Refund of Sales Tax obtained by the Assessee has no direct bearing or attribute of the export component of the business carried on by the Assessee and hence the Assessee cannot seek to retain the same by deriving the benefit spelt out in Section 80HHC.
Full Text of the High Court Judgment / Order is as follows:-
This Tax Case Appeal is directed against the order passed by the Income Tax Appellate Tribunal Bench ‘A’, Chennai, in I.T.A.No. 2755/Mds/2005, dated 15.09.2006.
2. The following substantial question of law has been raised by the Appellant-Assessee for consideration:
“ Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in holding that the Explanation (baa) to Section 80HHC of the Income-tax Act, 1961 would apply to the Sales Tax Subsidy received by the Appellant?”
3. The Assessee is carrying on business of manufacture and export of leather shoes and shoe uppers. It has received Sales Tax REP subsidy in a sum of Rs. 1,70,29,716/- and reflected the same, as ‘other income’ for the Assessment year 1999- 2000. During earlier assessment years viz., 1988-89 to 1994-95 the Assessee has transferred certain REP Licenses and no Sales Tax was paid thereon as the transfer of REP Licenses did not involve any transfer of property. The Tamil Nadu General Sales Tax Act has been amended charging Sales Tax on transfer of REP Licenses. A challenge mounted to the provisions of the amended Sales Tax Act has ended before the Supreme Court which upheld the amendment. In those circumstances, Sales Tax has become liable to be paid and accordingly the same has been paid by the Assessee to the State. But however, exporters of leather goods have represented to the State Government against the retrospective levy and the Government took a sympathetic view and allowed the exporters to claim a refund/ reimbursement of the amount of Sales Tax paid by them. In these circumstances, the refund of Sales Tax paid by the Assessee during the earlier years was refunded by the State Government and hence it was considered as other income for the Assessment year 1999- 2000.
4. The Assessee claims that as per Explanation (baa) incorporated below Sub-section 4(c) of Section 80HHC of the Income Tax Act (henceforth called the Act) would not apply to such receipts. Hence he returned Income of Rs. 11,72,310/- after claiming deduction of Rs. 2,70,89,222/-. The appeal preferred by the Assessee against the order of the Assessing Officer not extending the benefit of Explanation referred to supra has failed. The Commissioner of Income Tax (Appeals) had observed that computation of profits of the business for the purpose of Section 80HHC does not include receipts which do not have any element of turnover like rent, commission, interest etc. and hence such receipts are to be excluded from the business profits for allowing deduction under Section 80HHC. The same view was taken by the Income Tax Appellate Tribunal also and hence the present appeal.
5. Sub-section (1) of Section 4 of the Act enables Income Tax to be charged in respect of the total income of the previous year of every person. Section 28 enables the profits and gains of any business or profession which was carried on by the Assessee during the previous year as chargeable to Income tax. Section 41 brings out that where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the Assessee and subsequently during the previous year the Assessee has obtained, whether in cash or in any other manner whatsoever any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount so obtained by such person or the value of benefit accruing to it shall be deemed to be profits and gains of business or profession and accordingly chargeable to income tax as the income of that previous year irrespective of the fact whether the business or profession is in existence in that year or not. Thus, whenever any allowance or deduction has been made or claimed in any previous assessment year(s) towards loss, expenditure or trading liability and subsequently the Assessee obtains in cash or in any other form any remission or cessation or benefit in respect of such loss or expenditure the value of such benefit accruing is liable to be treated as profit or gain chargeable to Income Tax.
