Case Law Details
Explanation (baa) to s. 80HHC provides that 90% of interest, rent etc has to be reduced from the “Profits & gains” for purposes of s. 80HHC. In Lalsons Enterprises 89 ITD 25, the Special Bench of the Tribunal held that in computing the said interest, rent etc, the assessee was permitted to net off the interest receipt against the interest expenditure (having a nexus with the receipt) and only the balance could be reduced. This view was affirmed by the Delhi High Court in Shri Ram Honda Power Equipment 289 ITR 475 (Delhi).
In an oral judgement delivered today (19th March 2010) in CIT vs. Asian Star Co Ltd ITA No. 200 OF 2009 and other cases, the Bombay High Court has dissented from the judgement of the Delhi High Court and held that the language of Expl. (baa) to s. 80HHC did not permit such netting off. It held that the Special Bench had traversed the limits of interpretation and virtually legislated in giving the deduction. It held that merely because s. 80HHC was an incentive provision was no ground for giving more deduction that what the statute permitted. It held that for purposes of Expl. (baa) to s. 80HHC, 90% of gross interest has to be reduced from business profits.
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
INCOME TAX APPEAL NO. 200 of 2009
The Commissioner of Income Tax
Vs.
M/s. Asian Star Co. Ltd.,
Date of Judgement: March 18/19, 2010.
J U D G M E N T
(PER DR. D.Y. CHANDRACHUD, J):
The appeal by the Revenue under Section 260A of the Income Tax Act, 1961 raises a question of law as regards the interpretation of the provisions of Section 80HHC. The question of law has been formulated as follows in the Memo of Appeal:
“Whether on the facts and in the circumstances of the case and in law, the Honourable Tribunal was correct in holding that net interest on fixed deposits in banks received by the Assessee Company should be considered for the purpose of working out the deduction u/s. 80HHC and not the gross interest?”
The appeal was admitted on the aforesaid question.
The facts:
2. The assessee in the present case carries on the business of the export of cut and polished diamonds. A return of income for Assessment Year 2003-04 was filed on 28 November 2003, declaring a total income of Rs. 13.91 crores, after claiming a deduction of Rs. 13.22 crores under Section 80HHC. The return was initially processed under Section 143(1), after which the case was selected for scrutiny under Section 143(2) by the issuance of a notice. The assessee had debited an amount of Rs. 21.46 crores as interest paid/payable to the profit and loss account. The assessee, however, stated that the interest charged to the profit and loss account was net of interest received in the amount of Rs. 3.25 crores. The assessee was called upon to explain as to why the deduction under Section 80HHC should not be recomputed by excluding ninety per cent of the interest received in the amount of Rs. 3.25 crores. By its explanation, the assessee submitted that during the year, it received interest on fixed deposits. The assessee stated that it had borrowed monies in order to fulfil its working capital requirements and the Bank had called upon it to maintain a fixed deposit as margin money against the loans. The assessee consequently contended that there was a direct nexus between the deposits kept in the Bank and the amounts borrowed.
3. The Assessing Officer, while passing an order of assessment dated 30 January 2006, found that the explanation of the assessee could not be accepted since a plain reading of Explanation baa to Section 80HHE would suggest that ninety per cent of the receipts on account of brokerage, commission, interest, rent, charges or receipts of a similar nature were liable to be excluded while computing the profits of the business. In appeal, the CIT (Appeals) held by his order dated 17 November 2006 that from the Bank and fund flow statements, the assessee has established a direct nexus between interest bearing fixed deposits and the ‘interest charging’ borrowed funds. The CIT (Appeals) directed the Assessing Officer to allow the netting of interest income and interest expenses. The view of the CIT (Appeals) was confirmed in appeal by the Income Tax Appellate Tribunal on 11 March 2008. The Tribunal held that the finding of the Appellate Authority was based on the existence of a nexus between borrowed funds and fixed deposits. The Tribunal followed its decision in the case of Lalsons Enterprises (2004) 89 ITD 25.
The question :
4. The question of law which has been raised in the appeal by the Revenue relates to whether netting of interest can be allowed for the purpose of working out a deduction under Section 80HHC. The contention of the Revenue is that for computing the profits and gains of the business for the purposes of Section 80HHC, ninety per cent of the receipts by way of interest has to be reduced from the profits and gains of business or profession and the receipts that have to be reduced are the gross receipts. Consequently, it is the submission of the Revenue that gross receipts by way of interest cannot be netted against expenditure which is laid out for the earning of those receipts. On the other hand, the contention of the assessee is that Section 80HHC must have a purposive interpretation and the reduction that is to be applied of ninety per cent of the receipts, must relate to the inclusion of receipts in the profits and gains of business or profession which is comprised both of receipts and the expenditure which is incurred directly for the purpose of earning the receipts.
