Holding

A deduction under Section 80HHC is permissible only if the assessee demonstrates a positive profit; it is unavailable where the export business incurs a loss.

Summary

Induflex Products (P) Ltd, an export house, claimed a deduction under Section 80HHC of the Income Tax Act, 1961 despite declaring a loss on its export of trading goods. The Assessing Officer allowed the deduction, but the Commissioner ordered its withdrawal. The Income Tax Appellate Tribunal reinstated the benefit, and the High Court dismissed the Revenue’s challenge. The Supreme Court was asked to decide whether a deduction under Section 80HHC can be claimed when the assessee’s export business shows a negative profit. The Court held that the term “profits” in the provision denotes a positive profit; if the export business incurs a loss, the deduction is unavailable. Since the High Court had not examined whether any positive profit existed, the matter was remitted to the High Court for fresh consideration.

Issues considered

Whether a deduction under Section 80HHC of the Income Tax Act, 1961 is available when the assessee’s export business records a loss
Whether the High Court had determined the existence of a positive profit for the purpose of Section 80HHC

Legislation cited

Income Tax Act, 1961s. 143(3), s. 260A, s. 263, s. 80HHC(1), s. 80HHC(3)

Subjects

Section 80HHCexport incentiveprofit requirementtax deductionlossIncome Tax Actassessmenttax litigation

Judgment

INCOME TAX OFFICER, BANGALORE A
v.
MIS. INDUFLEX PRODUCTS (P) LTD.

DECEMBER 8, 2005

[S.B. SINHA AND R.V. RAVEENDRAN, JJ.] B

Income Tax Act, 1961-Section 80HHC-Export business-Declaration
by assessee incurring loss in the export of trading goods-Claiming benefit
under the provision-Benefit allowed by Assessing Officer but denied by the C
Commissioner-Tribunal as well as High Court allowed the benefit-In appeal,
held: In order to avail benefit u/s 80 HHC profit must be shown to be positivt;
profit-Benefit is not available in the event loss is incurred-Since it has not
been found by High ·Court whether the assessee had shown any positive
profit, matter remitted to High Court to consider this aspect.
D
Respondent-assessee was engaged in the business of export. It declared
that its profits out of export of trading goods were 'negative' i.e. it incurred
loss and therefore, it claimed benefit of Section 80 HHC of Income Tax Act,
1961. Assessing Officer allowed the benefit. Commission issued a notice to
the assessee on the premise that the order of assessment was erroneous and
prejudicial to Revenue and directed the Assessing Officer to withdraw its E
order. Appeal of the assessee thereagainst was allowed by the Appellate
Tribunal. The appeal of the Revenue against the order of Tribunal was
dismissed by High Court. Hence the present appeal.

Allowing the appeal and remitting the matter to High Court, the Court F
HELD: 1. The provisions under Section 80 HHC{l) and (3) of Income
Tax Act, 1961 was brought in the statute book for the purpose of providing
incentive to export houses but the same would not mean that even if the
assessee incurs a loss instead of profit, he would be entitled to the benefit
thereof. [697-C, DJ G
2. The expression "profits" used in Section 80 HHC connotes positive
profit. It is a profit earned from the said business alone which can be subject
matter of exemption. A fortiori if a profit is not earned, the question of
claiming exemption would not arise. [697-El
693 H
694 SUPREME COURT REPORTS [2005] SUPP. 5 S.C.R.

A 3. It is no doubt true that the term 'profit' implies positive profit which
has to be arrived at after taking into consideration the profit earned from
export of both self-manufactured goods and the trading goods and the profits
and losses in both the trades have, thus, to be taken into consideration. In the
event, if it is found that a loss has occurred, sub-section (3) of Section 80
B UPC will have no application. However, it does not appear from the rrcords as
to whether such an exercise was undertaken or not The Appellants themselves
averred that for the assessment year in question, the Respondent had earned
profit in its export business. Yet again in the order passed by the
Commissioner oflncome Tax, the contention of the assessee was noticed that
though the assessee earned export profit, it resulted in the negative figure. It
C may, therefore, be necessary to consider this aspect of the matter as to whether
the Appellant had shown any positive profit or not; as such a clear finding
does not appear to have been arrived at by the High Court (698-B-G]

IPCA Laboratory Ltd v. Dy. Commissioner of Income Tax, Mumbai,
(2004] 12 sec 742, relied on.
D
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 7307 of2005.

