JUDGMENT
A.D. Jain, Judicial Member.
This Hon’ble President of the Tribunal has referred the following questions to the Special Bench under section 255(3) of the Income-tax Act, 1961, for decision:
“(1) Whether the decision of Delhi Special Bench of ITAT in the case of Lalsons Enterprises v. Dy. CIT (2004) 89 ITD 25 (Del), holding that for the purpose of computing the deduction allowable under the proviso to sub-section (3) of section 80HHC in respect of export incentives mentioned in section 28(iiia), (iiib) and (iiic), the loss, if any, suffered by the assessee under any of the clause (a), (b) or (c) of the sub-section has to be ignored and deduction has to be allowed in respect of the amount computed under the said proviso, requires reconsideration in view of the subsequent decision of the Hon’ble Supreme Court in the case of IPCA Laboratory Ltd. v. Dy. CIT (2004) 266 ITR 521 (SC), especially considering the observations of the Hon’ble Apex Court recorded therein to the effect that the provisions of section 80HHC are also governed by section 80AB.
(2) Whether in any view of the matter, if the figures as computed under clause (a) or (b) or (c) of sub-section (3) is a negative figure, would an assessee be entitled to a deduction under section 80HHC, if after setting off the said negative figure against the amount computed under the proviso to sub-section (3), there remains a positive figure.”
2. The above issues have, in fact, arisen from ITA No. 6503/M/2002 filed by M/s. B. Sorabjee against the income-tax assessment order for the assessment year 1999-2000, as upheld by the learned Commissioner (Appeals). The facts in this case are that the assessee is a manufacturer and exporter of ready made garments. For assessment year 1999-2000, the assessee claimed deduction under section 80HHC of Rs. 1,75,08,996. It had credited Rs. 1,91,93,598 as incentive of exports in its profit and loss account. There is a resultant loss if this incentive representing duty draw back of Rs. 1,89,01,248, and profit from sale of special import licence of Rs. 2,92,350, etc. is excluded from the income. Relying on the decision of the Madras Tribunal in the case of Krislar Diesel Engines (P) Ltd. v. Asst. CIT (2000) 74 ITD 414 (Mad), the assessing officer held that the assessee is not entitled for deduction under section 80HHC, since there was a loss in export and since incentive cannot be considered as a profit derived from the export of the goods and merchandise. The assessing officer was of the view that as per section 80HHC, the assessee is entitled to deduction only to the extent of income, meaning thereby, that there is no eligibility for deduction under section 80HHC, if there is a negative figure of profit on account of exports. In holding that the determination of profits from exports of goods or merchandise under section 80HHC requires a direct nexus between the profits and the exports of goods and merchandise and that receipts in the form of duty draw back, cash incentives, etc., have no direct nexus with the export business and that these receipts are only incidental to such activities and so, they cannot be considered as profits ‘derived from’ export of goods or merchandise, the assessing officer relied on the decision of the Hon’ble Supreme Court in the case of CIT v. Sterling Foods (1999) 237 ITR 579 (SC). The Hon’ble Bombay High Court, in the case of IPCA Laboratories Ltd. v. Dy. CIT (No. 1) (2001) 251 ITR 401 (Bom), held, inter alia, that the profit in the context in which it is mentioned in section 80HHC(l), does not include a loss. This decision was also relied on by the assessing officer. The assessing officer was further of the view that since section 80HHC has been amended with effect from assessment year 1992-93, whereby the expression’total profits of business of the assessee’ in the proviso, have been replaced by “total profits derived by the assessee from exports of goods”, it is obvious that the intended purpose of this amendment was to ensure that the deduction under section 80HHC comes into play only when the assessee is deriving profits from its export activity. The assessing officer observed that income may include loss, but deduction is admissible only if the assessee is having profits from the activity of exports. The decision of the Hon’ble Kerala High Court in the case of CIT v. V T Joseph (1997) 225 ITR 731 (Ker), holding that only the actual profit in the export business can be considered for deduction under section 80HHC, was also relied on by the assessing officer. As such, the assessee’s claim for deduction under section 80HHC was rejected.
3. By virtue of the order dated 22-10-2002, the learned Commissioner (Appeals) upheld the assessment order.
4. Before us, the following assessees have sought to be impleaded as interveners :
S.No.
ITA No.
Assessee
Represented by
Asst. year
1.
7071/M/2004
Mrs. Arun S. Jain
Sh. M. Subramanian
2001-02
2.
4153/M/2001
Indokern Export Ltd.
Ms. D.J. Jariwala
1997-98
3.
6380/M/2004
M/s. SDM International
Sh. R.R. Vora
2001-02
4.
2781/M/1999
TATA International Ltd.
Withdrawal appli.
1992-93
5.
2738/M/1999
TATA International Ltd.
Withdrawal appli.
1992-93
6.
CO-297/M/99
TATA International Ltd.
Withdrawal appli.
1992-93
7.
2697/M/00
TATA International Ltd.
Withdrawal appli.
1994-95
8.
2846/M/00
TATA International Ltd.
Withdrawal Appli.
1994-95
9.
4171 /M/00
TATA International Ltd.
Withdrawal Appli.
1995-96
10.
4296/M/00
TATA International Ltd.
Withdrawal Appli.
1995-96
11.
CO 24/M/00
TATA International Ltd.
Withdrawal Appli.
1995-96
12.
6120/M/2002
Prama Exports
Shri R.R. Vora
1999-00
13.
6858/M/2004
Shri Anand J. Shah
Shri K.S. Chokshi
2001-02
14.
MA193/M/04
M/s. Ela Engineers
2001-02
15.
1285/M/02
Sonal Garments
Sh. Y.P. Trivedi
1998-99
16.
1512/M/2002
Sonal Garments
Shri Y.P. Trivedi
1998-99
17.
2291/M/2001
M/s. Ganesh Prop. Mrs. P. Amersey
Shri V.H. Patil
1994-95
18.
3530/M/2000
M/s. Ganesh Prop. Mrs. P. Amersey
Sh. V.H. Patil
1995-96
19.
7882/M/2004
Uday Exports (P.) Ltd.
Sh. V.H. Patil
2001-02
20.
1513/M/2002
M/s. Pan International
Shri Y.P. Trivedi
1998-99
21.
5205/M/2002
M/s. Pan International
Shri Y.P. Trivedi
1998-99
22.
365/M/2002
M/s. Jal Exports
Shri Y.P. Trivedi
1998-99
23.