6. Under Section 2(34) the expression “previous year” has been defined as the “previous year” as defined in Section 3 which in turn means the financial year immediately preceding the assessment year. Chapter VIA of the Act dealt with deductions to be made in computing the total income of an Assessee. Section 80HHC, falling in Chapter VIA, has specifically dealt with deduction in respect of profits retained for export business. Sub-section (1) thereof will have certain bearing upon the controversy at issue and hence the relevant part of it, as it stood prior to 01.04.2001, is extracted below:-
“80HHC. 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 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:”
7. Sub-section (1) of Section 80HHC thus enables the Assessee, which is an Indian Company or any person resident in India, if it is engaged in the business of export out of India of any goods or merchandise to which this section applies, to be allowed, in computing total income, a deduction to the extent of profits derived by the Assessee from the export of such goods or merchandise. Thus to the extent of profits derived by the Assessee from the business of export of goods or merchandise is required to be deducted while computing the total income of such an Assessee, so that he can retain it. In other words, where an Assessee is engaged in the business of both export of goods and also sale of such goods within the country, the profit earned by it from to the extent of such export business only is liable to be deducted from computation of the total income which shall be subjected to the assessment of Income Tax. For the purpose of effective and clear understanding of the provisions of Section 80HHC the expressions used therein have been explained in Clause (baa), incorporated below Sub-Sec.4(c). The expression “profits of the business” has been explained in the following manner:-
“(baa) “profits of the business” means the profits of the business 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;”
8. Thus, the Explanation in clause (baa) makes it clear that profits and gains of business or profession be reduced by 90% of any sum referred to in clause (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. Thus, when we bear this Explanation in mind for the purpose of reducing the profit derived by the Assessee from the export of goods or merchandise, it becomes imperative that the other income must have a bearing or nexus to such a profit derived from the export business. The main theme incorporated behind Section 80HHC is to enable every Assessee who derives profit from out of the business of export of goods or merchandise carried on by it, to retain it as it is and not subject the same to the assessment of income tax, by reducing it from the total income derived from the whole of the business or profession of such an Assessee. Thus, what was insulated against incidence of Tax by Section 80HHC was that part of the profit derived from export of goods. A formula is required to be applied to find out or for segregating the profit earned from the export business segment from out of the total profits earned, where the Assessee is not carrying on exclusively business of export of goods or merchandise but indulges in carrying on business of both export of goods as well as domestic sales. There may not present a problem where the Assessee is carrying on 100% export oriented business, in which case there will be no occasion for dissecting the profits earned, but where, like in the instant case, the Assessee is carrying on business of both export and domestic sales, to the extent of profit derived by it from the export of goods and merchandise alone, having been permitted to be retained by Section 80HHC, hence, it is required by the Department to ascertain and then segregate the extent of profit made out of export business from out of the total amount of profit earned from the composite business. All such components which constitute or form part of such profit made from export of goods have to be ascertained first and to the extent allowable, they be kept away from incidence of taxation, by applying deduction. Therefore, the refund of Sales Tax, obtained by the Assessee during the previous financial year to the assessment year, if were to insulated by securing the benefit contemplated by Section 80HHC, the same shall bear direct nexus to his export business. As was already noticed by us supra, the Assessee has been charged Sales Tax earlier by the State of Tamil Nadu because he has transferred certain REP Licenses. Though initially Sales Tax was not paid thereon, on the premise that the sale of REP Licenses did not involve transfer of goods, but nonetheless, after the challenge regarding its validity has failed in the Supreme Court, Sales Tax has been remitted by the Assessee to the Government. But, however, taking a sympathetic view of the representation of the Leather Goods Exporters, the State Government has decided to remit the Sales Tax so collected. Thus during the relevant financial year, the Assessee has received the refund of said Sales Tax amount paid earlier by it. That amount was claimed, rightly, as other income by the Assessee. But however, he urged that the benefit of Section 80HHC should be applied to such income. The Assessing Officer as well as the Appellate Authority and the Tribunal have all concluded the issue holding that the refund of Sales Tax by the State Government has no direct connection whatsoever to the turnover of business of export of goods carried on by the Assessee or the profit derived from such export business and hence to that part of the income the benefit of Section 80HHC cannot be extended.
