Supreme Court of India
IPCA LABORATORY LTD.versusDEPUTY COMMISSIONER OF INCOME TAX, MUMBAI
- Citation
- 2004 INSC 161
- Decided
- 11 March 2004
- Disposal
- Dismissed
- Bench
- S N VARIAVA
Holding
A deduction under Section 80HHC is available only if the net profit, after setting off profits and losses from both self‑manufactured and trading goods, is positive; otherwise no deduction is permitted.
Summary
IPCA Laboratory Ltd., an export house, exported self‑manufactured goods (earning a profit of Rs 3.78 crore) and trading goods (incurring a loss of Rs 6.86 crore). It claimed a deduction under Section 80HHC of the Income Tax Act for the profit, having issued disclaimer certificates to supporting manufacturers for the trading‑goods exports. The Assessing Officer held that the net result was a loss and disallowed the deduction; the Commissioner (Appeals), the ITAT and the Bombay High Court upheld that decision. The Supreme Court examined the meaning of "profit" in Section 80HHC(1) and 80HHC(3), the effect of a disclaimer, and the overriding nature of Section 80AB. It held that a deduction is permissible only when the aggregate profit after setting off losses from both self‑manufactured and trading goods is positive; a net loss precludes any deduction, and the disclaimer does not reduce the exporter’s turnover. Consequently, the appeal was dismissed.
Issues considered
- Whether a deduction under Section 80HHC can be claimed by ignoring the loss incurred on export of trading goods.
- Interpretation of the term "profit" in Section 80HHC(1) and 80HHC(3)(a)-(c).
- Effect of a disclaimer certificate on the computation of turnover and profit.
- Whether Section 80AB overrides the provisions of Section 80HHC.
Legislation cited
- Income Tax Act, 1961s. 288(2), s. 808(5), s. 80AB, s. 80HHC(1), s. 80HHC(3)(a), s. 80HHC(3)(b), s. 80HHC(3)(c)(i), s. 80HHC(3)(c)(ii)
Subjects
Section 80HHCprofit and loss set‑offexport housedisclaimer certificatedeductionIncome Tax ActSection 80ABnet profitcomputation of total income
Judgment
- IPCA LABORATORY LTD.
v.
DEPUTY COMMISSIONER OF INCOME TAX, MUMBAI
A
MARCH 11, 2004
[S.N.VARIA VA AND H.K. SEMA, JJ.] B
--- Income Tax Act, 1961:
Section 80HHC-Jncome tax-AY 1996-97-Profits retained for export
c
--- business-Deduction in respect of~Entitlement-Self manufactured goods as
well as trading goods-Export of-Total income-Computation of-Assessee,
an Export House, exported goods which were self-manufactured as well as
goods manufactured by supporting manufacturers i.e. trading goods~Assessee
derived profit from export of self-manufactured goods and incurred loss from
export of trading goods-Assessee had issued certificates of disclaimer in D
favour of supporting manufacturers-Assessee claimed deduction of the said
profit-Assessing Officer disallowed the deduction-I~' view of the disclaimer
and held that there was a net loss from export of goods~orrectness of-
Held: The word "profit" in S. 80HHC(l), 3(a) and 3(b) means a positive
profit-In calculating the positive profit both the profits and the losses from
the export of self-manufactured goods as well as trading goods have to be E
taken into consideration-If there is a net profit, assessee is entit~ed to
- deduction-If there is a net loss assessee is not entitled to deduction.
Section 80AB-Scope and ambit of-Held: S. 80AB prevails over all
other Sections in Chapter VIA ofthe Act-Hence, S. 80HHC would be governed F
by S. 80AB.
Section BOHHC(l) proviso-Disclaimer-Effect on turnover-Held: A
disclaimer enables an export house to pass on deduction-It, in no w~,
reduces the turnover of an export house-Jn computing the total income the
entire turnover is taken into account even though there is a disclaimer. G
Words and Phrases:
"Profit"-Meaning of-In the context of S. 80HHC of the Income Tax
Act, 1961.
1075 H
1076 SUPREME COURT REPORTS [2004) 2 S.C.R.
A The appellant, an export house, exported goods that were self-
manufactured as well as goods manufactured by supporting manufacturers
i.e. trading goods. The appellant derived a profit from the export of self- "
manufactured goods and incurred a loss from the export of trading goods.
