{"id":208222,"date":"2010-03-18T00:00:00","date_gmt":"2010-03-17T18:30:00","guid":{"rendered":"https:\/\/www.legalindia.com\/judgments\/the-commissioner-of-income-tax-vs-ms-asian-star-co-ltd-on-18-march-2010"},"modified":"2017-10-22T14:11:21","modified_gmt":"2017-10-22T08:41:21","slug":"the-commissioner-of-income-tax-vs-ms-asian-star-co-ltd-on-18-march-2010","status":"publish","type":"post","link":"https:\/\/www.legalindia.com\/judgments\/the-commissioner-of-income-tax-vs-ms-asian-star-co-ltd-on-18-march-2010","title":{"rendered":"The Commissioner Of Income Tax … vs M\/S.Asian Star Co.Ltd on 18 March, 2010"},"content":{"rendered":"
Bombay High Court<\/div>\n
The Commissioner Of Income Tax … vs M\/S.Asian Star Co.Ltd on 18 March, 2010<\/div>\n
Bench: Dr. D.Y. Chandrachud, J.P. Devadhar<\/div>\n
                                             1\n\n            IN THE HIGH COURT OF JUDICATURE AT BOMBAY\n                             O. O. C. J.\n\n\n\n\n                                                                                        \n                    INCOME TAX APPEAL NO.200 OF 2009\n\n\n\n\n                                                                \n    The Commissioner of Income Tax City-III,\n    Room No.607, 6th Floor, \n    Aayakar Bhavan, M.K.Road,\n\n\n\n\n                                                               \n    Mumbai-400 020.                                                  ...Appellant.\n                            Vs.\n    M\/s.Asian Star Co.Ltd.,\n    114-C, Mittal Court, Nariman Point,\n\n\n\n\n                                                  \n    Mumbai-400 021.                                                  ...Respondent.\n                                    ....\n                                  \n    Mr.  Vimal Gupta with Mr.Suresh Kumar for the Appellant.\n    Mr.J.B. Andhyarujina, Sr.Advocate with Dr.K.Shivram i\/b. Mr.A.R. \n    Singh and Mr.P.S.Savla  for the Respondent.\n                                 \n                                    .....\n                                    CORAM : DR.D.Y.CHANDRACHUD AND \n                                                   J.P.DEVADHAR,  JJ.\n<\/pre>\n
                                                  March 18\/19, 2010.\n<\/p>\n
    ORAL JUDGMENT (PER DR.D.Y.CHANDRACHUD, J) :\n<\/p>\n
                The appeal by the Revenue under Section   260A of the <\/p>\n
    Income   Tax   Act,   1961   raises   a   question   of   law   as   regards   the <\/p>\n
    interpretation of the provisions of Section 80HHC.  The question of <\/p>\n
    law has been formulated as follows in the Memo of Appeal :\n<\/p>\n
                ”  Whether on the facts and in the circumstances of the
\n                case   and   in   law,   the   Hon’ble   Tribunal   was   correct   in
\n                holding   that   net   interest   on   fixed   deposits   in   banks
\n                received by the Assessee Company should be considered
\n                for the purpose of working out the deduction u\/s.80HHC
\n                and not the gross interest?”<\/p>\n
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\n                                              2<\/span><\/p>\n
    The appeal was admitted on the aforesaid question.\n<\/p>\n
    The facts:\n<\/p>\n
    2.          The assessee in the present case carries on the business <\/p>\n
    of the export of cut and polished diamonds.  A return of income for <\/p>\n
    Assessment   Year   2003-04   was   filed   on   28   November   2003, <\/p>\n
    declaring   a   total   income   of   Rs.   13.91   crores,     after   claiming   a <\/p>\n
    deduction of Rs. 13.22   crores under Section 80HHC.   The return <\/p>\n
    was initially processed under Section  143(1), after which the case <\/p>\n
    was selected for scrutiny under Section  143(2) by the issuance of a <\/p>\n
    notice.   The assessee had debited an amount of Rs. 21.46 crores as <\/p>\n
    interest paid\/payable to the profit and loss account. The assessee, <\/p>\n
    however,   stated   that   the   interest   charged   to   the   profit   and   loss <\/p>\n
    account   was   net   of   interest   received   in   the   amount   of   Rs.   3.25 <\/p>\n
    crores.     The   assessee   was   called   upon   to   explain   as   to   why   the <\/p>\n
    deduction   under   Section     80HHC   should   not   be   recomputed   by <\/p>\n
    excluding ninety per cent of the interest received in the amount of <\/p>\n
    Rs.   3.25   crores.     By  its   explanation,   the   assessee   submitted   that <\/p>\n
    during the year, it received interest on fixed deposits.  The assessee <\/p>\n
    stated that it had borrowed monies in order to fulfill its working <\/p>\n
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\n                                              3<\/span><\/p>\n
    capital requirements and the Bank had called upon it to maintain a <\/p>\n
    fixed deposit as margin  money against the loans.     The assessee <\/p>\n
    consequently contended that there was a direct nexus between the <\/p>\n
    deposits kept in the Bank and the amounts borrowed.\n<\/p>\n
    3.          The   Assessing   Officer,   while   passing   an   order   of <\/p>\n
    assessment dated 30 January 2006, found that the explanation of <\/p>\n
    the   assessee   could   not   be   accepted   since   a   plain   reading   of <\/p>\n
    Explanation baa to Section 80HHE would suggest that  ninety per <\/p>\n
    cent  of the receipts on account of brokerage, commission, interest, <\/p>\n
    rent,   charges   or   receipts   of   a   similar   nature   were   liable   to   be <\/p>\n
    excluded while computing the profits of the business.   In appeal, <\/p>\n
    the CIT (Appeals) held by his order dated 17 November 2006 that <\/p>\n
    from   the   Bank   and   fund   flow   statements,   the   assessee     has <\/p>\n
    established a direct nexus between interest bearing fixed deposits <\/p>\n
    and the  ‘interest  charging’   borrowed   funds.      The  CIT  (Appeals) <\/p>\n
    directed   the   Assessing   Officer   to   allow   the   netting   of   interest <\/p>\n
    income and interest expenses.  The view of the CIT (Appeals) was <\/p>\n
    confirmed in appeal by the Income Tax Appellate Tribunal on 11 <\/p>\n
    March 2008.  The Tribunal  held that the finding of the Appellate <\/p>\n
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\n                                              4<\/span><\/p>\n
    Authority   was   based   on   the   existence   of   a   nexus   between <\/p>\n
    borrowed  funds  and   fixed  deposits.       The Tribunal  followed  its <\/p>\n
    decision in the case of Lalsons Enterprises.1  <\/p>\n
    The question :\n<\/p>\n
    4.          The question of law which has been raised in the appeal <\/p>\n
    by   the   Revenue   relates   to   whether     netting   of   interest   can     be <\/p>\n
    allowed for the purpose of working out a deduction under Section <\/p>\n
    80HHC. The contention of the Revenue is that for computing the <\/p>\n
    profits   and   gains   of   the   business   for   the   purposes   of   Section <\/p>\n
    80HHC, ninety per cent  of the receipts by way of interest has to be <\/p>\n
    reduced from the profits and gains of business or profession and <\/p>\n
    the   receipts   that   have   to   be   reduced   are   the   gross   receipts.\n<\/p>\n
    Consequently,   it   is   the   submission   of   the   Revenue   that     gross <\/p>\n
    receipts by way of interest cannot be netted against   expenditure <\/p>\n
    which is laid out   for the earning of those receipts.   On the other <\/p>\n
    hand,   the contention of the assessee is that Section 80HHC must <\/p>\n
    have   a   purposive   interpretation   and   the   reduction   that   is   to   be <\/p>\n
    applied   of  ninety   per   cent  of   the   receipts,   must   relate   to   the <\/p>\n
    1 (2004) 89 ITD 25<\/p>\n
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\n                                               5<\/span><\/p>\n
    inclusion   of   receipts   in   the   profits   and   gains   of   business   or <\/p>\n
    profession which is comprised both of  receipts and the expenditure <\/p>\n
    which is incurred directly for the purpose of earning  the receipts.\n<\/p>\n
    Section 80HHC:\n<\/p>\n
    5.          Sub-section  (1) of Section  80HHC provides  that where <\/p>\n
    an   assessee,   being   an   Indian   Company   or   a   person   residing   in <\/p>\n
    India, is engaged in the business of export out of India of goods or <\/p>\n
    merchandise to which the section applies, there shall be allowed in <\/p>\n
    computing   the   total   income   of   the   assessee,   a   deduction   to   the <\/p>\n
    extent   of   profit   referred   to   in   sub-section   (1B)  derived  by   the <\/p>\n
    assessee from the export of such goods.  Sub-section (1B) stipulates <\/p>\n
    the   extent   of   the   permissible   deduction   and   the   period   during <\/p>\n
    which the deduction could be claimed.  Sub-section (3) lays down <\/p>\n
    a   formula   with   reference   to   which   the   profits   derived   by   the <\/p>\n
    assessee from export have to be computed.   In the present case, <\/p>\n
    clause   (a)   of   sub-section   (3)   is   of   relevance   and   it   provides   as <\/p>\n
    follows:\n<\/p>\n
