ORDER
Shri S. Bandyopadhyay, Accountant Member
1. Only issue in this appeal filed by the assesses relates to whether for the purpose of computation of the deduction to be allowed to the assessee on export activities in accordance with the provisions of section 80HHC(3), the “total turnover of the business” carried on by the assessee should include the two items of subsidy on export (Rs. 10,29,736) and miscellaneous income (Rs. 56,65,969). The miscellaneous income again consists of the following different items :–
Sundry
Sales
Rs. 4,18.364
Offal
Sales
Rs.
12,88,772
(Barley
Husk)
Rent
Recoveries
Rs. 12,871
Rs.
17,20,007
Misc.
Receipts :
Sale
of Replicence
Rs. 42,041
Cash
Discount from Metal Box
Rs. 3,59,650
Sale
of Raw Materials
Rs. 4,155
Sale
of By Products
Rs. 2,98,171
Octroi
Recoveries
Rs. 4,81,768
Claims
Received
Rs. 1,42,086
Drawback
received
Rs.
16,47,091
Provision
written back
Rs. 9,63,439
Other
Sundries
Rs. 7,561
Rs.
39,45,962
Rs.
56,65,969
In the assessment, the Assessing Officer has considered the above-mentioned two items to be includible within total turnover of the business carried on by the assessee. His action has been upheld by the CIT(A).
2. At the stage of hearing of the appeal filed by the assessee before us, the ld. counsel for the assessee has come up with a written submission. He argues that the deduction envisaged under section 80HHC(3)(b) is required to be computed as below-
Export turnover
Profits & gains of business X __________________
Total turnover
He firstly argues that, inasmuch as, the “export turnover” cannot include the above-mentioned items like subsidy on exports, duty drawbacks etc. as a corollary, the total turnover also should not include such items. He relies upon two decisions of the ITAT, Calcutta Bench in support of this contention that a parity must be maintained between the items to be included in the “export turnover” and “total business turnover”–
(i) Chloride India Ltd. v. Dy. CIT [1995] 53 ITD 180 (Cal.),
(ii) Unreported judgment of ITAT, ‘A’ Bench, Calcutta dated 10-5-1999 in [ITA Nos. 3019 & 3008 (Cat.) of 1995 dated 10-5-1999] in the case of Stone India Ltd., assessment years 1991-92 and 1992-93.
3. Thereafter, the ld. counsel for the assessee refers to the definition of “total turnover” as provided in section 80HHC itself. It may be mentioned in this connection that Finance Act, 1990 introduced clause (bb) to the Explanation to section 80HHC, with effect from 1-4-1991 in accordance with which, for the purpose of this section, “total turnover” shall not include any sum referred to in clauses (iiia), (iiib) and (Hid) of section 28. This particular clause (bb) was, however, omitted by the Finance (No. 2) Act, 1991 with effect from 1 -4-1991 itself. In its place, another clause (ba) was inserted by the Finance (No.2) Act, 1991 with retrospective effect from 1-4-1987, which reads as below :–
“(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 first day of April, 1991, the expression “total turnover” shall have effect as if it also excluded any sum referred to in clauses (iiia), (iiib) and (me) of section 28.”
4. The ld. counsel for the assessee strongly contends in this connection that firstly this definition of “total turnover” is an excluding definition and not an including definition. The definition merely excludes freight and insurance with effect from 1-4-1987 and the sums referred to in clauses (iiia), (iiib) and (iiic) of section 28 w.e.f. 1-4-1991. He argues that as such the expression “turnover” should mean the sale proceeds alone and not other items of receipts. So far as this particular definition given under clause (ba) of the Explanation to section 80HHC is concerned, the ld. counsel for the assessee strongly argues that although the exclusion of the sums as referred to in clauses (iiia), (iiib) and (iiic) of section 28 is specifically provided w.e.f. 1-4-1991, the said provisions, should, however, be considered to be having retrospective effect, inasmuch as, the provision should be considered as merely clarificatory or directory in nature. He argues that if the above-mentioned items be considered to be includ-ible within “total turnover”, the same would be unjust and would lead to absurd results. In this connection, he refers to the Memorandum explaining the provisions in Finance (No. 2) Bill, 1991. It may be mentioned in this connection that the aforesaid Finance (No. 2) Act, 1991 also inserted another clause (baa) to the aforesaid Explanation to section 80HHC with effect from 1-4-1992 defining “profits of business”, which has been prescribed to mean the profits of business as computed under the head “profits and gains of business and profession” as reduced by 90% of any sum referred to in clauses (iiia), (iiib) and (iiic) of section 28 or of any receipt by way of brokerage, commission, interest, rent, charges or
interest receipt of a similar nature included in such profits. In explaining the introduction of the above provisions both in clauses (bd) and (bba) of the Explanation to section 80HHC, it was stated in the above-mentioned Memorandum explaining the provisions of Finance (No. 2) Bill that the existing formula (without excluding such items from both “total turnover” as well as “profits of business”) gives a distorted figure of export profits when receipts like interest, commission, etc. which do not have an element of turnover, are included in the Profit & Loss A/c. The ld. counsel for the assessee strongly contends that even the Legislature also accepted the position that these items do not have an element of turnover. He thus argues that in the year under present appeal, when the above-mentioned definition clauses did not exist, the “total turnover” of the business should not be considered to include items like these, which do not have the element of turnover at all.