The appellant claimed a deduction under Section 80HHC of the Income
B Tax Act, 1961 in respect of the said profit for the assessment year 1996-
97. It was found that the appellant had issued certificates of disclaimer in
favour of the supporting manufacturers in respect of the entire export of
trading goods. The Assessing Officer, therefore, held that there was a net
loss from export of goods and disallowed the deduction. The Commissioner
(Appeals), the Income Tax Appellate Tribunal and the High Court
C dismissed the appeals filed by the appellant. Hence the appeal.
The following question arose before the Court:-
Whether an assessee is entitled to deduction under Section 80HHC
of the Income Tax Act, 1961 in respect of the profit by ignoring the loss?
D
Dismissing the appeal, the Court
HELD: 1. Section 80HHC of the Income Tax Act, 1961 has been
incorporated with a view to providing incentive to the export houses. Even
though a liberal interpretation has to be given to such a provision the
E interpretation has to be as per the wordings of this Section. If the wordings
of a Section are clear then ben~fits, which are not availabl.e under that
Section, cannot be conferred by ignoring or misinterpreting the words in
that Section. (1086-C-D) ---
1
2. The word "profit" in section 80HHC(l) and Sections 80HHC(3)(a)
F and 3(b) means a positive profit. In other words if there is a loss then no
deduction would be available under Section 80HHC(l) or 3(a) or 3(b). In
arriving at the figure of positive profit, both the profits and losses will
have to be considered. If the net figure is a positive profit then the assessee
will be entitled to a deduction. If the net figure is a loss then the assessee
G will not be entitled to a deduction. Section 80HHC(3)(c) deals with the
cases where the export is of both self-manufactured goods as well as
trading goods. A plain reading of Section 80HHC(3)(c) shows that "profits
from such exports" has to be profits of exports of self-manufactured goods
plus profits of exports of trading goods. The profit is to be calculated in
the manner laid down in Section 80HHC(3)(c)(i) and (ii). The opening
H words "profit derived from such exports" together with the word "and"
IPCA LABORATORY LTD. v. DY. COMMR. OF INCOME TAX 1077
clearly indicate that the profits have to be calculated by counting both A
the exports. It is clear from a reading of Section 80HHC(3)(1) that a
deduction can be permitted only if there is a positive profit in the exports
of both self-mariufactured goods as well as trading goods. If there is a loss
in either of the two then that loss has to be taken into account for the
purposes of computing the profits. (1086-F-H; 1087-A)
B
Sea Pearl Industries v. CIT(2001) Vol. 247 ITR 578 and Bajaj Tempo
ltd v. CIT, (1992) Vol. 196 ITR 188, referred to.
-
3. Under Section 80HHC(3)(1) the deduction is to be given in
computing the total income of the assessee. In computing the total income C
of the assessee both the profits as well as the losses will have to be taken
into consideration. (1087-B)
4.1. Section 80AB is also in Chapter VI-A of the Act. It starts with
the words "where any deduction is required to be made or allowed under
any Section of this Chapter". This would include Section 80HHC. Section D
80AB further provides that "notwithstanding anything contained in that
. Se~tion". Thus Section 80AB has been given an overriding effect over all
other Sections in Chapter VI-A. Section 80HHC does not provide that its
provisions are to prevail over Section 80AB or over any other provision
of the Act. Section 80HHC would thus be governed by Section 80AB.
[1087-FJ E
CIT v. Shirke Construction Equipments Ltd (2000) Vol. 246 ITR 429
(Born.) and CIT v. Smt. T.C. Usha, 2000 (137) Taxman 297 (Ker.),
overruled.
4.2. Section 80AB makes it clear that the computation of income has F
to be in accordance with the provisions of the Act. If the income has to be
computed in accordance with the provisions of the Act, then not only
profits but also losses have to be taken into consideration. (1087-G)
5. Even under Section 80HHC(3)(c)(i) the profit is to be adjusted
profit of business. The adjusted profit of the business means a profit as G
reduced by the profit derived from the business of exports out of India of
trading goods. Thus in calculating the profits, under Section 80HHC(3)
(c)(i), one necessarily has to reduce the profits.under Section 80HHC(3)
