Indian Spices Co. vs Commissioner of Income Tax

The Income Tax Appellate Tribunal, Cochin Bench has referred the following two questions of law u/s 256(1) of the Income Tax Act, 1961 (hereinafter referred to as ''the Act'') for decision by this court at the instance of the assessee :

"1. Whether on the facts and in the circumstances of the case, the Tribunal was justified in upholding the order of the lower authorities restricting the claim u/s 80HHC of the Income Tax Act 1961 to a sum of Rs. 13.54,636?

Whether there were materials for the Tribunal to hold that the computation u/s 80HHC(3)(b) was relevant and not section 80HHC(3)(a) in the applicant''s case?"

The brief facts necessary for consideration of this case are as follows: The applicant-assessee is a partnership firm carrying on business in the purchase and sale of raw rubber, coconut oil and pepper. Pepper trade consists of both export sales and local sales. The assessee had maintained separate accounts for raw rubber which-consists of local sales only.

In the assessment for the year 1988-89, in working out the relief u/s 80HHC of the Act, the assessee had applied the provisions of section 80HHC(3)(a) and arrived at the profits from the export business of Rs. 19,22,911. According to the assessing officer since the assessee is having business of export sales as well as local sales, the profits from the export business has to be worked out only in accordance with the provisions of section 80HHC(3)(b) of the Act. He accordingly worked out the relief u/s 80HHC(3)(b) at Rs. 13,54,636. The difference in the two amounts was disallowed. Being aggrieved by the assessment order, the assessee filed appeal before the Commissioner (Appeals), Kochi. By order dated 29-3-1990 (Annexure B) the first appellate authority agreed with the assessing officer and rejected the claim made on the basis of section 80HHC(3)(a) of the Act. In further appeal by the assessee the Tribunal had also agreed with the two authorities that section 80HHC(3)(b) can be applied.

Sri. P. Balchandran, learned counsel for the applicant submits that the provisions of section 80HHC(3)(b) has application only to a case where the assessee is engaged in the export of pepper and also in local sale of pepper. According to the counsel in a case where the assessee is having local sales of rubber and coconut also the turnover of the same cannot be taken into account for the purpose of computation of the profits of the export business u/s 80HHC of the Act. In other words, the profits in the export business has to be worked out only in accordance with the provisions of section 80HHC(3)(a) of the Act. The counsel also relied on the decision of the Madras High Court in CIT v. Madras Motor Ltd. (2002) 257 ITR 601 . The counsel also submitted that the decision of this court in Commissioner of Income Tax Vs. Parry Agro Industries Ltd. (formerly CWS (India) Ltd.), is distinguishable, in that in the said decision, the assessee therein was engaged in the export sale and in the local sale of the very same commodity and further the question therein was as to whether, in a case where the assessee had kept separate books of account both in respect of export sales and in respect of local sales there is any question of application of clause (b) of section 80HHC(3) of the Act.

Sri P.K.R. Menon, learned senior Central Government standing counsel for taxes appearing for the respondent submits that the questions referred in this case are squarely covered by the decision of the Division Bench of this court in Madras Motor Ltd.''s case (supra). The senior counsel further submitted that this court in Commissioner of Income Tax Vs. Jose Thomas, took the view that where the assessee is having export business in a particular commodity and also local business as builders the, turnover of the cost of construction of buildings will also have to be taken into account while computing the profits from the export business u/s 80HHC of the Act.

We have bestowed for anxious considerations on the rival contentions made by the counsel for the parties and have also perused the orders of the authorities and the Tribunal. Admittedly the petitioner is engaged in the business of export of pepper and also the local sales of pepper, rubber and coconut. u/s 80HHC(1) of the Act 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 subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction equal to the aggregate of 4 per cent of that net foreign exchange realisation and 50 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). It further provides some other conditions also with which we are not concerned. There is no difficulty in finding out 4 per cent of the net foreign exchange realisation. The only problem in the present case is to find out 50 per cent of the profits derived by the assessee from the export of such goods referred to in the sub-section. Sub-section (3) of section 80HHC provides for the method of finding out the profits of export business referred to in sub-section (1) thereof which reads as follows :

"(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."

