Income Tax Appellate Tribunal - Cochin
Indian Spices Co. vs Income-Tax Officer on 31 December, 1994
Equivalent citations: [1995]54ITD68(COCH)
ORDER
G. Santhanam, Accountant Member
1. This is an appeal by the assessee.
2. The assessee is a partnership firm with previous year ending on 31-3-1988, relevant to the assessment year 1988-89. Its business consists of purchase and sale of raw rubber, coconut oil and pepper. The pepper trade consisted of both export sales and local sales. Separate accounts were maintained for raw rubber, which consisted of local sales only; for coconut oil which consisted of local sales only and for black pepper which consisted of export sales and local sales. These separate accounts were only in regard to the trading expenses. Common expenses like salary, office rent, bonus, electricity, telephone, travel, advertisement and other office expenses were also incurred by the concern which were not apportioned to the separate trading accounts maintained by the assessee in respect of rubber, coconut oil and pepper. As a result common expenses were charged against the gross profit derived from the trading in rubber, coconut oil and pepper and the net profit or loss of the entire business was ascertained. The assessee claimed deduction under Section 80HHC of the I.T. Act, 1961 in a sum of Rs. 19,22,911. The Assessing Officer in view of the features noticed in the trading account and the profit and loss account and the manner in which the profit was ascertained was of the view that the assessee was not maintaining accounts exclusively for exports and, therefore, the provisions of Section 80HHC(3)(b) of the I.T. Act, were attracted to the facts of the case. In this view of the matter, he restricted the deduction to Rs. 13,54,636 as against the claim of Rs. 19,22,911. The assessee's contention that the computation of deduction should not be done under Sub-section (3)(b) of Section 80HHC, but should rather be done under Sub-section (3)(a) of Section 80HHC was negatived by the learned CIT (Appeals). According to the CIT (Appeals), the assessee was having common management, common control and common fund and the business in rubber, coconut oil and pepper constituted the same business and, therefore, Section 80HHC(3)(b) was relevant to compute the deduction. He further held that general expenses like salary, rent, etc., had not been apportioned to the three lines of business carried on by the assessee, but were charged against the gross profit derived from each such business. Hence, he held that Sub-section (3)(b) of Section 80HHC stood attracted. This is how the CIT (Appeals) rejected the claim of the assessee. The assessee is in further appeal.
3. Sri A.K. Venkiteswaran for the assessee admitted that as against the export turnover of Rs. 4.94 crores in black pepper, the local sales which consisted of pinheads, light pepper, dust, etc., which are obtained in cleaning and processing of black pepper for exports amounted to only less than half a lakh rupees. The assessee's business in pepper was really for exports and the local sales of derivatives was purely incidental to the export of pepper. Therefore, it cannot be held that there was no exclusive export trade in pepper. Though the assessee was dealing in rubber and oil they were all intended for local sales only. The assessee has kept separate accounts for raw rubber, coconut oil and black pepper for export. All the expenses referable to the purchase and sale of the items intended for export viz., black pepper have been kept in separate account. No doubt, they were common expenses like salary, bonus, office expenses etc., which were referable to raw rubber and coconut oil alone and, therefore, such common expenses were not apportioned to the export trade vis--vis the local trade. The authorities erred in viewing that the assessee's business did not consist exclusively of exports. Even if a portion of the common expenses can be attributed to the export trade, it could be done on estimate basis in the ratio of the turnover of rubber, coconut oil and black pepper and the profits can be ascertained. Section 80HHC is intended to give a fillip to exports with a view to garner foreign exchange and the section has seen several amendments from year to year with a view to liberalise the scheme of giving incentives to exporters. Therefore, a liberal construction is called for. It was the further contention of the assessee's representative that under the head "Profits and gains of business", there could be more than one source of business, though for purpose of computing the total income they are lumped together and put under the head "Profits and gains of business". That does not mean that each distinct source of business loses its identity.
4. Sri C. Abraham, the learned senior departmental representative submitted that the assessee's business consisted of purchase and sale of raw rubber, coconut oil and black pepper. The assessee is having a common fund and common management. All these features constituted the same business. There were common expenses attributable to all the three distinct lines of business, but then they were not identified and apportioned to each line of business. Therefore, it cannot be contended that the assessee's business consisted exclusively of exports. Further, even in the case of black pepper, there were local sales though nominal and, therefore, in respect of black pepper, the assessee did not have exclusively an export business. Thus, he supported the order of the authorities.