(c)(ii). The term 'profit' means positive profit. Thus if there is loss then
those losses in export of trading goods have to be adjusted. They cannot H
1078 SUPREME COURT REPORTS [2004] 2 S.C.R.
A be ignored. A plain reading of Section 80HHC makes it clear that in
arriving at profits earned from export of both self-manufactured goods
and trading goods, the profits and losses in both the trades have to be taken
into consideration. If after such adjustments there is a positive profit the
assessee would be entitled to deduction under Section 80HHC(i). If there
B is a loss he will not be entitled to any deduction. (1088-A-C)
6. It is not necessary that the word "profit" in Section 80HHC must
have the same meaning in the entire Section. The meaning of the word
"profit" will depend on the context in which it is used. In Section
-
80HHC{l) it is admittedly used to indicate positive "profit" because the
C deduction will only be of a positive.profit. Section 80HHC(3) provides how
the profits are to be worked out in computing the total income. For
purposes of such computation both profit and losses have to be taken into
account. Thus the word "profit" in Section 80HHC(3) will mean profits
after taking into account losses, if any. More importantly, the term "profit"
in Section 80HHC(3)(1) and (3) means a positive profit worked ~ut after
D taking into consideration the losses, if any. Thus the word "profit" has
the same meaning in Section 80HHC (1) and (3). (1088-D-F)
7. The proviso to Section 80HHC(l) enables a disclaimer only to
enable the export house to pass on deductions. It, in no way, reduces the
turnover of the export house. In computing the total income, the entire
E turnover is taken into account even though there is a disclaimer. Even after
disclaimer the turnover has remained the turnover of the export house
i.e. the appellant. The disclaimer is only for purposes of enabling the export
house to pass on the deduction to the supporting manufacturer. It follows
that if no deduction is available, because there is a loss, then the export
F house cannot pass on or give credit of such non-existing deduction to a
supporting manufacturer. [1089-B-D)
CIT v. Harprasad and Co. P. Ltd., (1975) Vol. 99 ITR 118, held
inapplicable.
G CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1697 of
2003._
From the Judgment and Order dated 2.7.2001 of the Bombay High
Court in LT.A. No. 131 of 2001.
H Sohrab E. Dastur, F.V. Irani and Rustom B. Hathikhanawala for the
IPCA LABORATORY LTD. v. DY. COMMR. OF INCOME TAX (VARIAVA ,J.] 1079
Appellant. A
Rajiv Tyagi, Tufail A. Khan and B.V.Balram for the Respondents.
The Judgment of the Court was delivered by
S. N. VARIA VA, J. This Appeal is against a Judgment dated 2nd July, B
2001 passed by the Bombay High Court.
Briefly stated the facts are as follows:
The Appellants are a Export House. They hold a certificate issued by
the Chief Controller of Imports and Exports. For the Assessment Year 1996- C
97 ·the Appellants filed a return of income declaring Nil income. It is an
admitted position that the taxable income, before the deductions under Chapter
VIA, was Rs. 4.39 crores. However, against this taxable income the Appellants
claimed various deductions. One such deduction was under Section 80 HHC
for Rs. 3.78 crores. During the assessment proceedings it was found that the
Appellants were exporting goods which were self manufactured as well as D
goods manufactured by supporting manufacturers i.e. trading goods. It was
found that the sum of Rs. 3.78 crores, which had been claimed as a deduction,
was the profit from exports of self manufactured goods. It was found that
from the exports of trading goods there was a loss of Rs. 6.86 crores. It was
found that the Appellants had issued certificates of disclaimer in favour of E
the supporting manufacturers in respect of the entire export of trading goods.
The Assessing Officer therefore held that there was a net loss from export of
goods and disallowed the deduction of Rs. 3.78 crores. The Commissioner
(Appeals) dismissed the Appeal filed by the Appellants on 11th October,
1999. On 29th December, 2000 the Income Tax Appellate Tribunal dismissed
the Second Appeal. By the impugned Judgment the Bombay High Court has F
dismissed the Appeal filed under Section 260A of the Income Tax Act.
The question for consideration is whether the Appellants are entitled to
deduction under Section 80HHC in respect of the sum of Rs. 3.78 crores by
ignoring the loss of Rs. 6.86 crores. It therefore becomes necessary to look
at Section 80HHC of the Income Tax Act. The relevant portions of Section G
80HHC reads as follows:
"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 H
1080 SUPREME COURT REPORTS [2004) 2 S.C.R.
A 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 to the extent
of profits, referred to in sub-section (Im] derived by the assessee
from the export of such goods or merchandise :
B
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 or a Trading House, as the case may
be,) issues a certificate referred to i.n clause (b) of sub-section (4A),
c that in respect of the amount of the export turnover specified therein,
the deduction under this sub-section is to be allowed to a supporting
manufacturer, then the amount of deduction in the case of the assessee
--
shall be reduced by such amount which bears to the [total profits
derived by the assessee from the export of trading goods, the same
proportion as the amount of export turnover specified in the said
D certificate bears to the total export turnover of the assessee in respect
of such trading goods.]