698/M/2003
M/s. Jal Exports
Shri Y.P. Trivedi
1999-00
24.
7384/M/2004
M/s. Jal Exports
Shri Y.P. Trivedi
2001-02
25.
6666/M/2004
Sohil P. Shah
Shri K.S. Chokshi
2001-02
26.
283/M/2002
M/s. Ana Exports
Shri Y.P. Trivedi
1998-99
27.
284/M/2002
M/s. Ana Exports
Shri Y.P. Trivedi
1999-00
4.1 As evident from the above table, the assessee at serial Nos. 4 to 11, i.e., Tata International Ltd., has filed withdrawal applications. These applications have not been opposed by the department. They are accepted. Therefore, Tata International Ltd. is allowed to withdraw as intervener qua the items at serial numbers 4 to 11 above.
5. The issue before us is related to deduction under section 80HHC. Section 80HHC 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 of profits derived by the assessee from the export of such goods and 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 the export turnover specified in the said certificate bears to the total turnover of the assessee in respect of such trading goods.
(1A) 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 House has issued a certificate under the proviso to sub-section (1), 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 of the profits.
(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 the supporting manufacturer in convertible foreign exchange, within a period of six months from the end of the previous year or, where the Chief Commissioner or Commissioner is satisfied (for reasons to be recorded in writing) that the assessee is, for reasons beyond his control, unable to do so within the said period of six months, within such further period as the Chief Commissioner or Commissioner may allow in this behalf.
(b) This section does not apply to the following goods or merchandise, namely:-
(i) mineral oil; and
(ii) minerals and ores (other than processed minerals and ores specified in the Twelfth Schedule).
Explanation 1.The sale proceeds referred to in clause (a) shall be deemed to have been received in India where such sale proceeds are credited to a separate account maintained for the purpose by the assessee with any bank outside India with the approval of the Reserve Bank of India.
Explanation 2.For the removal of doubts, it is hereby declared that where any goods or merchandise are transferred by an assessee to a branch, office, warehouse or any other establishment of the assessee situate outside India and such goods or merchandise are sold from such branch, office, warehouse or establishment, then, such transfer shall be deemed to be export out of India of such goods and merchandise and the value of’such goods or merchandise declared in the shipping bill or bill of export as referred to in sub-section (1) of section 50 of the Customs Act, 1962 (52 of 1962), shall, for the purposes of this section, be deemed to be the sale proceeds thereof.
(3) For the purposes of sub-section (I),-
(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 (iiia) (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 the business carried on by the assessee.
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 from 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.
(3A) For the purposes of sub-section (1A), profits derived by a supporting manufacturer from the sale of goods or merchandise shall 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;
(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 Export House or Trading House bears to the total turnover of the business carried on by the assessee.
(4) The deduction under sub-section (1) 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 below sub-section (2) of section 288, certifying that the deduction has been correctly claimed in accordance with the provisions of this section.
(4A) The deduction under sub-section (IA) shall not be admissible unless the supporting manufacturer furnishes in the prescribed form along with his return of income,-
(a) the report of an accountant, as defined in the Explanation below sub-section (2) of section 288, certifying that the deduction has been correctly claimed on the basis of the profits of the supporting manufacturer in respect of his sale of goods or merchandise to the Export House or Trading House; and
(b) a certificate from the Export House or Trading House containing such particulars as may be prescribed and verified in the manner prescribed that in respect of the export turnover mentioned in the certificate, the Export House or Trading House has not claimed the deduction under this section:
Provided that the certificate specified in clause (b) shall be duly certified by the auditor auditing the accounts of the Export House or Trading House under the provisions of this Act or under any other law.
(4B) For the purposes of computing the total income under sub-section (1) or sub-section (IA), any income not charged to tax under this Act shall be excluded.
Explanation.-For the purposes of this section,-
(a) ‘convertible foreign exchange’ means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange Regulation Act, 1973 (46 of 1973), and any rules made thereunder :
(aa) ‘export out of India’ shall not include any transaction by way of sale or otherwise, in a shop, emporium or any other establishment situate in India, not involving clearance at any customs station as defined in the Customs Act, 1962 (52 of 1962);
(b) ‘export turnover’ means the sale proceeds received in, or brought into, India by the assessee in convertible foreign exchange in accordance with clause (a) of sub-section (2) of any goods or merchandise to which this section applies and which are exported out of India, but does not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act, 1962 (52 of 1962);
(ba) ‘total turnover’ shall not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act, 1962 (52 of 1962):
Provided that in relation to any assessment year commencing on or after the 1-4-1991, the expression ‘total turnover’ shall have effect as if it also excluded any sum referred to in clauses (iiia), (iiib) and (iiic) of section 28; (baa)’profits of the business’ means the profits of the business as computed under the head ‘profits and gains of business or profession’ as reduced by-
(1) ninety per cent of any sum referred to in clauses (iiia), (iiib) and (iiic) of section 28 or of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits; and
(2) the profits of any branch, office, warehouse or any other establishment of the assessee situate outside India:
(c) ‘Export House Certificate’ or ‘Trading House Certificate’ means a valid Export House Certificate or Trading House Certificate, as the case may be, issued by the Chief Controller of Imports and Exports, Government of India;
(d) ‘supporting manufacturer’ means a person being an Indian company or a person (other than a company) resident in India, manufacturing (including processing) goods or merchandise and selling such goods or merchandise to an Export House or a Trading House for the purposes of export;”.
6. The pertinent question is as to whether in a case where the assessee has admittedly suffered a loss under section 80HHC(l), the assessee is entitled to deduction of 90 per cent of incentives under the first proviso to section 80HHC(3). Whether loss under the said proviso is to be ignored or whether loss, i.e., negative profit is to be adjusted against positive receipts in the shape of incentives and if after such adjustment there is some positive figure, deduction can be allowed on such figure ?
7. The issue had arisen in a large number of cases before various Benches of the Tribunal. Some Benches held that the assessee is entitled to deduction on incentives even in cases where there is no profit from export in terms of sub-section (1) of section 80HHC. The loss suffered has to be ignored. Other Benches have held that the loss is to be adjusted against incentive receipts and if resultant figure is a positive figure, then deduction under the section is to be allowed on such positive figure.