                “(3) For the purposes of sub-section (1), –\n<\/p><\/blockquote>\n
                (a)   where   the   export   out   of   India   is   of   goods   or
\n                merchandise manufactured or  processed by the assessee, <\/p>\n
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\n                                              6<\/span><\/p>\n
                the profits derived from such export shall be the amount
\n                which   bears   to   the   profits   of   the   business,   the   same <\/p>\n
                proportion   as   the   export   turnover   in   respect   of   such
\n                goods bears to the total turnover of the business carried <\/p>\n
                on by the assessee.”\n<\/p><\/blockquote>\n
    The central focus of this appeal relates to the interpretation that is <\/p>\n
    to be placed on the provisions of clause (baa) of the Explanation.\n<\/p>\n
    Clause baa provides as follows:\n<\/p>\n
                “(baa) “profits of the business” means the profits of the
\n                business  as computed under the head “Profits and gains <\/p>\n
                of business or profession” as reduced by –\n<\/p><\/blockquote>\n
                    (1)ninety per cent of any sum referred to in clauses <\/p>\n
                       (iiia), (iiib), (iiic), (iiid) and (iiie) of section 28 or
\n                       of any receipts by way of brokerage, commission,
\n                       interest,   rent,   charges   or   any   other   receipt   of   a
\n                       similar nature included in such profits; and<\/p>\n
                    (2)the profits of any branch, office, warehouse or any
\n                       other establishment of the assessee situate outside <\/p>\n
                       India.”\n<\/p><\/blockquote>\n<\/blockquote>\n
    Hence, Clause  (a) of sub-section  (3) is applicable  to an assessee <\/p>\n
    whose   business   consists   of   the   export   out   of   India   of   goods   or <\/p>\n
    merchandise  manufactured or  processed by  the assessee.   In  the <\/p>\n
    case of such an assessee, the profits derived from such export is the <\/p>\n
    amount   which   bears   to   the   profits   of   the   business,   the   same <\/p>\n
    proportion as the export turnover in respect of such goods bears to <\/p>\n
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\n                                              7<\/span><\/p>\n
    the total turnover of the business carried on by the assessee.  The <\/p>\n
    expression “profits of the business” which has been used in clause <\/p>\n<\/blockquote>\n
    (a) of sub-section (3) is defined in clause baa of the Explanation.\n<\/p><\/blockquote>\n
    For the purposes of clause baa, profits of the business have to be <\/p>\n
    first   computed   under   the   head   ‘profits   and   gains   of   business   or <\/p>\n
    profession’.   That computation must necessarily be in accordance <\/p>\n
    with the provisions of Sections 28 to 44D of the Act.  Once such a <\/p>\n
    computation has been arrived at, clause baa requires a reduction to <\/p>\n
    be carried out.  The reduction is to be of (i) Ninety per cent of (a) <\/p>\n
    the export incentive referred to in clauses (iiia), (iiib), (iiic), (iiid) <\/p>\n
    and (iiie) of Section 28 or (b) any receipt  by way of brokerage, <\/p>\n
    commission, interest, rent, charges or any other receipt of a similar <\/p>\n
    nature included in such profits; and (ii) Profits of a branch, office, <\/p>\n
    warehouse   or   any   other   establishment   of   the   assessee   situated <\/p>\n
    outside   India.     The   issue   which   falls   for   determination   in   the <\/p>\n
    present case relates to the reduction factor of ninety per cent  that <\/p>\n
    is   to  be   applied   in  respect   of  any  receipts   by   way  of   brokerage, <\/p>\n
    commission, interest, rent, charges or any other receipt of a similar <\/p>\n
    nature   included   in   such   profits.     As   noticed   earlier,   it   is   the <\/p>\n
    contention of the Revenue that the reduction factor of  ninety per <\/p>\n
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\n                                             8<\/span><\/p>\n
    cent  must   be   applied   to   the   gross   receipts,   independent   of   any <\/p>\n
    expenditure that may be incurred in the earning of those receipts, <\/p>\n
    while according to the assessee, the use of the words “included in <\/p>\n
    such profits” must, in particular, result in the conclusion that the <\/p>\n
    reduction   factor  cannot   be  applied  in  isolation   only  to the  gross <\/p>\n
    receipts without reference to the expenditure laid out directly for <\/p>\n
    the purpose of earning those receipts.  It is in this background that <\/p>\n
    it would be necessary now to advert to the rival submissions.\n<\/p>\n
    Submissions :\n<\/p>\n
    6.          Counsel appearing on behalf of the Revenue submitted <\/p>\n
    firstly that Explanation baa seeks to exclude ninety per cent  of : (i) <\/p>\n
    Any sum by way of export incentives referred to in clause (iiia) to <\/p>\n
    (iiie) of Section 28; (ii) Receipts by way of brokerage, commission, <\/p>\n
    interest, rent, charges or other similar receipts; and the Profits of <\/p>\n
    any   branch,   office,   or   warehouse.     The   submission   is   that <\/p>\n
    Parliament   has   used   three   different   expressions,   namely,   “any <\/p>\n
    sums”, “receipts” and “profits”.  In so far as  receipts are concerned, <\/p>\n
    it   has   been   urged   that  ninety   per   cent  of   whatever   receipts   are <\/p>\n
    received of the description mentioned in the explanation must be <\/p>\n
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\n                                              9<\/span><\/p>\n
    excluded.  Secondly, it has been submitted that Section 80HHC is a <\/p>\n
    statutory   incentive   provided   to   exporters   and   the   object   of   the <\/p>\n
    provision is not to determine real income.  The underlying object of <\/p>\n
    Explanation baa was to exclude receipts which do not have a nexus <\/p>\n
    with  export turnover and ninety per cent of all such receipts would <\/p>\n
    have to be excluded in computing the deduction.   Thirdly, reliance <\/p>\n
    was   placed   on   a   circular   issued   by   the   Central   Board   of   Direct <\/p>\n
    Taxes on 19 December 1991 in order to contend that no netting of <\/p>\n
    receipts  with the expenditure laid out in   earning the receipts is <\/p>\n
    permissible since in mandating that a reduction of ninety per cent <\/p>\n
    shall   be   applied,   Parliament   has  already   taken   into  account,   the <\/p>\n
    element of common expenses that may be incurred by the assessee.\n<\/p>\n
    In other words, the submission was that while the entire receipts <\/p>\n
    on   account   of   brokerage,   commission,   interest,   rent,   charges   or <\/p>\n
    other similar receipts would have to be excluded since they do not <\/p>\n
    bear a nexus with export turnover, nonetheless the Legislature has <\/p>\n
    taken   notice   of   the   fact   that   the   assessee   would   have   incurred <\/p>\n
    certain   expenses   towards   those   receipts   and   had   consequently <\/p>\n
    applied a reduction factor of  ninety per cent.\n<\/p>\n
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\n                                            10<\/span><\/p>\n
    7.          The appeal before the Court has been placed for hearing <\/p>\n
    together with a batch of appeals where similar issues arise.  Since <\/p>\n
    common issues of law arise in this batch of appeals, we have, while <\/p>\n
    hearing the arguments of the Revenue in the present appeal, also <\/p>\n
    heard Counsel appearing on behalf of the Assessees in the entire <\/p>\n
    batch   on   the   question   of   interpretation.     Submissions   have   been <\/p>\n
    urged before the Court by Mr.Andhyarujina, Mr.Shivram, Mr.Irani <\/p>\n
    and Mr.Nilesh Joshi.  Counsel appearing on behalf of the Assessee <\/p>\n
    submitted that (i) The words “any receipts” denote the nature and <\/p>\n
    not   the   quantum   of   the   receipt;   (ii)   The   expression,   therefore, <\/p>\n
    requires the nature of the receipts to be examined; (iii) Explanation <\/p>\n
    baa  refers to any   receipts of a similar  nature “included in such <\/p>\n
    profits”. The words “such profits” would mean  profits and gains of <\/p>\n
    business or profession   computed under Sections 28 to 44D; (iv) <\/p>\n
    Profits can only be arrived at after the deduction of expenditure <\/p>\n
    from income and the net effect thereof would constitute profits; (v) <\/p>\n
    Explanation   baa   does   not   use   the   expression   “gross   or   net”.\n<\/p>\n
    However, having regard to the purpose and object of the provision <\/p>\n
    and the nature of the language used in the explanation, ninety per <\/p>\n
    cent  of the receipts that is required to be excluded would have to <\/p>\n
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\n                                               11<\/span><\/p>\n
    be computed with reference to the inclusion of such receipts in the <\/p>\n
    profits and gains of business which in turn involves both the credit <\/p>\n
