SUPREME COURT OF INDIA
P.R. Prabhakar
Vs
Commissioner of Income Tax, Coimbatore
Civil Appeal No. 877 of 2006
(S. B. Sinha and Dalveer Bhandari, JJ)
18.07.2006
S. B. SINHA, J.
The Appellant carries on business of export of its own products as also
procuring export contracts for other exporters on commission. In the assessment
year 1990-1991 he derived an income of Rs. 56.69, 321/- by way of commission,
whereas as an exporter of goods incurred a loss of Rs. 6, 372/-. The value of
the total exported goods outside India by the Appellant during the said
assessment year was Rs. 3.67, 600/-. He claimed a deduction in respect of
aforementioned income in terms of Section 80HHC of the Income Tax Act, 1961
(for short "the Act"). Exemption claimed under the aforementioned
provision was disallowed by the Assessing Officer on the premise that they
having incurred toss in respect of export business were not entitled thereto.
An appeal preferred thereagainst was rejected by the Commissioner of Income Tax
(Appeal). The Income tax Appellate Tribunal, however, on further appeal
preferred by the Appellant opined that the commission received by the Appellant
from the other exporters is to be taken into consideration for the said
purpose.
The Respondent aggrieved by and dissatisfied with the said decision filed an
application for reference to the High Court and by an order dated 13.9.1996 the
following questions were referred by the Tribunal:
1. Whether on the facts and in the circumstances of the case the Tribunal was
right in law in holding that the assessee is entitled to deduction under
Section 80HHC of the Income-tax Act even though the export business resulted in
a loss of Rs. 6, 372/-?
2. Whether on the facts and in the circumstances of the case the Tribunal is
right in law in holding that commission and brokerage for procuring export
contracts for other exporters is exempt under Section 80HHC of the Act on the
ground that the same is export profits?
By reason of the impugned judgment the High Court opined that income derived by
the Appellant towards commission/brokerage for procuring orders of export for
others is not eligible to exemption from tax under Section 80HHC of the Act.
Referring to the circulars issued by the Central Board of Direct Taxes (CBDT),
the High Court held that although the said provision was amended with effect
from 1.4.1992 by inserting an explanation whereby and whereunder the profit
derived out of such commission/ brokerage was confined to 10% of the income,
the same, being clarificatory in nature, would have retrospective effect. On
the said findings, answers to both the questions were rendered in the negative
and in favour of the Revenue.
Mr. C.A. Sundaram. learned senior counsel appearing on behalf of the Appellant
principally raised two contentions before us:
(i) The CBDT circular having clarified that the amendment would have a
prospective application with effect from 1.4.1992. the High Court committed a
serious error in holding that the same would operate retrospectively being
clarificatory in nature.
(ii) Earning of commission being a part of the export business, the income
derived therefrom should be calculated for the purpose of computing profit or
loss in regard to the applicability of Section 80HHC of the Act.
Mr. Rajiv Dutta, learned senior counsel appearing on behalf of the Respondents,
on the other hand, would submit that on a plain reading of the said provision
it would be evident that income from commission/brokerage could not have been
given any exemption for the purpose of invoking the provision of Section 80HHC
of the Act as it received statutory recognition only by reason of the said
amendment which came into force with effect from 1.4.1992.
Sub-sections (1) and (3) of Section 80HHC of the Income Tax Act read as under:
(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 or 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 (1B), derived by the assessee from the
export of such goods or merchandise:
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 in Clause (b) of Sub-section (4A), 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 certificate
bears to the total export turnover of the assessee in respect of such trading
goods.
(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 respect of such goods bears to the total turnover of the
business carried on by the assessee;
(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 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 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 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 person), and Clauses (iii-b) and
(iii-c) of Section 28 the same proportion as the export turnover hears to the
total turnover of business carried on by the assesses.
Explanation.--For the purposes of this sub-section.—
(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 (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;
(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 the total turnover:
(f) 'Trading goods' means goods which are not manufactured or processed by the
assessee.
On a plain reading of the said provisions, it is evident that it applies to the
assessee engaged in the business of export out of India including trading of
goods. The expressions 'business of export' must be given its due meaning. It
not only speaks of 'export out of India' but also includes 'trading of goods'.
Indisputably, the CBDT issued a circular bearing No. 621 dated 19th December.
1991 by way of explanatory notes to the said provision. Paragraph 32 of the
said circular provides for modification of provisions relating to exemption of
income from exports. The amendment by inserting Sub-section (3) in the said
provision was carried out so as to compensate the exporter from the comparative
disadvantages faced by him in the international market. The formula, as was
existing prior to 1991 as stated in the circular, often used to provide a
distorted figure of export profits when receipts like interest commission, etc.
which did not have an element of turnover were included in the profit and loss
account and, thus, it was clarified that "profits of the business"
for the said provision would not include receipt by way of brokerage,
commission, interest or any other receipt of a similar nature. It was, however,
categorically stated:
...As some expenditure might be incurred in earning these incomes, which in the
generality of cases is part of common expenses, ad hoc 10 per cent, deduction
from such incomes is provided to account for these expenses.