8. The third situation is the one pleaded and canvassed on behalf of the revenue. As per this situation no deduction to the assessee is permissible if there is no profit from export. According to the revenue the assessee is not entitled to any relief under section 80HHC if there is no profit under sub-section (1) of section 80HHC. Some Benches of the Tribunal have accepted the view canvassed on behalf of the revenue. Thereafter, the Hon’ble Bombay High Court in the case of IPCA Laboratories Ltd v. Dy. CIT (No.1) (2001) 251 ITR 401 (Bom), considered the matter and held that the loss, if any, incurred by the assessee in any of its activities is to be set off against the profit arising out of the assessee’s remaining activities.
9. As per the revenue, the decision of Hon’ble Bombay High Court in the case of IPCA (supra) fully supported their stand and the assessee was not entitled to any relief where there was no profit from export and there is no question of considering the claim of deduction with reference to incentive receipts.
10. In order to resolve the above conflict and to see the impact of the decision of Bombay High Court in the case of IPCA (supra), a Special Bench in the case of Lalsons Enterprises v. By. CIT (2004) 89 ITD 25 (Delhi), was constituted and the said Special Bench, as per decision dated 25-2-2004, held as under:
“(i) For the purpose of section 80HHC(3)(c), the loss arising in either export of manufactured goods or trading goods shall be set off or adjusted against the profit arisen in other business, which means that results of business of export of manufactured goods and business of export of trading goods shall be adjusted against each other.
(ii) For the purpose of computing the deduction allowable under the proviso to section 80HHC(3) in respect of export incentives mentioned in section 28(iiia), (iiib) and (iiic), loss, if any, suffered by the assessee under any of clauses (a), (b) or (c) of section 80HHC(3) shall be ignored and deduction shall be allowed in respect of amount computed under the said proviso.
(iii) For the purpose of applying Explanation (baa) below section 80HHC(4B) while reducing 90 per cent of the receipt by way of interest from profits of business, it is only 90 per cent of net interest remaining after allowing a set off of interest paid, which has a nexus with interest received, that can be reduced and not 90 per cent of gross interest.”
11. Thus, the Special Bench of the Tribunal, in Lalsons Enterprises case (supra) held that the loss arisen to an exporter under clause (a) or (b) or (c) of section 80HHC(3) needs to be ignored. The loss incurred by the assessee in any of the activities will not dilute the deduction allowable under the first proviso.
12. Meanwhile, the asscssee challenged the decision of the Bombay High Court in the case of IPCA (supra) before the Hon’ble Supreme Court. Their Lordships of the Supreme Court, vide order dated 11-3-2004 in IPCA Laboratory Ltd. v. By. CIT (2004) 266 ITR 521 (SC), held as under:
“We are concerned with the wordings of sub-section (3)(c) of section 80HHC. It would not be denied that the word ‘profit’ in section 80HHC(l) and sections 80HHC(3)(a) and 80HH, (3)(b) means a positive profit. In other words if there is a loss, no deduction would be available under sections 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, the assessee will be entitled to a deduction. If it is a loss, the assessee will not be entitled be available under sections 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, the assessee will be entitled to a deduction. If it is a loss, the assessee will not be entitled to any deduction. Sub-section (3)(c) and section 80HHC deal with cases where the export is of both self-manufactured goods as well trading goods. As per sub-section (1) of section 80HHC(3) 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, that loss has to be taken into account for the purpose of computing profits. Section 80AB has been given an overriding effect over all other sections contained in Chapter VI-A, including section 80HHC. If the income has to be computed in accordance with the provisions of the Act, not only profits but also losses have to be taken into account. The term ‘profit’ means a positive profit. It is not necessary that the word ‘profit’ must have the same meaning. The meaning of the word ‘profit’ will depend on the context in which it is used. For purposes of computation under section 80HHC(3), both profits as well as losses have to be taken into account. The word ‘profit’ in section 80HHC(3) will mean profit after taking into consideration losses, if any. The term ‘profit’ in section 80HHC both in sub-section (1) and sub-section (3) means a positive profit worked out after taking into account the losses, if any. Thus the word ‘profit’ has the same meaning in section 80HHC(l) and (3).”
13. The issue was again raised before the Mumbai Bench of the Tribunal in the case of Mangalya Trading & Investment Ltd. v. Dy. CIT (IT Appeal No. 6354 (Mum.) of 1998) and the Bench, after considering the decision of the Hon’ble Supreme Court, held that the decision of the Special Bench in the case of Lalsons Enterprises (supra) was not a good law. It was observed that deduction under section 80HHC(l) is available to an assessee who has derived a positive profit from the export of specified goods or merchandise. Deduction under the said section is not available to an assessee who has suffered a loss from the export and has not derived a positive profit therefrom. Such deduction is available on positive profit alone after adjusting the losses. Losses suffered by the assessee from the export of specified goods or merchandise can neither be ignored nor treated as nil for computation of deduction under section 80HHC. The export incentives alone are not sufficient to form the basis for deduction under section 80HHC(l), but shall be eligible only for further increasing the profits derived from the export and computed in the manner laid down in sub-section (3) of section 80HHC, in terms of the proviso thereto.
14. However, some other Benches of the Tribunal, after considering the abovesaid decision of the Hon’ble Supreme Court, held that loss as negative income was liable to be adjusted against receipt from incentives relief after adjustment there was positive figure. The assessee was entitled to deduction under section 80HHC on such figure.
15. Having regard to the above conflicting views, the Hon’ble President of the Tribunal was once again requested to constitute a larger Bench for considering the impact of the Supreme Court decision in IPCA’s case (supra) on the Special Bench decision of the ITAT in the case of Lalsons Enterprises (supra).
16. After considering the matter, the Hon’ble President constituted a Special Bench of 5 Members to consider and decide the questions referred to above.
17. The case was fixed for hearing. Before the matter was heard by this Special Bench, a similar issue was considered by the Hon’ble Bombay High Court in the case of Rohan Dyes & Intermediates Ltd v. CIT (2004) 270 ITR 350 (Bom).
