It is a pre-requisite that there must be profits from the export business. If the exports business has suffered a loss, deduction cannot be allowed from domestic business – Section 80HHC
Brief Facts of the Case and Question of Law
The appellant-assessee is engaged in the business of export of marine products and also financial consultancy and trading in equity shares. Its total business does not consist purely of exports but includes business within the country as well which situation is covered by Section 80HHC (3)(b). The total turnover of the Assessee comprised of export turnover of Marine products of Rs. 16,67,084 and Rs. 937,693/- earned from various sources like brokerage, dividend, interest and profit on sale of shares.
The assessee admittedly had not earned any profits from the export of the Marine products. On the other hand, it had suffered a loss from such exports. But there was a profit at entity level majorly because of income from brokerage, dividend, etc.
Question of Law:
Whether, on the facts and in the circumstances of the case, the view of High Court is right in law that the deduction under Section HHC is permissible only when there are profits from the exports of the goods or it would be open to the assessee to club the income from export business as well as domestic business and even if there are losses in the export business but after setting off those losses against the income/profits from the business in India, still there is net-profit of the business, the benefit under Section 80HHC will be available?
Contention of the Assessee:
The Assessee contended that the benefit of Section 80HHC shall not be given in cases where there is a loss. However in arriving at profits earned from export of both self-manufactured goods and trading goods, the profits and losses in both the trades have to be taken into consideration. If after such adjustments there is a positive profit, the assessee would be entitled to deduction under Section 80HHC(1) and if there is a loss, he will not be entitled to any deduction. Case Law relied upon IPCA Laboratory Ltd.
Also the term “profit of business” would not confine to profit from export business but income both from export business as well as from domestic business, had to be taken into consideration. Therefore, even if there was a loss from the export business, but there was profit from the business done within the country and on adjustment of loss from the export business against the profits from the business in India, in the balance sheet, it was still profit resulting into positive income, the benefit of Section 80HHC was admissible.
He further contended that Section80HHC was inserted in the Act to promote earning of foreign exchange as the deduction is subject to the condition that the sale proceeds of such goods are received in, or brought into, India in convertible foreign exchange. Therefore, even if there was loss from the export business, assessee had earned the foreign exchange and once it was found that overall there were profits, Section 80HHC became applicable.
Contention of the Revenue:
The Revenue relied on the clarification provided to Section 80HHC and pointed out that “profits of the business” for the purpose of Section 80HHC will not include receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature. There was no income from indigenous business but it was only in the form of brokerage, dividend, and interest which, in no case, be described as “turnover” and be part of “total turnover”.
The Revenue also contended that the Assessee had suffered a loss from the export of the Marine products. The deduction permissible under Section 80HHC is only a deduction of the profits of the assessee from the export of the goods or merchandise. By the very terms of Section 80HHC, it is clear that the assessee was not entitled to any benefit thereunder in the absence of any profits.
Held by the Apex Court:
The Apex court clarified the position in IPCA Laboratory Ltd. by stating that although Section 80HHC is incorporated with a view to provide incentive to export houses, a liberal interpretation has to be given to the section and the interpretation has to be as per the wordings of the section.
The opening words “profit derived from such exports” occurring in Section 80-HHC(3) together with the word “and” occurring between clauses (i) and (ii) thereof clearly indicate that the profits have to be calculated by counting both the exports. If there is a loss from export of traded goods, it could be netted off with profits arising on export if manufactured goods. If after such adjustments there is a positive profit the assessee would be entitled to deduction under Section 80-HHC(i). If there is a loss he will not be entitled to any deduction.
The situation in the present case is that so far as export business is concerned, there are losses. However the contention of assessee is the profits of the business as a whole i.e. including profits earned from the goods or merchandise within India will also be taken into consideration which the Apex court did not as in the first instance, it has to be satisfied that there are profits from the export business.
It would not mean that even if there are losses in the export business but the profits in respect of business carried out within India are more than the export losses, benefit under Section 80HHC would still be available.
The Apex Court citing the above points upheld the contentions of the Revenue and disposed off the appeal with costs.
Section 80HHC of the Income Tax Act 1961 for reference:
Deduction in respect of profits retained for export business.-(1) Where an assessee, being an Indian company or a person (other than a company) resident in India, is engaged in the business 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 a Trading House Certificate (hereinafter in this section referred to as an Export 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 of the export business of the assessee the same proportion as the amount of export turnover specified in the said certificate bears to the total export turnover of the assessee.
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.”