Section 80HHC:
5. Subsection (1) of Section 80HHC provides that where an assessee, being an Indian Company or a person residing in India, is engaged in the business of export out of India of goods or merchandise to which the section applies, there shall be allowed in computing the total income of the assessee, a deduction to the extent of profit referred to in subsection (1B) derived by the assessee from the export of such goods. Subsection (1B) stipulates the extent of the permissible deduction and the period during which the deduction could be claimed. Subsection (3) lays down a formula with reference to which the profits derived by the assessee from export have to be computed. In the present case, clause (a) of subsection (3) is of relevance and it provides as follows:
“(3) For the purposes of subsection (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.”
The central focus of this appeal relates to the interpretation that is to be placed on the provisions of clause (baa) of the Explanation. Clause baa provides as follows:
“(baa) “profits of the business” means the profits of the business as computed under the head “Profits and gains of business or profession” as reduced by (1)ninety per cent of any sum referred to in clauses (iiia), (iiib), (iiic), (iiid) and (iiie) of section 28 or of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits; and (2)the profits of any branch, office, warehouse or any other establishment of the assessee situate outside India.”
Hence, Clause (a) of subsection (3) is applicable to an assessee whose business consists of the export out of India of goods or merchandise manufactured or processed by the assessee. In the case of such an assessee, the profits derived from such export is 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. The expression “profits of the business” which has been used in clause (a) of subsection (3) is defined in clause baa of the Explanation. For the purposes of clause baa, profits of the business have to be first computed under the head ‘profits and gains of business or profession’. That computation must necessarily be in accordance with the provisions of Sections 28 to 44D of the Act. Once such a computation has been arrived at, clause baa requires a reduction to be carried out. The reduction is to be of (i) Ninety per cent of (a) the export incentive referred to in clauses (iiia), (iiib), (iiic), (iiid) and (iiie) of Section 28 or (b) any receipt by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits; and (ii) Profits of a branch, office, warehouse or any other establishment of the assessee situated outside India. The issue which falls for determination in the present case relates to the reduction factor of ninety per cent that is to be applied in respect of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits. As noticed earlier, it is the contention of the Revenue that the reduction factor of ninety per cent must be applied to the gross receipts, independent of any expenditure that may be incurred in the earning of those receipts, while according to the assessee, the use of the words “included in such profits” must, in particular, result in the conclusion that the reduction factor cannot be applied in isolation only to the gross receipts without reference to the expenditure laid out directly for the purpose of earning those receipts. It is in this background that it would be necessary now to advert to the rival submissions.
Submissions :
6. Counsel appearing on behalf of the Revenue submitted firstly that Explanation baa seeks to exclude ninety per cent of : (i) Any sum by way of export incentives referred to in clause (iiia) to (iiie) of Section 28; (ii) Receipts by way of brokerage, commission, interest, rent, charges or other similar receipts; and the Profits of any branch, office, or warehouse. The submission is that Parliament has used three different expressions, namely, “any sums”, “receipts” and “profits”. In so far as receipts are concerned, it has been urged that ninety per cent of whatever receipts are received of the description mentioned in the explanation must be excluded. Secondly, it has been submitted that Section 80HHC is a statutory incentive provided to exporters and the object of the provision is not to determine real income. The underlying object of Explanation baa was to exclude receipts which do not have a nexus with export turnover and ninety per cent of all such receipts would have to be excluded in computing the deduction. Thirdly, reliance was placed on a circular issued by the Central Board of Direct Taxes on 19 December 1991 in order to contend that no netting of receipts with the expenditure laid out in earning the receipts is permissible since in mandating that a reduction of ninety per cent shall be applied, Parliament has already taken into account, the element of common expenses that may be incurred by the assessee. In other words, the submission was that while the entire receipts on account of brokerage, commission, interest, rent, charges or other similar receipts would have to be excluded since they do not bear a nexus with export turnover, nonetheless the Legislature has taken notice of the fact that the assessee would have incurred certain expenses towards those receipts and had consequently applied a reduction factor of ninety per cent.
