisions of Sub-section (1) of Section 80HHC are clear enough to indicate that the benefit of deduction under Section 80HHC is to be extended only to the assessees deriving positive profits from the export. Sub-section (1) of Section 80HHC is not capable of any other interpretation. This requirement must be strictly complied with in Order to claim the deduction. The proviso, as enacted, is also in conformity with the main provisions of Sub-section (1) and hence it cannot be interpreted so as to make it repugnant to the main provisions or defeat their plain meaning.
32. In Shah Bros. v. CIT (2003) 259 ITR 741 (Bom), the assessee had not effected any export sales in asst. yr. 1996-97, but had received export incentives. It was held that the petitioner could not have claimed the deduction in respect of the export incentives in asst. yr. 1996-97. The aforesaid judgment lends credence to the view that export incentives by themselves cannot form the basis for deduction under Section 80HHC de hors the provisions of Sub-section (1) thereof.
33. We shall now deal with the submissions of the learned Authorised Representative. His first submission was that the assessee should be allowed deduction with reference to the export incentives ignoring the losses suffered by it by taking them to be nil. We are unable to agree with this submission for two main reasons. One, there is nothing in Sub-section (1) or Sub-section (3) including the proviso thereto on the basis of which it can be interpreted that losses suffered by the assessee should be ignored. As stated earlier, the plain and unambiguous language used in Sub-section (1) of Sub-section (3) including the proviso thereto makes it amply clear that the benefits of deduction should be extended only to those assessees who have positive profits derived from the export. In the face of such clear expression of law, we are unable to hold that the losses suffered by the assessee should be ignored and the benefits should be given on the basis of export incentives alone without attaching any importance to the statutory language employed in Sub-section (1) and Sub-section (3) of Section 80HHC. Two, the Hon'ble Supreme Court in IPCA Laboratories (supra) has held that losses cannot be ignored and, therefore, the benefit of deduction under Section 80HHC has to be granted only to an assessee who has derived a positive profit from the export. We, therefore, reject the submission of the assessee in this behalf.
34. It was next submitted by the learned Authorised Representative that it would be unjust to deprive the assessee, a loss-making exporter, the benefit of deduction under Section 80HHC with reference to the export incentives as, according to him, loss-making exporter needed more encouragement in Order to effectively compete in the international market. We are unable to agree with this submission either, for the reasons given below.
(i) It is a well settled principle of law that a statutory enactment must ordinarily be construed according to the plain and natural meaning of its language and no words should be added, altered or modified unless it is necessary to do so in Order to prevent a provision from being unintelligible, absurd, unreasonable, unworkable or totally irreconcilable with the rest of the statute. The assessee has not been able to point out as to how the words and phrases used in Section (1) or Sub-section (3) including the proviso thereto are ambiguous or vague. On the other hand, we find that the language used in Sub-section (1) and Sub-section (3) conveys the legislative intent in a very clear and unambiguous term. We are, therefore, not inclined to interpret the statute in a manner different from the one in which the provisions of Sub-section (1) or Sub-section (3) including the proviso thereto are worded. In IPCA (supra), the Hon'ble Supreme Court has held : "Undoubtedly Section 80HHC has been, incorporated with a view to provide incentives to export houses. Even though a liberal interpretation has to be given to such a provision, the interpretation has to be as per the wordings of this section. If the wordings of the Section are clear, then the benefits which are not available under the Section cannot be conferred by ignoring or misinterpreting the words in the section." Similar observations have been made by the Hon'ble jurisdictional High Court in Indian Rayon Corporation Ltd. v. CIT (1998) 231 ITR 26 (Bom). In Novopan India Ltd. v. CCE 73 ELT 769 : JT 1994 (6) SC 80, the Hon'ble Supreme Court has held that exemption being in the nature of exception is to be construed strictly at the stage of determination, whether the assessee falls within its terms or not, and in case of doubt or ambiguity, benefit of it must go to the State, but once the provision is found applicable full effect must be given. We, therefore, see no reason to take a view different from the one clearly conveyed by the provisions of Sub-section (1) and Sub-section (3) of Section 80HHC.
(ii) The plea of the assessee that denial of deduction to the loss-making exporters with reference to the export incentives will be unjust and cause hardship to them is again an argument which cannot be accepted. As held in H.H. Lakshmi Bai and Anr. Etc. v. CWT (1994) 206 ITR 688 (SC), it is a settled law that taxation statutes in particular have to be strictly construed and that there is no equity in a taxing provision. It is because of this that the submission of the assessee in the aforesaid case before the Supreme Court that strict interpretation of the proviso would cause hardship to small depositors as against richer ones, even if true, was held to be of no relevance. In Smt Tarulata Shyam and Ors. v. CIT (1977) 108 ITR 345 (SC), it has been held that the intention of the legislature is primarily to be gathered from the words used in the statute and once the assessee comes within the letter of law, he must be taxed, however great the hardship may appear to the judicial mind to be.
35. In view of the above, we are of the view that the language of Sub-sections (1) and (3) including the proviso thereto of Section 80HHC is clear in that the benefit of deduction has been statutorily extended to the assessees deriving a positive profit from the export and to none else. As a result we hold that the assessee, who has not derived a positive profit from the export, will not be entitled to claim deduction under Section 80HHC and that the proviso to Sub-section (3) of Section 80HHC cannot be pressed into service in cases where the assessee fails to show that he has derived a positive profit from the export.
36. We shall now deal with the submission made by the learned Authorised Representative that the loss suffered by the assessee from export should be ignored and treated as 'nil' so as to allow the assessee to claim the benefit of deduction with reference to export incentives without setting off the loss. This aspect will also take care of the alternative submission made by the " Revenue.