(lA) Where the assessee, being a supporting manufacturer, has during
the previous year, sold goods or merchandise to any Export House or
Trading House in respect of which the Export House or Trading
E House has issued a certificate under the proviso to sub-section (l ),
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 (IB)],
-
derived by the assessee from the sale of goods or merchandise to the
Export House or Trading House in respect of which the certificate
F has been issued by the Export House or Trading House.
xxx xxx xxx
xxx xxx xxx
G (3) For the purposes of sub-section (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
H respect of such goods bears to the total turnover of the business
IPCA LABORATORY LTD. 1·. DY. COM MR OF INCOME TAX [VARIAVA, J] J 08 J
carried on by the assessee; A
(b) where the export out of India is of trading goods, the profits
derived from such export shall be the export turnover in respect
of such trading goods as reduced by the direct costs and indirect
costs attributable to such export;
(c) where the export out of India is of goods or merchandise B
-- 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 of the business, the same proportion as the C
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 D
of such trading goods as reduced by the direct and indirect
costs 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 (iiia) E
(not being profits on sale of a licence acquired from any other person),
and clauses (iiib) and (iiic), 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, -
F
(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 G
provided in clause (b) of sub-section (3);
(c) "adjusted total turnover" means the total turnover of the
business as reduced by the export turnover in respect of trading
goods;
H
1082 SUPREME COURT REPORTS [2004] 2 S.C.R.
A (d) "direct costs" means costs directly attributable to the trading
goods exported out of India including the purchase price of such
goods;
(e) "indirect costs" means costs, not being direct costs, allocated
in the ratio of the export turnover in respect of trading goods to
B the total turnover;
(f) "trading goods" means goods which are not manufactured or ---
processed by the assessee.
(3A) For the purposes of sub-section (IA), profits derived by a
supporting manufacturer from the sale of goods or merchandise shall
c be, -
(a) in a case where the business carried on by the supporting
manufacturer consists exclusively of sale of goods or merchandise
to one or more Export Houses or Trading Houses, the profits of
the business;
D
(b) in a case where the business carried on by the supporting
manufacturer does not consist exclusively of sale of goods or
merchandise to one or more Export Houses or Trading Houses,
the amount which bears to the profits of the business the same
proportion as the turnover in respect of sale to the respective
E Export House or Trading House bears to the total turnover of the
business carried on by the assessee.
(4) The deduction under sub-section (I) shall not be admissible unless
the assessee furnishes in the prescribed form, along with the return of
income, the report of an accountant, as defined in the Explanation
F
--
below sub-section (2) of section 288, certifying that the deduction
has been correctly claimed in accordance with the provisions of this
section."