    and   the   debit   sides   of   the   profit   and   loss   account;   (vi)   For   the <\/p>\n
    purposes of Explanation baa, income from other sources would not <\/p>\n
    come within the purview of the explanation;  Only business income <\/p>\n
    would have to be considered and interest in the nature of business <\/p>\n
    income would have to be taken into consideration; (vii) Receipts by <\/p>\n
    way   of   interest   in   Explanation   baa   denotes   the   nature   of   the <\/p>\n
    receipts and inclusion in  ‘such profits’ would denote the quantum <\/p>\n
    of   the   receipts;   (viii)   The   words   which   have   been   used   by   the <\/p>\n
    legislature suggest what is included in the total income or what has <\/p>\n
    gone into the computation of the total income.  Consequently, both <\/p>\n
    the debit and the credit sides of the profit and loss account would <\/p>\n
    have to be considered; (ix) The words “such profits” can only mean <\/p>\n
    such profits as computed in accordance with the provisions of the <\/p>\n
    Act; (x) The words “receipt” and “income” in Explanation baa are <\/p>\n
    interchangeably used and consequently, receipts would have to be <\/p>\n
    read as income; (xi) The correct interpretation would be to take <\/p>\n
    into consideration netting and exclude all expenses which have a <\/p>\n
    direct  nexus  with the earning of the income;  (xii) The provision <\/p>\n
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\n                                               12<\/span><\/p>\n
    being   an   incentive   provision   under   Chapter   VIA,   it   must   be <\/p>\n
    beneficially   construed   in   order   to   encourage   exports;   (xiii)   The <\/p>\n
    word   “profits”   would   denote   profits   in   a   commercial   sense.\n<\/p>\n
    Another perspective of the submissions which have been urged on <\/p>\n
    behalf of the assessee is that the object of the exclusion contained <\/p>\n
    in Explanation baa is to sequester certain non-operational income <\/p>\n
    which   does   not   bear   a   direct   nexus   with   export   income.\n<\/p>\n
    Consequently,   the   sequestration   or   exclusion   cannot   be   confined <\/p>\n
    only   to   the   credit   side   of   the   profit   and   loss   account,   but   must <\/p>\n
    extend equally to the debit  side subject  to the rider that a clear <\/p>\n
    nexus has to be established.  The Revenue, it has been urged, seeks <\/p>\n
    to exclude non-operational income on the one hand, because it has <\/p>\n
    no  nexus   with   the   export   turnover   while   on   the   other   hand,     it <\/p>\n
    seeks to depress profits by including expenditure which has been <\/p>\n
    incurred for those very items.  This, it has been submitted,  would <\/p>\n
    lead   to  a   consequence   which     could   not   have   been   intended   by <\/p>\n
    Parliament   having   regard   to   the   beneficial   object   underlying   the <\/p>\n
    provision.\n<\/p>\n
    The rationale underlying the exclusion :\n<\/p>\n
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\n                                            13<\/span><\/p>\n
    8.          Sub-section   (3)   of  Section   80HHC   was  inserted  by   the <\/p>\n
    Finance Act of 1991, with effect from 1st April 1992.  The principal <\/p>\n
    reason underlying the adoption of the formula in sub-section (3) of <\/p>\n
    Section 80HHC was to disallow a part of the concession when the <\/p>\n
    entire deduction claimed could not be regarded as being derived <\/p>\n
    from   export.     Section   80HHC   had   to   be   amended   several   times <\/p>\n
    since the formula had resulted in a distorted figure of export profits <\/p>\n
    where   receipts   such   as   interest,   rent,   commission   and  brokerage <\/p>\n
    which   did   not   have   a   direct   nexus   with   export   turnover   were <\/p>\n
    included in the profit and loss account and resultantly became a <\/p>\n
    subject   of   deduction.       By   the   amendment,   the   position   that <\/p>\n
    emerged was that receipts which do not have any element of or <\/p>\n
    nexus   with   export   turnover   would   not   become   eligible   for <\/p>\n
    deduction   merely   because   they   form   part   of   the   profit   and   loss <\/p>\n
    account.  This aspect of the history underlying Section 80HHC, has <\/p>\n
    been   elaborated   upon   in   the   judgment   of   Hon’ble   Shri   Justice <\/p>\n
    S.H.Kapadia, speaking for the Supreme Court, in CIT vs. Lakshmi <\/p>\n
    Machine Works.2    <\/p>\n
    2 (2007) 290 ITR 667<\/p>\n
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\n                                             14<\/span><\/p>\n
    9.          Explanation   baa   has   to   be   read   in   the   context   of   this <\/p>\n
    background   underlying   the   exclusion   of   certain   constituent <\/p>\n
    elements   of   the   profit   and   loss   account   from   the   eligibility   for <\/p>\n
    deduction      under   Section   80HHC.     What   Explanation   baa <\/p>\n
    postulates   is   that,   in   computing   the   profits   of   business   for   the <\/p>\n
    purposes of Section 80HHC, the profits of business have to be first <\/p>\n
    computed   under   the   head   profits   and   gains   of   business   or <\/p>\n
    profession,   in   accordance   with   the   provisions   of   Sections   28   to <\/p>\n
    44D.     Once   that   exercise   is   completed,   those   profits   have   to   be <\/p>\n
    reduced   to   the   extent   provided   by   clauses   (1)   and   (2)   of <\/p>\n
    Explanation   baa.     Clause   (1)   to   the   explanation   requires   the <\/p>\n
    application of the ninety per cent deduction to two categories.  The <\/p>\n
    first category consists of export incentives which are referred to in <\/p>\n
    clauses (iiia) to (iiie) of Section 28.  The second category consists <\/p>\n
    of receipts by way of brokerage, commission, interest, rent, charges <\/p>\n
    or any other receipts of a similar nature included in such profits.\n<\/p>\n
    The importance of the second category lies in the fact that such <\/p>\n
    receipts by way   of brokerage, commission, interest, rent, charges <\/p>\n
    or other receipts of a similar nature, though included in the profits <\/p>\n
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\n                                             15<\/span><\/p>\n
    and gains of business or profession, do not bear a nexus with the <\/p>\n
    export   turnover.     Consequently,  though  they are   included  in the <\/p>\n
    computation of profits and gains of business or profession,  ninety <\/p>\n
    per   cent  of   such   receipts   have   to   be   excluded   in   computing   the <\/p>\n
    profits of business for the purposes of Section 80HHC.\n<\/p>\n
    10.         The reason for the exclusion is borne out by a circular <\/p>\n
    issued by the Central Board of Direct Taxes on 19 December 1991.\n<\/p>\n
    The circular issued by the Board noted that the existing formula <\/p>\n
    often presented a distorted figure of export profits when receipts <\/p>\n
    like   interest,   commission   etc.   which   did  not   have   an   element   of <\/p>\n
    turnover   were   included   in   the   profit   and   loss   account.\n<\/p>\n
    Consequently,   a   clarification   had   been   introduced   by   which   the <\/p>\n
    profits of business for the purposes of Section 80HHC would not <\/p>\n
    include   receipts     of   a   similar   nature.     However,   as   some <\/p>\n
    expenditure   might   have   been   incurred   in   earning   these   incomes <\/p>\n
    which   in   the   generality   of   cases   would   be   a   part   of   common <\/p>\n
    expenditure, an ad-hoc deduction of ten per cent from such income <\/p>\n
    was provided to account for these expenses.\n<\/p>\n
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\n                                             16<\/span><\/p>\n
    11.         Now, reading Explanation baa as it stands, the Court is <\/p>\n
    required   to   give   a   meaning   to   the   provision   consistent   with   the <\/p>\n
    underlying scheme, object and purpose of the statutory provision.\n<\/p>\n
    Parliament considered it appropriate to exclude from the purview <\/p>\n
    of the deduction under Section 80HHC, certain receipts or income <\/p>\n
    which did not have a proximate nexus with export turnover.  Such <\/p>\n
    items   form   part   of   the   profit   and   loss   account   and   form   a <\/p>\n
    constituent element in the computation of the profits or gains of <\/p>\n
    business   or   profession   under   Sections   28   to   44D.       The <\/p>\n
    interpretation which we  place on the provisions of Section 80HHC <\/p>\n
    and on Explanation baa must be consistent with the law laid down <\/p>\n
    by the Supreme Court.\n<\/p>\n
    12.         In     Commissioner   of   Income   Tax                               vs.<\/p>\n
    K.Ravindranathan Nair,3 the Supreme Court<\/a> held that processing <\/p>\n
    charges, though a part of gross total income constituted an item of <\/p>\n
    independent   income   like   rent,   commission   and   brokerage   and <\/p>\n