9. As was noticed by us, Section 28 of the Act renders the profits and gains of any business or profession as chargeable to income tax. Whereas Section 41 has dealt with as to how profits chargeable to tax are liable to be computed and in that process it was set out that where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the Assessee but subsequently the Assessee has obtained any amount in respect of such loss or expenditure, the amount so obtained by such Assessee shall be deemed to be profit and gain of the business or profession and accordingly chargeable to income tax. In the instant case, in the previous assessment years expenditure towards Sales Tax has been claimed by the Assessee. But however, during the previous financial year to the Assessment year 1999-2000, the amount representing Sales Tax has been remitted back to the Assessee. Thus, the said remission amounts to obtaining profit and gain of the business during the relevant Assessment year, in terms of sub-section (1) of Section 41 and chargeable to Income Tax. When we keep in mind the provisions contained under Section 28 read with Section 41 further read with Section 80HHC, it becomes clear that the remission of Sales Tax obtained by the Assessee answers the description of profit and gain from the business of the Assessee “chargeable to income tax” and at the same time it having no bearing exclusively to the component of export business carried on by the Assessee, the same cannot be retained by the Assessee by way of deduction without being charged for income tax. Since, as a policy, any profit and gain derived by the Assessee from out of export business carried on is only allowed to be retained, hence if the Assessee seeks to retain the refunded Sales Tax amount, he must necessarily demonstrate it’s direct bearing to such component of export business. If the “other income”, referred to in clause (baa) of Explanation of Section 80HHC, under which the remission of Sales Tax falls has no bearing to the export business carried on by the Assessee, then, such income cannot be deducted from the computation of total income derived by way of profit and gain from the whole of the business of the Assessee. The explanation (baa) clearly brings out that ‘the other income’ derived must be relatable to the export business as well.
10. Learned counsel for the petitioner has placed reliance upon the following judgements rendered by the Supreme Court in support of his plea:
(1) Commissioner of Income Tax vs. T.V. Sundaram Iyengar & Sons Ltd., (1996) 222 ITR 0344.
(2) Commissioner of Income Tax vs. Lakshmi Machine Works (2007) 290 ITR 667 (SC)
(3) Commissioner of Income Tax vs. Abdul Rahman Industries (2007) 293 ITR 475 (Mad)
(4) Commissioner of Income Tax-VII vs. Punjab Stainless Industries (2014) 364 ITR 0144 (SC)
11. In T.V. Sundaram Iyengar and Sons case, the Supreme Court after noticing the principles enunciated in Morley (H.M. Inspector of Taxes) vs. Tattersall (1939) 7 ITR 316 (CA), which was explained later in Jay’s The Jewellers Limited vs. IRC (1947) 29 Tax Cases 274 (KB), had laid down the relevant principle as under:-
“13. …… There was no question of the claim of the customers being barred by limitation in that case. When the amount was taken to the accounts of the partners, it was held by Lord Greene that the character of the receipt did not change and the amount did not become a trading receipt in the hands of Tattersall.
Tattersall’s case (supra) was explained and distinguished in the case of Jay’s The Jewellers Ltd., vs. IRC (1947) 29 Tax Cases 274 (KB). In that case, the assessee-company carried on the business of jewellers and pawn-brokers. In the course of its business of pawnbroking, it received various articles as pledges on the strength of which it lent money. The pledges were of three types – (a) pledges pawned for a sum of ten shillings or under; (b) pledges pawned for a sum exceeding ten shillings and not exceeding ten pounds; and © pledges pawned for a sum exceeding ten pounds. The business of pawnbroking was controlled by the Pawnbrokers Act, 1872. It was pointed out in that Act that if a pledge pawned for ten shillings or under was not redeemed within the year of redemption and days of grace, the pledge article would become the pawnbroker’s absolute property. There was no dispute that profit arising out of sale of such pledged article would be the pawnbroker’s income. Under the second type of pledges which were pawned for a sum exceeding ten shillings and not exceeding ten pounds, the pledged article did not become the property of the pawnbrokers. If the pledges were sold for more than the amount of the loan and interest due at the time of sale, the excess had to be paid to the pawner on demand provided the demand was made within three years after the sale. In the third type of case, where pledges were pawned for a sum exceeding ten pounds, there was no time-limit for return of the excess amount to the pawners after the sale. But limitation set in after six years. It was held in that case that the surplus receipts in the pawnbroker’s trade became assessable profits. The Court agreed with the assessee’s contention that these surpluses were debts owed to the customers and that for three years or six years as the case may be, the company could be called upon to pay the amount to the customers. The whole amount was a legal liability. The court also agreed with the assessee’s contention that the surpluses were not trading receipts in the year in which they were received. However, the Court went on to hold:
“The true accountancy view would, I think, demand that these sums should be treated as paid into a suspense account, and should so appear in the balance-sheet. The surpluses should not be get brought into the annual trading account as a receipt at the time they are received. Only time will show what their ultimate fate and character will be. After three years that fate is such, as to one class of surplus, that in so far as the suspense account has not been reduced by payments to clients, that part of it which is remaining becomes, by operation of law, a receipt of the company, and ought to be transferred from the suspense account and appear in the P&L a/c for that year as a receipt and profit. That is what it in fact is. In that year Jays become the richer by the amount which automatically becomes theirs, and that asset arises out of an ordinary trade transaction. It seems to me to be the commonsense way of dealing with these matters.”