Mr. Dastur submitted that Section 80 HHC appears in Chapter VIA of
G the Income Tax Act. He submitted that Chapter VIA provides for deduction
to be made in computing the total income. He took us through the various
provisions of Chapter VIA and submitted that these provisions were enacted
for encouraging business out of India so that foreign exchange is earned. He
submitted that these provisions are meant to be an incentive for earning
foreign exchange. He submitted that with this aim in mind deductions were
H given (a) under Section 80 HHB for profits from projects outside India; (b)
ll'CA LABORATORY LTD. 1·. DY. COM MR. OF INCOME TAX [VARIAVA. J.] I 083
under Section 80 HHC for profits from exports; (c) under Section 80 HHD A
for hotels and tour operators; (d) under Section 80 HHE from exports of
computer software; (e) under Section 80 HHF from exports or transfer of
film software; (t) under Section 80-0 for royalties etc. from foreign enterprises;
(g) under Section 80R for deduction of remuneration from foreign sources of
professors, teachers etc.; (h) under Section 80RR for deduction of professional B
income from foreign sources and (i) under Section 80RRA for remuneration
- received for services rendered outside India. He submitted that these incentives
were given as the Parliament considered earning of foreign exchange to be
in national interest and in the interest of our society. Mr. Dastur submitted
that as the Appellants were exporting goods manufactured by them as well
as trading goods the deduction under Section 80HHC had to be computed in C
the manner set out in Sub-section (3)( c). He submitted that the provision
having been enacted to give an incentive for earning foreign exchange the
Section must be given an interpretation which would further that object. He
pointed out that from the export trade the Appellants had brought in foreign
exchange to the tune of approximately Rs. 81,62,49,276. D
Mr. Dastur relied upon the case of Sea Pearl Industries v. Commissioner
of Income Tax reported in (200 I) Vol. 24 7 ITR 578. In this case the Appellant
(therein) was not an export house and therefore could not avail of special
facilities granted to export houses. The Appellant however entered into an
agreement with an export house under which the Appellant exported sea food E
in the name of the export house against Purchase Orders placed on the export
house by foreign buyers. The question was whether the Appellan,t (therein)
could claim deduction under Section 80HHC in respect of exports made by
them on account of the export house. This Court held that the object of
Section 80HHC was to grant an incentive to the earners of foreign exchange
and that the matter therefore had to be considered with reference to this F
object. Section 80HHC at the relevant time read as follows:
"80HHC. (l) Where the assessee, being an Indian company or a
person (other than a company), who is resident in India, exports out
of India during the previous year relevant to an assessment year any
goods or merchandise to which this section applies, there shall, in G
accordance with and subject to the provisions of this section, be
allowed, in computing the total income of the assessee, the following
deductions, namely:-
(a) a deduction of an amount equal to one per cent of the export
turnover of such goods or merchandise during the previous year; and H
1084 SUPREME COURT REPORTS (2004] 2 S.C.R.
A (b) a deduction of an amount equal to five per cent of the amount
by which the export turnover of such goods or merchandise during
the previous year exceeds the export turnover of such goods or
merchandise during the immediately preceding previous year.
(2)(a) This section applies to all goods or merchandise (other
B. than those specified in clause (b )) if the sale proceeds of such goods
or merchandise exported out of India are receivable by the assessee
in convertible foreign exchange."
This Court negatived the argument that, because the Appellant (therein)
C
received commission on the sales, the words "sale proceeds of such goods"
were to be construed to mean sale proceeds ultimately received. On a
construction of Section 80HHC this Court held that if the contention of the
-
Appellant (therein) were to be upheld, it would mean that not only the export
house but also the Appellant could claim deduction under Section 80HHC in
respect of same amount. It was held that such an outcome would be contrary
D to the language of the Section itself. This Court therefore dismissed the claim
of the Appellant (therein) and held that the Appellant was not entitled to the
benefits of Section 80HHC. In our view, far from assisting the Appellants,
this case is against them. It shows that even though Section 80HHC ha~ to
be construed in the light of the object of giving incentives, it still has to be
interpreted as per its language. An interpretation which leads to an absurd
E result or a result not contemplated by its language cannot be given.
Mr. Dastur also relied upon the case of Commissioner of Income Tax
v. Shirlee Construction Equipments Ltd. reported in (2000) Vol. 246 ITR 429.
In this case the Bombay High Court has held that Section 80HHC is a complete
code in itself and that it is not controlled by Section 80AB. It was held that
F profits had to be computed under Section 29 and Section 72 was not applicable.
It was held that carry forward losses could not be set off for computing
profits for the purpose of Section 80HHC. In this case it was also noticed that
the object was to encourage exports.
G Mr. Dastur also relied upon the case of Bajaj Tempo Ltd. v.
Commissioner of Income Tax reported in (1992) Vol. 196 ITR 188. In this
case it has been held that provisions granting incentive should be construed
liberally and that if a literal construction would defeat the purpose of the
section then it becomes necessary to resort to a construction which is reasonable
and purposeful to make the provision meaningful.
H
IPCA LABORATORY LTD. v. DY. COM MR. OF INCOME TAX IVARIA VA . .I] I 085
=---- Mr. Dastur also relied upon a Circular issued by the Board bearing No. A
421 dated I 2th June, 1985 wherein it has been mentioned that Section 80HHC
is a provision relating to incentives for exporters and has been incorporated
with a view to providing its exporters with requisite resources for
modernization, technological upgradation, product development and other
activities.
