Income Tax Appellate Tribunal - Ahmedabad
Hindustan Fashions Ltd. vs Assistant Commissioner Of Income Tax on 6 October, 1997
Equivalent citations: (1998)61TTJ(AHD)734
Order B.L. Chhibber, A.M. :
Since common issues are involved in these two appeals by the assessee, the same are consolidated and disposed of by this common order for the sake of convenience.
2. The first grievance of the assessee in both the years is with regard to disallowance of claim under section 80HHC of the Income Tax Act, 1961.
3. The assessee, a limited company, is an exporter of goods manufactured by it as well as of goods bought from the local market i.e. "trading goods". For both the years under appeal, the assessee claimed deduction under section 80HHC of the Act, Rs. 46,96,800 in the assessment year 1992-93 and Rs. 49,10,202 in the assessment year 1993-94, in respect of export of goods. The assessing officer rejected the claim of the assessee observing as under :
"From the details furnished by the assessee-company it is gathered that the assessee is a mixed exporter. Besides the assessee is engaged in the local sales also. In respect of its export turnover, the assessee-company has claimed deduction under section 80HHC to the tune of Rs. 46,90,535. As per Form No. 10CCAC, the assessee was eligible for deduction under section 80HHC to the tune of Rs. 1,51,48,405 but the same was restricted to Rs. 46,90,353 because of the availability of gross total income only to these extent of Rs. 46,90,353. The working of deduction under section 80HHC was carefully perused. The assessee-company has not followed the provisions of section 80HHC, so far as the method of calculation is concerned correctly. If the provisions of the relevant portion is of section 80HHC pertaining to mixed exporter are summarised, it will be clear that the deduction has to be calculated as per the following formula :
(a) Profit derived from export of goods or merchandise manufactured of processed
(b) Profit derived from export of trading goods
(c) 90 per cent of export incentives x Export turnover Total turnover Thus, section 80HHC has given a formula which is required to be followed strictly. If the working is strictly done, it would appear that while the figure (a) comes to () Rs. 1,67,3,374 (b) to () Rs. 140,53,431, the figure (c) comes to Rs. 1,52,34,291. This is as per Annexure-A to Form No. 10CCAC. In place of these negative figures, the assessee-company has worked out the deduction by considering the same at Nil. The negative figure has to be considered as negative only. If these negative figures are considered as negative only then it would be clear that assessee is not eligible for deduction under section 80HHC at all. The assessee-company confronted with this fact and the assessee has taken up the view that since the section 80HHC is an incentive section, it cannot be followed strictly. It should be interpreted liberally. In this connection the assessees attention was drawn towards page No. 65 of "Provisions of section 80HHC of the Income Tax Act. A study" a journal of Bombay Chartered Accountants Society, wherein it has been specifically mentioned that the profit or loss at a particular stage of working cannot be ignored on the ground that section 80HHC is an incentive provision and hence only if there is a profit, it should be considered and not if it is a loss. Since as per this, the assessee-company is, instead of the income, having the loss which in case is considered, the deduction under section 80HHC will become Nil. In my opinion the section has to be strictly followed. When the Act itself has given a jacket formula there is no consideration left with the assessee to consider a particular figure in a different way. My view gets supported by the Taxmans publication Taxation of Exporters, 1994 wherein on page 73 it has been mentioned that the profits of the business may result in a minus figure due to the export incentives being higher than the computed profits, or due to setoff of current losses, or even due to the computed profits being a minus figure. Even in such cases, the computation of the deduction must be made in accordance with the above steps, since, quite likely the figure arrived at a Step 3 may turn out to be a positive figure.
Looking to the above discussion, I hereby reject the assessees argument of treating the negative figures as Nil. Since as per the formula narrated above, the assessees claim of deduction under section 80HHC will become Nil. Hence no deduction is allowed under this section".