From the Judgment and Order dated 12.8.2003 of the Kamataka High
Court in LT.A. No. 14 of2003.

E Mohan Parasaran, Additional Solicitor General, T.V. Ratnam and B.V.
Balaram Das for the Appellant.

The Judgment of the Court was delivered by

S.B. SINHA, J. Leave granted.
F
The Respondent is an assessee of Income Tax. It is engaged in the
business of expert. It claimed benefit of Section 80HHC of the Income Tax Act,
1961 (Act). A declaration was made by it that its profits out of export of
trading goods were 'negative' i.e. it incurred loss. The said benefit having
been allowed by the assessing officer while making assessment under Section
G 143(3) of the Act, the Commissioner of Income Tax in exercise of his power
conferred upon him under Section 263 thereof issued a notice to the assessee
on the premise that the said order of assessment was erroneous and prejudicial
to revenue. Upon hearing the assessee, by an order dated 3 .3 .1999; a direction
was issued to the assessing officer to withdraw the said relief. The Respondent
H preferred an appeal thereagainst before the Income Tax Appellate Tribunal,
INCOME TAX OFFICER, BANGALORE v. INDUFLEX PRODUCTS (P) LTD. [SINHA, J.J 695

Bangalore. By an order dead 19.8.2002, the said appeal was allowed following A
a decision of Cochin Bench of the Tribunal in the case of A.M Mossa v. CIT,
in ITA No. 498/Coch/1995. The appeal was preferred by the Appellant herein
before the High Court in terms of Section 260A of the Act. The substantial
question of law raised in the said appeal was as under:

"Whether, under the facts and circumstances of the case the Tribunal B
was justified in allowing the deduction under Section 80HHC of the
Act to the assessee Company in spite of not fulfilling the pre-condition
which is mandatory in order to obtain such deduction?"

The Appeal was dismissed in limine by the High Court. The Appellant
is, thus, in appeal before us. C
Sub-section (l) and sub-section (3) of Section 80HHC reads as under:

"(1) Where an assessee, being an Indian complany 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 D
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 to the extent of profits, referred to in sub-
section (l B), derived by the assessee from the export of such goods
or merchandise:
E
Provided that if the assessee, being a holder of an Export House
Certificate or a Trading House Certificate (hereafter in this section
referred to as an Export House of a Trading House, as the case may·
be,) issues a certificate referred to in clause (b) of sub-section (4A),
that in respect of the amount of the export turnover specified therein, F
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
derived by the assessee from the export of trading goods, the same
proportion as the amount of export turnover specified in the said
certificate bears to the total export turnover of the assessee in respect G
of such trading goods."

•••••••••
"(3) For the purposes of sub-section (I),
H
A
696 SUPREME COURT REPORTS [2005] SUPP. 5 S.C.R.

(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;
B
(b) where the export out of India is of trading goods, the profits
derived from such export shail be the export turnover in respect of
such trading goods as reduced by the direct costs and indirect costs
attributable to such export;

c (c) where the export out of India is of goods or merchandise
manufactured or processed by the assessee and of trading goods, the
profits derived from such export shall,- •,

(i) in respect of the goods or merchandise manufactured or processed
by the assessee, be the amount which bears to the adjusted profits
D of the business, the same proportion as the adjusted export turnover
in respect of such goods bears to the adjusted total turnover of the
business carried on by the assessee; and

(ii) in.respect of trading goods, be the export turnover in respect of
such trading goods as reduced by the direct and indirect costs
E attributable to export of such trading goods:
'--

Provided that the profits computed under clause (a} or clause (b) or
clause (c) of this sub-section shall be further increased by the amount
which bears to ninety per cent of any sum referred to in clause (iii-
a) (not being profit on sale of a licence acquired from any other
F person), and clauses (iii-b) and (iii-c) of Section 28, the same proportion
as the export turnover bears to the total turnover of business carried
on by the assessee.