5. In support of his argument that when the plain literal interpretation of a statutory provision produces a manifestly absurd and unjust result which could never have been intended by the Legislature, the Court may modify the language used by the Legislature or even ‘do some violence’ to it, so as to achieve the obvious intention of the Legislature and produces a rational construction, he relies on the following judgments in support of his contention :–
(i) K.P. Varghese v. ITO [1981] 131 ITR 597 (SC) at pages 605-606;
(ii) CIT v. J.H. Golta [1985] 156 ITR 323 (SC) at page 339;
(iii) Seaford Court Estates Ltd. v. Asher 1949 2 All E.R. 155 at page 164 (extract from this judgment in the following language was used by the Supreme Court in its judgment in the case of M. Pentiah v. Muddala Veeramallappa AIR 1961 SC 1107 at page 1115.
“When a defect appears, a judge cannot simply fold his hands and blame the draftsman. He must set to work on the constructive act of finding the intention of Parliament….. and then he must supplement the
written word so as to give ‘force and life’ to the intention of the Legislature…..a judge should ask himself the question how,
if the makers of the act had themselves, come across this ruck in the texture of it, they would have straightened it out ? He must then do as they would have done. A judge must not alter the material of which the act is woven, but he can and should iron out the creases.”
6. The ld. counsel for the assessee thereafter argues that the Supreme Court has held in the following two cases that amendments which appear to be prospective but at the same time are clarificatory or explanatory in nature, should be construed retrospectively even though such retrospective operation was not specifically mentioned by the Legislature :–
(i) Allied Motors (P.) Ltd. v. CIT [1997] 224 ITR 677 (SC) at page 686–
In this particular case, the Supreme Court held as below :–
“The Supreme Court held that the first proviso inserted to section 43B by Finance Act, 1988 with effect from the assessment year 1989-90, should be construed as having been inserted retrospectively from the date on which the section itself came into existence i.e., 1-4-1984, inasmuch as, the proviso was merely explanatory or clarificatory in nature. The Supreme Court inter alia held in this case – “a proviso” which is intended to remedy unintended consequences and to make the provision workable, a proviso which supplies an obvious submission in the section and is required to be read into the section to give the section a reasonable interpretation, requires to be treated as retrospective in operation, so that a reasonable interpretation can be given to the section as a whole.”
(ii) CIT v. Podar Cement (P.) Ltd. [1997] 226 ITR 625′ (SC) –
The Supreme Court held that clause (iiid) of section 27 of the Income-tax Act, inserted by the Finance Act, 1987 with effect from assessment year 1988-89 was merely clarificatory in nature and should thus be construed retrospectively since the inception of the statute.
7. As against the above-mentioned arguments put forward by the ld. counsel for the assessee, the ld. D.R. strongly argued that the items having nexus with sale, should form part of the turnover. He relied on a judgment of ITAT. Cochin Bench in the case of Smt. T.C Usha v. Dy. CIT [1999] 70 ITD 279 (Coch.) to argue that if an item is excluded from “turnover”, the same should not be included in profits of business. The ld. D.R. also relied on the following two judgments holding that anything which has no nexus with sale proceeds should not be included within the definition of “turnover” to argue that items having clear nexus, with the sale operations, must be considered to be includible, in the definition of ‘turnover’:–
(i) Salgaocar Mining Industries Ltd. v. Dy. CIT [1997] 61 ITD 105 (ITAT – Pune);
(ii) Nathani Sleek Ltd v. Dy. CIT [1996] 57 ITD 584 (ITAT – Bombay).