7. The appeal before the Court has been placed for hearing together with a batch of appeals where similar issues arise. Since common issues of law arise in this batch of appeals, we have, while hearing the arguments of the Revenue in the present appeal, also heard Counsel appearing on behalf of the Assessees in the entire batch on the question of interpretation. Submissions have been urged before the Court by Mr. Andhyarujina, Mr. Shivram, Mr. Irani and Mr. Nilesh Joshi. Counsel appearing on behalf of the Assessee submitted that
(i) The words “any receipts” denote the nature and not the quantum of the receipt;
(ii) The expression, therefore, requires the nature of the receipts to be examined;
(iii) Explanation baa refers to any receipts of a similar nature “included in such profits”. The words “such profits” would mean profits and gains of business or profession computed under Sections 28 to 44D;
(iv) Profits can only be arrived at after the deduction of expenditure from income and the net effect thereof would constitute profits;
(v) Explanation baa does not use the expression “gross or net”. However, having regard to the purpose and object of the provision and the nature of the language used in the explanation, ninety per cent of the receipts that is required to be excluded would have to be computed with reference to the inclusion of such receipts in the profits and gains of business which in turn involves both the credit and the debit sides of the profit and loss account;
(vi) For the purposes of Explanation baa, income from other sources would not come within the purview of the explanation; Only business income would have to be considered and interest in the nature of business income would have to be taken into consideration;
(vii) Receipts by way of interest in Explanation baa denotes the nature of the receipts and inclusion in ‘such profits’ would denote the quantum of the receipts;
(viii) The words which have been used by the legislature suggest what is included in the total income or what has gone into the computation of the total income. Consequently, both the debit and the credit sides of the profit and loss account would have to be considered;
(ix) The words “such profits” can only mean such profits as computed in accordance with the provisions of the Act;
(x) The words “receipt” and “income” in Explanation baa are interchangeably used and consequently, receipts would have to be read as income;
(xi) The correct interpretation would be to take into consideration netting and exclude all expenses which have a direct nexus with the earning of the income;
(xii) The provision being an incentive provision under Chapter VIA, it must be beneficially construed in order to encourage exports;
(xiii) The word “profits” would denote profits in a commercial sense.
Another perspective of the submissions which have been urged on behalf of the assessee is that the object of the exclusion contained in Explanation baa is to sequester certain nonoperational income which does not bear a direct nexus with export income. Consequently, the sequestration or exclusion cannot be confined only to the credit side of the profit and loss account, but must extend equally to the debit side subject to the rider that a clear nexus has to be established. The Revenue, it has been urged, seeks to exclude nonoperational income on the one hand, because it has no nexus with the export turnover while on the other hand, it seeks to depress profits by including expenditure which has been incurred for those very items. This, it has been submitted, would lead to a consequence which could not have been intended by Parliament having regard to the beneficial object underlying the provision.
The rationale underlying the exclusion :
8. Subsection (3) of Section 80HHC was inserted by the Finance Act of 1991, with effect from 1st April 1992. The principal reason underlying the adoption of the formula in subsection (3) of Section 80HHC was to disallow a part of the concession when the entire deduction claimed could not be regarded as being derived from export. Section 80HHC had to be amended several times since the formula had resulted in a distorted figure of export profits where receipts such as interest, rent, commission and brokerage which did not have a direct nexus with export turnover were included in the profit and loss account and resultantly became a subject of deduction. By the amendment, the position that emerged was that receipts which do not have any element of or nexus with export turnover would not become eligible for deduction merely because they form part of the profit and loss account. This aspect of the history underlying Section 80HHC, has been elaborated upon in the judgement of Honourable Shri Justice S.H.Kapadia, speaking for the Supreme Court, in CIT vs. Lakshmi Machine Works (2007) 290 ITR 667.
9. Explanation baa has to be read in the context of this background underlying the exclusion of certain constituent elements of the profit and loss account from the eligibility for deduction under Section 80HHC. What Explanation baa postulates is that, in computing the profits of business for the purposes of Section 80HHC, the profits of business have to be first computed under the head profits and gains of business or profession, in accordance with the provisions of Sections 28 to 44D. Once that exercise is completed, those profits have to be reduced to the extent provided by clauses (1) and (2) of Explanation baa. Clause (1) to the explanation requires the application of the ninety per cent deduction to two categories. The first category consists of export incentives which are referred to in clauses (iiia) to (iiie) of Section 28. The second category consists of receipts by way of brokerage, commission, interest, rent, charges or any other receipts of a similar nature included in such profits. The importance of the second category lies in the fact that such receipts by way of brokerage, commission, interest, rent, charges or other receipts of a similar nature, though included in the profits and gains of business or profession, do not bear a nexus with the export turnover. Consequently, though they are included in the computation of profits and gains of business or profession, ninety per cent of such receipts have to be excluded in computing the profits of business for the purposes of Section 80HHC.
10. The reason for the exclusion is borne out by a circular issued by the Central Board of Direct Taxes on 19 December 1991. The circular issued by the Board noted that the existing formula often presented a distorted figure of export profits when receipts like interest, commission etc. which did not have an element of turnover were included in the profit and loss account. Consequently, a clarification had been introduced by which the profits of business for the purposes of Section 80HHC would not include receipts of a similar nature. However, as some expenditure might have been incurred in earning these incomes which in the generality of cases would be a part of common expenditure, an adhoc deduction of ten per cent from such income was provided to account for these expenses.
11. Now, reading Explanation baa as it stands, the Court is required to give a meaning to the provision consistent with the underlying scheme, object and purpose of the statutory provision. Parliament considered it appropriate to exclude from the purview of the deduction under Section 80HHC, certain receipts or income which did not have a proximate nexus with export turnover. Such items form part of the profit and loss account and form a constituent element in the computation of the profits or gains of business or profession under Sections 28 to 44D. The interpretation which we place on the provisions of Section 80HHC and on Explanation baa must be consistent with the law laid down by the Supreme Court.
