By TIOL News Service

NEW DELHI, APR 07, 2015: THE issue before the issue is - Whether if there are losses in the export business of the assessee, but the profits of indigenous business outweigh those losses and the net result is that there are profits in the business, the deduction u/s 80HHC would still be available to the assessee. NO is the answer.

Facts of the case

The assessee company is engaged in the business of export of Marine products and also financial consultancy and trading in equity shares. Its total business does not consist purely of exports but includes business within the country as well which was covered by Section 80HHC. The AO in respect of the AY 1989-1990 took the view that the deduction was not allowable on the ground that there was no relationship between the Assessee Company and the Processors. On appeal, CIT(A) had dismissed assessee's contentions. On further appeal, Tribunal set aside the order of the AO and concluded that assessee was entitled to full relief u/s 80HHC and directed the AO to grant relief to the assessee. On remand, AO passed fresh order giving effect to the orders of the ITAT. While giving the effect, it had found that the assessee had not earned any profits from the export of Marine products and in fact, it had suffered a loss. Therefore, according to AO, as per Section 80AB, the deduction u/s 80HHC could not exceed the amount of income included in the total income. It had found that as the income from export of Marine product business was in the negative, the deduction u/s 80HHC would be nil, even when the assessee was entitled to deduction under the said provision. The assessee again challenged the order passed by AO before CIT(A) contending that the formula which was applied by AO was different from the formula prescribed u/s 80HHC and it was also in direct violation of CBDT Circular dated 05.07.1990. The CIT(A), however, dismissed the appeal of the assessee principally on the ground that u/s 246, an order of AO giving effect to the order of the ITAT was not an appealable order. On further appeal, Tribunal also dismissed the appeal of the assessee and upheld the order of AO. Challenging the order of ITAT, assessee approached the HC, u/s 256(2) seeking reference to it. The HC held that the assessment admittedly had not earned any profits from the export of the Marine products. On the other hand, it had suffered a loss. The deduction permissible u/s 80HHC was only a deduction of the profits of the assessee from the export of the goods or merchandise. By the very terms of Section 80HHC, it was clear that the assessee was not entitled to any benefit thereunder in the absence of any profits. The question referred was therefore answered against the assessee and in favour of the revenue.

Having heard the matter, the Apex court held that,

++ in IPCA Laboratory, the Apex court held that although Section 80-HHC has been incorporated with a view to provide incentive to export houses and a liberal interpretation has to be given to such a provision, the interpretation has to be as per the wordings of that section. When the legislature wanted to take exports from self-manufactured goods or trading goods separately, it has already so provided in sub-sections (3) (a) and (3)(b). The word "profit" in Section 80-HHC(1) and Sections 80-HHC(3)(a) and (b) means a positive profit. In other words, if there is a loss then no deduction would be available under Section 80-HHC(1) 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 loss then the assessee will not be entitled to a deduction. The opening words "profit derived from such exports" occurring in Section 80-HHC(3) together with the work "and" occurring between clauses (i) and (ii) thereof clearly indicate that the profits have to be calculated by counting both the exports. Under Section 80-HHC(1), the deduction is to be given in computing the 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. Sections 80-AB and 80-B(5) are relevant. Section 80-AB has been given an overriding effect over all other sections in Chapter VI-A. Section 80-HHC would thus be governed by Section 80-AB which makes it clear that the computation of income has to be in accordance with the provisions of the Act. Moreover, even u/s 80-HHC(3)(c)(i) the profit is to be adjusted profit of business which means a profit as reduced by the profit derived from business of exports out of India of trading goods. Thus in calculating the profits, u/s 3(c)(i), one necessarily has to reduce the profits u/s 3(c)(ii). Section 80-HHC 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 u/s 80-HHC(i). If there is a loss he will not be entitled to any deduction. In Section 80-HHC, the word "profit" is admittedly used to indicate positive "profit" because the deduction will only be of a positive profit. Section 80-HHC(3) provides how profits are to be worked out in computing total income. For the purposes of such computation both profits and losses have to be taken into account. Thus the word "profit" in Section 80-HHC(3) will mean profits after taking into account losses, if any. The term "profit" in both Sections 80-HHC(1) and 80-HHC(3) means a positive profit worked out after taking into consideration the losses, if any. Thus the word "profit" has the same meaning in Sections 80-HHC(1) and (3). The proviso to sub-section (1) of Section 80-HHC enables a disclaimer only to enable the export house to pass on deductions. It in no way reduces the turnover of the export house. 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 deduction to a supporting manufacturer. The Board circular also shows that only positive profits can be considered for purposes of deduction;

++ it stands settled, on the co-joint reading of IPCA and A.M. Moosa, that where there are losses in the export of one type of goods (for example self-manufactured goods) and profits from the export of other type of goods (for example trading goods) then both are to be clubbed together to arrive at net-profits or losses for the purpose of applying the provisions of Section 80HHC of the Act. If the net result was loss from the export business, then the deduction under the aforesaid Act is not permissible. As a fortiori, if there is net profit from the export business, after adjusting the losses from one type of export business from other type of export business, the benefit of the said provision would be granted. It is also to be borne in mind that in both the aforesaid cases namely IPCA and A.M. Moosa, the Court was concerned with two business activities, both of which related to export, one from export of self manufactured goods and other in respect of trading goods i.e. those which are manufactured by others. In other words, the Court was concerned only with the income from exports. In the present case, however, the fact situation is somewhat different. Here, in so far as export business is concerned, there are losses. However, the assessee relies upon Section 80HHC(3)(b), as existed at the relevant time, to contend that the profits of the business as a whole i.e. including profits earned from the goods or merchandise within India will also be taken into consideration. In this manner, argues the appellant, even if there are losses in the export business, but profits of indigenous business outweigh those losses and the net result is that there is profit of the business, then the deduction under Section 80HHC should be given. However, having regard to the law laid down in IPCA and A.M. Moosa, we cannot agree with the counsel for the appellant. From the scheme of Section 80HHC, it is clear that deduction is to be provided under sub-section (1) thereof which is "in respect of profits retained for export business". Therefore, in the first instance, it has to be satisfied that there are profits from the export business. That is the pre-requisite as held in IPCA and A.M. Moosa as well. Sub-section (3) comes into picture only for the purpose of computation of deduction. For such an eventuality, while computing the "total turnover", one may apply the formula stated in clause (b) of sub-section (3) of Section 80HHC. However, that would not mean that even if there are losses in the export business but the profits in respect of business carried out within India are more than the export losses, benefit u/s 80HHC would still be available. In the present case, since there are losses in the export business, question of providing deduction under Section 80HHC does not arise and as a consequence, there is no question of computation of any such deduction in the manner provided under sub-section (3);

++ therefore, we are of the opinion that the view taken by the High Court is correct on the facts of this case. With this, there may not be need to answer the second facet of the problem as the question of computation of deduction does not arise. However, we find that even here, the approach of the ITAT is correct. In the present case, the domestic income in respect of which benefit is sought is from dividend income, interest income, profit or sale of shares and fees received from arranging finance for the assessee's clients. The Tribunal observed that aforesaid four items are income simplicitor and cannot be covered by the expression "total turnover". We are in agreement with the aforesaid view of the Tribunal. Therefore, even otherwise, the formula as sought to be applied by the appellant does not become applicable on the facts of this case. Thus, from every angle the matter is to be looked into, the appeal lacks merit. Same is, accordingly, dismissed with costs.

(See 2015-TIOL-52-SC-IT)