18. We have heard the learned representatives of the parties and the interveners in extenso. The arguments of the learned counsel for the assessee and the interveners and the learned Departmental Representatives are summarized as under:
Arguments on behalf of the assessee
19. Before us, Sarv Shri K Shivaram, Y.P. Trivedi, V.H. Patil, R.R. Vora, Subramaniam Choksi and Ms. D.J. Jeriwala have addressed their arguments. A fact-sheet and 3 paper books have been filed. Contentions have been advanced with regard to deduction of the tax incentive for exports under section 80HHC of the Act. Attention in this regard has been drawn to pages 170 to 178 and 180 to 181 of the Assessee’s Paper Book (‘APB’, for short) in’B. Sorabjee’. Reference has been made to CBDT CircularNo. 564, dated 5-7-1990, which allegedly clarifies that incentives are to be included in the profits of the business. This Circular is contained at pages 182 to 184 of the APB. CBDT Circular No. 571 dated 1-8-1990, has also been referred to. This, as per the Id. counsel, further clarifies that incentives are to be included in the profits of the business. This circular is at page 185 of the APB. Reference has also made to CBDT Circular No. 621 of 19-12-1991, explaining the provisions of Finance (No. 2) Act, 1991 with regard to section 80HHC (pages 190 to 193 of the APB).
20. With regard to duty drawback, it is submitted that this is derived from exports. Attention in this regard has been invited to pages 461 to 464 and the duty drawback scheme and rates contained at pages 464 to 483 of the APB.
21. It is contended that the decision of the Hon’ble Supreme Court confirming the Hon’ble Bombay High Court’s decision in IPCA’s case (supra) is also not applicable. The issue in that case was as to whether the loss in respect of export of trading goods was to be ignored while determining the assessee’s entitlement to deduction under section 80HHC(3)(c) of the Act. There, the assessee had export loss from trading goods amounting to Rs. 6.86 crores. The export profit from manufacturing goods, after considering the incentives, was Rs. 3.78 crores. The assessee had issued disclaimer certificates in favour of manufacturing exporters. It had, accordingly, contended that loss from trading exports was to be ignored and deduction under section 80HHC was to be computed. This export profit was inclusive of incentives. The Hon’ble Bombay High Court was required to interpret the proviso to sub-section (1) to section 80HHC and have not dealt with the proviso to sub-section (3) of section 80HHC. The Hon’ble High Court made certain observations with respect to computation of deduction under sub-section (3) to section 80HHC. However, the applicability of the proviso to sub-section (3) was not dealt with.
22. The Hon’ble Bombay High Court has itself, in Rohan Dyes & Intermediates Ltd. v. CIT (2004) 270 ITR 350 (Bom), held that the Hon’ble Supreme Court, in IPCA’s case (supra) was not concerned with the proviso to section 80HHC(3).
23. Reliance has been placed on the following decisions:-
1. Goodyear India Ltd. v. State of Haryana (1991) 188 ITR 402 (SC);
2. CIT v. K Ramakrishnan (1993) 202 ITR 997 (Ker.);
3. CIT v. Smt. Kamla Devi Rathi (1995) 213 ITR 177 (Pat.) (FB); and
4. CIT v. Sudhir Jayantilal Mulji (1995) 214 ITR I54 (Bom.).
It has further been alleged that the decision in Rohan Dyes & Intermediates Ltd.’s case (supra) is also not applicable to the present facts. In the said case, the assessee had a loss, even after applying the provisions. In that case, the assessing officer himself adjusted the incentives against the losses. As the amount computed under sub-section (3) was a negative amount and the facts were identical with IPCA’s case (supra), the assessee was not allowed deduction under section 80HHC. The Commissioner (Appeals) allowed the deduction. The Tribunal, relying on the decision of Hon’ble Bombay High Court in IPCA’s case (supra), allowed the department’s appeal. However, there is no discussion in the Tribunal’s order regarding the proviso to sub-section (3). The Hon’ble Bombay High Court has dismissed the appeal filed by the assessee on the ground that the issue under consideration is covered by the decision of the Hon’ble Supreme Court in IPCA’s case (supra).
24. So far as regards the alleged non-applicability of the IPCA case (supra) Supreme Court decision, it has been submitted that a precedent is an authority only for what is actually decides and not for what may remotely or even logically follow from it. A decision on a question that has not been argued cannot be treated as a precedent. Judgments must be read as a whole and observations in judgments should be considered in the context in which they are made and in the light of the questions that were before the Court. Observations in judgments should be read in the context in which they are stated. Judgments should not be construed as statutes. To lift a sentence from a judgment, as if it is an independent provision in a statute, and to emphasize it as declaring the law, will result in unanticipated and unexpected consequences.
25. In IPCA’s case (supra), even after incentives, there was a loss. In the assessee’s case, there is a positive figure after considering the incentives. In IPCA’s case (supra), the assessee had given the disclaimer certificate in favour of supporting manufacturers in spite of incurring losses in trading exports. In the assessec’s case, no such disclaimer certificate has been given. As the facts are different, the decision in the case of IPCA (supra) cannot be held to be a binding precedent on the assessee’s case.
26. Further, the Hon’ble Bombay High Court’s decision in the case of Rohan Dyes &Intermediates (supra) is also stated to be not applicable to the facts of the present case. As per the learned Counsel, in the said case, the Hon’ble Bombay High Court has dismissed the appeal filed by the assessee on the ground that the issue under consideration is covered by the decision of the Hon’ble Supreme Court in IPCA case (supra). It has further been argued that dismissal of Special Leave to appeal in limine does not mean that the Hon’ble Supreme Court has decided the issue on merits. Reference in this regard has been made to Hemalatha Gargya v. CIT (2003) 259 ITR 11 (SC), and Kunhayammed v. State of Kerala (2000) 245 ITR 360 (SC). It has also been contended that dismissal on merits in respect of the judgment of the Division Bench does not amount to a declaration of law. The decision of Brooke Bond India Ltd. CIT (2004) 269 ITR 232 (Cal.), in this connection, has been referred to.
27. It has further been submitted that as the appeal was dismissed at the admission stage itself in the case of Rohan Dyes & Intermediates Ltd. (supra) on the ground that no substantial question of law arose from the order, the said order would be binding only on the parties to the appeal and not on others. The decision of the Hon’ble Bombay High Court in IPCA’s case (supra) was considered by the Mumbai Tribunal in the case of Vishal Exports Overseas Ltd. v. Income Tax Officer (IT Appeal No. 1248 (Mum.) of 2002, dated 20-1-2003) and in the case of Shri Samdas T. Budhrani and by the Special Bench of the Delhi Tribunal in Lalsons Enterprises case (supra). In all these decisions, the Tribunal has held that the issue before the Hon’ble Bombay High Court was different from that in the present case.