12. In Commissioner of Income Tax Vs. K.Ravindranathan Nair, (2007) 295 ITR 228 the Supreme Court held that processing charges, though a part of gross total income constituted an item of independent income like rent, commission and brokerage and consequently, ninety per cent of the processing charges would have to be reduced from gross total income to arrive at business profits. As a result, the processing charges would be includible in total turnover in the formula under Section 80HHC(3). For the purpose of this appeal, it would be appropriate to formulate the principles which emerge from the decision in Ravindranathan Nair. These may be summarised as follows:
(i) Section 80HHC is not a charging section, but a provision by way of an incentive and its object is not to ascertain real income;
(ii) The expression “derived from” in Subsection (1) of Section 80HHC is narrower than the expression “attributable to” and consequently, it is only profits derived from export which can become the basis for working out the formula in Section 80HHC(3);
(iii) As a result of the amendment brought about from 1st April 1992 by the Finance Act of 1991, the expression “profits of the business” stands defined to mean profits of the business as computed under the head profits and gains of the business under Sections 28 to 44D;
(iv) Before allowing a deduction under Subsection (3) of Section 80HHC, the gross total income of an assessee, being profits from business, has to be arrived at in terms of clause baa of the explanation. Business profits have to be calculated in terms of Sections 28 to 44D alone;
(v) The deduction has to be from the profits as understood in the commercial sense;
(vi) Under clause (1) of Explanation baa, ninety per cent of any amount referred to in clauses (iiia), (iiib), (iiic), (iiid) and (iiie) of Section 28 or of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits has to be reduced. The expression “included in such profits” indicates that such item which forms a subject matter of the reduction also forms a part of gross total income being business profits;
(vii) Incentive profits and items like rent, commission, interest and brokerage, though they form a part of the gross total income, have to be excluded since they do not possess any nexus with export turnover. The inclusion of such items in profits of the business would result in a distortion of the figure of export profits;
(viii) In the formula, there exist four variables namely, business profits, export turnover, total turnover and ninety per cent of the sums referred to in Explanation baa. In the computation of the deduction under Section 80HHC, all the four variables are required to be taken into account;
(ix) Section 80HHC(3) secures profits derived from the export of eligible goods. Every receipt is not income and every income would not necessarily include the element of export turnover;
(x) By Explanation baa ninety percent of incentive profits or receipts by way of brokerage, commission, interest, rent, charges or any other receipts of like nature included in business profits have to be deducted from business profits as computed under Sections 28 to 44D;
(xi) In other words, receipts which result in an independent income which has no nexus with export, are required to be reduced from business profits under Explanation baa;
(xii) Though receipts by way of brokerage, commission, interest, rent, charges or any receipts of a similar nature form part of the gross total income, yet for the purpose of working out the formula and in order to avoid a distortion in arriving at export profits, Explanation baa has been inserted;
(xiii) As a result of the insertion of Explanation baa incentive profits and receipts which result in “independent income” have to be excluded from the gross total income to the extent of ninety per cent because such receipts have no nexus with the export turnover.
13. In Lakshmi Machine Works (supra), the issue before the Supreme Court was whether excise duty and sales tax were included in the total turnover for the purpose of working out the formula contained in Section 80HHC(3). The Supreme Court held that the object of the legislature in enacting Section 80HHC was to confer benefit on profits accruing with reference to export turnover. The Supreme Court observed that “commission, rent, interest etc. did not involve any turnover” and “therefore, ninety per cent of such commission, interest etc. was excluded from the profits derived from the export.” Just as interest, commission etc. did not emanate from export turnover, so also excise duty and sales tax had to be excluded.
The resultant position in law :
14. The deduction under Section 80HHC is available to an assessee engaged in the export of goods or merchandise outside India to the extent of the profits specified in subsection (1B) of the provision. Clause (a) of Subsection (3) of Section 80HHC provides that where the exported goods are manufactured by the assessee, the deduction under subsection (1) would be in accordance with the formula stated therein. The formula is that 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. Explanation baa was inserted by the Finance Act of 1991 with retrospective effect from 1st April 1987. Under Explanation baa, the expression “profits of the business” means the profits of the business as computed under the head “profits and gains of business or profession” as reduced by ninety per cent of (a) Any sums referred to in clauses (iiia), (iiib), (iiic), (iiid) and (iiie) of Section 28; or (b) Any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits. The profits of any branch, office, warehouse or any other establishment of the assessee situated outside India have also to be reduced. Since receipts by way of brokerage, commission, interest, rent, charges or other similar receipts have no nexus with the export activity, the legislature thought it fit, for the purpose of deduction under Section 80HHC to exclude such items from business profits. Parliament was, however, conscious of the fact that the expenditure incurred in earning the items which were liable to be excluded had already gone into the computation of business profits. This was because the computation of business profits under Chapter IV is made by amalgamating the receipts as well as the expenditure incurred in carrying on the business. Since the expenditure incurred in earning the income by way of interest, brokerage, commission, rent, charges or other similar receipts had also gone into the computation of business profits, Parliament thought it fit to exclude only ninety per cent of the receipts received by the assessee in order to ensure that the expenditure which is incurred by the assessee in earning the receipts which has gone into the computation of the business profits is taken care of.