37. The aforesaid issue has been specifically considered by the Hon'ble Special Bench of the Tribunal in Lalsons Enterprises (supra), As stated earlier, the Special Bench of the Tribunal in Lalsons (supra), after referring to several orders of the Tribunal including that of the Vishal Exports 'Overseas Ltd. (supra) cited by the assessee before us, has held that the losses suffered by an exporter should be ignored by taking the same as 'nil' and the benefit of deduction under Section 80HHC should be made available to him with reference to the export incentives alone. We are fully conscious of the fact that the decision of a larger Bench of the Tribunal is required to be followed by the Division Benches. However, the contention of the Revenue that the judgment of the Hon'ble Supreme Court in IPCA Laboratories (supra) has since altered the position cannot be lightly brushed aside. The learned Departmental Representative has also filed copies of two orders of the Tribunal, namely, Order in Kedia Polyfils (P) Ltd. v. ITO and Dy. CIT v. Cots Garments in support of the proposition that losses cannot be ignored. It is further submitted by the Revenue that the Special Bench decision of the Tribunal in Lalsons (supra) must yield to the law subsequently declared by the Supreme Court in IPCA Laboratories (supra) as the same is binding on us under the Constitutional provisions of Article 141.
38. We have carefully perused the Order of the Special Bench of the Tribunal in Lalsons (supra) as also the judgment of the Hon'ble Supreme Court in IPCA Laboratories (supra). The Hon'ble Special Bench has held in Lalsons (supra) that losses should be ignored whereas the Hon'ble Supreme Court has held that losses cannot be ignored. The Special Bench of the Tribunal has held that losses should be treated as 'nil' whereas the Hon'ble Supreme Court has held that losses should be adjusted against the profits and the deduction allowed only on positive profits. The Hon'ble Supreme Court has considered the provisions of Section 80AB, whereas the Hon'ble Special Bench of the Tribunal has not considered the provisions of Section 80AB. In view of the judgment of the Hon'ble Supreme Court in IPCA Laboratories (supra), we are of the view that losses can neither be ignored nor taken as nil. The loss incurred by the assessee must, in terms of the judgment of the Hon'ble Supreme Court in IPCA Laboratories (supra), be adjusted against the profits as the deduction is required to be made available with reference to positive profits alone under Sub-section (1) after adjusting the losses. We are, therefore, unable to take a view contrary to the one declared so explicitly by the Hon'ble Supreme Court.
39. We shall now deal with the submissions of the learned Authorised Representative. His first submission was that the issue before the Hon'ble Supreme Court was whether the losses in export of trading goods should be adjusted against profit in export of goods manufactured by the assessee. According to him, the Supreme Court was not concerned with the interpretation of the proviso to Sub-section (3) of Section 80HHC. According to him, the effect of the proviso was considered by the Hon'ble Special Bench in Lalsons (supra) and hence, the decision of the Hon'ble Special Bench should be followed and the deduction allowed on export incentives ignoring the losses suffered by the assessee from the export business.
40. We have carefully considered the aforesaid submission of the assessee. The Hon'ble Supreme Court was concerned in IPCA Laboratories Ltd. (supra) not only with the question referred to it but also with the interpretation of the word "profit" occurring in sub-ss. (1) and (3) of Section 80HHC. As already mentioned earlier, Section (1) is the main provision on the basis of which the deduction is made available. It is not possible to extend the benefit of deduction de hors the provisions of Sub-section (1). Therefore, the interpretation placed by the Hon'ble Supreme Court on the word "profit" occurring in Section (1) of Section 80HHC cannot be ignored. It is binding on us. Secondly, the Hon'ble Supreme Court has also referred to the provisions of Section 80 AB which control the entire Section 80HHC including the proviso to Sub-section (3) of Section 80HHC. Thirdly, the reasoning given by the Hon'ble Special Bench of the Tribunal in Lalsons Enterprises (supra) is, in our view, no longer valid in view of the judgment of the Hon'ble Supreme Court in IPCA Laboratories Ltd. (supra), We cannot, therefore, ignore the judgment of the Hon'ble Supreme Court in IPCA Laboratories Ltd. (supra). Coming as it does from the highest Court of the land, we are bound to follow the same and, respectfully following the same, we hold that the assessee would not be entitled to deduction under Section 80HHC(1) on the gross amount of export incentives without adjusting the same against the losses.
41. The next submission of the learned Authorised Representative was that the observations made by the Hon'ble Supreme Court in IPCA Laboratories Ltd. (supra) were in the nature of obiter dicta and, hence, not binding on us. We are unable to accept the aforesaid submission of the assessee either. All the issues and propositions were not only raised before the Hon'ble Supreme Court, they were also argued, debated, and thoroughly considered by the Hon'ble Supreme Court and the law clearly stated by the Hon'ble Supreme Court. We are unable to hold that the observations made by the Hon'ble Supreme Court in IPCA (supra) are in the nature of obiter dicta. Even if they are, they are entitled to the highest respect.
42. In view of the above, we hold as under:
(i) Deduction under Section 80HHC(1) is available to an assessee who has derived a positive profit from the export of specified goods or merchandise. In other words, deduction under Section 80HHC is not available to an assessee who has suffered a loss from the export or, in other words, not derived a positive profit from the export.
(ii) Deduction under Section 80HHC(1) is available on positive profit alone after adjusting the losses. Losses suffered by the assessee from the export of specified goods or merchandise can neither be ignored nor treated as nil for computation of the deduction under Section 80HHC.
(iii) The export incentives alone are not sufficient to form the basis for deduction under Section 80HHC(1) but shall be eligible only for further increasing the profits derived from the export and computed in the manner laid down in sub-Section (3), in terms of the proviso thereto.
43. The appeal filed by the assessee fails and is consequently dismissed.