On identical grounds, the assessing officer rejected the claim of the assessee for the assessment year 1993-94. In short, the assessing officer has denied the benefit of deduction available under section 80HHC on the ground that no deduction is permissible in case the resultant working ends in minus figure.
4. The assessee appealed to the Commissioner (Appeals). It was contended before him that the interpretation of section 80HHC given by the assessing officer was erroneous. In support of this contention, reliance was placed on the order of the Tribunal Cochin Bench in the case of A.M. Moosa v. Asstt. CIT (ITA No. 498/Coch/1995) decided on 14-9-1995, reported in (1996) 54 TTJ (Coch) 193 where exactly the opposite point of view which is the same as the view put forward by the assessee is taken. Reliance was placed on the decision of the Supreme Court in the case of CIT v. J.H. Gotla (1985) 156 ITR 323 (SC) and K.P. Verghese v. ITO (1981) 131 ITR 597 (SC) wherein it was held that the statutory provisions must be so construed if possible that absurdity and mischief may be avoided. It was also submitted before him that the object of section 80HHC was to promote exports and hence liberal interpretation needs to be construed in respect of incentive section and in support of this view, the reliance was placed on the following authorities:
(1) Bajaj Tempo Ltd. v. CIT (1992) 196 ITR 188 (SC);
(2) CIT v. U.P. Co-op. Federation Ltd. (1989) 176 ITR 435 (SC), and (3) Chloride India Ltd. v. Dy. CIT (1995) 53 ITD 180 (Cal).
The Commissioner (Appeals) rejecting the contentions of the representative of the assessee and relying upon the decision of the Supreme Court in the case of CIT v. Harprasad & Co. (1975) 99 ITR 118 (SC), upheld the action of the assessing officer concluding as under:
"To my mind, I find that there is no scope of having two views and the view taken by the assessing officer is the only view which is possible."
5. K.R. Dixit, the learned counsel for the assessee submitted that the interpretation given by the authorities below to section 80HHC was erroneous. He submitted that both the authorities below applied the concept of negative income which cannot be applied to the case of the assessee. He submitted that the Commissioner (Appeals) referred to "charging section" thus showing clearly that he was applying the criterion applicable for ascertaining real income". Here the task is not ascertaining the real income but deduction. Sub-section (3) begins with the words "for the purpose of sub-section (1)". An Expln. (baa) distinguishes profits of business from the profits and gains of business showing that they are separate concepts. According to the learned counsel for the assessee there is no question of loss because that can happen only against other revenue income and ultimately against capital. According to the learned counsel for the assessee the Supreme Court decision in the case of CIT v. Harprasad & Co. (P) Ltd. (supra) and the observations at pp. 124 and 125 of ITR on which the Commissioner (Appeals) has relied upon, have no application to the facts of the case of the assessee. The learned counsel for the assessee further submitted that the objection of section 80HHC was to earn foreign exchange and for that purpose to promote export and in this connection he drew our attention to the speech of the Finance Minister delivered on 28-2-1983, at the time of introduction of the provision for benefits regarding exports and accordingly the section should be given a liberal interpretation. In support of these contentions he relied upon the authorities cited before the Commissioner (Appeals). (reproduced at page-4). The learned counsel for the the assessee further submitted that the issue stands squarely covered in favour of the assessee by the decision of the Cochin Bench of the Tribunal in the case of A.M. Moosa (supra). He extensively quoted from the decision and submitted that though this case was specifically relied upon before the Commissioner (Appeals), the Commissioner (Appeals) simply brushed it aside without giving any cogent reasons as to why the ratio laid down by the Cochin Bench of the Tribunal was not applicable to the facts of the case of the assessee. The learned counsel for the assessee submitted that the Commissioner (Appeals) is not justified in holding that there is no scope for having two views when the opposite point of view is not only possible but it has in fact been taken by no less a judicial authority than by another Bench of this Tribunal at Cochin. He submitted that the assessee had relied upon well known decision of the Supreme Court in the case of CIT v. Vegetable Products Ltd. (1973) 88 ITR 192 (SC) wherein it had been laid down that where two views are possible, the one in favour of the assessee should be taken. According to the assessees counsel, it is in order to get over this decision of the Supreme Court that the Commissioner (Appeals) has gone to the length of saying that only one view is possible in the face of the existing view of the Tribunal in the case of A.M. Moosa (supra).