The principle laid down by Atkinson J., applies in full force to the facts of this case. If a commonsense view of the matter is taken, the assessee, because of the trading operation, had become richer by the amount which it transferred to its P&L a/c. The moneys had arisen out of ordinary trading transactions. Although the amounts received originally were not of income nature, the amounts remained with the assessee for a long period unclaimed by the trade parties. By lapse of time, the claim of the deposit became timebarred and the amount attained a totally different quality. It became a definite trade surplus. Atkinson J. pointed out that in Tattersall’s case (supra) no trading asset was created. Mere change of method of book-keeping had taken place. But, where a new asset came into being automatically by operation of law, commonsense demanded that the amount should be entered in the P&L a/c for the year and be treated as taxable income. In other words, the principle appears to be that if an amount is received in the course of trading transaction, even though it is not taxable in the year of receipt as being of revenue character, the amount changes its character when the amount becomes the assessee’s own money because of limitation or by any other statutory or contractual right. When such a thing happens, commonsense demands that the amount should be treated as income of the assessee. “
12. The Supreme Court in Lakshsmi Machine Works case had an occasion to consider the whole scheme of rationalisation of provisions relating to tax concession for export profits and held as under:-
“ 7. A brief analysis of the above Section 80HHC of the Act, as amended with effect from 1.4.1992, indicates rationalisation of provisions relating to tax concession for export profits. Under Section 80HHC, the exporters were allowed, in the computation of their total income, a deduction of the entire profits derived from exports. During the relevant year, there existed a dual system for computation of export profits. The first method operated in cases where the export was of goods manufactured by the tax payer. In those cases the export profit had to be computed on the basis of the ratio of “export turnover” to “total turnover”. In effect, the formula was as follows: 80HHC concession = export profits = total profits x export turnover
Where the export consisted of goods purchased from third parties (trading goods) there was a second method of computation in which the export profits were to be calculated by deducting from the export turnover, direct and indirect costs attributable to such exports. In that case the formula was as under: 80HHC concession = export profits = export turnover (costs attributable to such exports)
8. By the Finance Act, 1992, one more amendment was made by which the legislature declared that commission received on assignment of export orders, brokerage, interest, rent and items mentioned in Section 28(iiia), (iiib) and (iiic), should not be treated in toto as profits of the business relatable to exports and only 10% thereof should be considered as the profit of the business and the balance 90% should not be included in the profits. These amendments took place with effect from 1.4.92, the date from which the dual system of computation of export profits came into effect.
9. All assessable entities were not eligible for deduction under Section 80HHC of the Act. According to Section 80HHC only an Indian company or a non company assessee who was the resident in India was eligible for deduction provided he was engaged in the export business of eligible goods.