    consequently, ninety per cent of the processing charges would have <\/p>\n
    to be reduced from gross total income to arrive at business profits.\n<\/p>\n
    3 (2007) 295 ITR 228<\/p>\n
                                                               ::: Downloaded on – 09\/06\/2013 15:43:51 :::<\/span>
\n                                              17<\/span><\/p>\n
    As   a   result,   the   processing   charges   would   be   includible   in   total <\/p>\n
    turnover in the formula under Section 80HHC(3).  For the purpose <\/p>\n
    of this appeal, it would be appropriate to formulate the principles <\/p>\n
    which emerge from the decision in  Ravindranathan Nair.   These <\/p>\n
    may be summarized as follows:\n<\/p>\n
    -(i)        Section 80HHC is not a charging section, but a provision <\/p>\n
    by   way   of   an   incentive   and   its   object   is   not   to   ascertain   real <\/p>\n
    income;\n<\/p>\n
    -(ii)       The   expression   “derived   from”   in   Sub-section   (1)   of <\/p>\n
    Section  80HHC is narrower than the expression  “attributable  to”\n<\/p>\n
    and consequently, it is only profits  derived from export which can <\/p>\n
    become   the   basis   for   working   out   the   formula   in   Section <\/p>\n
    80HHC(3);\n<\/p>\n
    -(iii)      As   a   result   of   the   amendment   brought   about   from   1st <\/p>\n
    April 1992 by the Finance Act of 1991, the expression “profits of <\/p>\n
    the   business”   stands   defined   to   mean   profits   of   the   business   as <\/p>\n
    computed under the head profits and gains of the business under <\/p>\n
    Sections 28 to 44D;\n<\/p>\n
    -(iv)       Before   allowing   a   deduction   under   Sub-section   (3)   of <\/p>\n
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\n                                               18<\/span><\/p>\n
    Section 80HHC, the gross total income of an assessee, being profits <\/p>\n
    from business, has to be arrived at in terms of clause baa of the <\/p>\n
    explanation.     Business   profits   have   to   be   calculated   in   terms   of <\/p>\n
    Sections 28 to 44D alone;\n<\/p>\n
    -(v)         The deduction has to be from the profits as understood <\/p>\n
    in the commercial sense;\n<\/p>\n
    -(vi)        Under clause (1) of Explanation baa, ninety per cent of <\/p>\n
    any   amount   referred   to   in   clauses   (iiia),   (iiib),   (iiic),   (iiid)   and <\/p>\n
    (iiie)   of   Section   28   or   of   any   receipts   by   way   of   brokerage, <\/p>\n
    commission, interest, rent, charges or any other receipt of a similar <\/p>\n
    nature included in such profits has to be reduced.  The expression <\/p>\n
    “included in such profits” indicates that such item which forms a <\/p>\n
    subject   matter   of   the   reduction   also   forms   a   part   of   gross   total <\/p>\n
    income being business profits;\n<\/p>\n
    -(vii)       Incentive profits and items like rent, commission, interest <\/p>\n
    and brokerage, though they form a part of the gross total income, <\/p>\n
    have   to   be   excluded   since   they   do   not   possess   any   nexus   with <\/p>\n
    export   turnover.     The   inclusion   of   such   items   in   profits   of   the <\/p>\n
    business would result in a distortion of the figure of  export profits;\n<\/p>\n
    -(viii)      In   the   formula,   there   exist   four   variables   namely, <\/p>\n
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\n                                              19<\/span><\/p>\n
    business profits, export turnover, total turnover and ninety per cent <\/p>\n
    of the sums referred to in Explanation baa.  In the computation of <\/p>\n
    the   deduction   under   Section   80HHC,   all   the   four   variables   are <\/p>\n
    required to be taken into account;\n<\/p>\n
    -(ix)        Section   80HHC(3)   secures   profits   derived   from   the <\/p>\n
    export   of   eligible   goods.     Every  receipt   is  not  income   and  every <\/p>\n
    income   would   not   necessarily   include   the   element   of   export <\/p>\n
    turnover;\n<\/p>\n
    -(x)   By   Explanation   baa   ninety   per   cent   of   incentive   profits   or <\/p>\n
    receipts by way of brokerage, commission, interest, rent, charges or <\/p>\n
    any other receipts of like nature included in business profits have <\/p>\n
    to be deducted from business profits as computed under Sections <\/p>\n
    28 to 44D;\n<\/p>\n
    -(xi)        In other words, receipts which result in an independent <\/p>\n
    income which has no nexus with export, are required to be reduced <\/p>\n
    from business profits under Explanation baa;\n<\/p>\n
    -(xii)       Though   receipts   by   way   of   brokerage,   commission, <\/p>\n
    interest, rent, charges or any receipts of a similar nature form part <\/p>\n
    of the gross total income, yet for the purpose of working out the <\/p>\n
    formula   and   in   order   to   avoid   a  distortion   in   arriving   at   export <\/p>\n
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\n                                           20<\/span><\/p>\n
    profits, Explanation baa has been inserted;\n<\/p>\n
    -(xiii)    As a result of the insertion of Explanation baa  incentive <\/p>\n
    profits and receipts which result in “independent income” have to <\/p>\n
    be excluded from the gross total income to the extent of ninety per <\/p>\n
    cent because such receipts have no nexus with the export turnover.\n<\/p>\n
    13.        In  Lakshmi Machine Works  (supra),    the issue before <\/p>\n
    the   Supreme   Court   was   whether   excise   duty   and  sales   tax   were <\/p>\n
    included in the total turnover for the purpose of working out the <\/p>\n
    formula contained in Section 80HHC(3).  The Supreme Court held <\/p>\n
    that the object of the legislature in enacting Section 80HHC was to <\/p>\n
    confer   benefit   on   profits   accruing   with   reference   to   export <\/p>\n
    turnover.     The   Supreme   Court   observed   that   “commission,   rent, <\/p>\n
    interest etc. did not involve any turnover” and “therefore, ninety <\/p>\n
    per cent of such commission, interest etc. was excluded from the <\/p>\n
    profits derived from the export.”  Just as  interest, commission etc. <\/p>\n
    did not emanate from export turnover, so also excise duty and sales <\/p>\n
    tax had to be excluded.\n<\/p>\n
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\n                                              21<\/span><\/p>\n
    The resultant position in law :\n<\/p>\n
    14.         The deduction  under Section  80HHC is available to an <\/p>\n
    assessee   engaged   in  the  export   of  goods  or  merchandise   outside <\/p>\n
    India to the extent of the profits specified in sub-section (1B) of the <\/p>\n
    provision.     Clause   (a)   of   Sub-section   (3)   of   Section   80HHC <\/p>\n
    provides that where the exported goods are manufactured by the <\/p>\n
    assessee,   the   deduction   under   sub-section   (1)   would   be   in <\/p>\n
    accordance with the formula stated therein.   The formula is that <\/p>\n
    the   profits   derived   from   such   export   shall   be   the   amount   which <\/p>\n
    bears   to   the   profits   of   the   business,   the   same   proportion   as   the <\/p>\n
    export turnover in respect of such goods bears to the total turnover <\/p>\n
    of the business carried on by the assessee.   Explanation baa was <\/p>\n
    inserted by the Finance Act  of 1991 with retrospective effect from <\/p>\n
    1st  April 1987.   Under Explanation baa, the expression “profits of <\/p>\n
    the business” means the profits of the business as computed under <\/p>\n
    the head “profits and gains of business or profession” as reduced by <\/p>\n
    ninety per cent of  (a) Any sums referred to in clauses (iiia), (iiib), <\/p>\n
    (iiic), (iiid) and (iiie) of Section 28; or (b) Any receipts by way of <\/p>\n
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\n                                               22<\/span><\/p>\n
    brokerage, commission, interest, rent, charges or any other receipt <\/p>\n
    of   a   similar   nature   included   in   such   profits.     The   profits   of   any <\/p>\n
    branch,   office,   warehouse   or   any   other   establishment   of   the <\/p>\n
    assessee   situated   outside   India   have   also   to   be   reduced.   Since <\/p>\n
    receipts by way of brokerage, commission, interest, rent, charges or <\/p>\n
    other similar receipts have no nexus with the export activity, the <\/p>\n
    legislature   thought   it   fit,   for   the   purpose   of   deduction   under <\/p>\n
    Section   80HHC   to   exclude   such   items   from     business   profits.\n<\/p>\n
    Parliament   was,   however,   conscious   of   the   fact     that   the <\/p>\n
    expenditure incurred in earning the items which were liable to be <\/p>\n
    excluded   had   already   gone   into   the   computation   of   business <\/p>\n
    profits.     This   was   because   the   computation   of   business   profits <\/p>\n
    under Chapter IV is made by amalgamating the receipts as well as <\/p>\n
    the  expenditure   incurred   in  carrying   on  the  business.     Since  the <\/p>\n