5. We have thus heard rival submissions and perused the records. In order to qualify for deduction under Section 80HHC the assessee should be an Indian company or if it is not a company, it should be a resident in India and should be engaged in the business of export of any goods or merchandise out of India other than mineral oil, minerals and ores [Sub-section (1) read with Sub-section (2) of Section 80HHC]. In the case of the assessee, there is no dispute that it is exporting black pepper and, therefore, it is entitled to deduction to the extent specified in Section 80HHC. The assessee is having three distinct activities, One of which alone pertains to export of goods. The assessee's contention is that the deduction should be quantified in terms of Sub-section (3)(a) of Section 80HHC. The assessee argues that its business in pepper consisted of exports only and the local sales of pepper was only as a result of sale of rejects and dust which arose in the course of cleaning the goods for purpose of export. We do not accept this contention in view of the provisions of Sub-section (3) of Section 80HHC which reads as follows:
(3) For the purposes of Sub-section (1), profits derived from the export of goods or merchandise out of India shall, be,
(a) in a case where the business carried on by the assessee consists exclusively of the export out of India of the goods or merchandise to which this section applies, the profits of the business as computed under the head 'Profits and gains of business or profession';
(b) in a case where the business carried on by the assessee does not consist exclusively of the export out of India of the goods or merchandise to which this section applies, the amount which bears to the profits of the business (as computed under the head 'Profits and gains of business or profession') the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee.
6. From the profit and loss account it is seen that the assessee has exported 8499.40 kgs. of pepper for a sum of Rs. 4,98,08,547. It had also sold locally pinheads, light pepper and dust etc., which are not fit for export and such sales accounted for 19.30 kgs. for a consideration of Rs. 48,241. When the assessee has effected local sales, whether as seconds or rejects, the fact is that the assessee was not in export business exclusively. In addition, the assessee was having local sales in rubber and coconut oil. Thus, the assessee is in the business of exports as well as inland trade. Therefore, the argument of the assessee that it was exclusively in export business cannot be accepted. In this view of the matter, Clause (a) of Sub-section (3) of Section 80HHC is not attracted to the facts of the case.
7. The next contention of the assessee is that even if Clause (b) of Sub-section (3) of Section 80HHC is applicable to it, it is only the profit from the export business as revealed in the trading account that should be the basis. The other contention is that the total turnover must refer to the turnover of the goods, both export turnover and inland turnover, pertaining to pepper and the authorities erred in including the turnover of rubber and coconut oil, which were not exported at all. We are unable to accept this argument. Similar contentions were raised before the Delhi Bench "D" (Special Bench) of the Tribunal in the case of International Research Park Laboratories Ltd. v. Assistant CIT [1994] 50 ITD 37. It was held therein per Hon'ble Ch. G. Krishnamurthy, the then President of the Income-tax Appellate Tribunal as follows :
Section 80HHC(3) is a beneficial section. It was intended to provide incentives to promote exports to earn foreign exchange for the country. The incentive provided is to exempt the profits relatable to exports. Since it is not possible to conceive of an exclusive exporter without having domestic business and it is often found impracticable to ascertain profits of export exclusively and since in the opinion of the Legislature it is possible for an assessee to carry on both export and local business, not only in the same commodity or goods but in a diverse variety of goods, not only in trading but also in the manufacture and with a view to avoid litigation, the Legislature deliberately provided that the profit of the entire business including exports must be ascertained irrespective of the fact whether separate accounts were maintained for export or not, computing them by applying those rules as are applicable for the computation of income under the head 'Profits and gains of business or profession' and then apportioning those profits on the basis of turnover of export bearing to the total turnover.
The expression 'total turover' used in Section 80HHC(3)(b) unambiguously refers to the total turnover of the entire business and not to the total turnover of the export business. 'Business' includes not only the turnover of exports but also the domestic turnover. While Clause (a) of Sub-section (3) refers to a situation where an exporter has exclusive business of export and not having any local business, Clause (b) refers to the situation, where an assessee has both exports and local turnover. If an assessee has therefore local turnover and export turnover there is no escape from the application of the formula provided in Clause (b) of Sub-section (3). Those profits are computed under the head 'Profits and gains of business or profession' and only such profits as are attributable to exports turnover by apportionment thereof are entitled to the exemption. Thus, when a person has exports as well as local business, the entire profits are to be computed in the manner laid down in that sub-section, namely, under the head 'Profits and gains of business or profession', and only a part of that amalgamated profits or the result of the computation has to be apportioned on the basis of the turnover. There are no words in Sub-section (3) as to limit this apportionment of profit on the basis of turnover in exports or to suggest that the apportionment has to be resorted to only when the same kind of goods exported are also dealt with locally.
The Legislature has contemplated the ascertainment of total profits in the entire business and then apportionment of it on the basis of turnover. This is how the CBDT also understood this provision and explained it in its circulars for the benefit and also for the uniform application of this provision throughout the country by all the Assessing Officers. To bring the intention of the Board more clearly to the Assessing Officers, they have given examples and those examples do not suggest that if there is export turnover and local turnover, either the local turnover must be excluded or the aggregation is to be made only when the goods exported outside India happened to be the same as were dealt in India.