28. It has thus been submitted that the decision of the Delhi Special Bench of the Tribunal in Lalsons Enterprises case (supra) is still good law and accordingly, the loss under clauses (a), (b) or (c) of sub-section (3) of section 80HHC has to be ignored and deduction is available on the basis of the proviso to sub-section (3). In the facts of the assessee’s case, as the gross total income is positive and there is export profit considering duty drawback, the provisions of section 80AB would not disentitle the assessee from claiming deduction under section 80HHC.
Submissions of the department
29. On the other hand on behalf of the department, Dr. P. Daniel, the learned Special counsel and Shri Girish Dave, the learned Commissioner (Appeals), departmental Representative, assisted by Shri K.L. Maheshwari, the learned Departmental Representative have argued that the issue at hand is squarely covered by the decision of the Hon’ble Supreme Court in the case of IPCA (supra).
30. it has further been contended that the Hon’ble Bombay High Court, in the case of Rohan Dyes & Intermediates (supra) held that the meaning of the word ‘profit in the proviso appended to section 80HHC(3)(c) is no different than that in section 80HHC(l) and (3). It carries the same meaning, i.e., positive profit worked out after taking into consideration the losses, if any. The proviso is not an independent provision. The expression ‘further increased is no pointer that the proviso is enacted as a separate section. The words ‘profit derived from such exports’ together with the word ‘and’ clearly indicate that the profits have to be calculated by counting both the exports. The word ‘profits’ appearing in the proviso appended to sub-section (3)(c) of section 80HHC has to be given that meaning and clearly indicated that the profits have to be calculated by counting both the exports.
31. It has been pointed out that the issue raised in the appeal before the ITAT, Mumbai in the case of Income Tax Officer v. Rohan Dyes & Intermediates (P) Ltd. (IT Appeal No. 5211 (Mum.) of 2000), was as under:-
“On the facts and in the circumstances of the case and in law the learned Commissioner (Appeals) erred in directing the Assessing officer to ignore the losses suffered by the assessee and calculate the deduction under section 80HHC of the Act on the profit taxable under sub-clauses (iiia), (iiib) and (iiic) of section 28 of the Income Tax Act.”
32. The Tribunal, following the judgment of the Hon’ble Bombay High Court in the case of IPCA (supra), set aside the order of the learned Commissioner (Appeals) on this issue and directed the assessing officer to compute deduction under section 80HHC at nil The appeal has been dismissed by the Hon’ble High Court of Bombay, holding that the ITAT did not commit any error in upholding the order of the assessing officer, wherein it was stated that the assessee was not entitled to deduction as specified in section 80HHC.
33. It is further submitted that if the resultant figure under sub-section (3)(c) of section 80HHC is a negative figure, there is nothing at hand to further increase, and hence, the proviso does not come into play at all. The moment the working under sections 80HHC(3)(a), (b) or (c) arrives at a loss, there is no further computation needed, as there is no profit derived’ from export of the specified goods or merchandise. The export incentives received by the assessee were not profits derived from the export of goods, but merely benefit given by the Government after the export had been made.
34. It has been pointed out that according to the Special Bench of the ITAT in Lalsons Enterprises case (supra), the loss in the export business and the grant of export incentives referred to in section 28(iiia), (iiib) and (iiic) represent different specifies of income. The latter is not considered as profit of the business in view of the fact that it is reduced from the profits of the business by Explanation (baa) to section 80HHC(4B). It is brought to tax within the purview of the deduction by the proviso to sub-section (3) as a separate category of income. Thus, in view of Lalsons Enterprises’ case (supra), the exporter incurring loss will get deduction under section 80HHC with reference to the non-export profit. So, in order to be eligible for deduction under section 80HHC, the profit need not be derived from the export sales which are brought into India in convertible foreign exchange. In the eventuality of loss in export also, the assessee would not be denied benefit of deduction. The decision of the Special Bench of the Tribunal in Lalsons Enterprises’ case (supra) was delivered on 25-2-2004. After 15 days, i.e., on 11 -3-2004, the decision of the Hon’ble Supreme Court was given in the case of IPCA (supra).
35. The learned Departmental Representatives have argued that in the light of the decision of the Hon’ble Apex Court in IPCA’s case (supra), it is now settled that section 80HHC would be governed by section 80AB and the decision of the Hon’ble Bombay High Court to the contrary, in the case of CIT v. Shirke Construction Equipments Ltd. (2000) 246 ITR 429 (Bom), was disapproved. This view is in accordance with their Lordships’ earlier judgments in the cases of H.H. Sir Rama Varmav. CIT (1994) 205 ITR 433 2 (SC), and Motilal Pesticides (I) (P) Ltd. v. CIT (2000) 243 ITR 26 (SC).
36. It has been pointed out that in view of these decisions, section 80AB will have an overriding effect over all other sections in Chapter VI-A of the Act, under the heading’C’, which contains section 80HHC also. It is also stated that if there is loss, the exporter would not be eligible to any deduction with reference to the mechanism of deduction under sub-section (3) of section 80HHC and claim of deduction with reference to the proviso would be of no avail. The profit refers to only a positive profit and not a loss, as held by the Hon’ble Apex Court.
37. Ultimately, the learned Departmental Representatives have sought dismissal of the assessee’s challenge.
38. We have given our careful thought to the arguments raised by both the parties and to the material placed on record before us.
39. In IPCA’s case (supra), the Hon’ble Supreme Court held that 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 wording of the section. If the wording of the section is clear, then benefits, which are not available under the section, cannot be conferred by ignoring or misinterpreting words in the section. Sub-section (3)(a) deals with the case where the export is only of self-manufactured goods. Sub-section 3(b) considers 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-sections (3)(a) and 3(b). It would not be denied that the word ‘profit’ in section 80HHC(l) and section 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(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 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. In case the net figure is a loss, 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 as trading goods. The opening part of sub-section (3)(c) states ‘profits derived from such export shall’. Then follow (i) and (ii). Between (i) and (ii) the word ‘and’ appears. A plain reading of sub-section (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 sub-section (3)(c)(i) and (ii). The opening words ‘profit derived from such exports’ together with the word ‘and’ clearly indicate that the profits have to be calculated by counting both the exports. It is clear from a reading of sub-section (1) 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. 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 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 the total income. For the purposes of such computation, both profits 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, both in sub-section (1) and in sub-section (3), means a positive profit worked out after taking the losses, if any. Thus, the word ‘profit’ has the same meaning in section 80HHC(l) and (3). When the Legislature wanted to take exports from self-manufactured goods or trading goods separately, it was already so provided in sub-sections (3)(a) and (3)(b). Subsection (3)(c) says that ‘profit from such exports’ has to be profits of exports of self-manufactured goods as well as trading goods. The profit has to be calculated in the manner laid down in sub-section (3). The words ‘profits derived from such exports’ together with the word ‘and’ clearly indicate that the profits have to be calculated by counting both the exports. The word ‘profits’ appearing in the proviso appended to sub-section (3)(c) of section 80HHC has to be given that meaning, and that clearly indicates that the profits have to be calculated by counting both the exports. Even under section 80HHC(3)(c)(i), the profit is to be the 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 sub-section 3(c)(i), one necessarily has to reduce by profits under sub-section (3)(c)(ii). The term ‘profit’ means positive profit. Thus, if there is a loss, then those losses in exports of trading goods have to be adjusted. They cannot be ignored. Therefore, a plain reading of section 80HHC makes it clear that in arriving at the 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(l). If there is a loss, he will not be entitled to any deduction.
