Kerala High Court
Commissioner Of Income-Tax vs Jose Thomas on 30 November, 2001
Equivalent citations: [2002]253ITR553(KER)
Author: C. N. Ramachandran Nair
Bench: P.K. Balasubramanyan, C.N. Ramachandran Nair
JUDGMENT C. N. Ramachandran Nair, J.
1. The assessee is an individual engaged in various business activities such as processing and export of sea foods, in the construction and sale of flats, shipping agency business and is also deriving income in the form of interest, dividend, etc. The assessments involved in these two cases are for the assessment years 1990-91 and 1991-92. There is only one issue involved in I. T. A. No. 60 of 2001 which is for the assessment year 1990-91 and the substantial question formulated by us for decision in the appeal is the following :
"Whether, on the facts and in the circumstances of the case, the interest income and dividend on SBI Magnum units totalling to Rs. 11,62,980 is entitled to be assessed under the head 'Business income' and eligible for deduction under Section 80HHC of the Income-tax Act, 1961 ?"
2. he income-tax reference., I. T. R. No. 111 of 1997, the Tribunal has referred the following four questions for decision of this court :
"I. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that interest received by the assessee from fixed deposit and Magnum deposit with the bank is eligible for deduction under Section 80HHC ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the words 'total turnover1 for Section 80HHC can only have reference to the turnover by way of sales and cannot take in its stride the gross receipts received ?
3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that for the purpose of deduction under Section 80HHC the turnover of the construction division should be adopted at Rs. 61,26,097 being the difference between gross amount of Rs. 4,65,50,906 received from the owners of the fiats and the corresponding expenses thereto as against Rs. 4,65,50,906 being the gross amount received and adopted in the assessment ?
4. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that in working out the proportionate income eligible for deduction under Section 80HHC allowable on the export income the turnover of the business under Explanation (c) to Section 80HHC(1) should include only net receipts after allowing construction expenses as against gross amounts received from flat owners and adopted in the assessment ?"
3.The ole question in the appeal case for the assessment year 1990-91 and the first question in the reference case for the assessment year 1991-92 relate to the same matter, and the question is whether the interest income received by the assessee from fixed deposits in the bank and the dividend received from the SBI Magnum constitute "business income" for the purpose of computation of eligible deduction on export profits under Section 80HHC of the Income-tax act.
4. The balance three questions referred by the Tribunal to this court for the assessment year 1991-92 are on the manner of computation and the extent of relief available to the assessee as a deduction on export profits provided under Section 80HHC of the Income-tax Act. In order to decide the controversy, we feel that the questions deserve to be redrafted to reflect the issues arising in the case. However, prior to redrafting the questions, we find it necessary to state the facts, the claim made by the assessee, the way the authorities approached and decided the issues, and the way the issues arise in the case before us.
5. The various figures available are the following :
Rs.
Total adjusted income for computation of relief under section 80HHC as per the assessee's statement 60,46,782 Total turnover of sea foods division as per the assessee's statement 1,88,23,993 Export turnover (assessee has only sea foods export) as per the assessee's accounts 1,87,95,309 Gross profit in sea foods business as per assessee's accounts 23,88,067 Gross profit from shipping business as per assessee's accounts 14,99,048 Gross profit from construction division, contract fee-choice garden 61,26,097 Income from building management 72,700 Other sources 11,74,708 Income from software 1,28,400 Total 1,13,18,720 Total turnover adopted by the assessee without including the amount of Rs. 4,04,24,809 being the cost of flats constructed and given to customers for the purpose of computation of eligible export profit under section 80HHC(3) of the Income-tax Act =Rs. 2,66,50,238, The assessee's manner of computation for deduction of export profit under section 80HHC Export turnover = __________________________________________ X net income from business Total turnover (excluding cost of flats) = 1,87,95,309 __________________________________________ X 60,46,782 = Rs. 42,64,590 2,66,20,238
6. Accordingly, the assessee has claimed deduction under Section 80HHC for an amount of Rs. 42,64,590 towards eligible deduction of export profit from the sea foods export as against gross profit from sea foods business computed by the assessee at Rs. 23,88,067. The Assessing Officer was of the view that the assessee cannot claim export profit over the gross profit from that line of business. Moreover, the Assessing Officer also felt that certain items of income, including interest from bank deposits and dividend from SBI Magnum do not come within the description of "business income" and, therefore, the assessee cannot claim deduction on export profit under Section 80HHC of the Act in respect of those items of income. Accordingly, the total adjusted income computed by the assessee was reduced by those items of income including interest income on bank deposits and dividend income from SBI Magnum for the purpose of computation of eligible deduction under Section 80HHC of the Act. The Assessing Officer redetermined the total adjusted income at Rs. 55,98,671. The Assessing Officer worked out the eligible deduction on export profit under Section 80HHC of the Act by taking the figures applicable to the sea food division because the assessee has exports only in sea foods. First, he determined the net profit from sea foods by applying the foilowing formula :