15. The reason why Parliament confined the reduction factor to ninety per cent of the receipts is stated in the Memorandum explaining the provisions of the Finance Bill of 1991. In so far as it is relevant, the Memorandum states thus:
“The existing formula may also give a distorted figure of export profits when receipts like interest, commission, etc., which do not have an element of turnover are included in the profit and loss account. It is, therefore, proposed to clarify 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. As some expenditure might be incurred in earning these incomes, which in the generality of cases is part of common expenses, it is proposed to provide ad hoc 10 per cent deduction from such incomes to account for these expenses.”
Parliament, therefore, confined the reduction to the extent of ninety per cent of the income earned through such receipts since it was cognisant of the fact that the assessee would have incurred some expenditure in earning those incomes. Parliament provided an adhoc deduction of ten per cent from such incomes to account for the expenses incurred in earning the receipts. The explanatory statement which is contained in the Memorandum explaining the provisions of the Finance Bill of 1991 has also been reflected in the explanatory circular issued by the Central Board of Direct Taxes on 19 December 1991 (Circular No. 621). The distortion of the profits that would take place by excluding the receipts received by the assessee which were unrelated to export turnover and not the expenditure incurred by the assessee in earning those receipts was factored in by Parliament by excluding only ninety per cent of the receipts received by the assessee. In a given case, the expenditure incurred by the assessee in earning the receipts, which is to be excluded, may be more than ten per cent or less than ten per cent. Parliament, however, thought it fit to adopt a uniform formula envisaging a reduction of ninety per cent to make due allowance for the expenditure which would have been incurred by the assessee in earning the receipts. Parliament regarded the element of expenditure computed at ten per cent of the receipts to be a reasonable parameter of what would have been expended by the assessee. It is in this background that in Explanation baa, Parliament has thought it fit to exclude ninety per cent of the receipts received by the assessee which have no nexus with the export activity. Ordinarily, the sums, receipts and profits set out in clause baa would have been required to be excluded completely from the profits of the business, being unrelated to export turnover. Yet, since the expenditure incurred in earning such sums, receipts and profits has already been taken into account on the debit side, in computing profits of the business, it is only ninety per cent of these sums, receipts and profits referred to therein which would have to be excluded from the profits of the business in order to off set the expenditure taken into account while computing the business profits. In other words, the distortion in the profits of business that would take place by excluding only the sums, receipts and profits from the credit side, but not the expenditure from the debit side, is off set by excluding only ninety per cent of such sums, receipts and profits to represent the expenditure incurred on earning them. As stated earlier, it may well be that the actual expenditure incurred in a case may be more or less than the statutory factor of ten per cent enacted by Parliament, but in order to simplify the application of the law, Parliament treated a uniform expenditure computed at ten per cent to be applicable in order to ensure that there is no distortion of profits by exclusion of income which is not relatable to export profits.
Distributors Baroda :
16. In Distributors (Baroda) Pvt. Ltd. Vs. Union of India, (1985) 155 ITR 120 what was in issue before the Supreme Court was the deduction provided for in Section 80M. Section 80M provided that where the gross total income of an assessee, being a company includes any income by way of dividends received from a domestic company, in computing the total income of the assessee, there shall be allowed a deduction from such income by way of dividends of a certain amount. The extent of the deduction varied between sixty to eighty per cent. The Supreme Court observed that ‘income by way of dividend from a domestic company included in the gross total income’ would be the income computed in accordance with the provisions of the Act, that is after deducting interest on monies borrowed for earning such income. While interpreting the words “included in the gross total income” and, emphasising words “a deduction from such income by way of dividend”, the Supreme Court held thus:
“Now, when in computing the total income of the assessee, a deduction has to be made from “such income by way of dividends, it is elementary that “such income by way of dividends” from which deduction has to be made must be part of gross total income. It is difficult to see how the language of this part of sub s.(1) of s. 80M can possibly fit in if “such income by way of dividends” were interpreted to mean the full amount of dividend received by the assessee. The full amount of dividend received by the assessee would not be included in the gross total income. What would be included would only be the amount of dividend as computed in accordance with the provisions of the Act. If that be so, it is difficult to appreciate how for the purpose of computing the total income from the gross total income, any deduction should be required to be made from the full amount of the dividend. The deduction required to be made for computing the total income from the gross total income can only be from the amount of dividend computed in accordance with the provisions of the Act which would be forming part of the gross total income.”