Explanation. For the purposes of this sub-section,

G (a) 'adjusted export turnover' means the export turnover as reduced
by the export turnover in respect of trading goods;

(b) 'adjusted profits of the business' means the profits of the business
as reduced by the profits derived from the business of export out of
India of trading goods as computed in the manner provided in clause
,/

H (b) of sub-section (3 );
INCOME TAX OFFICER, BANGALORE v. IN DU FLEX PRODUCTS (P) LTD. [S!NHA,J.] 697

(c) 'adjusted total turnover' means the total turnover of the business A
as reduced by the export turnover in respect of trading goods;

(d) 'direct costs' means costs directly attributable to the trading
goods exported out of India including the purchase price of such
goods;
B
(e) 'indirect costs' means costs, not being direct costs, allocated in
the ratio of the export turnover in respect of trading goods to the total
turnover;

(f) 'trading goods' means goods which are not manufactured or
processed by the assessee." C
The aforementioned provision was brought in the statute book for the
purpose of providing incentive to export houses but the same would not
mean that even if the assessee incurs a loss instead of profit, he would be
entitled to the benefit thereof.
D
From a perusal of the aforementioned provision, it is evident that the
profits derived from the export of goods which would be subject-matter of
exemption thereunder must be the profits out of the business carried on by
the assessee. The expression "profits" used in the aforementioned provision
connotes positive profit. It is a profit earned from the said business alone
which can be the subject-matter of exemption. A fortiori if a profit is not E
earned, the question of claiming exemption would not arise.

The question came up recently before this Court in IPCA Laboratory
Ltd v. Dy. Commissioner ofIncome Tax, Mumbai., [2004] 12 SCC 742. In that
case, the taxable income before the deductions under Chapter VI-A came to
Rs. 4.39 crores. The Appellants therein, however, claimed various deductions F
in terms of Section 80HHC to the extent of Rs. 3.78 crores. It was found that
the sun of Rs. 3.78 crores claimc.d for deduction was the profit for exports of
self-manufactured goods. It was further found that from the exports of trading
goods there was a loss of rs. 6.86 crores. The question which arose for
consideration was as to whether the Appellants was entitled to deduction G
under Section 80HHC in respect of the sun of Rs. 3.78 cores ignoring the loss
of Rs. 6.86 crores. This Court repelled the contention that even when the
profits are to be reduced by the losses in cases where an export house has
disclaimed its turnover in favour of a supporting manufacturer, the turnover
of the exporter gets reduced to the extent disclaimed opining that in computing
total income the entire turnover is taken into account even though there is H
698 SUPREME COURT REPORTS [2005] SUPP. 5 S.C.R.

A a disclaimer. The Court further negatived the submission of the assessee that
even loss in negative profit.

IPCA Laboratory (supra) is an-authority for the proposition that adjusted
profit of business would be a profit as reduced by the profit derived from
business of exports out of India of trading goods. It is no doubt true that the
B term 'profit' implies positive profit which has to be arrived at after taking into
consideration the profit earned from export of both self-manufactured goods
and the trading goods and the profits and losses in both the trades have,
thus, to be taken into consideration. In the event, if it is found that a loss
has occurred, sub-section (3) of Section 8-HHC will have no application.

C However, it does not appear from the records as to whether such an
exercise was undertaken or not. The Appellants themselves in the list of dates
averred that for the assessment year 1994-95, the Respondent had earned
profit in its export business.

Yet again in the order dated 03.03.1999 passed under Section 263 of the
D Income Tax Act by the Commissioner of Income Tax, the contention of the
assessee was noticed in the following terms:

"The learned Counsel for the assessee who appeared on the
appointed day, contended that, though the assessee earned export
profit, it resulted in the negative figure owing to the provisions in Sec.
E 80 HHC(3); that, in such a situation, the profit should be taken at Nil
and relief should be allowed having regard to the export incentives
(viz. advance licences); that as section 80 HHC is benefit giving
section it should be liberally construed; that the Appellate Tribunal
in the case of A.M. Mossa v. CIT ITAT Cochin Bench ITA No.498/
Coch/1995, support this view, and that the assessment order is not
F erroneous."

It may, therefore, be necessary, in our opinion, to consider this aspect
of the matter as to whether the Appellant had shown any positive profit or
not as such clear finding does not appear to have been arrived at by the High
Court.
G
We are, therefore, of the opinion that the matter should be considered
from this angle by the High Court. This appeal is, therefore, allowed and the
matter is remitted to the High Court for consideration of the matter afresh in
the light of the observations made hereinbefore.

H K.K.T. Appeal allowed.