1. The assessee, a limited company and the department are in cross-appeals, raising the common issue of the extent of deduction permissible under Section 80HHC of the Income-tax Act. In the appeal of the assessee, it has contested sustaining of disallowances from out of certain expenses. In view of the common issue, these appeals were heard together and for the sake of convenience, they are being disposed of by this composite order. We shall initially deal with the common issue and then deal with the disallowances of expenses, as contested by the appellant company.
2. The facts relating to the claim of deduction under Section 80HHC of the Income-tax Act are briefly stated hereunder. The assessee has been carrying on the business activity of providing consultation till the assessment year 1988-89 and its income comprised mainly of commission income from such consultations. In view of the prescription of uniform accounting year for all companies by the Income-tax Act, the previous year relevant to the assessment year under appeal, was for twenty one months. During the previous year relevant to the assessment year under appeal, in addition to its usual consultation activities, it exported fashion garments and sports goods of an invoice value of Rs. 46,86,435.
The assessee claimed deduction under Section 80HHC of Rs. 18,93,970.
3. The Assessing Officer (hereinafter referred to as AO), had noted that, the cost of goods sold was Rs. 43,18,942 and the gross profit on sale of goods was just Rs. 3,69,003. The AO also had noted that, the claim of deduction was based on the report of the auditor. The AO had observed that, the assessee had stated that, the total turnover at Rs. 143,43,602, including commission income of Rs. 91,08,191. The AO had noted that, the assessee due to incapacity to execute all the export orders received by it, passed the same to other exporters, for which it was paid commission at the rate of 10 per cent of the export value, in India and in Indian rupees. The AO while computing the figure of turnover, considered the invoice value of the goods exported by others of Rs. 9,10,81,907 (on which the assessee received ten per cent commission) and added to the invoice value of exports made by the assessee of Rs. 46,87,945 and arrived at the figure of total turnover at Rs. 9,56,69,852. The AO then, from the figure of total income as computed under the provisions of the Income-tax Act, excluded amounts of incomes from consultancy, miscellaneous receipts and lease rentals from cylinders and arrived at the business profit figure of Rs. 59,65,827.The AO then applied the provisions of Sub-clause (b) of Sub-section (3) of Section 80HHC, determined the figure of permissible deduction of Rs. 2,92,170, which was allowed as a deduction.
4. The assessee agitated the restriction in the deduction under Section 80HHC and claimed that, "the deduction under Section 80HHC should have been allowed of the entire income computed under the head 'profits and gains from business or profession' according to Chapter IV-D and other provisions of the IT Act, 1961". The assessee contended that, the AO could not have considered the turnover of other exporters, from whom, the assessee had received commission of 10 per cent, for calculating the deduction under Section 80HHC, which the CIT (A), found to be a reasonable proposition.
The CIT (A), examined the profit & loss account for the assessment year 1988-89, in which period the assessee had not made any exports, but had received its major income from commission and noted the net profit on commission income was 46 per cent. He assumed that, the net profit for twenty-one months ending with March 31,1989, would also be 46 per cent on the commission income and calculated the amount of net profit figure at Rs. 41,91,968. From the net profit according to profit & loss account of Rs. 59,65,827, he excluded the assumed profit on commission income of Rs. 41,91,968 and arrived at the figure of profit derived from the exports of goods at Rs. 17,66,859, which he held as the figure that would be allowed as deduction under Section 80HHC of the Act.
5. The assessee and the department, both are aggrieved by the order of the CIT(A) and thus are in cross-appeals before us. The assessee is agitating on the restriction of deduction to Rs. 17,66,859 as against its claim of Rs. 18,93,970 and the department is objecting to the increase in the amount of deduction from Rs. 2,92,170.