    expenditure   incurred   in   earning   the   income   by   way   of   interest, <\/p>\n
    brokerage, commission, rent, charges or other similar receipts had <\/p>\n
    also   gone   into   the   computation   of   business   profits,   Parliament <\/p>\n
    thought   it   fit   to   exclude   only   ninety   per   cent   of   the   receipts <\/p>\n
    received by the assessee in order to ensure that the expenditure <\/p>\n
    which is incurred by the assessee in earning the receipts which has <\/p>\n
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\n                                             23<\/span><\/p>\n
    gone into the computation of the business profits is taken care of.\n<\/p>\n
    15.         The reason why Parliament confined the reduction factor <\/p>\n
    to   ninety   per   cent   of   the   receipts   is   stated   in   the   Memorandum <\/p>\n
    explaining the provisions of the Finance Bill of 1991.  In so far as it <\/p>\n
    is relevant, the Memorandum states thus:\n<\/p>\n
                            “The existing formula may also give a distorted
\n                figure   of   export   profits   when   receipts   like   interest, <\/p>\n
                commission,   etc.,   which   do   not   have   an   element   of
\n                turnover are included in the profit and loss account.\n<\/p><\/blockquote>\n
                            It is, therefore, proposed to clarify that “profits
\n                of the business” for the purpose of section 80HHC will
\n                not   include   receipts   by   way   of   brokerage,   commission,
\n                interest, rent, charges or any other receipt  of a similar <\/p>\n
                nature.     As   some   expenditure   might   be   incurred   in
\n                earning these incomes, which in the generality of cases is <\/p>\n
                part of common expenses, it is proposed to provide ad
\n                hoc 10 per cent deduction from such incomes to account
\n                for these expenses.”\n<\/p><\/blockquote>\n
    Parliament,   therefore,   confined   the   reduction   to   the   extent   of <\/p>\n
    ninety per cent of the income earned through such receipts since it <\/p>\n
    was  cognizant  of  the fact  that the assessee would have  incurred <\/p>\n
    some expenditure in earning those incomes.   Parliament provided <\/p>\n
    an ad-hoc deduction of ten per cent from such incomes to account <\/p>\n
    for the expenses incurred in earning the receipts.  The explanatory <\/p>\n
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\n                                              24<\/span><\/p>\n
    statement which is contained in the Memorandum explaining the <\/p>\n
    provisions of the Finance Bill of 1991 has also been reflected in the <\/p>\n
    explanatory circular issued by the Central Board of Direct Taxes on <\/p>\n
    19 December 1991 (Circular No.621).  The distortion of the profits <\/p>\n
    that   would   take   place   by   excluding   the   receipts   received   by   the <\/p>\n
    assessee   which   were   unrelated   to   export   turnover   and   not   the <\/p>\n
    expenditure incurred by the assessee in earning those receipts was <\/p>\n
    factored in by Parliament by excluding only ninety per cent of the <\/p>\n
    receipts received by the assessee.  In a given case, the expenditure <\/p>\n
    incurred   by   the   assessee   in   earning   the   receipts,   which   is   to   be <\/p>\n
    excluded, may be more than ten per cent or less than ten per cent.\n<\/p>\n
    Parliament,   however,   thought   it   fit   to   adopt   a   uniform   formula <\/p>\n
    envisaging a reduction of ninety per cent to make due allowance <\/p>\n
    for   the   expenditure   which   would   have   been   incurred   by   the <\/p>\n
    assessee in earning the receipts.  Parliament regarded the element <\/p>\n
    of  expenditure  computed  at  ten  per cent  of the  receipts  to be  a <\/p>\n
    reasonable   parameter of what would have been expended by the <\/p>\n
    assessee.     It   is   in   this   background   that   in   Explanation   baa, <\/p>\n
    Parliament   has   thought   it   fit   to   exclude   ninety   per   cent   of   the <\/p>\n
    receipts   received   by   the   assessee   which   have   no   nexus   with   the <\/p>\n
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\n                                            25<\/span><\/p>\n
    export activity.  Ordinarily, the sums, receipts and profits set out in <\/p>\n
    clause   baa  would  have  been  required   to  be  excluded   completely <\/p>\n
    from the profits of the business, being unrelated to export turnover.\n<\/p>\n
    Yet, since the expenditure incurred in earning such sums, receipts <\/p>\n
    and profits has already been taken into account on the debit side, <\/p>\n
    in computing profits of the business, it is only ninety per cent of <\/p>\n
    these sums, receipts  and profits referred to therein which would <\/p>\n
    have to be excluded from the profits of the business in order to off <\/p>\n
    set   the   expenditure   taken   into   account   while   computing   the <\/p>\n
    business  profits.    In   other  words,   the  distortion   in  the  profits   of <\/p>\n
    business that would take place by excluding only the sums, receipts <\/p>\n
    and profits from the credit side, but not the expenditure from the <\/p>\n
    debit side, is off set by excluding only ninety per cent of such sums, <\/p>\n
    receipts   and   profits   to   represent   the   expenditure   incurred   on <\/p>\n
    earning them.     As stated earlier, it may well be that the actual <\/p>\n
    expenditure   incurred   in   a   case   may   be   more   or   less   than   the <\/p>\n
    statutory factor of ten per cent enacted by Parliament, but in order <\/p>\n
    to simplify the application of the law, Parliament treated a uniform <\/p>\n
    expenditure computed at ten per cent to be applicable in order to <\/p>\n
    ensure that there is no distortion of profits by exclusion of income <\/p>\n
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\n                                           26<\/span><\/p>\n
    which is not relatable to export profits.\n<\/p>\n
    Distributors Baroda :\n<\/p>\n
    16.        In  Distributors   (Baroda)   P.  Ltd.   vs.  Union  of  India,4<\/a> <\/p>\n
    what   was   in   issue   before   the   Supreme   Court   was  the   deduction <\/p>\n
    provided for in Section 80M.  Section 80M provided that where the <\/p>\n
    gross total income of an assessee, being a company includes any <\/p>\n
    income by way of dividends received from a domestic company, in <\/p>\n
    computing the total income of the assessee, there shall be allowed <\/p>\n
    a   deduction   from   such   income   by  way   of  dividends   of  a  certain <\/p>\n
    amount.     The   extent   of   the   deduction   varied   between   sixty   to <\/p>\n
    eighty per cent.       The Supreme Court observed that ‘income by <\/p>\n
    way of dividend from a domestic company included in the gross <\/p>\n
    total income’ would be the income computed in accordance with <\/p>\n
    the provisions of the Act, that is after deducting interest on monies <\/p>\n
    borrowed for earning such income.   While interpreting the words <\/p>\n
    “included in the gross total income” and, emphasizing   words “a <\/p>\n
    deduction  from  such income    by way of dividend”,  the Supreme <\/p>\n
    Court held thus:\n<\/p>\n
    4 (1985) 155 ITR 120<\/p>\n
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\n                                            27<\/span><\/p>\n
                “Now,   when   in   computing   the   total   income   of   the
\n                assessee, a deduction has to be made from “such income <\/p>\n
                by way of dividends, it is elementary that “such income
\n                by   way   of   dividends”   from   which   deduction   has   to   be <\/p>\n
                made must be part of gross total income.  It is difficult to
\n                see how the language of this part of sub -s.(1) of s. 80M
\n                can possibly fit in if “such income by way of dividends”
\n                were   interpreted   to   mean   the   full   amount   of   dividend <\/p>\n
                received by the assessee.   The full amount of dividend
\n                received   by  the   assessee   would   not   be   included   in  the
\n                gross total income.  What would be included  would only
\n                be the amount of dividend as computed in accordance <\/p>\n
                with the provisions of the Act.   If that be so, it is difficult
\n                to appreciate how for the purpose  of computing the total <\/p>\n
                income   from   the   gross   total   income,   any   deduction
\n                should be required to be made from the full amount of
\n                the   dividend.     The   deduction   required   to   be   made   for <\/p>\n
                computing the total income from the gross total income
\n                can only be from the amount of dividend computed in
\n                accordance with the provisions of the Act which would
\n                be forming part of the gross total income.”\n<\/p>\n
    17.         The principle which has been laid down by the Supreme <\/p>\n
