1. This appeal by the assessee is directed against the order dated 29-9-1992 of the CIT (Appeals)-VI, Madras relating to the assessment year 1989-90.
2. The appellant-company is engaged in the business of financial consultancy. It is also an exporter of marine foods.
For the assessment year 1989-90 it filed its return of income on 23-11-1989 disclosing an income of Rs. 3,10,023. Such income came to be returned by the assessee on the footing that it was entitled to deduction of Rs. 4,96,718 under Section 80HHC of the Act in relation to the profits of its business.
The aforesaid claim came to be made in the following circumstances. On 31-1-1989 the assessee entered into an agreement with one Devi Marine Food Products Ltd. - a company engaged in the business of processing frozen marine products (processors for short). The said agreement provided that the export orders secured by the assessee-company would be executed by the said processors, that is to say, the processors would ship the marine products covered by the export orders. After the products are shipped, the assessee-company would negotiate the relevant documents and would credit the proceeds to the account of the processors. The assessee-company also agreed to pass on to the processors REP licence, cash assistance and the like relating to the said exports. The assessee would further pay the processors incentive calculated at 3.75 per cent of the FOB value of the exports including service charge.
On their part, the processors undertook not to claim any deduction under Section 80HHC of the Act in relation to the exports attributable to the export orders procured by the assessee-company.
It was on the basis of the aforesaid agreement/arrangement that the assessee made a claim for deduction under the said section.
... there is no supporting manufacturer or export house relationship between the assessee-company and the Processors. Further, when the export incentive of import replenishment licence and cash assistance are made available to exporters, the company has agreed to forfeit these benefits in favour of the Processor and they thereby excluded such value from its profits. In the event, the claim for deduction under Section 80HHC is not in order and is disallowed.
In the process the Assessing Officer computed the total income of the assessee at Rs. 8,06,741.
4. Predictably, the assessee took up the matter in appeal before the CIT (Appeals), who declined to interfere in the matter observing : ...It is settled law that contract between two parties cannot affect the effect of the provisions of tax statutes. In this case the contracting parties were the assessee who had not known exports earlier. The party whose goods are exported cannot disclaim the benefit under statute by mere agreement unless permitted by law or rules thereunder. Since export houses and State Trading Corporation only have been made eligible for deduction, the supply of goods by processor to the assessee and the assessee's activity in respect of the matter is not entitled to any benefit under Section 80HHC.5. Thereafter the assessee moved the ITAT, which, on an examination of the claim under Section 80HHC held that the assessee was entitled to deduction under Section 80HHC in principle. Accordingly, it directed the Assessing Officer to allow the assessee the benefit of Section 80HHC to the extent admissible under that section (see order dated 24-4-1992 of the ITAT, Madras Bench-A in ITA No. 1874/Mds./91).
6. On 28-5-1992 the Assessing Officer passed an order giving effect to the aforesaid order of the ITAT. In the said order he held that the assessee is not entitled to deduction under Section 80HHC. To quote the Assessing Officer: As per Section 80AB, the deduction under Section 80HHC cannot exceed the amount of income included in the total income. Since the amount of income from export of marine products business is being loss, deduction under Section 80HHC is ML.
The assessee is entitled to deduction under Section 80HHC but the amount of deduction worked out to Rs. ML.
7. The said order signalled a fresh round of appeal to the CIT (Appeals), who dismissed the appeal on the ground that under Section 246, an order of the Assessing Officer giving effect to the order of the ITAT is not an appealable order. This was on 29-9-1992.
9. Shri K.R. Rarnamani, the learned counsel for the assessee vehemently contended that the first appellate authority was not justified in dismissing the assessee's appeal as not being maintainable and that, in any event, the Assessing Officer was not justified in dismissing the assessee's claim for deduction under Section 80HHC of the Act. As for the reference to Section 80AB of the Act made by the Assessing Officer, Shrl Ramamani argued that for purposes of quantifying the deduction admissible under Section 80HHC, one has merely to look at the provisions of that section and ascertain the mode of computation of the deduction stipulated therein. The scheme of Section 80HHC is to allow deduction of the prescribed percentage of export profits. Consequently there was no call for the Assessing Officer to Invoke the provisions of Section 80AB of the Act. In this regard, he referred to and relied upon the decision of the ITAT Delhi Bench-C in the case of Expo Machinery Ltd. v. IAC [1989] 31 ITD 41.