40. The aforesaid decision of the Hon’ble Supreme Court in IPCA’s case (supra) was considered by the Hon’ble Bombay High Court in Rohan Dyes & Intermediates Ltd.’s case (supra). In the said case, the Tribunal, relying upon the decision in IPCA’s case (supra), held that the assessing officer was right in holding that in view of the fact that the assessee had incurred loss from export of trading goods, computed under sub-section (3) of section 80HHC, the ultimate figure of deduction under sub-section (3) was a negative profit (loss) and, therefore, the deduction under section 80HHC was not available to the assessee.
41. Before the High Court, it was submitted that the loss suffered by the assessee from the export of trading goods while computing the deduction under sub-section (3) of section 80HHC was required to be taken as nil that the proviso to sub-section (3)(c) of section 80HHC is an independent provision unconnected with sub-section (3) and in view thereof, on the profits earned by the assessee on the export of merchandise manufactured by the -assessec, the deduction under section 80HHC was admissible. The Division Bench judgment of the Bombay High Court in IPCA Laboratories Ltd. v. Dy. CIT (No. 1) (2001) 251 ITR 401 (Bom) and the judgment of the Supreme Court in IPCA Laboratory Ltd. v. Dy. CIT (2004) 266 ITR 521 (SC), conforming the Division Bench judgment of the Bombay High Court, were sought to be distinguished inter se. The decision of the Hon’ble Delhi High Court in Modi Cement Ltd. v. Union of India (1992) 193 ITR 91 (Del) and the decision of the Hon’ble Allahabad High Court in Indo-Gulf Fertilizers & Chemicals Corpn. Ltd. v. Union of India (1992) 195 ITR 485(All) and the CBDT circular pursuant to the amendment to section 80HHC in 1991 were referred to.
42. Their Lordships of the Bombay High Court, after considering IPCA’s case (supra) (SC), held:
“The Supreme Court had a close look at section 80HHC and held that though section 80HHC has been incorporated in the Income Tax Act with a view to provide incentive for earning foreign exchange and a liberal interpretation of such provision may be called for, the plain language of the said section being clear, the benefits which are not available cannot be conferred by ignoring or misinterpreting the words in the section. The Supreme Court, considering the word ‘profit’ occurring in sub-sections (1) and (3)(a) and (b) of section 80HHC, held that the said word ‘profit means a positive profit and that if there is a loss, then no deduction should be available. As regards sub-section (3)(c), the Supreme Court held that ‘profits from such exports’ has to be profits of exports of self-manufactured goods plus profits of exports of trading good. 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.”
43. After quoting from the decision of IPCA’s case (supra), as referred above, Their Lordships further observed that:
“The meaning of the word ‘profit’ occurring in section 80HHC, subsections (1) and (3), as held by the Supreme Court, is the same and that is positive profit worked out after taking into consideration the losses. The meaning of the word ‘profit’ in the proviso appended to sub-section (3)(c) is no different and it carries the same meaning, i.e., the positive profit worked out after taking into consideration the losses. It is true that in the case of IPCA Laboratory Ltd. (2004) 266 ITR 521 (SC), the Supreme Court was not concerned with the proviso appended to sub-section (3)(c) of section 80HHC, as it was not necessary for the purpose of that case, but the construction of the word ‘profit’ by the Supreme Court in relation to the main provision contained in sub-section (3) of section 80HHC is equally applicable to the word ‘profits’ occurring in the proviso appended to that sub-section. The proviso is surely not an independent provision, as was sought to be contended by the learned counsel for the assessee. There is no indication to that effect. Normally, a proviso is to be construed in relation to the subject-matter covered by the section to which the proviso is appended. The known rule of construction of a statutory provision is that a proviso to a particular provision of a statute only embraces the field which is covered by the main provision. It carves out an exception to the main provision to which it has been enacted as a proviso and no other. Moreover, the language of the main provision, namely, sub-section (3) of section 80HHC, is very clear and has been held to be so by the Supreme Court. The word ‘profit’ understood in the main provision has to be understood the same way in the proviso appended thereto. The expression ‘further increased’ is no pointer that the proviso is enacted as a separate section. The proviso appended to clause (c) of sub-section (3) of section 80HHC reads that the profit computed, inter alia, under clause (c) of sub-section (3) shall be further increased by the amount which bears to ninety per cent of any sum referred to in clause (iiia) (not being profits on sale of a licence acquired from any other person), and clauses (iiib) and (iiic) of section 28. The profit computed under clause (c) of sub-section (3) means positive profit worked out after taking into consideration the losses, if any, and therefore, the word ‘profits’ occurring in the proviso means positive profit.”
44. In Rohan Dyes & Intermediates Ltd.’s case (supra), their Lordships of the Bombay High Court also noted that the submission sought to be advanced before them for the assessee was the same as the one put forward before the Hon’ble Supreme Court, but the Apex Court negatived. the same, as per the observations made in the decision and referred to above. In the ultimate conclusion, their Lordships observed as under:
“The contention of learned counsel for the assessee, thus, cannot be accepted that negative profit or in other word ‘loss’ from the export of trading goods arising on computing the deduction under sub-section (3) of section 80HHC has to be taken nil. This is based on misconstruction of the proviso appended to sub-section (3)(c) of section 80HHC.
As regards the circular issued by the Central Board of Direct Taxes relied upon by learned counsel for the assessee, suffice it to observe that the said circular also shows that the positive profits can only be considered for the purpose of deduction. This is what the Supreme Court said regarding the said circular in IPCA Laboratory Ltd. (2004) 266 ITR 521 (SC).”