17. The principle which has been laid down by the Supreme Court in the context of Section 80M was sought to be extrapolated by Counsel appearing on behalf of the Assessees in the present case, in their submission, in relation to the correct interpretation of Explanation baa to Section 80HHC. Now, undoubtedly, as already noted earlier, Explanation baa provides first for the computation of the profits of the business which are defined to mean the profits and gains of business or profession as reduced under clauses (1) and (2). For the purpose of clause (1) of Explanation baa, the words “included in such profits” would clearly evince the intent of Parliament that such receipts ought to have formed a part of the profits and gains of business or profession as computed in accordance with the provisions of Sections 28 to 44D. The distinguishing aspect of Explanation baa is that the profits of the business as computed under the head of profits and gains of business or profession are subject to a reduction factor of ninety per cent. The rationale for the exclusion which has been provided for by Parliament in Explanation baa is that items which are unrelated to export turnover have to be excluded in computing the profits of business. Including items which are unrelated to export turnover in computing the profits of business would result in a distortion of the formula which is to be applied in construing the provisions of Section 80HHC. The reason for exclusion, therefore, is that in computing the profits of business items which are unrelated to export turnover must be excluded because the basis of Section 80HHC is to provide an incentive for export. The extent of the exclusion which is statutorily mandated by Parliament is ninety per cent of the total receipts. Though the entire quantum of receipts unrelated to export turnover would ordinarily have to be excluded, the extent of the exclusion has been confined to ninety per cent. This is because the expenditure which is incurred by the assessee in earning these receipts would have gone into the computation of the profits and gains of business or profession and a distortion would be caused if the entirety of the income generated from the receipts alone were to be excluded. It is in order to obviate such a distortion that Parliament mandated that ninety per cent of the receipts would be excluded. Consequently, while the principle which has been laid down by the Supreme Court in Distributors (Baroda) must illuminate the interpretation of the words “included in such profits”, the Court cannot, at the same time, be unmindful of the reduction which is postulated by explanation baa, the extent of the reduction and the rationale for effecting the reduction.
Decisions of the High Courts :
18. Several High Courts had occasion to deal with the provisions of Section 80HHC including explanation baa. The Madras High Court considered the interpretation of Section 80HHC in K.S.Subbiah Pillai & Co.(India) Pvt. Ltd. Vs. CIT. (2003) 260 ITR 304 The questions of law which were referred to the High Court were as follows :
1. Whether on a true construction of the Explanation (baa) to Section 80HHC of the Income Tax Act, 1961, interest, rent and commission are to be deducted from export profits or only net receipts, if any, after taking into account the payments?
2. Whether on a true construction of the Explanation (baa) to section 80HHC of the Income tax Act all the net receipts by way of interest, rent and commission should be aggregated before deduction and only the net balance, if any, should be deducted from export profits?”
The High Court held that the second question of law did not arise on the order of the Tribunal and only the first question was required to be addressed. Dealing with the first question, Mr. Justice R. Jayasimha Babu, speaking for the Division Bench held as follows:
The clause does not refer to net interest. It refers, inter alia, to the interest included in the profits and gains of the business or profession. .. The reference to “such profits” in sub clause (1) of clause (baa) can only be to the profits of the business computed under the head “Profits and gains of business or profession”. Addition of prefix “the” to “profits” in clause (baa), while referring to the profits and gains of business or profession makes it clear that it is only the amounts already included in that computation which are now to be reduced to the extent of 90 per cent., if those items are included in sub clause (1) of that definition.”
The High Court held that interest paid and claimed as a deduction in the computation of profits and gains for business could not be set off against interest received and paid under income from other sources. The judgment in Subbiah Pillai was followed by another Division Bench in CIT Vs. V.Chinnapandi. (2006) 282 ITR 389 In the case before the Madras High Court, the assessee had paid interest of Rs.9.24 lakhs and had received interest of Rs. 2.65 lakhs and the net interest of Rs. 6.59 lakhs came to be debited. The Assessing Officer held that under Section 80HHC, ninety per cent of the receipts had to be excluded and consequently the deduction was confined to ninety per cent of the income of Rs. 2.65 lakhs received on account of interest. The order of the Assessing Officer was confirmed by the Appellate Authority. The Income Tax Tribunal, however, held that the net figure of interest was Rs. 6.59 lakhs which was not a receipt and hence, there was no question of removing any amount while computing the deduction under Section 80HHC. The Division Bench of the Madras High Court held that “on a plain reading of the provision”, it was clear that what the provision stipulates is that the profits of business would be the profits as computed under the head of profits and gains of business or profession. While computing such profits under the head of profits and gains of business or profession, if any receipts by way of brokerage, commission, interest, rent, charges or a receipt of a similar nature was included in such profits that would have to be reduced by ninety per cent from the profits so computed. The Division Bench held that no reference to net interest is mentioned in Explanation baa and what had to be seen is only the nature of the receipts as contemplated by the clause. Once the receipt of interest was known, ninety per cent of it would have to be reduced from the profits without deducting any amount. The Division Bench held as follows:
“No expenditure or any other deduction is permissible from the receipt of interest income. Section 80HHC stipulates a deduction in respect of export profits. Instead of enjoining the Assessing Officer to compute such export profits from out of the consolidated amount of the assessee, which may involve income by way of interest, rent, commission etc., the Legislature has provided a simple procedure under which 90 per cent of the receipts such as interest, rent, commission, brokerage, etc., shall be excluded as profits not attributable to exports. The intention is, therefore, clear that there should be no attempt to deduct any expenditure from the receipts, however, related, such expenditure may be to the receipts. It is in this view of the matter that the expression “receipt by way of” has been used in the section and not “income” of that nature.”