    Court in the context of Section 80M was sought to be extrapolated <\/p>\n
    by   Counsel   appearing   on   behalf   of   the   Assessees   in   the   present <\/p>\n
    case, in their submission, in relation to the correct interpretation of <\/p>\n
    Explanation baa to Section 80HHC.  Now, undoubtedly, as already <\/p>\n
    noted earlier, Explanation baa provides first for the computation of <\/p>\n
    the profits of the business which are defined to mean the profits <\/p>\n
    and gains of business or profession as reduced under clauses (1) <\/p>\n
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\n                                             28<\/span><\/p>\n
    and  (2).     For   the   purpose   of   clause   (1)  of  Explanation   baa,   the <\/p>\n
    words “included in such profits” would clearly evince the intent of <\/p>\n
    Parliament that such receipts ought to have formed a part of the <\/p>\n
    profits   and   gains   of     business   or   profession   as   computed   in <\/p>\n
    accordance   with   the   provisions   of   Sections   28   to   44D.       The <\/p>\n
    distinguishing aspect of Explanation baa is that the profits of the <\/p>\n
    business     as   computed   under   the   head   of   profits   and   gains   of <\/p>\n
    business or profession are subject to a reduction factor of ninety <\/p>\n
    per cent.  The rationale for the exclusion which has been provided <\/p>\n
    for   by   Parliament   in   Explanation   baa   is   that   items   which   are <\/p>\n
    unrelated to export turnover have to be excluded in computing the <\/p>\n
    profits of business.  Including items which are unrelated to export <\/p>\n
    turnover   in computing the profits of business would  result in a <\/p>\n
    distortion of the formula  which is to be applied in construing the <\/p>\n
    provisions of Section 80HHC.  The reason for exclusion, therefore, <\/p>\n
    is   that   in   computing   the   profits   of   business   items   which   are <\/p>\n
    unrelated to export turnover must be excluded because the basis of <\/p>\n
    Section 80HHC is to provide an incentive for export.  The extent of <\/p>\n
    the exclusion which is statutorily mandated by Parliament is ninety <\/p>\n
    per   cent   of   the   total   receipts.     Though   the   entire   quantum   of <\/p>\n
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\n                                           29<\/span><\/p>\n
    receipts unrelated to export turnover would ordinarily have to be <\/p>\n
    excluded,  the extent of the exclusion has been confined to ninety <\/p>\n
    per cent. This is because the expenditure which is incurred by the <\/p>\n
    assessee   in   earning   these   receipts     would   have   gone   into   the <\/p>\n
    computation of the profits and gains of business or profession and <\/p>\n
    a   distortion   would   be   caused   if   the   entirety   of   the   income <\/p>\n
    generated from  the receipts  alone  were  to be  excluded.    It  is in <\/p>\n
    order to obviate such a distortion that Parliament mandated that <\/p>\n
    ninety per cent of the receipts would be excluded.   Consequently, <\/p>\n
    while   the   principle   which   has   been   laid   down   by   the   Supreme <\/p>\n
    Court in Distributors (Baroda) must illuminate the interpretation <\/p>\n
    of the words “included in such profits”, the Court cannot, at the <\/p>\n
    same time, be unmindful of the reduction which is postulated by <\/p>\n
    explanation baa, the extent of the reduction and the rationale for <\/p>\n
    effecting the reduction.\n<\/p>\n
    Decisions of the High Courts :\n<\/p>\n
    18.        Several   High   Courts   had   occasion   to   deal   with   the <\/p>\n
    provisions   of   Section   80HHC   including   explanation   baa.     The <\/p>\n
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\n                                              30<\/span><\/p>\n
    Madras High Court considered the interpretation of Section 80HHC <\/p>\n
    in  K.S.Subbiah   Pillai   &   Co.(India)   Pvt.Ltd.   vs.   CIT.5    The <\/p>\n
    questions of law which were referred to the High Court were as <\/p>\n
    follows :\n<\/p>\n
                “1.   Whether   on   a   true   construction   of   the   Explanation
\n                (baa)   to   Section   80HHC   of   the   Income-tax   Act,   1961,
\n                interest, rent and commission are to be deducted from
\n                export   profits   or   only   net   receipts,   if   any,   after   taking <\/p>\n
                into account the payments?\n<\/p><\/blockquote>\n
                -2.   Whether   on   a   true   construction   of   the   Explanation
\n                (baa) to section 80HHC of the Income-tax Act all the net
\n                receipts by way of interest, rent and commission should <\/p>\n
                be   aggregated   before   deduction   and   only   the   net
\n                balance, if any, should be deducted from export profits?”\n<\/p><\/blockquote>\n
    The High Court held that the second question of law did not arise <\/p>\n
    on   the   order   of   the   Tribunal   and   only   the   first   question   was <\/p>\n
    required   to   be   addressed.     Dealing   with   the   first   question, <\/p>\n
    Mr.Justice R.Jayasimha Babu, speaking for  the Division Bench held <\/p>\n
    as follows:\n<\/p>\n
                The clause does not refer to net interest.  It refers, inter
\n                alia, to the interest included in the profits and gains of
\n                the   business   or   profession.   ..     The   reference   to   “such
\n                profits” in sub-clause (1) of clause (baa) can only be to
\n                the   profits   of   the   business   computed   under   the   head
\n                “Profits and gains of business or profession”.  Addition of <\/p>\n
    5 (2003) 260 ITR 304<\/p>\n
                                                                  ::: Downloaded on – 09\/06\/2013 15:43:51 :::<\/span>
\n                                             31<\/span><\/p>\n
                prefix “the” to “profits” in clause (baa), while referring to
\n                the profits and gains of business or profession makes it <\/p>\n
                clear that it is only the amounts already included in that
\n                computation which are now to be reduced to the extent <\/p>\n
                of 90 per cent., if those items are included in sub-clause
\n                (1) of that definition.”\n<\/p><\/blockquote>\n
    The High Court held that interest paid and claimed as a deduction <\/p>\n
    in the computation of profits and gains for business could not be <\/p>\n
    set off against interest received and paid under income from other <\/p>\n
    sources.  The judgment in Subbiah Pillai was followed by another <\/p>\n
    Division Bench in  CIT vs. V.Chinnapandi.6  In the case before the <\/p>\n
    Madras High Court, the assessee had paid interest of Rs.9.24 lakhs <\/p>\n
    and had received  interest of Rs.2.65 lakhs and the net interest of <\/p>\n
    Rs.6.59 lakhs came to be debited.  The Assessing Officer held that <\/p>\n
    under Section   80HHC,  ninety per  cent of  the receipts  had  to  be <\/p>\n
    excluded and consequently the deduction was confined to ninety <\/p>\n
    per   cent   of   the   income   of   Rs.2.65   lakhs   received   on   account   of <\/p>\n
    interest.   The order of the Assessing Officer was confirmed by the <\/p>\n
    Appellate Authority.  The Income Tax Tribunal, however, held  that <\/p>\n
    the net figure of interest was Rs.6.59 lakhs which was not a receipt <\/p>\n
    and hence, there was no question of removing any amount while <\/p>\n
    6 (2006) 282 ITR 389<\/p>\n
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\n                                             32<\/span><\/p>\n
    computing   the   deduction   under   Section   80HHC.     The   Division <\/p>\n
    Bench of the Madras High Court held that “on a plain reading of <\/p>\n
    the provision”, it was clear that what the provision stipulates is that <\/p>\n
    the profits of business would be the profits as computed under the <\/p>\n
    head   of   profits   and   gains   of   business   or   profession.     While <\/p>\n
    computing   such   profits   under   the   head   of   profits   and   gains   of <\/p>\n
    business   or   profession,   if   any   receipts   by   way   of   brokerage, <\/p>\n
    commission, interest, rent, charges or a receipt of a similar nature <\/p>\n
    was   included   in   such   profits   that   would   have   to   be   reduced   by <\/p>\n
    ninety per cent from the profits so computed.  The Division Bench <\/p>\n
    held that no reference to net interest is mentioned in Explanation <\/p>\n
    baa and what had to be seen is only the nature of the receipts as <\/p>\n
    contemplated   by   the   clause.     Once   the   receipt   of   interest   was <\/p>\n
    known, ninety per cent of it would have to be reduced from the <\/p>\n
    profits without deducting any amount.  The Division Bench held as <\/p>\n
    follows:\n<\/p>\n
                “No   expenditure   or   any   other   deduction   is   permissible
\n                from   the   receipt   of   interest   income.     Section   80HHC
\n                stipulates   a   deduction   in   respect   of   export   profits.