6. The learned counsel of the assessee, Shri Ganesan submitted that, the CIT (A) was wrong in excluding the commission income from the concept of turnover of the business. He contended that, for the business, the term 'turnover' is not merely a total of sales of goods, but, is the total figure of credits to the profit and loss account. He pleaded that, Section 80HHC of the Act, refers to the export of goods and merchandise in Sub-section (1) and the quantum of deduction is to be determined concerning Sub-clauses (a) and (b) of Sub-section (3) of that section. He pointed out that, Sub-clause (a), refers to an assessee, who has exclusive export business activity, ie., no other activity and, therefore, this sub-clause has no applicability to the assessee, because, in addition to the export activity, the assessee has earned income from commission in India and hence would fall within the ambit of Sub-clause (b).
He submitted that, according to Sub-clause (b), the assessee, if it has profit derived from exports, as well as from its domestic business, then, total of the profit from exports and others, would need to be apportioned in the ratio as the export turnover bears to the total turnover. He contended that, the auditors had calculated the amount of permissible deduction on the above basis, ie., by considering the total of the credits to the profit & loss account as the total turnover and then apportioning the net profit between the exports and other business in the ratio of the respective incomes to the total of credit to the profit & loss account, which is in strict conformity with the provisions of the Act. He referred to the amendment to the section, that is effective from 1-4-1992, wherein, it was stated that, the turnover would have to exclude receipts like interest, commission and this having been made effective from 1-4-1992, indicating that, the intention of the lawmaker was not to exclude commission from the total turnover, before that date. He addressed us on the several clarifications that have been issued by the Central Board of Direct Taxes and to the subsequent amendment to the section and pleaded that, till assessment year 1992-93, the intention remained to consider commission as part of the turnover of the business and on that basis, the claim as made by the assessee, for allowing of deduction of Rs. 18,93,970 was proper. He referred to the explanatory notes on the provisions relating to Direct Taxes, as was issued by the CBDT in connection with Finance (No. 2) Act, 1991, that was reported in [1992] 195 ITR (St.) 154 and drew our attention specifically to paragraphs 32.5 and 32.10, in support of his contention that, it was only at that time that, the revenue authorities came to the conclusion that, commission, interest etc., do not form part of the turnover. He accordingly contended that, for the assessment year under appeal, this explanation not being available, the commission income could not be excluded from being included as part of the total turnover.
7. Smt. Surabhi Sinha, the learned Senior departmental representative submitted that, the answer to the claim advanced by the appellant company, lay on the figure of gross profit on export trade at Rs. 3,69,003. She contended that, there would be obviously some administrative expenses related to the export trade, which can be considered, for the sake of argument, as nothing less than the figure of gross profit, when the totals of all such administrative expenses aggregate to Rs. 42,87,508 and therefore, there is no profit derived from the export business, hence, assessee could not have claimed any deduction at all. But, she submitted that, since the AO, had allowed deduction on some basis, she has no alternative, but to plead for limiting the deduction to that extent only. She referred to the decision of the Tribunal in Impulse India (P.) Ltd. v. ITO [1992] 40 ITD 36 (Delhi), for the proposition that, commission could not be treated as turnover. She also referred to the decision of the Tribunal in V.D. Swami & Co. Ltd. v. Dy. CIT [1993] 44 ITD 91 (Mad.), for the proposition that, the intention of Section 80HHC being to identify the export profits and commission earned in India, could not be considered for working out the export profits or for working out the eligible deduction.
8. We have very carefully considered the rival submissions and have perused all the circulars, issued as clarifications, relating to Section 80HHC of the Act and to the materials that have been placed on our record, to which there had been no objection from the department that, they are not so placed before the authorities below. Because, the issue revolves around the interpretation of the provisions of Section 80HHC of the Income-tax Act, we shall reproduce the section as it existed for the relevant assessment year under appeal hereunder for the sake of facility : 80HHC. Deduction in respect of profits related to export business.- (1) Where an assessee, being an Indian company or a person (other than a company) resident in India, is engaged in the business of export out of India of any goods or merchandise to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of the profits derived by the assessee from the export of such goods or merchandise: Provided that if the assessee, being a holder of an Export House Certificate or a Trading House Certificate (hereafter in this section referred to as an Export House or Trading House, as the case may be,) issues a certificate referred to in Clause (b) of Sub-section (4A), that in respect of the amount of the export turnover specified therein, the deduction under this Sub-section is to be allowed to a supporting manufacturer, then the amount of deduction in the case of the assessee shall be reduced by such amount which bears to the total profits of the export business of the assessee the same proportion as the amount of export turnover specified in the said certificate bears to the total export turnover of the assessee.