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. The only dispute is that if the assessee is also engaged in the business of local sale of other goods (goods other than the goods exported) whether clause (b) of section (3) is attracted to rope in the sale proceeds of local sale of other goods also in the ''total turnover'' for the computation of the profits contemplated under clause (b) of sub-section (1) of section 80HHC of the Act. True, the decision of the Madras High Court in Madras Motor Ltd.''s case (supra) has held that clause (b) of sub-section (3) of section 80HHC applies only to a case where the assessee is engaged in the business of export sale as well as local sales of the same commodity and that the turnover of sale of other commodities dealt with by the assessee cannot form part of the total turnover of the assessee for the purpose of relief u/s 80HHC of the Act. The Madras High Court has taken the said view on the basis of the wording in sub-section (1) and sub-section (3) with reference of the goods or merchandise referred to in sub-section (2a) of the Act. We do not propose to consider the logic and reasoning of the Madras High Court in taking such a view in this case in detail for the reason that a Division Bench of this court in Parry Agro Industries Ltd.''s case (supra) has clearly taken the view that the only distinction that can be drawn is export sale on the one hand and local sale on the other and that no dichotomy can be made with regard to the item covered by local sales. In other words, if the assessee is engaged in the business of local sale of goods in addition to the export sales clause (b) of sub-section (3) of section 80HHC is attracted. There is no question of further considering the components of the local sales and to apply clause (b) only in respect of the local sales relating to the very same goods which are extracted above. This is what the Division Bench had observed with regard to the scope of clause (a) and (b) of sub-section (3) of section 80HHC.

"What section 80HHC provides is that in a case where the assessee is engaged wholly in the business of export out of India of any goods, the deduction granted should be in accordance with section 80HHC(1). The stress under sub-section (1) is that it is attracted only if the profits are derived by the assessee exclusively from exports and not by indulging in any domestic trade. As such sub-section (1) is confined to and specifically relates to export trade. Sub-section (3) thereof indicates the manner of computation of the profits derived from the export of goods out of India where the assessee indulges in domestic trade as well. Clause (a) may not be applied here as admittedly the assessee is carrying on domestic trade as also export. The procedure in clause (b) would take when there is export as well as domestic trade.

The argument of Mr. Jayasankar is that in this case where the profit derived by the assessee by export business is separately maintained and separately ascertained there is not need to have recourse to section 80HHC(3) (a) and (b). In such a situation section 80HHC(1) can be applied in exclusion of sub-section (3). Therefore, there was no need for invoking sub-section (3)(b) for finding out what should be the deduction u/s 80HHC. Per contra, Mr. Menon, learned counsel for the revenue, submits that this is the only provision that is provided u/s 80HHC(1) of the Act. The mode of calculation pleaded by the assessee is not contemplated or provided by the statute."

We note that the main contention taken by the assessee in that case was that the assessee was engaged in the export of Assam tea and the local sale of other teas and that the assessee had kept separate books of account in respect of the export of Assam tea and therefore, there was no question of applying the provisions of clause (b) of sub-section (3) of section 80HHC to find out the profits from the export business. The Division Bench has to find out the profits from the export business. The Division Bench has observed that if the contention of the assessee is accepted, that will amount to redrafting the provisions of sub-section (3) of section 80HHC. The Division Bench held that the provisions of clause (b) of sub-section (3) of section 80HHC squarely applies. Even though the Division Bench was not concerned as such with the situation of the present case where the assessee was engaged in the local sale of pepper as well as rubber and coconut oil the reasoning given by the Division Bench in the above extracted passage squarely applies to the present case also.

In view of the aforesaid decision of this court which is binding on us we apply the same principle and answer the questions referred in the affirmative, i.e. in favour of the revenue and against the assessee.