\n                Instead   of   enjoining   the   Assessing   Officer   to   compute
\n                such export profits from out of the consolidated amount
\n                of   the   assessee,   which   may   involve   income   by   way   of
\n                interest,   rent,   commission   etc.,   the   Legislature   has <\/p>\n
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\n                                             33<\/span><\/p>\n
                provided a simple procedure under which 90 per cent of
\n                the   receipts   such   as   interest,   rent,   commission, <\/p>\n
                brokerage,   etc.,   shall   be   excluded   as   profits   not
\n                attributable to exports.  The intention is, therefore, clear <\/p>\n
                that   there   should   be   no   attempt   to   deduct   any
\n                expenditure   from   the   receipts,   however,   related,   such
\n                expenditure may be to the receipts.  It is in this view of
\n                the matter that the expression  “receipt  by way of”  has <\/p>\n
                been   used   in   the   section   and   not   “income”   of   that
\n                nature.”\n<\/p><\/blockquote>\n
    The same view has been taken by a Division Bench of the Punjab <\/p>\n
    and Haryana High Court in  Rani Paliwal vs. CIT.7     In that case, <\/p>\n
    the   total   interest   received   by   the   assessee   during   the   relevant <\/p>\n
    Assessment Year was Rs.6.33 lakhs while the total interest paid was <\/p>\n
    Rs.4.12 lakhs.   The Assessing Officer was of the view that ninety <\/p>\n
    per cent of the receipts on account of interest in the amount of Rs.\n<\/p>\n
    6.33   lakhs   was   liable   to   be   deducted   from   the   profits   of   the <\/p>\n
    business for the purposes of deduction under Section 80HHC.  The <\/p>\n
    CIT (Appeals) however, took the view that the interest would have <\/p>\n
    to   be   netted.     The   Income   Tax   Appellate   Tribunal,   on   appeal, <\/p>\n
    confirmed the view of the Assessing Officer by holding that ninety <\/p>\n
    per  cent   of   the   interest   that   was  deductible   for   the  claim   under <\/p>\n
    Section 80HHC was from the gross interest received by the assessee <\/p>\n
    7 (2004) 268 ITR 220<\/p>\n
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\n                                           34<\/span><\/p>\n
    and that the amount of the interest paid by the assessee could not <\/p>\n
    be   deducted   therefrom.     The   Division   Bench   held   that   “a   plain <\/p>\n
    reading of clause baa of   Explanation to Section 80HHC .. makes <\/p>\n
    this aspect quite clear” and the Tribunal was right in disallowing <\/p>\n
    the claim of the assessee.   A subsequent decision of the Punjab and <\/p>\n
    Haryana High Court in  CIT vs. Liberty Footwears,8   also adopts <\/p>\n
    the same position.\n<\/p>\n
    19.         Reliance  is, however,  sought to be  placed on behalf of <\/p>\n
    the assessee upon the judgment of a Division Bench of the Delhi <\/p>\n
    High Court in CIT vs. Shri Ram Honda Power Equip.9   One of the <\/p>\n
    issues which came up for decision in the appeal  was whether the <\/p>\n
    expression   “interest”   in   Explanation   baa  connotes   net  interest   as <\/p>\n
    gross  income less expenditure incurred by the assessee for earning <\/p>\n
    such income.  The Delhi High Court held that the judgment of the <\/p>\n
    Supreme Court in Distributors (Baroda) (supra) would fully cover <\/p>\n
    the question as to whether the deduction which is to be effected <\/p>\n
    under Explanation baa was of the entire interest received or of the <\/p>\n
    interest less the expenditure incurred by the assessee for earning <\/p>\n
    8 (2006) 287 ITR 279
\n    9 (2007) 289 ITR 475<\/p>\n
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\n                                             35<\/span><\/p>\n
    such income.     Observing that the words used in Section 80HHC <\/p>\n
    were similar to those in Section 80M, the Delhi High Court held <\/p>\n
    thus:\n<\/p>\n
                “The   expression   “by   way   of”   which   qualified   the   word
\n                “income” in section 80M is similar to the words “receipts <\/p>\n
                by way of” occurring in the Explanation (baa) of section
\n                80HHC of the Act.  Further the words “included in such
\n                profits”   occurs   in   both   the   provisions.     Just   as   in
\n                Distributors (Baroda) [1985] 155 ITR 120 (SC) where it <\/p>\n
                was   explained   by   the   Hon’ble   Supreme   Court   that   the
\n                words   “such”   profits   can   only   be   understood   as <\/p>\n
                “computed in accordance with the provisions of the Act”,
\n                we   are   of   the   view   that   similar   words   in   clause   (baa)
\n                should partake of the same meaning.  Applying the ratio <\/p>\n
                of Distributors  (Baroda) [1985] 155 ITR 120 (SC),  we
\n                hold   that   the   legislative   intent   in   using   the   word
\n                “interest”  in clause  (baa) to the Explanation  in section
\n                80HHC is indicative of “net interest”, i.e., gross interest <\/p>\n
                less the expenditure incurred by the assessee in earning
\n                such interest.”\n<\/p><\/blockquote>\n
    The   Delhi   High   Court   was   of   the   view   that   where   the   plain   or <\/p>\n
    literal interpretation of a statute would produce an unintended or <\/p>\n
    absurd     result,   the   literal   construction   should   not   be   adopted.\n<\/p>\n
    According to the Delhi High Court, the words “included any such <\/p>\n
    profits”  was a clear pointer to the fact that only net interest would <\/p>\n
    be   includible   in   arriving   at   the   business   profit.   The   Delhi   High <\/p>\n
    Court also held that unless netting were to be permitted, it would <\/p>\n
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\n                                               36<\/span><\/p>\n
    not   be   in   ‘sync’     with   the   entire   section.     The   contention   of  the <\/p>\n
    assessee  was that if  the deduction  of ninety per cent is of gross <\/p>\n
    interest   itself,   the   amounts   spent   in   earning   such   interest   will <\/p>\n
    remain  on the debit side of the profit  and loss account and will <\/p>\n
    depress the profits to that extent.   This submission was accepted <\/p>\n
    with the observation that the idea of Section 80HHC was to ensure <\/p>\n
    that the exporter gets benefit from the profits derived from export <\/p>\n
    and  not   to  depress   the   profits   further.     Hence,   according   to  the <\/p>\n
    High Court, it can only be   net interest which can be included in <\/p>\n
    the   profits   and  if     netting    were   not   to  be   permitted,   the   result <\/p>\n
    would be that the profits of the exporter would be depressed by an <\/p>\n
    item that is expenditure incurred on earning interest which does <\/p>\n
    not form part of the profits at all.\n<\/p>\n
    20.          Having given a careful consideration to the judgment of <\/p>\n
    the Delhi High Court, we are not inclined to follow the view for a <\/p>\n
    number of     reasons.     The   substratum of   the judgment of the <\/p>\n
    Delhi   High   Court   proceeds   on   the   basis   that   the   question   as   to <\/p>\n
    whether   netting   should   be   permissible   stands   concluded   by   the <\/p>\n
    judgment   of   the   Supreme   Court   in  Distributors   (Baroda).    In <\/p>\n
                                                                   ::: Downloaded on – 09\/06\/2013 15:43:52 :::<\/span>
\n                                             37<\/span><\/p>\n
    Distributors (Baroda), while considering the provisions of Section <\/p>\n
    80M, the Supreme Court interpreted the words “where the gross <\/p>\n
    total income of the assessee being a company included any income <\/p>\n
    by way of dividend received” and the words which provided that in <\/p>\n
    computing the total income of the assessee “a deduction from such <\/p>\n
    income by way of dividend” shall be allowed to the extent specified <\/p>\n
    in   the   provision.     While   applying   the   ratio   of   the   judgment   in <\/p>\n
    Distributors   (Baroda),   we   have   observed   that   the   expression <\/p>\n
    “receipts   of   a   similar   nature   included   in   such   profits”   in <\/p>\n
    Explanation   baa   to   Section   80HHC   must   refer   to   receipts   which <\/p>\n
    form a part of the computation under the head of profits and gains <\/p>\n
    of business or profession under Sections 28 to 44D of the Income <\/p>\n
    Tax Act, 1961.   The expression “such profits” therefore, following <\/p>\n
    the   rationale   in  Distributors   Baroda,  must   refer   to   the <\/p>\n
    computation   of   profits   and   gains   of   business   or   profession   in <\/p>\n
    accordance   with   the   aforesaid   provisions   of   the   Act.     But,   the <\/p>\n
    similarity   between   the   provisions   of   Sections   80HHC   and   80M <\/p>\n