14. The principal reason for enacting the above formula was to disallow a part of 80HHC concession when the entire deduction claimed could not be regarded as relatable to exports. Therefore, while interpreting the words “total turnover” in the above formula in Section 80HHC one has to give a schematic interpretation to that expression. There is one more reason for giving schematic interpretation. The various amendments to Section 80HHC show that receipts by way of brokerage, commission, interest, rent etc. do not form part of business profits as they have no nexus with the activity of exports. If interest or rent was not regarded by the legislature as business profits, the question of treating the same as part of the total turnover in the above formula did not arise. In fact, Section 80 HHC had to be amended several times since the formula on several occasions gave a distorted figure of export profits when receipts like interest, rent, commission etc. which did not have the element of turnover got included in the profit and loss account and consequently became entitled to deduction. This was clarified by the above amendment to Section 80HHC commencing from 1.4.92. The said amendment made it clear that though commission and interest emanated from exports, they did not involve any element of turnover and merely for the reason that commission, interest, rent etc. were included in the profit and loss account, they did not become eligible to deduction. We have to give purposeful interpretation to the above section. The said section is entirely based on the formula. The amendments from time to time indicate that they became necessary in order to make the formula workable. Hence, we have to give schematic interpretation to Section 80HHC of the Act.
16………….Section 80HHC(3) was a beneficial section. It was intended to provide incentives to promote exports. The incentive was to exempt profits relatable to exports. In the case of combined business of an assessee having export business and domestic business the legislature intended to have a formula to ascertain export profits by apportioning the total business profits on the basis of turnovers. Apportionment of profits on the basis of turnover was accepted as a method of arriving at export profits. This method earlier existed under Excess Profits Tax Act, it existed in the Business Profits Tax Act. Therefore, just as commission received by an assessee is relatable to exports and yet it cannot form part of “turnover”, excise duty and sales tax also cannot form part of the “turnover”. Similarly, “interest” emanates from exports and yet “interest” does not involve an element of turnover. The object of the legislature in enacting Section 80HHC of the Act was to confer a benefit on profits accruing with reference to export turnover. Therefore, “turnover” was the requirement. Commission, rent, interest etc. did not involve any turnover. Therefore, 90% of such commission, interest etc. was excluded from the profits derived from the export. Therefore, even without the clarification such items did not form part of the formula in Section 80HHC(3) for the simple reason that it did not emanate from the “export turnover”, much less any turnover. Even if the assessee was an exclusive dealer in exports, the said commission was not includible as it did not spring from the “turnover”. Just as interest, commission etc. did not emanate from the “turnover”, so also excise duty and sales tax did not emanate from such turnover. Since excise duty and sales tax did not involve any such turnover, such taxes had to be excluded. Commission, interest, rent etc. do yield profits, but they do not partake of the character of turnover and, therefore, they were not includible in the “total turnover”. The above discussion shows that income from rent, commission etc. cannot be considered as part of business profits and, therefore, they cannot be held as part of the turnover also. In fact, in Civil Appeal No.4409 of 2005, the above proposition has been accepted by the A.O. [See: page no.24 of the paper book], if so, then excise duty and sales tax also cannot form part of the “total turnover” under Section 80HHC(3), otherwise the formula becomes unworkable. In our view, sales tax and excise duty also do not have any element of “turnover” which is the position even in the case of rent, commission, interest etc. It is important to bear in mind that excise duty and sales tax are indirect taxes. They are recovered by the assessee on behalf of the Government. Therefore, if they are made relatable to exports, the formula under Section 80HHC would become unworkable. The view which we have taken is in the light of amendments made to Section 80HHC from time to time.
17. Before concluding we may state that profits are of three types, namely, book-profits, statutory profits and actual profits. The amendments toSection 80HHC(3) indicate exclusion of book profits. For example, commission, interest, etc. do form part of the profit and loss account but for the purposes of calculation of profits derived from local sales and exports, they stand excluded. The difficulty arises because the formula is based on the Hybrid System of Profits, namely, actual and statutory profits. Therefore, this judgement should be read in the context of the above parameters. Our reasoning in this judgement is confined to the work ability of the formula in Section 80HHC(3) of the Act as it stood at the material time.”