Regarding the subsidy on export, duty drawback, etc., the ld. D.R. contended that exclusion of these items from “total turnover” was omitted specifically in the statute from first day of April, 1991 and hence, during the year under present appeal, i.e., assessment year 1987-88, these items should, consequently, be considered to be includible within turnover. The ld. D.R. furthermore argued that, inasmuch as, the language used herein is clear, there is no scope for causing any violence to the language, inasmuch as, the language used in the Act does not lead to any absurdity at all. He relied on a judgment of the Supreme Court in the case of M/s. Punjab Tin Supply Co. v. Central Government AIR 1984 SC 87 at page 94. The Supreme Court held in this case as below :–
“All laws which affect substantive rights generally operate prospectively and there is a presumption against the retrospectivety if they affect
vested rights and obligations unless the Legislative intent is clear and compulsive.”
On the other hand, the ld. counsel for the assessee relied on a judgment of the Calcutta High Court in the case of CIT v. India Exchange Traders’ Association [1992] 197 ITR 356′ at page 382. In this particular case, the Calcutta High Court upheld the declaratory validity of Rule 1D of the Wealth Tax Rules on the consideration of a latter amendment to the Wealth Tax Act by inserting Schedule-III to the Act almost in the same manner, in which Rule 1D had earlier been enacted.
8. The subsidy on export (cash assistance) is considered to constitute business income under section 28(iiib). Similarly sale of rep licence (Rs. 42,041} and duty drawbacks received by the assessee (Rs. 16,47,091), considered by clauses (iiia) and (me) respectively of section 28 are closely connected with export activities. These amounts have been received by the assessee either by selling the import licence received by the assessee directly out of export activities or obtained from the Government because of probable loss/shortage of profit suffered by the assessee in carrying on export activities. These items should, therefore, form parts of the total turnover of the business of the assessee. It may be mentioned in this connection that it has been held in the case of Aris-Bain Bridge v. Turner Manufacturing Co. Lid. 50 All. ER 1178 that the “turnover of the Company’s annual business” must be taken to include all sums received and receivable in the year as a result of the Company’s trading, whether normal or abnormal. So far as the instant case is concerned, these amounts were certainly received by the assessee in the process of or in connection with the normal trading activities of the assessee-company. The two items like sundry sales (Rs. 4,18,364) and offal sales (Rs. 12,88,772) are clearly items of sale and must be considered to be includible within the total turnover of business of the assessee. Similarly, sale of raw materials (Rs. 4,155) and sale of by-products (Rs. 2,98,171) are direct items of sale and should necessarily be included in total turnover. The details of claims received (Rs. 1,42,086) are not available. However, they also seem to be directly related to the sale operations.
Hence, we are of the opinion that even in the normal course also, all the above-mentioned items should be considered to be forming part of the total turnover of business of the assessee.
However, the following items of receipts cannot be considered to be having any connection with the sale operations. Hence, they should not be includible within turnover of business of the assessee :–
(i) Rent recoveries - Rs. 12,871 (ii) Cash discount from Metal Box - Rs. 3,59,650
(This item rather seems to be a deduction from the total purchase made by the assessee from Metal Box Co. Hence, it docs not have any direct connection with the sale operations).
(iii)
Octroi
recovery
-Rs-
4,81,768
(This item
also seems to represent a deduction from the expense and not exactly an item of income).
(IV)
Provision
written back
– Rs.
9,63,439
(This
item cannot represent any sale proceed. On the other hand, it has arisen by
way of remission of an old
liability).
(v)
Other
sundries
– Rs.
7,561
(This
item seems to consist of various typ’es of miscellaneous receipts unconnected
with sale).
In view of the above discussions, all these items as enumerated in the immediately preceding sub-paragraph should be deducted from the figure of total turnover of business. We order accordingly.
9. Now it is required to answer the question as to whether the proviso to section (ba) of the Explanation to section 80HHC can be considered to lead to any absurd result or not. It is required to be mentioned in this connection that the two decisions of Supreme Court to which the ld. counsel for the assessee lias alluded are in the cases of Allied Motors (P.) Ltd. (supra) and Podar Cement (P.) Ltd. (supra), where the provisos considered by the Supreme Court did not specifically mention any particular date for applicability of the said provisos. So far as the instant case is concerned, the proviso states within itself that it would apply in relation to any assessment year commencing on or after the first day of April, 1991. Hence, there cannot be any doubt about the fact that “total turnover” shall exclude the sums referred to in clauses (iiia), (iiib) and (iiic) of section 28 with effect from assessment year 1991-92. That by itself would, however, not lead to the necessary conclusion that prior to that date, these items must be considered to be includible within “total turnover”. At the same time again, there is nothing in the proviso to suggest that it is merely clarificatory in nature and hence, for periods prior to assessment year 1991-92, “total turnover” must exclude these three items. The entire question of includibility or excludibility of the items during a year prior to assessment year 1991-92 should, therefore, depend on whether “total turnover” can be considered to include these items or not. If these items per se are not includible within the definition of “total p turnover”, then even in such earlier years also, the items would not be includible, irrespective of whether the proviso was ever brought to the statute book or not. In other words, the retrospectivity of the proviso is not suggested by the proviso by making a clear mention of the date being “1st April, 1991”. The Explanatory Memorandum to Finance (No. 2) Bill, 1991, again, stated merely items like interest, commission etc., to be not having an element of turnover. We are, therefore, of the opinion that so far as the
period prior to assessment year 1991 -92 is concerned, this proviso cannot come into play in determining whether the items under consideration should be included or not in the expression “total turnover of business”.