B
.,,,.___ Mr. Dastur also relied upon a Judgment in the case of Commissioner
of Income-tax v. Smt. TC.Usha, reported in 2003(137) Taxman 297. In this
case the Kerala High Court was considering an identical question i.e. whether
the profits earned from export of self manufactured goods were to be set off
-- against Joss incurred in export of trading goods. The Kerala High Court has
accepted arguments similar to those made by Mr. Dastur and has concluded
that the losses were not to be set off against the profits earned from export
c
of own manufactured goods. In coming to this conclusion the Kerala High
Court has proceeded on the footing that Section 80HHC is a self contained
code and the proceeds have to be worked out strictly in accordance with the
provisions. D
Mr. Dastur submitted that a reading of Section 80HHC would show
that where the assessee exports goods manufactured by him he would be
covered by sub-clause (3)(a) and only the profits of such business would be
taken into account. He submitted that where the assessee exports only trading
goods then the profits of those goods only would be taken into account in E
sub-clause (3)(b). He submitted that sub-clause (3)(c) dealt with a case where
the assessee exported goods manufactured by him as well as trading goods.
He submitted that in such a case profits from export of goods manufactured
by the assessee were to be considered separately and the profits from exports
of trading goods were to be considered separately. He submitted that ifthere F
were profits from both then both the profits would be taken into consideration.
He submitted that if there were profits only in respect of one type of exports
then those profits could not be negatived or set off against the loss from the
other export. He submitted that the word "and" in Section 80HHC(3)(c) has
to be liberally construed and cannot to be taken to mean that both the profits
have to be clubbed or considered together. He submitted that persons who G
earn valuable foreign exchange cannot be deprived of the benefits of his
export by adopting a construction which would defeat the very purpose for
which the provision has been enacted. He submitted that the fact that the
~
word "and" does not mean that sub-clauses 3(c)(i) and (ii) have to be taken
together is ctear from the fact that in other Sections, such as Section 80HHD,
H
1086 SUPREME COURT REPORTS [2004] 2 S.C.R.
A the Legislature has used the words "aggregate of'. He submitted that wherever
the Legislature intended that both were to be taken together it has used words
like "aggregate of'. He submitted that when the Legislature has not used
such words it necessarily meant that the intention of the Legislature was that
the two are not to be taken. together, but that each has to be considered
B separately and on its own. He submitted that the aim being to give an incentive
for earning foreign exchange, so long as there was a profit from export either
of self manufactured goods or from export of trading goods deduction has to
be given for that profit by ignoring a loss in respect of other export. He
---
submitted that a party who has earned valuable foreign exchange cannot be
C
deprived of the benefit on an interpretation which defeats the very purpose
of the enactment.
We are unable to accept the submission of Mr. Dastur. Undoubtedly
--
Section 80HHC has been incorporated with a view to providing incentive to
export houses. Even though a liberal interpretation has to be given to such
a provision the interpretation has to be as per the wordings of this Section.
D If the wordings of the Section are clear then benefits, which are not available
under the Section, cannot be conferred by ignoring or misinterpreting words
in the Section. In this case we are concerned with the wordings of sub-section
3(c) of Section 80HHC. As noted earlier sub-Section 3(a) deals with the case
where the export is only of self manufactured goods. Sub-section 3(b) deals
E with the case where the export is only of trading goods. Thus when the
Legislature wanted to take exports from self manufactured goods or trading
goods separately, it has already so provided in sub-section (3)(a) and (3)(b).
It would not be denied that the word "profit" in Section 80HHC(I) and
--
Sections 80HHC (3)(a) and 3(b) means a positive profit. In other_ words if
there is a loss then no deduction would be available under Section 80HHC
F (I) or (3 )(a) or (3 )(b). In arriving at the figure of positive profit, both the
profits and the losses will have to be considered. If the net figure is a positive
profit then the assessee will be entitled to a deduction. If the net figure is a
loss thxn the assessee will not be entitled to a deduction. Sub-section 3(c)
deals with cases where the export is of both self manufactured goods as well
G as trading goods. The opening part of sub-section 3(c) states "profits derived .
from such export shall". Then follows (i) and (ii). Between (i) and (ii) the
word "and" appears. A plain reading of sub-section (c) shows that "profits
from such exports" has to be profits of exports of self manufactured goods
plus profits of exports of trading goods. The profit is to be calculated in the
manner laid down in 3(c)(i) and (ii). The opening words "profit derived from
H such exports" together with the word "and" clearly indicate that the profits
IPCA LABORATORY LTD. v. DY. COM MR. OF INCOME TAX [VARIAVA . .I] J087
have to be calculated by counting both the exports. It is clear from a reading A
of Sub-section (I) of Section 80HHC(3) that a deduction can be permitted
only if there is a positive profit in the exports of both self manufactured
goods as well as trading goods. If there is a loss in either of the two then that
loss has to be taken into account for the purposes of computing profits.