    which   is   relied   upon   in   the   judgment   of   the   Delhi   High   Court <\/p>\n
    would miss the comprehensive position as it obtains under Section <\/p>\n
    80HHC.  The similarity of the provisions should not result into an <\/p>\n
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\n                                             38<\/span><\/p>\n
    assumption   that  the  provisions  are  identical,  when  they  are   not.\n<\/p>\n
    Section   80   HHC   is   a   provision   which   is   intended   to   provide   an <\/p>\n
    incentive for export.  Parliament, therefore, expressed a legislative <\/p>\n
    intent to exclude items which were unrelated to export turnover <\/p>\n
    from the computation of the deduction and the application of the <\/p>\n
    formula.       While   excluding   such   items   which   are   unrelated   to <\/p>\n
    export for the purposes  of Section 80HHC,  Parliament has taken <\/p>\n
    due note of the fact that the exporter assessee would have incurred <\/p>\n
    some expenditure  in earning the receipts.   The expenditure would <\/p>\n
    have gone into the computation of profits and gains of business or <\/p>\n
    profession     since     the   computation   of   business   profits   under <\/p>\n
    Chapter IV of the Act is made  by amalgamating the receipts as well <\/p>\n
    as expenditure incurred in carrying on the business.   Parliament, <\/p>\n
    however, legislated that in order to remove a cause for distortion, <\/p>\n
    the   reduction   to   be   effected   of     receipts   such   as   brokerage, <\/p>\n
    commission, and interest  should be confined to ninety per cent of <\/p>\n
    those receipts.   In providing a simplified formula in these terms, <\/p>\n
    Parliament evidently adopted a fair and reasonable statutory basis <\/p>\n
    of what may be regarded as expenditure incurred for the earning of <\/p>\n
    the receipts.  Once Parliament has legislated both in regard to the <\/p>\n
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\n                                             39<\/span><\/p>\n
    nature of the exclusion and the extent of the exclusion, it would <\/p>\n
    not   be   open   to   the   Court   to   order   otherwise   by   rewriting   the <\/p>\n
    legislative provision.   The task of interpretation is to find out the <\/p>\n
    true intent of a legislative provision.  Undoubtedly, in dealing with <\/p>\n
    a provision by way of an incentive, the Court must adopt a broad <\/p>\n
    and liberal interpretation which would advance the purpose. While <\/p>\n
    doing so, the Court is duty bound to iron out the creases but, it is <\/p>\n
    clearly not open to the Court to legislate by substituting a formula <\/p>\n
    or provision other than what has been legislated by   Parliament.\n<\/p>\n
    The Delhi High Court, with respect, has not adequately emphasised <\/p>\n
    the entire rationale for confining the deduction only to the extent <\/p>\n
    of ninety per cent of the excludible receipts.  While the judgment of <\/p>\n
    the   Delhi   High   Court   referred   to   the   C.B.D.T.   Circular   dated   19 <\/p>\n
    December   1991,   as   noted   earlier,   we   have   also   adverted   to   the <\/p>\n
    Memorandum explaining the clauses of the Finance Bill of 1991.\n<\/p>\n
    The Memorandum can be relied upon as a legitimate instrument of <\/p>\n
    statutory  interpretation   and  to  shed  light   upon  the  provisions  of <\/p>\n
    Explanation baa.\n<\/p>\n
    21.         Before concluding, it would be necessary to note that the <\/p>\n
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\n                                             40<\/span><\/p>\n
    Delhi   High   Court     affirmed   the   judgment   of   a   Special   Bench   of <\/p>\n
    Income   Tax   Appellate   Tribunal     in   the   case   of  Lalsons.       The <\/p>\n
    Tribunal in the course of its decision, adverted to the deduction of <\/p>\n
    ten   per   cent   allowed   by   Parliament   in   Explanation   baa   while <\/p>\n
    legislating   that   only   ninety  per  cent   of  the   receipts   unrelated   to <\/p>\n
    export   turnover   would   be   excluded   from   the   profits   of  business.\n<\/p>\n
    The   Tribunal,     observed   that   the   allowance   of   ten   per   cent   had <\/p>\n
    been   made   by   Parliament   only   for   meeting   common   expenses, <\/p>\n
    according to Circular 621 dated 19 December 1991 of the C.B.D.T.\n<\/p>\n
    In Lalsons, the Tribunal observed that in addition to such common <\/p>\n
    expenses, there may be other expenses which have a direct bearing <\/p>\n
    on excludible receipts.  The Tribunal held that if such receipts were <\/p>\n
    to be taken out of the business profits on the footing that they had <\/p>\n
    no connection with the business profits or turnover, it would only <\/p>\n
    be  reasonable    to hold  that expenditure  having nexus with such <\/p>\n
    receipts    should also be  taken out of the business profits on the <\/p>\n
    same   footing.       The   Tribunal   noted   that   the   use   of   the   word <\/p>\n
    “receipts” would not refer to gross receipts because the legislature <\/p>\n
    had not used the words “gross” nor “net”.  We are affirmatively of <\/p>\n
    the view that in its discussion on the issue of netting, the Tribunal <\/p>\n
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\n                                              41<\/span><\/p>\n
    in   its   Special   Bench   decision   in  Lalsons  has   transgressed   the <\/p>\n
    limitations on the exercise of judicial power.  The Tribunal  has in <\/p>\n
    effect,   legislated   by   providing   a   deduction   on   the   ground   of <\/p>\n
    expenses   other   than   in   the   terms   which   have   been   allowed   by <\/p>\n
    Parliament.     That   is   impermissible.       In   the   present   case,     it   is <\/p>\n
    necessary to emphasize that the question before the Court relates <\/p>\n
    to the deduction under Section 80HHC.   An assessee may well be <\/p>\n
    entitled to a deduction in respect of the expenditure laid out wholly <\/p>\n
    and exclusively for the purpose of business in the computation of <\/p>\n
    the profits and gains of business or profession.   However, for the <\/p>\n
    purposes  of   computing  the  deduction  under  Section   80HHC,  the <\/p>\n
    provisions which have been enacted by Parliament would have to <\/p>\n
    be   complied.       A   deduction   in   excess   of   what   is   mandated   by <\/p>\n
    Parliament cannot be allowed on the theory that it is an incentive <\/p>\n
    provision   intended   to   encourage   export.         The   extent   of   the <\/p>\n
    deduction   and   the   conditions   subject   to   which   the   deduction <\/p>\n
    should   be   granted,   are   matters   for   Parliament   to  legislate   upon.\n<\/p>\n
    Parliament having legislated, it would not be open to the Court to <\/p>\n
    deviate   from   the  provisions   which   have   been   enacted  in   Section <\/p>\n
    80HHC.\n<\/p>\n
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\n                                             42<\/span><\/p>\n
    22.         In   the   circumstances,   we   allow   the   appeal   by   holding <\/p>\n
    that the Tribunal was not justified in coming to the conclusion that <\/p>\n
    the   net   interest   on   fixed   deposits   in   the   Bank   received   by   the <\/p>\n
    assessee should be  considered for the purposes of working out the <\/p>\n
    deduction under Section 80HHC and not the gross interest.   The <\/p>\n
    question of law would accordingly stand answered in the aforesaid <\/p>\n
    terms in favour of the Revenue and against the assessee.   There <\/p>\n
    shall be no order as to costs.\n<\/p>\n
                                                ( Dr.D.Y.Chandrachud, J.)<\/p>\n
                                                   ( J.P.Devadhar, J.)<\/p>\n
                                                                ::: Downloaded on – 09\/06\/2013 15:43:52 :::<\/span>\n <\/p>\n","protected":false},"excerpt":{"rendered":"
Bombay High Court The Commissioner Of Income Tax … vs M\/S.Asian Star Co.Ltd on 18 March, 2010 Bench: Dr. D.Y. Chandrachud, J.P. Devadhar 1 IN THE HIGH COURT OF JUDICATURE AT BOMBAY O. O. C. J. INCOME TAX APPEAL NO.200 OF 2009 The Commissioner of Income Tax City-III, Room No.607, 6th Floor, Aayakar Bhavan, M.K.Road, […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"","_lmt_disable":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[11,8],"tags":[],"class_list":["post-208222","post","type-post","status-publish","format-standard","hentry","category-bombay-high-court","category-high-court"],"yoast_head":"\nThe Commissioner Of Income Tax ... vs M\/S.Asian Star Co.Ltd on 18 March, 2010 - Free Judgements of Supreme Court & High Court | Legal India<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.legalindia.com\/judgments\/the-commissioner-of-income-tax-vs-ms-asian-star-co-ltd-on-18-march-2010\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"The Commissioner Of Income Tax ... vs M\/S.Asian Star Co.Ltd on 18 March, 2010 - 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