45. The main contention advanced before us on behalf of the assessee and the interveners was that the decision of the Hon’ble Bombay High Court in Rohan Dyes & Intermediates Ltd.’s case (supra) cannot be treated as a binding precedent, as the question before their Lordships was not whether loss suffered by an exporter under sub-section (1) of section 80HHC was to be ignored and deduction allowed on incentive as per proviso (1) to section 80HHC(3) of Income Tax Act. Therefore, the view expressed by the High Court cannot be treated as a ratio decidendi but at best, it is obiter dicta, which is not binding.
46. As we understand, the case of the assessee and the interveners is that the decision of the Hon’ble Supreme Court in IPCA’s case (supra) is to be considered in the light of the question posed before the Hon’ble Supreme Court. There, the assessee had exported both self-manufactured as well as trading goods. There was a profit in the export of self-manufactured goods, whereas there was loss in the export of trading goods. The assessee pleaded that the loss should be ignored. It is in this context that it came to be held by the Supreme Court that the loss cannot be ignored and the profit and loss in the export of self-manufactured goods as well as in the export of trading goods needs to be considered. The decision of the Supreme Court does not hold that if there is a loss in sections 80HHC(3)(a), (b) and (c), then 90 per cent of the export incentives, as prescribed in the proviso, has to be ignored, which is the case of the Department. Rather, the Supreme Court has held that the loss cannot be ignored, but should be adjusted along with the profit. The decision of the Supreme Court was with regard to sub-clauses (i) and (it) of section 80HHC(3)(c). It would apply on all fours. There is loss in section 80HHC(3)(a), (b) or (c) and a positive amount as per the proviso. When there is a loss in section 80HHC(3)(a), (b) and (c), it cannot be ignored. It has to be taken into account along with 90 per cent of the export incentives, as prescribed in the proviso. The intention of the Legislature is to give deduction for the profit earned by an assessee from the export of goods. So far as regards Rohan Dyes & Intermediates Ltd.’s case (supra), while holding that the loss in section 80HHC(3)(c) cannot be ignored or taken at nil, the Supreme Court decision in IPCA’s case (supra) was relied on. It was held that the profit from export of self -manufactured goods is to be adjusted against the loss from export of trading goods. Likewise, the loss in section 80HHC(3)(c) is to be adjusted against 90 per cent of the export incentives in the proviso and if after adjustment there is any positive profit, the assessee will get deduction under section 80HHC. However, if after such adjustment the ultimate result is a loss, the assessee will not get any deduction under section 80HHC.
47. The department’s case, as we understand, is that the Supreme Court decision in IPCA’s case (supra) squarely covers the case at hand. This position has been clarified further by the subsequent decision of the Hon’ble Bombay High Court in the case of Rohan Dyes & Intermediates Ltd. (supra). As such, the proviso in question is not an independent provision. ‘Profit’ in the proviso to section 80HHC(3)(c) means the same as ‘profit’ in section 80HHC(1) and (3). This profit means a positive profit arrived at after taking into consideration, the losses incurred. Only profits derived from exports can be ‘further increased’. That which is absent cannot be increased. So, in the event of the resultant of figure under section 80HHC(3)(c) being a negative figure, there cannot be anything that can be ‘further increased’. Therefore, the proviso cannot be invoked. In view of the Supreme Court decision in IPCA’s case (supra), section 80HHC is governed by section 80AB.
48. The main submission of the assessee is that the Supreme Court decision in IPCA’s case (supra) and the Bombay High Court decision in Rohan Dyes & Intermediates Ltd.’s case (supra) are not applicable to the present case, and that the question raised is wide open. According to the learned counsel for the assessee and the interveners IPCA’s case (supra) and Rohan Dyes & Intermediates Ltd.’s case (supra) are, to be read in the light of the respective questions agitated therein, respectively. What is binding and applicable is the ratio of a decision, and not any passing remark or observation of the Court. The observations of the Bombay High Court in Rohan Dyes & Intermediates Ltd.’s case (supra) are only obiter dicta, whereas in IPCA’s case (supra) the question before the Hon’ble Supreme Court was totally different.
49. We have given our thoughtful consideration to the matter. As per the doctrine of precedent, precedents not only have great authority, but must, where applicable, be allowed. The practice of treating precedents as absolutely binding is necessary to secure the certainty of the law, predictability of decisions being more important than approximation to an ideal. Authoritative decisions must be followed, whether they are approved of or not, they being legal sources of law. Here, it becomes necessary to examine as to what part of a decision it is that is actually binding on lower courts.
50. The final and decisive portion of ajudgment consists of two parts, the decision and the reason therefor : the decision in concreto or the res judicata, and the principiigeneralis or the general principles, on which that concrete decision of the case is founded.
51. Res judidata or the thing decided (i.e., the concrete decision of the case) is final and binding upon the parties. No court will allow to raise the matter or the issue decided once again. Res judicala pro veritate accipitur: A thing adjudicated is received as true. The only way of getting that concrete decision reversed or modified is by way of revision, review, rectification or appeal provided for under the relevant statute.
52. The ratio decidendum of a decision is the judicial reason on which that decision is founded. It is what that case decides generally or rule of law for which it is an authority. It is of universal application. It binds the subject, the Executive and the subordinate courts alike. The principle decided will be applied whenever a new case comes up for decision. Where the judgment acts against the whole world, that is, in rem, the findings in that case may be conclusive even against third parties. As against persons not party to the suit, the only part of a case which is conclusive is the general rule of law for which it is authority, or the ratio decidendum of ‘the judgment. It is the rule of law applied by and acted on by the court, or the rule which the court regarded as governing the case. Literally, it means reason (ratio) for the decision (decidendum). The nature of ratio decidendi has been discussed in, inter alia:
1. Jagdish Lal v. State of Haryana (1997) 6 SCC 538; and
2. John Martin v. State of West Bengal AIR 1935 SC 772.
53. Opposed to the ratio decidendi stand obiter dicta Literally, this phrase means things said (dicta) by the way (obiter). Judicial obiter dicta, that is to say, as per Sir John Salmond, in Salmond on Jurisprudence, Twelfth Edition by P.J. Fitzgerald, statements of law which go beyond the occasion, and lay down a rule that is irrelevant to the purpose in hand, or is stated by way of analogy merely, or is regarded by a later court as being unduly wide, on the other hand, are persuasive precedents. A court may give various observations not precisely relevant to the issue before it. Such observations do not give the court’s final decision on a live issue. So, they are not endowed with as much authority as the actual decision. They are without binding authority, but are nonetheless important. Not only do they help to rationalize the law, they serve to suggest solutions to problems, not yet decided by the courts. The nature of obiter dicta has been considered in, inter alia:
1. H.H. Maharajadhiraia Madhav Rao Jivaji Rao Scindia Bahadur v. Union of India AIR 1971 SC 530; and
2. Addl Distt. Magistrate v. Shivakant Shukla AIR 1976 SC 1207.
54. However, the Supreme Court of India being the Apex court of the land, not only the ratio decidendi, but also the obiter dicta of the Hon’ble Supreme Court are binding on all other courts and other bodies discharging judicial or quasi-judicial functions, like statutory Tribunals. It has been judicially so noticed in:
1. Municipal Committee v. Hazara Singh AIR 1975 SC 1087;
2. Vishva Dutt Vashisth v. Maharashtra Watch & Gramophone Co. & Firm at Bombay AIR 1967 Bom. 434; and
3. Anant Baburao Sawant v. State AIR 1967 Bom 109.
55. After having considered the submissions of the assessee and the interveners in the light of the above, we agree that obiter dicta of a High Court decision may not be binding on subordinate courts and judicial and quasi-judicial bodies. However, obiter dicta of the Hon’ble Supreme Court are binding. For the present purposes, we may also accept the proposition that an unreasoned order of even the Hon’ble Supreme Court may not be a binding precedent or a decision having force under article 141 of the Constitution of India. But in our considered opinion, the decision of the Hon’ble Supreme Court in the case of IPCA (supra), regarding the issue at hand, is ratio and not obiter. It fully covers the controversy. This was specifically held by the Hon’ble Bombay High Court in Rohan Dyes & Intermediates Ltd.’s case (supra).
56. Both IPCA case (supra) and Rohan Dyes & Intermediates Ltd.’s case (supra) are to be treated as binding, for disposing of the two questions referred to this Bench.
57. Incidentally, in a still later decision, CIT v. A.M. Moosa, Bharath Sea Foods (2005) 272 ITR 29 (Ker.) it has been held that the word ‘profit’ has to be given its natural meaning; that the profit mentioned in the proviso to section 80HHC(3) is clearly a profit and not loss; and that when there is no difficulty in understanding the word used in the statute, it is not necessary to find out the nature of the provisions.
58. In view of the above decisions in IPCA’s case (supra), Rohan Dyes & Intermediates Ltd.’s case (supra) and A.M. Moosa, Bharath Sea Foods’ case (supra), that ‘profit’ in the proviso to section 80HHC(3) means a positive profit, we need say nothing more than that the Supreme Court decision in IPCA’s case (supra) is fully applicable hereto.
59. The two decisions in Rohan Dyes & Intermediates Ltd.’s case (supra) and A.M. Moosa, Bharath Sea Foods’ case (supra), are also precedents, and their ratios are fully applicable to the controversy at hand. As already noted above, a ratio is the rule of law applied and acted upon by the court. Now when we examine the question as to what the ratio of these decisions is, we have to examine the reasons given therein. In both the said cases, in order to resolve the controversy, it was deemed necessary to determine as to what the meaning of the word ‘profit’ in section 80HHC(3) of the Income Tax Act is. It was held in both these cases that such profit means ‘positive profit’ and not loss. No deduction under section 80HHC(3) is permissible in case of a loss. There is no question of ignoring the resultant (sic).
60. Having regard to the elaborate discussion in Rohan Dyes & Intermediates Ltd.’s case (supra), it is difficult to accept that the said decision is not a reasoned decision. It cannot be distinguished or surpassed.
61. The questions before us are, therefore, squarely covered by the Supreme Court decision in IPCA case (supra) and the Bombay High Court decision in Rohan Dyes & Intermediates Ltd.’s case (supra). So, the loss arisen is to be ignored. There is no question of it being adjusted against incentive receipts. The assessee is not entitled to any deduction under section 80HHC.
62. The assessee has tried to distinguish the IPCA’s case (supra) and Rohan Dyes & Intermediates Ltd.’s case (supra) decisions on equitable grounds also, firstly by saying that incentives were allowed so that Indian exporters may compete in the International market, as accepted in Lalsons Enterprises’ case (supra), and secondly, by contending that if there is a profit of one rupee, the assessee would be entitled to deduction of 90 per cent of the incentives as per the proviso, as against the assessee who suffers a loss of one rupee and would lose the entire of incentive deductions. Thus, the difference of a meagre amount of two rupees would change the entire scenario. Such interpretation, apart from being inequitable, would lead to absurd results.
63. As regards the first contention, their Lordships have already considered and rejected the same with cogent reasons which need not be repeated (sic) accepted in Lalsons Enterprises’ case (supra), and secondly, by contending that if there is a profit of one rupee, the assessee would be entitled to deduction of 90 per cent of the incentives as per the proviso, as against the assessee who suffers a loss of one rupee and would lose the entire of incentive deductions. Thus, the difference of a meagre amount of two rupees would change the entire scenario. Such interpretation, apart from being inequitable, would lead to absurd results.
64. As regards the first contention, their Lordships have already considered and rejected the same with cogent reasons which need not be repeated. Besides, export incentives, despite the purpose therefor, have been made taxable under the provisions of section 28 of the Act. Therefore, there is no question of treating them as exempt from tax on equitable grounds.
65. Apropos the second contention, we have to consider the language of a statutory provision as it is. Whether the result of such interpretation is equitable or not is beyond the domain of the court. It is for the Policy Makers or Legislature to consider and to make necessary changes, wherever so thought necessary.
66. Hence, both these issues are decided in favour of the department and against the assessee, in respectful consonance with the decision of the Hon’ble Supreme Court in the case of IPCA (supra) and the decision of the Hon’ble Bombay High Court in the case of Rohan Dyes & Intermediates Ltd. (supra).
67. So far as regards the other issues, the parties agree that they be decided by the regular Division Bench.
68. The file shall go back to the regular Division Bench for passing orders on these issues in accordance with our above findings.
69. The other issues raised in the respective appeals will also be duly considered and decided by the regular Division Benches.
70. In the above manner, the reference stands disposed of.