10. The second point made by the iearned counsel for the assessee was that the deduction claimed by the assessee had been calculated strictly in accordance with the provisions of Section 80HHC of the Act.
In view of the foregoing, therefore, contended Shri Ramamani, the assessee is entitled to succeed.
11. On his part, Shri K. Argal, the learned Departmental Representative strongly supported the orders of the lower authorities.
12. In the course of the hearing, we wanted to know the basis on which the assessee's claim for deduction under Section 80HHC in a sum of Rs. 4,96,718 came to be computed. In response the following details were furnished on behalf of the assessee: Thereupon the Bench elicited response of the learned counsel for the assessee to the following two propositions: Proposition No. 1: In the case of V.D. Swami&Co. Ltd. v. Dy. CIT[1993] 44 ITD 91, ITAT Madras Bench B has held: ... On a purposive construction of this section, it would appear that Sub-section (a) would apply where the export profi t is easily identifiable. If such identification is not possible, then Sub-section (b) enables the grant of proportionate relief. In other words, the relief is to be made under Sub-section (a) and only when it is not possible the relief is to be given under Sub-section (b)....
In this case it is easy to identify and determine the export profits.
But the export business has resulted in a negative profit, that is loss. It should, therefore, follow that the deduction admissible under Section 80HHC will be nil.
Proposition No. 2: A plain reading of Section 80HHC(3) will indicate that Parliament has made a distinction between "turnover" on one hand and "profit" on the other. For a fact, as respects cases falling under Section 80HHC(3)(b), the scheme of the section is to arrive at the export profits by applying to the business profits the ratio which the export turnover bears to the total turnover of the assessee's business.
Secondly, "turnover" means the aggregate of the sale price received or receivable by a dealer in respect of the goods sold by him. Thus, turnover is the amount representing total sales of a trader during a given period, which is usually one year.
13. It is, however, seen from the assessee's Profit and Loss Account for the year of account ending on 31-3-1989 that the aggregate sum of Rs. 26,04,477 (which the assessee has labelled as total turnover) comprised not only export turnover of Rs. 16,67,084 but also the following items which cannot properly be regarded as turnover: finance for the assessee's clients : Rs. 8,50,321(2) Dividend : Rs. 5,247(3) Interest : Rs. 7,212(4) Profit on sale of shares : Rs. 74,913 Rs. 9,37,693 Properly viewed, all the aforesaid four items are income simpliciter.
They may be gross income in the sense that the expenditure incurred by the assessee for earning the said income have been shown separately and have not been deducted from the gross income. Nevertheless, they remain what they really are, namely income. Such being the fact - situation, can the aforesaid aggregate amount of Rs. 9,37,693 properly be viewed as turnover? 14. On the first proposition the learned counsel for the assessee fairly stated that in view of the ITAT decision in the case of V.D.Swami & Co. Ltd. (supra), he would leave the matter to us.
On the second proposition, Shri Ramamani sought to contend that the term "turnover" has more than one connotation and that in the context of Section 80HHC the total turnover of the assessee would include the aforesaid aggregate sum of Rs. 9,37,693 also. In this regard he drew our attention to the fact that, in the context of Section 44AB, which obligates certain persons carrying on business or profession to have their accounts audited, the CBDT had issued Circular No. 452 of 17-3-1986 (Taxmann's Direct Taxes Circulars, Vol. 1, p. 446), in which the applicability of the said section to commission agents and arhatias were examined. In that regard the Circular stated that so far as kachha arhatias are concerned, turnover does not include sales effected on behalf of the principals and that only the gross commission has to be considered for the purpose of Section 44AB. The position relating to pacca arhatias, however, is different. A pacca arhatia is not, in the proper sense of the word, an agent or even del credre agent. A principal to principal relationship exists between pacca arhatias and its constituents. Consequently, in the case of these arhatias the total sales/turnover of the business inclusive of the commission earned should be taken into account for determining the applicability of the provisions of Section 44AB.15. We have looked into the facts of the case. We have considered the rival submissions.
16. As we see it, from whichever angle we approach the matter - whether from the angle of Section 80HHC(3)(a) or from the angle of Section 80HHC(3)(b) - the deduction admissible to the assessee Is 'NIL'. If, as has been held by the Tribunal in the case of V.D. Swami & Co. Ltd. (supra), the main thrust of Section 80HHC is that the profits attributable to the export business must be identifiable, then we have before us a clear case of loss arising out of export business and that consequently, deduction admissible to the assessee under Section 80HHC of the Act will be nil.