6. Ramesh Chander, the learned Departmental Representative strongly supported the orders of the authorities below. He drew our attention to the provisions of sections 80HHC and submitted that Form No. 10CCA together with various adjustments to be carried out as per provisions of section 80HHC, will illustrate that the provisions of section 80HHC are nothing but recasting of Profit & Loss a/c with regard to export activities. Positive or negative results at a particular stage which will be the net result of congregating/segregating various debits/credits cannot be ignored. According to the Departmental Representative all exercises mentioned under section 80HHC (including Explanation, proviso, etc.) for working out the actual profits derived by the assessee from the export activities have to be carried out simultaneously and in totality. If this recasting of the Profit & Loss a/c or the exercise is done in the assessees own case it will be clear that as far as the assessment for assessment year 1992-93 is concerned, the assessee has in fact not earned any profits from the export activities. As the assessee had not earned any profits from the export activities which is a sine quo non for claiming deduction under section 80HHC, the assessees claim for deduction under section 80HHC was rightly disallowed. However, in respect of assessment year 1993-94, after recasting the Profit & Loss a/c exercise, there were profits and to this extent the assessing officer had rightly allowed the deduction.
6.1 Reacting to the contentions of the learned counsel for the assessee that liberal interpretation should be given to section 80HHC, the learned Departmental Representative submitted that earning of foreign exchange does not mean that to earn foreign exchange at any cost. It simply means that export as much as possible and if business earns less profits merely because of unfavourable rates available in the foreign countries, Government provides certain incentives to compensate this possible relative/actual loss. According to the Departmental Representative these receipts can never be seen in isolation and can never be said to be the only net profits (without considering the negative figure i.e. the loss) of the export business. These receipts get mixed up with other credits in the Profit & Loss a/c. According to the learned Departmental Representative section 80HHC is a machinery provision and such machinery provision has to be read in its entirety to find logical meaning. The observations/findings of the Tribunal Cochin Bench in the case of A.M. Moosa (supra) that:
"We feel it our bounden duty to liberally construe the provisions of sub-section (3) and the proviso thereunder of section 80HHC as the section was enacted to give a fillip to the exporters who earned precious foreign exchange"
is the incorrect interpretation of the provisions of section 80HHC. In support of these contentions, the learned Departmental Representative relied upon the decision of the Tribunal Indore Bench in the case of Prestige Foods Ltd. v. Dy. CIT (1997) 58 TTJ (Ind) 300. He further relied upon the judgment of the Supreme Court in the case of CIT v. N.C. Budharaja & Co. & Anr. (1993) 204 ITR 412 (SC).
7. We have considered the rival submissions and perused the facts on record. The vital issue before us is interpretation of section 80HHC especially the words "as reduced by" as incorporated in sub-clause (baa) in the Explanation after sub-section (4A). Do these words mean any negative figure or at the most not less than "Nil" figure?