Net adjusted business Net profit from sea = income X Gross profit from sea food food division ____________________________ division Gross profit from business 55,98,671 = ____________________________ X 23,88,067 = Rs. 13,35,236 10,01,321 Thereafter, the Assessing Officer worked out export profit for deduction under section 80HHC by applying the following formula:
Eligible deduction Net adjusted income deter-
under section = _ mined in sea food business_ X Export turnover
80HHC Total turn over in sea food
= ________ 13,35,236_____ X 1,87,59,309 = Rs. 13,33,315
1,88,23,993
7. Accordingly, the Assessing Officer disallowed the claim of deduction on export profit under Section 80HHC in excess of what is computed as above. The Assessing Officer also in the course of computation of adjusted total income excluded a few items of income, including interest on fixed deposits and dividend from SBI Magnum. The assessee's appeal on the computation of relief under Section 80HHC was not successful before the Commissioner of Income-tax (Appeals). However, on second appeal filed by the assessee, the Tribunal reversed the order of the Commissioner of Income-tax (Appeals) and allowed the assessee's claim. While deciding the appeal by the Department, the Tribunal held as follows :
"1. The Assessing Officer's manner of working out of relief under Section 80HHC is incorrect because the Assessing Officer confined his working out only to the sea foods division of the assessee on the ground that the asses-see has export only in sea foods.
2. The Assessing Officer's finding that the amount received from the owners of flats on construction and sale of flats by the assessee constitutes 'total turnover' is wrong and therefore the amount received by the assessee in the form of gross income from real estate business only can be treated as turnover. This has resulted in exclusion of turnover of Rs. 4,04,24,809 received by the assessee towards cost of flats constructed and given to customers.
3. The computation of relief under Section 80HHC by the assessee is correct."
8. Therefore, the first question is whether the method adopted by the assessee or the Assessing Officer is the correct method of computation of relief under Section 80HHC(3) of the Income-tax Act. If the assessee's method is the correct one, then the second issue is whether the exclusion of the amount received by the assessee for the construction and delivery of flats to the customers from "total turnover" for the purpose of computation of relief under Section 80HHC of the Act is correct. In order to consider these questions, we have to reframe the questions as follows :
"1. Whether the Tribunal was justified in holding that the method and manner of computation of eligible deduction under Section 80HHC(3) of the Income-tax Act by the Assessing Officer is not correct ?
2. If the answer to the above question is in the affirmative, was the Tribunal justified in upholding the method adopted by the assessee for the computation of relief under Section 80HHC(3) and in further holding that the amount received by the assessee from the customers for construction and delivery of flats in the land owned by the assessee is not part of 'total turnover' for the purpose of computation of eligible deduction under Section 80HHC of the Act ?"
9. We therefore proceed to answer the reference on these questions reframed by us and also on the common question referred to in paragraphs Nos. 1 and 2.
10. In order to appreciate the issues, it is necessary to refer to the relevant portion of Section 80HHC which is extracted hereunder :
"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 :...
(3) For the purposes of Sub-section (1), profits derived from the export of goods or merchandise out of India shall be 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 . . .
(4) 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 on the basis of the amount of export turnover . . .
Explanation.--For the purposes of this section,--
(a) 'convertible foreign exchange' means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange Regulation Act, 1973 (46 of 1973), and any rules made thereunder ;
(b) 'export turnover' means the sale proceeds receivable by the assessee in convertible foreign exchange in accordance with Clause (a) of Sub-section (2) of any goods or merchandise to which this Section applies and which are exported out of India, but does not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act, 1962 (52 of 1962) ;
(bb) 'total turnover' shall not include any sum referred to in Clauses (iiia), (iiib) and (iiie) of Section 28."
11. There is no dispute on the facts that the assessee is engaged in export of only sea foods and the assessee has various other items of income under the same head "Business Income", and is also deriving income from "other sources". Therefore, the computation of deduction of eligible profit in respect of export business has to be made only under Sub-section (3) of Section 80HHC of the Act.