If, on the other hand, we proceed on the footing that the assessee's case is covered by Section 80HHC(3)(b), we are unable to accept the contention of the learned counsel for the assessee that the aggregate amount of Rs. 9,37,693 must be regarded as turnover for the purpose of Section 80HHC of the Act. For more than one reason. First, while setting out proposition No. 2 we have already adumbrated how Section 80HHC(3) itself makes a distinction between turnover and profits.
Secondly, it is well settled that whenever the right to receive money in the course of trading transactions accrues or arises, or the money is realised, the profit or the income embedded in the receipt also arises or accrues or is received. Thus, in the case of Turner Morrison & Co. Ltd. v. CIT [1953] 23 ITR 152 the Supreme Court at page 161 of the Report observed: There can, therefore, be no question that when the gross sale proceeds were received by the Agents in India they necessarily received whatever income, profits and gains were lying dormant or hidden or otherwise embedded in them. Of course, if on the taking of accounts it be found that there was no profit during the year then the question of receipt of income, profits and gains would not arise but if there were income, profits and gains, then the proportionate part thereof attributable to the sale proceeds received by the Agents in India were income, profits and gains received by them at the moment the gross sale proceeds were received by them in India and that being the position the provisions of Section 4(1)(a) were immediately attracted and the income, profits and gains so received became chargeable to tax under Section 3 of the Act.
Again in the case of Raja Mohan Raja Bahadur v. CIT [1967] 66 ITR 378 Supreme Court observed at p. 382 of the Report: ...If accounts are maintained according to the mercantile system, wjsenever the right to receive money in the course of a trading transaction accrues or arises, even though income is not realised, income embedded in the receipt is deemed to arise or accrue. Where the accounts are maintained on cash basis receipt of money or money's worth and not the accrual of the right to. receive is the determining factor. Therefore, if commercial assets are received by a trader maintaining accounts on cash basis in satisfaction of an obligation, income which is embedded in the value of the assets is deemed to be received : the receipt of income is not deferred till the asset is realized in terms of cash or money. It makes no difference whether the receipt of assets is in pursuance of an agreement or that the trader is compelled by law to accept the assets from the debtor. Once title of the trader to an asset received is complete, whether by a consensual arrangement or by operation of law, he receives the income embedded in the value of the asset. In Californian Copper Syndicate v. Harris [1904] 5 Tax Cas. 159, 167, Lord Trayner in dealing with a case of assessment to income-tax of a company, formed for the purpose, inter alia, of acquiring and re-selling mining property, which resold the whole of its assets to a second company and received payment in fully paid shares of the purchasing company, observed: 'A profit is realised when the seller gets the price he has bargained for. No doubt here the price took the form of fully paid shares in another company, but, if there can be no realised profit, except when that is paid in cash, the shares were realisable and could have been turned into cash, if the appellants had been pleased to do so. I cannot think that income-tax is due or not according to the manner in which the person making the profit pleases to deal with it'.
17. Now the mode and mechanics of computing the deduction admissible to an assessee falling under Section 80HHC(3)(b) clearly proceeds on the basis that in trading transactions profit, or, as the case may be, loss is embedded in the gross turnover. The most significant conclusion that flows from the said provision is that when Section 80HHC(3) talks of turnover, it talks of trading receipts and not of receipts which are of the nature of income to start with. It should, therefore, follow that the aggregate sum of Rs. 9,37,693 referred to supra cannot be regarded as turnover and that by the same token it should be left out of reckoning for purposes of computing deduction admissible to the assessee under Section 80HHC. If this exercise is done, we are back to Proposition No. 1. This would mean that the deduction admissible to the assessee under Section 80HHC would be nil, especially in view of the fact that the export business of the assessee has resulted in a loss.
18. Shri Ramamani's arguments, based on Section 44AB and the Board Circular issued thereunder remain to be considered. As we see it, neither the section nor the Circular can avail the assessee.