13. Whereas the learned Standing counsel Mrs. Hemalatha has placed reliance upon the judgement rendered by the Supreme Court in Commissioner of Income Tax vs. K.Ravindaranathan Nair (Civil Appeal No. 5173 of 2007).
14. At the very out set, it is only appropriate for us to notice that, the Supreme Court after noticing the ratio laid down by it in Lakshmi Machine Woks case, in paragraphs 21 and 23 of the Judgement in Ravindaranathan Nair’s case, has clearly brought out that every receipt is not income and every income need not necessarily include the element of export turnover and while applying Section 80HHC, one has to ascertain as to whether the receipt has an attribute to export turnover, for the Assessee to exclude the same from the gross total income chargeable to Tax. Relevant principle has been brought out in the following words:-
“21. At the outset, we may state that, in the present case, we are dealing with the law as it stood during assessment year 1993-94. At that time Section 80HHC(3) of the I.T. Act constituted a Code by itself. Subsequent amendments have imposed restrictions/ qualifications by which the said provision has ceased to be a code by itself. In the above formula there existed four variables, namely, business profits, export turnover, total turnover and 90% of the sums referred to in clause (baa) to the said Explanation. In the computation of deduction under Section 80HHC all four variables had to be taken into account. All four variables were required to be given weightage. The substitution of Section 80HHC(3) secures profits derived from the exports of eligible goods. Therefore, if all the four variables are kept in mind, it becomes clear that every receipt is not income and every income would not necessarily include element of export turnover. This aspect needs to be kept in mind while interpreting clause (baa) to the said Explanation. The said clause stated that 90% of incentive profits or receipts by way of brokerage, commission, interest, rent, charges or any other receipt of like nature included in Business Profits, had to be deducted from Business Profits computed in terms of Sections 28 to 44D of the I.T. Act. In other words, receipts constituting independent income having no nexus with exports were required to be reduced from Business Profits under clause (baa). A bare reading of clause (baa)(1) indicates that receipts by way of brokerage, commission, interest, rent, charges etc. formed part of gross total income being Business Profits. But for the purposes of working out the formula and in order to avoid distortion of arriving export profits clause (baa) stood inserted to say that although incentive profits and “independent incomes” constituted part of gross total income, they had to be excluded from gross total income because such receipts had no nexus with the export turnover. Therefore, in the above formula, we have to read all the four variables. On reading all the variables it becomes clear that every receipt may not constitute sale proceeds from exports. That, every receipt is not income under the I.T. Act and every income may not be attributable to exports. This was the reason for this Court to hold that indirect taxes like excise duty which are recovered by the taxpayers for and on behalf of the government, shall not be included in the total turnover in the above formula (See: Commissioner of Income Tax, Coimbatore v. M/s. Lakshmi Machine Works – 2007(6) Scale 168).
23. Before concluding we state that the nature of every receipt needs to be ascertained in order to find out whether the said receipt forms part of/or that it has an attribute of an export turnover. When an indirect tax is collected by the taxpayer on behalf of the government the tax recovered is for the government. It may be an income in the conceptual sense or even under the I.T. Act but while working out the formula under Section 80HHC(3) of the I.T. Act and while applying the four variables one has to ascertain whether the receipt has an attribute of export turnover. An indirect tax like excise duty does not have that element of export turnover as understood in the above formula. As stated above, it is recovered by the taxpayer on behalf of the government. Therefore, in the present cases, our judgement in Commissioner of Income Tax, Coimbatore v. M/s. Lakshmi Machine Works – 2007(6) Scale 168, has no application.”(Emphasis is ours)
15. Applying the ratio in Ravindaranathan Nair’s case, to the fact situation prevailing in the present case, the refund of Sales Tax obtained by the Assessee has no direct bearing or attribute of the export component of the business carried on by the Assessee and hence the Assessee cannot seek to retain the same by deriving the benefit spelt out in Section 80HHC.
16. The reference is answered accordingly.
17. We find no merit in this appeal and accordingly it stands dismissed. No costs.