According to the authorities below the interpretation put is that after taking into account the formula envisaged in section 80HHC if the deduction comes to a negative figure, than this (negative figure has to be considered as negative. This, in our considered opinion, is not the judicially correct interpretation. Ultimately, the object of the section 80HHC is to earn foreign exchange and for that purpose to promote export as can be seen clearly from the Finance Ministers Budget Speech on 28-2-1983, at the time of introduction of the provision for benefits regarding export. He stated that "as we are placed not the budget must reflect the imperatives of attaining as speedily as possible a viable external payment situation and, therefore, seek to promote export....through a judicial use of the fiscal instruments". Therefore, the section must be so read as to fulfil this object of earning foreign exchange by promoting exports. The implication of the Revenues view would be that regarding manufactured goods the export must be greater than the non-export earnings and for trading goods the export earning must be profitable. This is because under the proviso to sub-section (3) only the proportionate part of the export incentive is to be added while the whole of it is to be deducted under the said sub-section (baa) as also the other non-export income from the income under section 28. So far as trading goods are concerned also, the total of direct and indirect costs must always be less than export turnover according to the view of the Revenue. This, in our opinion, is an absurd view as it goes against the object of the legislature to promote exports. No businessman can do export business if he had to calculate and forecast whether the above desired result of the assessing officer will come. If the view of the Revenue is accepted, that will tantamount to the position that the assessee has not exported at all which is not the actual position because as admitted by the Revenue, the assessee did export goods manufactured by it on a large scale. Reference is invited to the Supreme Court decision in the case of CIT v. J.H. Gotla (supra) wherein it was held that though equity and taxation are often strangers, attempts should be made that these do not remain always so and if a construction results in equity rather than injustice then such construction should be preferred to literal construction. It is now well settled that a statutory provision must be so construed if possible that absurdity and mischief may be avoided(K.P. Verghese v. ITO (supra)). The Supreme Court has recently held in the case of C.W.S. (India) Ltd. v. CIT (1994) 208 ITR 649 (SC) as under:
"Literal construction may be the general rule in construing taxing enactments, but that does not mean that it should be adopted even if it leads to a discriminatory or incongruous result. When a literal interpretation leads to an absurd or unintended result, the language of the statute can be modified to accord with the intention of Parliament and to avoid absurdity."
The Honble Supreme Court has further observed in CIT v. Gwalior Rayon Silk Mills Co. Ltd. (1992) 196 ITR 149 (SC) that it is settled law that the expressions used in a taxing statute would ordinarily be understood in the sense in which it is harmonious with the object of the statute to effectuate the legislative intention and if the language is plain and unambiguous, one can only look fairly at the language used and interpret it to give effect to the legislative intention. Their Lordships have further observed that nevertheless, tax laws have to be interpreted reasonably and in consonance with justice adopting a purposive approach. The contextual meaning has to be ascertained and given effect to".
Accordingly, taking a harmonious view with the object of the statute to effectuate the legislative intention, we hold that the assessee will be entitled to relief under section 80HHC.
7.1 The issue before us stands squarely covered in favour of the assessee and against the Revenue by the decision of the Cochin Bench of the Tribunal in the case of A.M. Moosa (supra). In this case, the Tribunal has narrated the relevant facts at page 196 showing that the figure under section 80HHC(3) is a negative figure and under the proviso to that sub-section the figure is positive. The positive figure would be completely nullified by the negative figure and so the facts there are on all fours with the facts of the case before us. At page 198 the Tribunal has stated that the assessing officers view which is the same as that taken by the assessing officer in the case before us. At page 206 the view of the Tribunal is recorded wherein it has been stated that the word "profit" as defined in the Explanation means profits only. On the same page in para 9, the Tribunal has stated as follows:
"From another point of view even if the proviso to sub-section (3) of section 80HHC is viewed only as a proviso, still in our opinion, the assessee cannot be denied the deduction. This is because under the main provision of sub-section (3) the statutory profit of business is to be taken at Nil, there being no profit. This should be increased by the amount specified in the proviso to sub-section (3). As a result, a positive figure will emerge. Thus from any point of view the assessee succeeds. The assessing officer is directed to quantify the amount of deduction and allow the same subject to the availability of total income."
7.2 The observations of the Commissioner (Appeals) that there is no scope of having two views and the view taken by the assessing officer is the only view which is possible, is not tenable because not only the opposite view is possible but it has in fact been taken by no less a judicial authority than the another Bench of this Tribunal at Cochin. It is not well known that where two views are possible, the one in favour of the assessee should be takenVegetables Products Ltd. (supra).