10. We have already held above that the three items under consideration, being closely connected with the sate operations, should be included within the expression “total turnover of business”. The main reason, which the ld. counsel for the assessee argues suggesting that such an interpretation would lead to an absurd result comes out of the consideration that both the numerator as well as the denominator in the computation of the deduction under sub-section (3) of section 80HHC should have parity between themselves and must include the same items. There is no doubt about the fact that that in the instant case, the figure of export turnover has been taken into consideration by referring to the definition thereof as per clause (b) of the above-mentioned Explanation to section 80HHC, which means merely the sale proceeds received in or brought into India in convertible foreign exchange, in respect of goods exported out of India. In that way, it is evident that the items under consideration are not includible in the definition of “export turnover”. The arguments put forward by the ld. counsel for the assessee may thus look quite attractive and plausible. At the same time again, we must notice that the computation of the deduction under section 80HHC(3) is required to be done in accordance with the following formula :–
Export turnover
Export Profits & gains of business X _________________
Total turnover.
It may be noted that in the expression on the right-hand side of the above-mentioned equation, two quantities are used in the numerator and one in the denominator. Mathematically, the two expressions in the numerator are inter-changeable and if they are actually inter-changed, the value of the entire expression would remain the same, or in other words, the expression can be re-written as below :–
Export turnover X Profits & gains of business
Total turnover
It may be seen that when the expression is used in the first mentioned form as above, it denotes what percentage of the total profits and gains of the business, is constituted by the export activities by applying the factor export turnover divided by total turnover to the total profits and gains of the business. The matter can be looked at from the other angle also. There is no doubt about the fact that the profits and gains of a business arise out of its turnover and the same is essentially embodied in the figure of turnover, and always constitute a percentage of the turnover. This would be true in respect of the relationship between the total profits and gains of the business and total turnover of the business on the one hand, vis-avis, the export profit and the export turnover on the other hand. The
computation of export profit may thus be arrived at from the other angle, i.e. by computing what percentage of the export turnover is constituted by the export profit. In that case what would be required to do is to apply the factor of profits and gains of business divided by total turnover of the business to the figure of export turnover. It is an undisputed fact that the total profits and gains of business in the instant case include all the items under consideration, which we have considered to form part of the turnover of the business (of course, certain other items which are explicitly beyond the ambit of turnover may also be included within the profits and gains of business).
11. It would thus be evident that if the computation be looked at from this angle then there would be a clear parity between the numerator, ie., the profits and gains of business and the turnover of business, inasmuch as, all the items considered by us herein, can be found to be included in both the expressions forming the numeral or as well as the denominator. There is no doubt about the fact that as per the proviso to clause (ba) of the Explanation to section 80HHC, the sums referred to in clauses (iiia), (iiib) and (iiic) of section 28 are required to be excluded from total turnover with effect from 1-4-1991. It maybe noted that by virtue of the insertion of clause (bba) to the same Explanation, the profits of business would also get shorn of 90 per cent of such items of receipts, 10 per cent thereof being referable to the expenses incurred to earn such receipts. Hence, it may be said that the Legislature, in its wisdom, has caused maintenance of the parity between the numerator and the denominator from this angle, almost simultaneously. Hence, in our view there would be no absurdity or undue or unwanted results in treating the items under consideration as parts of the total turnover of business of the assessec. The judgments of ITAT, Calcutta Bench in the cases of Chloride India Ltd. (supra) and Stone India Ltd. (supra) would also, therefore, be perfectly in line with this argument and our final finding. Hence, the question of interpreting the section in a way other than what is literally stated and what appears to be correct from the common sense angle, would not at all arise.
In view of the above position, we arc unable to accept the contention of the assessee that all the items as considered by the Assessing Officer as parts of the total turnover of business of the assessee, should be excluded in computation of its export profit in this year. On the other hand, certain items, which are clearly not of the nature of turnover, and mention of which we have made as above, are required to be excluded. We order accordingly.
12. In the result, the appeal filed by the assessee is partially allowed to the above-mentioned extent.