Under Section 80HHC( I) the deduction is to be given in computing the B
total income of the assessee. In. computing the total income of the assessee
both profits as well as losses will have to be taken into consideration. Section
80AB is relevant. It reads as follows:
"80AB. Where any deduction is required to be made or allowed
under any section included in this Chapter under the heading "C- C
Deductions in respect of certain incomes" in respect of any income
of the nature specified in that section which is included in the gross
total income of the assessee, then, notwithstanding anything contained
in that section, for the purpose of computing the deduction under that
section, the amount of income of that nature as computed in accordance D
with the provisions of this Act (before making any deduction under
this Chapter) shall alone be deemed to be the amount of income of
that nature which is derived or received by the assessee and which is
included in his gross total income."
Section 808(5) is also relevant. Section 808(5) provides that "gross E
total income" means total income computed in accordance with the provisions
of the Income Tax Act.
Section 80A8 is also in Chapter VI-A. It starts with the words "where
1any deduction is required to be made or allowed under any Section of this
Chapter". This would include Section 80HHC. Section 80AB further provides F
that "notwithstanding anything contained in that Section". Thus Section 80AB
has been given an overriding effect over all other Sections in Chapter VIA.
Section 80HHC does not provide that its provisions are to prevail over Section
80A8 or over any other provision of the Act. Section 80HHC would thus be
governed by Section 80AB. Decisions of the Bombay High Court and the G
Kerala High Court to the contrary cannot be said to be the correct law.
Section 80AB makes it clear that the computation of income has to be in
accordance with the provisions of the Act. If the income has to be computed
in accordance with the provisions of the Act, then not only profits but also
losses have to be taken into consideration.
H
A
1088 SUPREME COURT REPORTS [2004) 2 S.C.R.
Another reason why the argument of Mr. Dastur cannot be accepted is
that even under Section 80HHC (3)(c)(i) the profit is to be adjusted profit of
-
business. The adjusted profit of the business means a profit as reduced by the
profit derived from business of exports out of India of trading goods. Thus
in calculating the profits, under Section 3(c)(i), one necessarily has to reduce
by profits under 3(c)(ii). As seen above the term "profit" means positive
B profit. Thus if there is loss then those losses in export of trading goods have
to be adjusted. They cannot be ignored. We, therefore, hold that a plain
reading of Section 80HHC makes it clear that in arriving at profits earned
-----
from export of both self manufactured goods and trading goods, the profits
c
and losses in both the trades have to be taken into consideration. If after such
adjustments there is a positive profit the assessee would be entitled to deduction
under Section 80HHC(i). If there is a loss he will not be entitled to any
-
deduction.
Mr. Dastur submitted that the word "profit" in Section 80 HHC must
have the same meaning in the entire Section. He submitted that as the word
D profit in Section 80HHC (I) means only positive profit, it will have the same
meaning in Section 80HHC (3)(c). He submitted that thus the word profit in
Section 80HHC (3)(c) would not include losses and if there are any losses
they are to be ignored. We are unable to accept this submission for more than
one reason. Firstly it is not necessary that the word "profit" must have the
same meaning. The meaning that the word "profit" will depend on the context
E
in which it is used. In Section 80HHC (1) it is admittedly used to indicate
positive "profit" because the deduction will only be of a positive profit. -.-.....
Section 80HHC(3) is the sub-section which provides how profits are to be
worked out in computing total income. For purposes of such computation
both profit and losses have to be taken into account. Thus the word "profit"
F in Section 80HHC(3) will mean profits after taking into account losses, if
any. More importantly, in our view, the term "profit" in Section 80HHC both
in Sub-section (I) and in sub-section (3) means a positive profit worked out
after taking into consideration the losses, if any. Thus the word "profit" has
-
the same meaning in Section 80HHC (I) and (3).