7.3 Reliance placed by the Departmental Representative on the later decision of the Indore Bench of the Tribunal in the case of Prestige Foods Ltd. (supra) is of no assistance to the Revenue, as the facts in that case were different from those in the case before us as admitted by the Indore Bench as page 327 of the said decision. Form the reading of the said decision we also find that the Indore Bench has not differed from the basic decision of the Cochin Bench of the Tribunal in the case of A.M. Moosa (supra).
7.4 The Honble Supreme Courts decision in the case of CIT v. Harprasad & Co. (P) Ltd. (supra) and the observations at pp. 124 and 125 on which the Commissioner (Appeals) has relied upon, have no application the case before us. That was a case where the question was whether carry forward of capital loss is to be allowed to be carried forward when capital gain was not taxable. Thus, it was a case of real loss unlike this case. The so-called loss here is not to be deducted from any gain or carried forward for a future purpose. The word and between clause (i) and clause (ii) is significant if either clause (i) or clause (ii) is taken as negative and not as Nil the result will be different from the result which will follow if 3(a) and 3(b) are taken separately although clause (c) is nothing more than the combination of (a) and (b). In other words, the fact that the person is exporting trading goods would be a handicapped or have negative effect on his export of goods manufactured by him and vice versa.
7.5 In the light of the above discussion, we reverse the finding of the authorities below and hold that the assessee is entitled to deduction claimed under section 80HHC. The grounds raised by the assessee in both the years are accordingly allowed.
8. The next grievance of the assessee is with regard to inclusion of the following items within the term "turnover" for the purposes of calculation of deduction under section 80HHC of the Act :
Rs.
Asstt. yr. 1992-93
(i) Stitching charges 2,50,14,834
(ii) Interest 26,60,804
(iii) Miscellaneous income 28,97,358 Asst. yr. 1993-94
(i) Stitching charges 3,09,72,866
(ii) Sale of scrap 2,71,000 At the time of hearing before us, the learned counsel for the assessee did not press the issues regarding the stitching charges and Sale of scrap. But the learned counsel for the assessee submitted that the assessing officer was not justified in including the interest amounting to Rs. 26,60,804 in the assessment year 1992-93. The assessing officer considered the interest as part of turnover. On appeal, the Commissioner (Appeals) confirmed the action of the assessing officer relying upon the decision of the Supreme Court in the case of Cambay Electric Supply & Industrial Co. Ltd. v. CIT (1978) 113 ITR 84 (SC).
8.1 K.R. Dixit, the learned counsel for the assessee submitted that the assessing officer has wrongly taken only the interest received by the assessee while the correct view is that the net interest taking into account both the interest received and the interest paid, which has to be considered for inclusion of "profits of business" as per said sub-clause (baa). In support of this contention he relied upon the judgment of the Supreme Court in the case of Keshavji Raowjee & Co. v. CIT (1990) 183 ITR 1 (SC).
8.2 The learned Departmental Representative submitted that interest was attributable to the business activities carried on by the assessee and hence it becomes part of the total receipts though classified under section 56. As it is in the nature of receipts the netting of expenditure on account of interest cannot be allowed because for the purpose of turnover under section 80HHC the Revenue is concerned with the gross receipts and not with the net receipts. In support of his contentions he relied upon the decisions relied upon by the Commissioner (Appeals) and reported in 221 ITR 130 (sic) and 130 ITR 84 (sic).
8.3 We have considered the rival submissions and perused the facts on record. The controversy before us is not that the interest income was not attributable to the business activities and the controversy is with regard to only whether net interest is to be taken as against gross interest as part of the turn over. In our opinion, the view propounded by the assessees counsel is the correct view in view of the judgment of the Supreme Court in the case of Keshavji Raowjee & Co. (supra). We direct the assessing officer accordingly to adopt only the net figure of interest as part of the turnover.
9. In the result, both the appeals are allowed in part.