The object of the section obviously is to cast an obligation on certain types of assessees to have their accounts compulsorily audited. The scheme of the section is that having identified the classes of assessees who are obligated to get their accounts compulsorily audited, the section proceeds to make a further classification so as to indicate that a group of assessees falling in the said classes need not get their accounts audited compulsorily. Of course, this particular provision is purely a matter of administrative convenience. For this purpose the section has necessarily to draw a line somewhere. This the section has achieved thus by adopting turnover, or as the case may be, gross receipts as the yardstick. Given the limited purpose which the said yardsticks are designed to serve, no reliance can be placed on that section of interpreting the term "turnover", especially when the term "turnover" has not been defined either under the Income-tax Act or in the Rules made thereunder.
Secondly, in the case of a person carrying on business, Section 44AB itself uses the expression "total sales, turnover or gross receipts, as the case may be, in business". On the contrary, while speaking of persons carrying on profession, the section uses the expression "gross receipts in profession". Thus the section itself proceeds on the footing that the term "turnover" which is applicable to business has a different connotation from the term "gross receipts" from profession.
Thirdly, as is ex facie clear from the aforesaid CBDT Circular, that Circular came to be issued in relation to kacha and pacca arhatias, who are an integral part of the trading sector. Therefore, the instructions issued by the Board as respects kacha and pacca arhatias cannot be applied to the case of the assessee before us, who arranges finances for others for a fee. The assessee may choose to label the fee as brokerage or even as commission. But the fee - or to use a generic expression 'receipt' - cannot be regarded as turnover proper. We, therefore, reject the related arguments of Shri Ramamani.
19. There is yet another aspect of the matter that is noteworthy. We have already seen how, while Section 44AB talks of "total sales, turnover or gross receipts, as the case may be, in business", in the case of a person carrying on business and of "gross receipts in profession" in relation to a person carrying on profession, Section 80HHC(3)(b) talks of "export turnover" and "total turnover". As we see it, the latter section has advisedly - and indeed intentionally - used the terms "export turnover" and "total turnover". The object of Section 80HHC is clear, namely, to give some tax relief with a view to giving fillip to exports. The focus of Section 80HHC thus is on exports.
If an assessee manufactures goods or merchandise [other than of course those listed under Section 80HHC(2)(b)] and exports them in their entirety and makes a profit at the end of the year of account, he became eligible to the deduction prescribed by and under Section 80HHC in relation to such profits.
But a manufacturer may not invariably be able to export, in their entirety, the goods or merchandise manufactured. He may export a part of then; and sell the rest in India. Given the paramount need to give fillip to exports, Parliament clearly intended that the benefit of Section 80HHC should not be denied in such cases. But the difficulty in such cases is that the profits attributable to exports cannot be ascertained with precision. This is because not only the manufacturing activities but also the selling activities (including the activities connected with exports) form a continuous, integrated whole. Even so, the intention of Parliament was to extend the benefit of Section 80HHC to the extent of the profits generated by exports. With this end in view, Parliament incorporated a rule of thumb in Section 80HHC(3)(b).
As long as the assessee has cleared profits in a particular year of account, export profits are computed by applying to total profits the ratio which export turnover bears to total turnover.
Given the true legislative intent, export profits, as we see it, is a function of the following three factors: (b) total turnover, that is to say the aggregate of (a) above and the sale proceeds receivable of the goods and merchandise sold in India; and (c) profits of the business relating to the goods and merchandise in question as computed under the head "Profits and gains of business or profession.
Given the aforesaid mode and mechanics of computing export profits, no other factor, such as dividend income, interest income, profit on sale of shares or even the fees received for arranging finance for the assessee's clients can be taken into reckoning.
In the case before us, it is common ground, the exports made by the assessee had resulted in a loss. The assessee's Profit and Loss Account for the year ending on 31-3-1989, no doubt, shows a pre-tax profit of Rs. 8,11,360. But this is mainly due to aggregate gross income of Rs. 9,37,693 under the four heads referred to supra. Given the true scheme of Section 80HHC, there is no call to treat the said aggregate sum as forming part of the assessee's turnover. The result is that even under Section 80HHC(3)(b), the deduction admissible to the assessee is nil.
20. Before taking leave of this case, we may add that, in the first round of litigation, the Tribunal has held that the assessee is entitled to deduction under Section 80HHC in principle. In the second round of the proceedings, we hold that, the exports made by the assessee having resulted in a loss, the deduction admissible to the assessee under Section 80HHC is nil.
21. In view of the foregoing, therefore, we decline to interfere in the matter.