The same view has been taken by a Division Bench of the Punjab and Haryana High Court in Rani Paliwal Vs. CIT. 7 In that case, the total interest received by the assessee during the relevant Assessment Year was Rs. 6.33 lakhs while the total interest paid was Rs. 4.12 lakhs. The Assessing Officer was of the view that ninety per cent of the receipts on account of interest in the amount of Rs. 6.33 lakhs was liable to be deducted from the profits of the business for the purposes of deduction under Section 80HHC. The CIT (Appeals) however, took the view that the interest would have to be netted. The Income Tax Appellate Tribunal, on appeal, confirmed the view of the Assessing Officer by holding that ninety per cent of the interest that was deductible for the claim under Section 80HHC was from the gross interest received by the assessee and that the amount of the interest paid by the assessee could not be deducted therefrom. The Division Bench held that “a plain reading of clause baa of Explanation to Section 80HHC .. makes this aspect quite clear” and the Tribunal was right in disallowing the claim of the assessee. A subsequent decision of the Punjab and Haryana High Court in CIT Vs. Liberty Footwear, (2006) 287 ITR 279 also adopts the same position.
19. Reliance is, however, sought to be placed on behalf of the assessee upon the judgment of a Division Bench of the Delhi High Court in CIT Vs. Shri Ram Honda Power Equip. (2007) 289 ITR 475 One of the issues which came up for decision in the appeal was whether the expression “interest” in Explanation baa connotes net interest as gross income less expenditure incurred by the assessee for earning such income. The Delhi High Court held that the judgement of the Supreme Court in Distributors (Baroda) (supra) would fully cover the question as to whether the deduction which is to be effected under Explanation baa was of the entire interest received or of the interest less the expenditure incurred by the assessee for earning such income. Observing that the words used in Section 80HHC were similar to those in Section 80M, the Delhi High Court held thus:
“The expression “by way of” which qualified the word “income” in section 80M is similar to the words “receipts by way of” occurring in the Explanation (baa) of section 80HHC of the Act. Further the words “included in such profits” occurs in both the provisions. Just as in Distributors (Baroda) [1985] 155 ITR 120 (SC) where it was explained by the Honourable Supreme Court that the words “such” profits can only be understood as “computed in accordance with the provisions of the Act”, we are of the view that similar words in clause (baa) should partake of the same meaning. Applying the ratio of Distributors (Baroda) [1985] 155 ITR 120 (SC), we hold that the legislative intent in using the word “interest” in clause (baa) to the Explanation in section 80HHC is indicative of “net interest”, i.e., gross interest less the expenditure incurred by the assessee in earning such interest.”
The Delhi High Court was of the view that where the plain or literal interpretation of a statute would produce an unintended or absurd result, the literal construction should not be adopted. According to the Delhi High Court, the words “included any such profits” was a clear pointer to the fact that only net interest would be includible in arriving at the business profit. The Delhi High Court also held that unless netting were to be permitted, it would not be in ‘sync’ with the entire section. The contention of the assessee was that if the deduction of ninety per cent is of gross interest itself, the amounts spent in earning such interest will remain on the debit side of the profit and loss account and will depress the profits to that extent. This submission was accepted with the observation that the idea of Section 80HHC was to ensure that the exporter gets benefit from the profits derived from export and not to depress the profits further. Hence, according to the High Court, it can only be net interest which can be included in the profits and if netting were not to be permitted, the result would be that the profits of the exporter would be depressed by an item that is expenditure incurred on earning interest which does not form part of the profits at all.