The amendments in no uncertain terms were to take effect from 1st April, 1992,
i.e., for the assessment year 1992-93 and subsequent assessment years. Where,
however, the provisions were to operate with retrospective effect the same had
been categorically stated as, for example, in paragraph 32.17 thereat which is
as under:
This amendment takes effect retrospectively from 1st April, 1986, the day on
which the substituted Section 80HHC took effect. It will, accordingly, apply in
relation to assessment year 1986-87 and subsequent years.
The aforementioned circular dated 19th December, 1991 issued by the CBDT is
binding on the Department. [See Mercantile Bank Ltd., Bombay v. The
Commissioner of Income Tax, Bombay City - III 2006 (5) SCALE 244 and
Union of India and Anr. v. Azadi Bachao Andolan and Anr.]
Once it is held that the amendment carried out in 1991 by reason of Finance Act
(No. 2), Act, 1991 was prospective in nature, ex facie the High Court committed
a serious error in opining that the same being clarificatory in character would
apply to the assessment year in question. By reason of the purported
clarification issued by the CBDT in terms of the said circular, the area of
exemption had not been widened. It has, in effect and substance as would appear
from paragraph 32.11, been curtailed. By reason of such amendment, the
Parliament did not intend that the income derived by way of
brokerage/commission by the assessee should not be reckoned for the purpose of
computing profit or loss earned by a person engaged in the business of export
but by reason thereof the deduction to the extent of 10% held to be allowable
thereby. We, therefore, cannot accept the submission of Mr. Dutta that the
income derived by way of commission and/or brokerage by an assessee carrying on
business of export became exigible to exemption to the extent of 10% for the first
time with effect from 1.4.1992.
The purport and reason for enacting Section 80HHC of the Income Tax Act
indisputably was to provide incentive to export houses. It is now a
well-settled principle of law that although the exemption provisions are to be construed
strictly as regards the applicability thereof to the case of the assessee but
once it is found that the same is applicable, the same are required to be
interpreted liberally. [See Tata Iron and Steel Company Ltd. v. State of
Jharkhand and Ors., Government of India and Ors. v. Indian Tobacco Association
and Commnr. of Central Excise, Raipur v. Hira Cement.]
It is also trite law that an exemption is to be granted unless it is expressly
taken away. [See Adityapur Industrial Area Development Authority v. Union of
India and Ors. 2006 (5) SCALE 321
The expression "income arising out of business of export" brings
within its sweep not only the export of any goods or merchandise manufactured
or possessed by the assessee but also of trading goods. The Parliament
therefore, intended to provide incentive when a positive profit is earned by an
exporter, [See IPCA Laboratory Ltd. v. Dy. Commissioner of Income Tax Mumbai.]
The question again came up for consideration before a Division Bench of this
Court in Income Tax Officer, Bangalore v. Induflex Products (P) Ltd. 2005
(10) SCALE 132, wherein it was opined:
...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....
Indeed the question as to whether earning of income by way of
commission/brokerage would attract Section 80HHC of the Act or not precisely
came up for consideration before a Special Bench of the Income Tax Appellate
Tribunal Delhi Bench in International Research Park Laboratories Ltd. v.
Assistant Commissioner of Income-Tax 1994 Indlaw MUM
317 wherein interpreting the CBDT circular, it was stated:
Now we come to whether the commission received could form part of export
profits. Here again, we are unable to see it differently. It is no doubt true
that this commission is not turnover but it is a profit relatable to exports.
Coming back to Section 80HHC(1), if the assessee is an exclusive exporter
without having any local sales, then the profit on commission is admittedly
includible as profit of the business computed under the head "Profits and
gains of business or profession" and the whole of it would be eligible for
exemption under Clause (a) of Sub-section (3) of Section 80HHC. When such
commission could be regarded as profit derived from export for the purpose of
Clause (a), how can the same be excluded for the purpose of Clause (b) unless
it amounted to discrimination. The interpretation of Clauses (a) and (b) must
be harmonious and not discriminatory, cutting, against each other. What is
sauce for the goods is also sauce for the gander. Secondly, we have just
mentioned that this profit is profit derived from export and export is the
basis or the foundation or the nexus. The argument of Shri B.B. Ahuja and all
his effort to show to us that it has no reference to the export is, therefore,
unacceptable to us. In our opinion, the argument advanced by Shri Ahuja
overlooks the fact that the commission would not have come to the assesses had
he not been engaged in the export business. He sought to justify his argument
by referring to subsequent amendments made from April 1, 1992, whereunder as we
have pointed out above by adding Clause (baa) to the Explanation at the end of
Sub-section (4A) with effect from April 1, 1992, 90 per cent of this commission
etc. is not to be regarded as profits derived from export business and this
amendment as explained in the Memorandum of Bill was only to clarify the
position.
It is stated at the Bar that the Revenue did not prefer any appeal there
against. We, for the reasons stated hereinbefore, agree with the law laid down
by the Tribunal.
For the views, we have taken, the judgment of the High Court cannot be
sustained. It is set aside accordingly. The appeal is, accordingly, allowed.
The parties shall, however, pay and bear their own costs.
J