When Sub-section (3) of Section 80HHC refers to Sub-section (1) and then says that for that purpose 'the profits derived from the export of goods or merchandise outside India' shall have to be ascertained in the manner provided thereafter, one has to see what that Sub-section (1) contains. It says if an assessee is engaged in the business of export out of India any goods or merchandise, there shall be, in accordance with the subject to the provisions of that section, allowed in computing the total income a deduction of profits derived by the assessee from the export of such goods or merchandise. The object of Sub-section (3) is, therefore, to arrive at the profits derived by the assessee from the export of goods or merchandise for the purposes of deduction. Since it is possible for an assessee to carry on the business exclusively in export, then Clause (a) of Sub-section (3) provides that the profits of the business as a whole as computed under the head 'Profits and gains of business or profession' will be deemed to be the profits derived from the export of goods or merchandise and should be allowed as a deduction. Clause (a) of Sub-section (3) does not contemplate a situation where an assessee dealing in exports is in a position to ascertain or identify the profits relatable to such exports. The condition is that the person must deal exclusively in the business of exporting goods outside India. Nowhere it is said that if such a person has dealings both in export and local but if export profits are easily identifiable then only Clause (a) would apply. This is reading something into the section which it does not provide. The object of Clause (a) of Sub-section (3) is clearly not to identify the export profits. The object of Clause (a) of Sub-section (3) is to find out whether the business carried on by the assessee consists exclusively of exports of goods outside India. Carrying on an exclusive business out of India without domestic turnover will disclose only the profits in such exclusive export business. That does not mean that the purpose of Clause (a) is to find out whether the profits in export are easily identifiable even in a case where the business carried on does not consist exclusively of exports outside India of the goods or merchandise. If in addition to the export, there are dealings in India then Clause (b) will automatically take over the position. With a view not to deny the benefit of exemption to persons having domestic turnover and with a view to avoid litigation, the Legislature has provided a formula to arrive at the profits in such situations where the business carried on by the assessee does not consist exclusively of the export of goods outside India. So, the test for the purpose of Sub-section (3) of Section 80HHC is whether the assessee is carrying on business of exclusive export or exports and domestic business also. If it is the former Clause (a) would apply and if it is latter Clause (b) would apply. If Clause (a) applies, the entire profit computed in the manner in which the profits under the head 'Profits and gains of business or profession' are to be computed and the whole of it is entitled to deduction. But if Clause (b) of Sub-section (3) of Section 80HHC applies the profit of the entire business has first to be ascertained and then apportioned in proportion the export turnover bears to the total turnover to arrive at the profits derived from the export of goods or merchandise. Therefore, it provides that the profit of the business meaning the entire profit as computed under the head 'Profits and gains of business or profession' has to be ascertained and that profit should be apportioned on the basis of the total turnover of the business carried on by the assessee. Here the reference to the business is not to export business but to the business which consists both of the export out of India of the goods or merchandise or domestic sales.
** ** ** Section 80HHC uses the words 'business carried on by the assessee' and not undertaking. An assessee may have the business of carrying more than one undertaking. All the undertakings put together constitute one single business coming under the single head 'Profits and gains of business or profession'. This is now settled law that whatever may be the kind of business carried on by an assessee and wherever carried on, in whatever fashion, it would all constitute one business and not different businesses. The concept of different businesses in the concept of each undertaking taken as a different business is alien to the Income-tax Act. What is mentioned in Sub-section (3) is only a type of business that assessee is carrying on to be able to earn exemption. It is therefore difficult to see that the export business is a different business or an undertaking distinct from the local business or even a combined business. The argument that each activity must be taken as separate business cannot be accepted.
If the business does-not consist exclusively of exports, irrespective of whether the profits on export business are ascertainable or not, if there is domestic turnover, it is Clause (b) of Sub-section (3) that would become operational and according to Clause (b) the entire turnover of the entire business must be aggregated and then only apportioned.
If the assessee has a business which does not consist exclusively of export of goods or merchandise outside India, then it is Clause (b) that would apply and according to that clause the turnover of the entire business including export must be aggregated and the net profits of the business must be ascertained in the same manner in which the profits under the head "Profits and gains of business or profession' are to be computed, and that profit must be apportioned in proportion the export turnover bears to the total turnover and the resultant amount alone shall be deemed to be the profit derived from export turnover, although the profit derived from export by other means may be found to be more than this amount. The same result is arrived at by the rules provided to arrive at export profits.
Though the above observations are found in relation to the assessment years 1990-91 and 1991 -92, they are equally applicable to the assessment year 1988-89 in regard to the lucid exposition of (i) the meaning of the word "business" as found in Section 80HHC(1) and (3) read together, (ii) what constitutes "business" which consisted exclusively of exports, and "business" which does not consist exclusively of exports, (iii) situations in which Clause (a) or (b) of Sub-section (3) of Section 80HHC is attracted, (iv) the meaning to be assigned to the expression profits of the business as computed under the head 'Profits and gains of business or profession', and (v) the sweep of the expression 'total turnover' as occurring in Sub-section (3)(b). Respectfully following the Special Bench decision (supra) in regard to the interpretation of Sub-section (3) of Section 80HHC, we hold that the computation as made by the Assessing Officer is in accordance with the provisions of Section 80HHC. In this view of the matter, we reject all the contentions of the assessee and uphold the order of the learned CIT (Appeals).
8. The appeal is dismissed.