Commissioner of Income Tax vs Jindal Fine Industries

Ajay Kumar Mittal, J.—In this reference at the instance of the Revenue, the Income Tax Appellate Tribunal, Chandigarh Bench, Chandigarh (for short "the Tribunal"), vide its order dated November 16, 1994, passed in R. A. No. 52/Chandi/1994 arising out of I. T. A. No. 201/Chandi/1992 has referred the following question of law u/s 256(1) of the Income Tax Act, 1961 (for short "the Act"), for the assessment year 1988-89:

Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in law in holding that the case of the assessee was covered u/s 80HHC(3)(a) and not u/s 80HHC(3)(b) of the Income Tax Act 1961, and that the Commissioner of Income Tax was not justified in withdrawing the deduction of Rs. 8,84,660 ?

Briefly noticed, the facts are that the original assessment was made on June 19, 1989, by the Assessing Officer and deduction u/s 80HHC of the Act was allowed at Rs. 17,12,765 as per the audit report. The Commissioner of Income Tax ("the CIT"), invoking the powers u/s 263 of the Act, came to the conclusion that since the business carried on by the assessee did not consist exclusively of exports outside India of the goods or merchandise to which Section 80HHC applied, the deduction had to be allowed to the assessee as per Section 80HHC(3)(b) of the Act on a pro rata basis. The Commissioner of Income Tax allowed deduction to the assessee u/s 80HHC at Rs. 8,28,105 as against the deduction of Rs. 17,12,765 allowed by the Assessing Officer and held that deduction had been allowed in excess to the extent of Rs. 8,84,660. Accordingly, he recomputed the assessable income at Rs. 16,32,360 by adding the aforesaid amount of Rs. 8,84,660. The assessee took the matter in appeal before the Tribunal who vide its order dated January 31, 1994, allowed the appeal holding that the Commissioner of Income Tax was not justified in resorting to the provisions of Section 263 and withdrawing the deduction of Rs. 8,84,660.

The point that requires adjudication in this reference is whether an assessee who is engaged in the export business but his business actively does not consist exclusively of exports outside India of the goods or merchandise would be entitled to have deduction as per Section 80HHC(3)(b) on a pro rata basis or u/s 80HHC(3)(a) of the Act.

It is apposite to refer to Section 80HHC of the Act as stood at the relevant time which reads thus:

80HHC.(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 equal to the aggregate of--

(a) four per cent, of the net foreign exchange realisation; and

(b) fifty per cent, of so much of the profits derived by the assessee from the export of such goods or merchandise as exceeds the amount referred to in Clause (a):

Provided that the deduction under this Sub-section shall not exceed the profits derived by the assessee from the export of such goods or merchandise:

Provided further that an amount equal to the amount of the deduction claimed under this Sub-section is debited to the profit and loss account of the previous year in respect of which the deduction is to be allowed and credited to a reserve account to be utilised for the purposes of the business of the assessee.

(2)(a) This section applies to all goods or merchandise, other 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.

(b) This section does not apply to the following goods or merchandise, namely:

(i) mineral oil; and

(ii) minerals and ores,

(3) For the purposes of Sub-section (1), profits derived from the export of goods or merchandise out of India shall be,--

(a) in a case where the business carried on by the assessee consists exclusively of the export out of India of the goods or merchandise to which this section applies, the profits of the business as computed under the head ''Profits and gains of business or profession;

(b) in a case where the business carried on by the assessee does not consist exclusively of the export out of India of the goods or merchandise to which this section applies, the amount which bears to the profits of the business (as computed under the head ''Profits and gains of business or profession'') the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee.

A plain reading of Clause (a) of Sub-section (3) of Section 80HHC of the Act shows that for the purposes of Sub-section (1), profits derived from the export of the eligible goods or merchandise out of India in a case where business carried on by the eligible assessee consists exclusively of the export out of India of the goods or merchandise shall be the profits of the business as computed under the head "Profits and gains of business or profession.

However, in a case where the business carried on by the eligible assessee did not consist exclusively of export out of India of the goods or merchandise but includes domestic sales as well as, then Clause (b) of Sub-section (3) it shall be the amount which bears to the profits of the business as computed under the head "Profits and gains of business or profession" the same proportion as the export turnover bears to the total turnover of the business carried on by the eligible assessee.

The said provision came up for consideration in Indian Spices Co. Vs. Commissioner of Income Tax, before the Kerala High Court. The Division Bench of the Kerala High Court after following its earlier decision in Commissioner of Income Tax Vs. Parry Agro Industries Ltd. (formerly CWS (India) Ltd.), held as under (page 448):

Clause (a) extracted above applies only to a case where the assessee is engaged exclusively in the business of export out of India of the goods or merchandise to which this section applies. In a case where the assessee is engaged in the export business as well as in the business of local sale of goods or merchandise, for the purpose of Sub-section (1) profits derived from the export of goods or merchandise out of India shall be worked out in accordance with the provisions of Clause (b). There is no doubt that in a case where the assessee is engaged in the business of export of goods or merchandise as well as in the business of local sale of the very same goods, Clause (b) of Sub-section (3) will apply.

As noticed from the statement of the facts, the business carried on by the assessee did not consist exclusively of exports outside India of the goods or merchandise and had a mixture of export as well as domestic activities and, therefore, the assessee would be entitled to deduction under Clause (b) of Sub-section (3) of Section 80HHC of the Act.

In order to be fair to learned Counsel for the assessee, we refer to the judgment of the Madras High Court in Commissioner of Income Tax Vs. Rathore Brothers, on which the assessee had placed reliance. In the said case the assessee was not carrying on exclusively export business and was maintaining separate hooks of account for the domestic trade and for the export business. The assessee was held entitled for 100 per cent, deduction in respect of export business and disallowance on a pro rata basis by invoking Clause (b) of Sub-section (3) of Section 80HHC was held to be unjustified.

A plain reading of the Section 80HHC(3)(b) shows that the thrust of the opening Clause (b) of Sub-section (3) of Section 80HHC of the Act is on the words "does not consist exclusively of the export". Therefore, no other meaning to Clause (b) of Sub-section (3) of Section 80HHC as has been interpreted by the Kerala High Court can be assigned and we are in agreement with the same. With due respect, we express our inability to accept the contrary view taken by the Madras High Court in Commissioner of Income Tax Vs. Rathore Brothers, .

In the light of the aforesaid findings and in view of the above, the question of law referred to this and as reproduced above, is answered in the negative, i.e., in favour of the Revenue and against the assessee.