20. Having given a careful consideration to the judgement of the Delhi High Court, we are not inclined to follow the view for a number of reasons. The substratum of the judgement of the Delhi High Court proceeds on the basis that the question as to whether netting should be permissible stands concluded by the judgement of the Supreme Court in Distributors (Baroda). In Distributors (Baroda), while considering the provisions of Section 80M, the Supreme Court interpreted the words “where the gross total income of the assessee being a company included any income by way of dividend received” and the words which provided that in computing the total income of the assessee “a deduction from such income by way of dividend” shall be allowed to the extent specified in the provision. While applying the ratio of the judgement in Distributors (Baroda), we have observed that the expression “receipts of a similar nature included in such profits” in Explanation baa to Section 80HHC must refer to receipts which form a part of the computation under the head of profits and gains of business or profession under Sections 28 to 44D of the Income Tax Act, 1961. The expression “such profits” therefore, following the rationale in Distributors Baroda, must refer to the computation of profits and gains of business or profession in accordance with the aforesaid provisions of the Act. But, the similarity between the provisions of Sections 80HHC and 80M which is relied upon in the judgment of the Delhi High Court would miss the comprehensive position as it obtains under Section 80HHC. The similarity of the provisions should not result into an assumption that the provisions are identical, when they are not. Section 80 HHC is a provision which is intended to provide an incentive for export. Parliament, therefore, expressed a legislative intent to exclude items which were unrelated to export turnover from the computation of the deduction and the application of the formula. While excluding such items which are unrelated to export for the purposes of Section 80HHC, Parliament has taken due note of the fact that the exporter assessee would have incurred some expenditure in earning the receipts. The expenditure would have gone into the computation of profits and gains of business or profession since the computation of business profits under Chapter IV of the Act is made by amalgamating the receipts as well as expenditure incurred in carrying on the business. Parliament, however, legislated that in order to remove a cause for distortion, the reduction to be effected of receipts such as brokerage, commission, and interest should be confined to ninety per cent of those receipts. In providing a simplified formula in these terms, Parliament evidently adopted a fair and reasonable statutory basis of what may be regarded as expenditure incurred for the earning of the receipts. Once Parliament has legislated both in regard to the nature of the exclusion and the extent of the exclusion, it would not be open to the Court to order otherwise by rewriting the legislative provision. The task of interpretation is to find out the true intent of a legislative provision. Undoubtedly, in dealing with a provision by way of an incentive, the Court must adopt a broad and liberal interpretation which would advance the purpose. While doing so, the Court is duty bound to iron out the creases but, it is clearly not open to the Court to legislate by substituting a formula or provision other than what has been legislated by Parliament. The Delhi High Court, with respect, has not adequately emphasised the entire rationale for confining the deduction only to the extent of ninety per cent of the excludible receipts. While the judgement of the Delhi High Court referred to the C.B.D.T. Circular dated 19 December 1991, as noted earlier, we have also adverted to the Memorandum explaining the clauses of the Finance Bill of 1991. The Memorandum can be relied upon as a legitimate instrument of statutory interpretation and to shed light upon the provisions of Explanation baa.
21. Before concluding, it would be necessary to note that the Delhi High Court affirmed the judgement of a Special Bench of Income Tax Appellate Tribunal in the case of Lalsons. The Tribunal in the course of its decision, adverted to the deduction of ten per cent allowed by Parliament in Explanation baa while legislating that only ninety per cent of the receipts unrelated to export turnover would be excluded from the profits of business. The Tribunal, observed that the allowance of ten per cent had been made by Parliament only for meeting common expenses, according to Circular 621 dated 19 December 1991 of the C.B.D.T. In Lalsons, the Tribunal observed that in addition to such common expenses, there may be other expenses which have a direct bearing on excludible receipts. The Tribunal held that if such receipts were to be taken out of the business profits on the footing that they had no connection with the business profits or turnover, it would only be reasonable to hold that expenditure having nexus with such receipts should also be taken out of the business profits on the same footing. The Tribunal noted that the use of the word “receipts” would not refer to gross receipts because the legislature had not used the words “gross” nor “net”. We are affirmatively of the view that in its discussion on the issue of netting, the Tribunal in its Special Bench decision in Lalsons has transgressed the limitations on the exercise of judicial power. The Tribunal has in effect, legislated by providing a deduction on the ground of expenses other than in the terms which have been allowed by Parliament. That is impermissible. In the present case, it is necessary to emphasise that the question before the Court relates to the deduction under Section 80HHC. An assessee may well be entitled to a deduction in respect of the expenditure laid out wholly and exclusively for the purpose of business in the computation of the profits and gains of business or profession. However, for the purposes of computing the deduction under Section 80HHC, the provisions which have been enacted by Parliament would have to be complied. A deduction in excess of what is mandated by Parliament cannot be allowed on the theory that it is an incentive provision intended to encourage export. The extent of the deduction and the conditions subject to which the deduction should be granted, are matters for Parliament to legislate upon. Parliament having legislated, it would not be open to the Court to deviate from the provisions which have been enacted in Section 80HHC.
22. In the circumstances, we allow the appeal by holding that the Tribunal was not justified in coming to the conclusion that the net interest on fixed deposits in the Bank received by the assessee should be considered for the purposes of working out the deduction under Section 80HHC and not the gross interest. The question of law would accordingly stand answered in the aforesaid terms in favour of the Revenue and against the assessee. There shall be no order as to costs.