12. As already stated, the first question is whether the income in the form of dividend from SBI Magnum, and interest income from bank deposits would constitute "business income" of the assessee for the purpose of computation of deduction under Section 80HHC. We have already taken a decision in I. T. R. No. 29 of 1998 by judgment dated November 13, 2001--CIT v. Parekh Brothers [2002] 253 ITR 43 (Ker), to the effect that interest income on bank deposits is only income from "other sources" and does not constitute business income for the purpose of computation of relief under Section 80HHC of the Income-tax Act. Similar is the view taken by this court in Traco Cable Company Ltd. v. CIT [1969] 72 ITR 503 and in Collis Line P. Ltd. v. CIT [1982] 135 ITR 390 (Ker). The Tribunal, on the other hand, has stated that the bank deposits and SBI Magnum certificates were offered as security for availing of packing credit facility and therefore there is connection between the bank deposit and the business activities of the assessee. In that view of the matter, the Tribunal held that the interest earned by the assessee on such bank deposits would constitute business income. We are unable to accept this logic of the Tribunal. The income generated from collateral security does not constitute business income unless the assessee is engaged in this case in the activity of advancing money and receiving income in the form of interest. We are afraid if the assessee had offered agricultural land as collateral security for business loan, the Tribunal probably would have held that agricultural income arising from such land would also constitute "business income" for the purpose of computation of eligible profit under Section 80HHC of the Act. Similar is the nature of income in the form of dividend from SBI Magnum. Therefore, we are of the view that the Tribunal went wrong in reversing the exclusion of these items from business income made by the Assessing Officer, and affirmed by the Commissioner of Income-tax (Appeals). Following our decision in I. T. R. No. 29 of 1998-CIT v. Parekh Brothers [2002] 253 ITR 43, and the decisions of this court in Collis Line's case [1982] 135 ITR 390 and Traco Cable Company's case [1969] 72 ITR 503, we answer the sole question in I. T. A. No. 60 of 2001 and the first question in I. T. R. No. 111 of 1997 in favour of the Revenue and against the assessee. Accordingly, we reverse the order of the Tribunal in both the cases on this point.
13. With regard to computation of eligible deduction of export profit from business, we feel that the method adopted by the Assessing Officer is not correct, because it is not strictly in conformity with Sub-section (3) of Section 80HHC of the Act. The asscssee is only engaged in export of sea foods, and the assessee's profit in sea foods, turnover of export sales, and total turnover of sea foods division are also available on record. After all the method of computation under Section 80HHC(3) is only to find out the profit attributable to export business in a case where the assessee has local as well as export business. Therefore, even though the assessee has several lines of business under his various divisions, there was no necessity to reckon the figures in all these business activities, if it was possible for the Assessing Officer to work out export profit otherwise which in fact he has done. We are fully in agreement with the view expressed by the Assessing Officer that whatever be the formula adopted for computation of export profit under Sub-section (3) of Section 80HHC, the same should not involve the transfer of profit from local business to export business. In other words, the assessee's working out of export profit at Rs. 42,64,590 which is obviously more than the gross profit from the sea foods division is patently untenable. However, we feel the Assessing Officer did not strictly comply with the formula provided under Section 80HHC(3) of the Act for the purpose of computation of eligible profit from export business. This is because the Assessing Officer has applied the formula :
_____________ Export turnover__________ x Proportionate adjusted income Total turnover of sea foods division from sea foods division On the other hand, section 80HHC(3) provides for the following formula:
_ Profit as computed under the head "Business income"_ x Export turnover Total turnover
14. As already mentioned, the only dispute with regard to business income computed under the provisions of the Act is only on the exclusion of two items of income, namely, interest and dividend which we have confirmed. There is also no dispute on the export turnover which is adopted by the Assessing Officer from the assessee's accounts. However, there is a serious dispute on (he total turnover as computed by the Assessing Officer and as offered by the assessee. Since the Assessing Officer has adopted a different method of computation, his finding on the total turnover did not have much significance. However, since we have found that the Assessing Officer has not strictly followed Section 80HHC(3) in the computation of eligible deduction, it has become necessary for us to adjudicate on the correctness of the finding of the Tribunal with regard to the meaning of "total turnover". In this regard, the only dispute is whether the amount received by the assessee from the flat owners towards cost of construction of flats is to be treated as turnover. The amount involved is Rs. 4,04,24,809, which is completely excluded by the assessee while adopting "total turnover" for the purpose of computation of eligible deduction on export profit. The assessee has only taken the gross profit of the construction division as "turnover" and the same is upheld by the Tribunal. We have no doubt in our mind that the income from the construction division is not the "turnover" and, therefore, the finding of the Tribunal is patently untenable. The question to be addressed is what turnover yielded this gross profit to the assessee. In that view of the matter, we feel that the turnover to be adopted is the entire receipt from the customers for the development of the land and construction and sale of flats. The assessee has also produced an agreement before the Tribunal, and the Tribunal has referred to the clauses in the agreement, which is part of a typical land development agreement whereunder the assessee as the owner of land agrees to sell an undivided right in the land and by separate agreement undertakes to construct and deliver the flats to the customers. The Assessing Officer and the Commissioner of Income-tax (Appeals) found, and the assessee has no case to the contrary, that the assessee as a contractor has purchased bulk materials on his own account and constructed the seven-storied building with 82 flats and sold the flats to the purchasers. Therefore, the assessee is the purchaser in his own account, and the construction is carried out at the assessee's expenses. It was not the case of the assessee that he was acting as agent for construction of flats and he was receiving commission or other service charges from the customers along with the reimbursement of actual cost. The assessee obviously made huge margin in the construction and sale of flats and the same is evident from the fact that the assessee has earned a gross profit of Rs. 61,26,097 from the construction division. Learned counsel appearing for the assessee contended that the amount received from the flat owners towards cost of flats should not be treated as turnover of the assessee and in any case, according to him, the assessee has not received the entire amount of Rs. 4,04,24,809 in the relevant previous year. So much so, the contention of learned counsel is that the amount does not form part of turnover at least for this year. As already observed above, it is a question of finding out the turnover from which the assessee has derived the gross profit of Rs. 61,26,097 under the construction division. Since the assessee has made a margin on the construction of the flats, the sale price of the flats has to be the turnover of the assessee. If the assessee is to account for the profit in the subsequent years from the construction and sale of flats, then certainly the collections in the subsequent years towards the cost of the flats should not be treated as part of the turnover of this year. However, this does not appear to be the position, and such a question was not raised before the lower authorities. If the profit for the construction and sale of flats is fully accounted in this year, then the entire turnover including the amount received towards cost of construction of the flats, i.e., Rs. 4,04,24,809 has to be treated as turnover for the purpose of computation of eligible deduction of profit under Section 80HHC(3) of the Act. The Tribunal has elaborately discussed the scope of turnover and gave a finding that the cost of construction docs not form part of turnover. In this context, we find that the definition in the section is not helpful. Therefore, the reference to "turnover" as defined in the KGST Act pursuant to the Constitution (46th Amendment) Act has significance. The turnover on works contract defined in Explanation 1(A)(i) to Section 2(xxvii) is as follows : "turnover in respect of works contract shall be the aggregate amounts received or receivable by the dealer for the transfer of goods (whether as goods or in some other form) involved in the execution of such contract."
15. Therefore, we are of the view that the Tribunal committed an error of law in holding that the total turnover for the purpose of computation of eligible deduction under Section 80HHC(3) docs not include the cost of flats constructed by the asscssee. Accordingly, we reverse the order of the Tribunal. However, this does not mean that the computation as done by the Assessing Officer and as affirmed by the Commissioner of Income-tax (Appeals) is to be upheld as such. As already mentioned, the formula adopted by the Assessing Officer and confirmed in the first appeal is not strictly in conformity with the formula provided under Section 80HHC of the Act. Therefore, we reverse the order of the Tribunal and that of the authorities below and direct the Tribunal to recompute the eligible deduction and if necessary to remand the case to the Assessing Officer for recomputation by applying the following formula :
Income as computed under the head "Income from business" after excluding interest income from bank deposits and dividend Eligible deduction income from SBI Magnum Export under section = _______________________________________________ X turnover 80HHC Total turnover including Rs. 4,04,24,809 or such other amount determined by the Tribunal being the cost of construction of flats received by the assessee from the flat owners
16. In view of the contention raised by the assessee that the entire cost of flats is not the turnover of this year, we feel the same requires investigation. The assessee is given liberty to furnish figures of earlier and subsequent years accounted and prove the total turnover in the construction and sale of flats attributable to the profit accounted in this year.
17. In the result, the Income-tax Appeal No. 60 of 2001 stands allowed by reversing the order of the Income-tax Appellate Tribunal. In the Income-tax Reference No. 111 of 1997, we answer the first question as refrained by us in favour of the Revenue and against the assessee and the second question as reframed by us is answered partly in favour of the Revenue and partly in favour of the assessee with direction to the Tribunal to work out the relief in the light of our findings and observations above.