G It was next submitted that even when the profits are to be reduced by
the losses in cases where an export house has disclaimed its tum over in
favour of a supporting manufacturer, the tum over of the exporter gets reduced ~,
to the extent disclaimed. It is submitted that as the turnover, which is ~
disclaimed, is reduced it cannot then be taken into consideration for the
H purposes of computing profits under sub-section 3(c)(ii). In our view this is
IPCA LABORATORY LTD. v. DY. COMMR. OF INCOME TAX [VARIAVA, J.] I 089
an argument which merely needs to be stated to be rejected. If such an A
argument is accepted it would lead to an absurd result. It would mean when
if there was no disclaimer the export house would not be entitled to any
deduction in cases where there is a loss but because disclaimer has been
made both the export house and the supporting manufacturer would become
entitled to deductions. The proviso to sub-section (i) of Section 80HHC enables B
a disclaimer only to enable the export house to pass on deductions. It in no
way reduces the turnover of the export house. In computing total income, the
entire turnover is taken into account even though there is a disclaimer. Thus
even though the disclaimer is made the taxable income of Rs. 4.39 crores has
been arrived at by the Appellants after taking into account the entire turnover
--..... from export of trading goods. In arriving at the figure of Rs. 4.39 crores C
admittedly the loss of Rs. 6.86 crores has been taken into account. Even after
disclaimer the turnover has remained the turnover of the Export House i.e.
the Appellants. The disclaimer is only for purposes of enabling the export
house to pass on the deduction which it would have got to the supporting
manufacturer. It follows that if no deduction is available, because there is a
loss, then the export house cannot pass on or give credit of such non-existing D
deduction to a supporting manufacturer.
Faced with this situation, it was submitted that even a loss is a negative
profit. In support of the submissipn, reliance was placed upon the authority
of this Court in the case of Commissioner of Income-Tax (Central), Delhi v. E
Harprasad and Co. P. Ltd reported in 1975 (Vol. 99) ITR 118. In this case
the meaning of loss was being considered in the context of capital gains
made from sale of shares. The question was whether the loss could be carried
forward and set off against capital gains in a subsequent year. While
considering this question, it was held as follows:
F
"From the charging provision of the Act, it is discernible that the
words "income" or "profits and gains" should be understood as
including losses also, so that, in one sense "profits and gains" represent
"plus income" whereas losses represent "minus income". In other
words, loss is negative profit. Both positive and negative profits are
of a revenue character. Both must enter into computation, wherever G
it becomes material, in the same mode of the taxable income of the
assessee."
In our view, the above observations are against the Appellants. They
show that in computing income profits and gains, losses must also be taken
into consideration. H
1090 SUPREME COURT REPORTS [2004] 2 S.C.R.
A Mr. Dastur relied on a format of Form No. I OCCAC and a Circular of
the Board wherein it is stated as follows:
"With the adoption of the dual system for computing export profit,
the computation of the disclaimed export turnover also required
modification. The Finance Act has therefore amended section 80HHC
B in order to provide that, where the Export or Trading House disclaims
the tax concession in favour of the supporting manufacturer, the
concession to the Export or Trading House will be reduced by the
amount which bears to the total export profits of trading goods the
same proportion as the disclaimed export turnover bears to the total
export turnover of trading goods. The formula in such cases will now
c be -
80HHC concession = export profit
- [export profits on trading goods x
D disclaimed export turnover]
total export turnover"
Mr. Dastur submitted that if even both profits and losses are to be taken into
account the, on a disclaimer the losses will also have to be considered as
negative profits and as per the Board Circular the calculation would be as
E follows:
"80HHC Concession =
*Export Profits - [Export Profits on Trading Goods x
F Disclaimed Export Turnover] .
Total Export Turnover of Trading Goods __.,_,
= * (-3,07,84,867) - (-6,86,65,804) x 18,53,53.371
18,53,53,371
G
= (-3,07,84,867) - (-6,86,65,804)
= (-3,07,84,867) + 6,86,65,804
= 3,78,80,937"
H He submitted that even on this calculation the Appellants are entitled to
IPCA LABORATORY LTD.,._ DY. COMMR. OF INCOME TAX [VARIAVA . .I] J 09 J
-- deduction of Rs. 3,78,80,937 /-. We are unable to accept this submission. The
calculation as per the Board Circular would not be as claimed. The Board
A
Circular nowhere provides for negative profits. The Board Circular also shows
that only positive profits can be considered for purposes of deduction.
We, therefore, see no substance in the Appeal. The same stands
dismissed. There shall be no order as to costs. B
v.s.s. Appeal dismissed.
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