(1A) Where the assessee, being a supporting manufacturer, has, during the previous year, sold goods or merchandise to any Export House or Trading House in respect of which the Export House or Trading House has issued a certificate under the proviso to Sub-section (1), there shall, in accordance with and subject to the provision of this section, be allowed in computing the total income of the assessee, a deduction of the profits derived by the assessee from the sale of goods or merchandise to the Export House or Trading House in respect of which the certificate has been issued by the Export House or Trading House.
(2)(a) This section applies to all goods and merchandise, other than those specified in Clause (b), if the sale proceeds of such goods or merchandise exported out of India are received in, or brought into, India by the assessee (other than the supporting manufacturer) in convertible foreign exchange.
(b) This section does not apply to the following goods and merchandise, namely:- (3) For the purposes of Sub-section (1), profits derivedfrom the export of goods or mercliandise out of India shall be,- (a) in a case where the business carried on by the assessee consists exclusively of the export out of India of the goods or merchandise to which this section applies, the profits of the business as computed under the head 'Profits and gains of business or profession'; (b) in a case where the business carried on by the assessee does not consist exclusively of the export out of India of such goods or merchandise to which this section applies, the amount which bears to the profits of the business (as computed under the head 'Profits and gains of business or profession') the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee.
(4) The deduction under Sub-section (1) shall not be admissible unless the assessee furnishes in the prescribed form, along with the return of income, the report of an accountant, as defined in the Explanation below Sub-section (2) of Section 288, certifying that the deduction has been correctly claimed on the basis of the amount of export turnover.
(4A) The deduction under Sub-section (1A) shall not be admissible unless the supporting manufacturer furnishes in the prescribed form along with his return of income,- (a) the report of an accountant, as defined in the Explanation below Sub-section (2) of Section 288, certifying that the deduction has been correctly claimed on the basis of the profits of the supporting manufacturer in respect of his sale of goods and merchandise to the Export House or Trading House ; and (b) a certificate from the Export House or Trading House containing such particulars as may be prescribed and verified in the manner prescribed that in respect of the export turnover mentioned in the certificate, the Export House or Trading House has not been claimed the deduction under this section : Provided that the certificate specified in Clause (b) shall be duly certified by the auditor auditing the accounts of the Export House or Trading House under the provisions of this Act or under any other law.
(a)'convertible foreign exchange' means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange Regulation Act, 1973 (46 of 1973) and any rules made thereunder; (b) 'export turnover' means the sale proceeds received in, or brought into, India by the assessee in convertible foreign exchange of any goods or merchandise to which this section applies and which are exported out of India, but does not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act, 1962 (52 of 1962); (c) 'Export House Certificate' or Trading House Certificate' means a valid Export House Certificate or Trading House Certificate, as the case may be, issued by the Chief Controller of Imports and Exports, Government of India ; (d) 'supporting manufacturer' means a person being an Indian company or a person (other than a company) resident in India, manufacturing (including processing) goods or merchandise and selling such goods or merchandise to an Export House for the purposes of export.
9. The counsel Shri Ganesan, referred to the Circular No. 564 dated July 5, 1990, issued by CBDT, which has provided guidelines for the benefit of the AO and others, as to the manner of computation of the deduction permissible under this section and had submitted that, the amount of profit derived from the export business, had to be computed by taking into account, the entire profit from all of its business and that, the circular does not make any distinction about the profit from trade of goods or from commission. He had submitted that, Sub-clause (b), has been explained in the said circular to include situations, where the business comprises of exports and other domestic business. He had pleaded that, the said circular that grants benefits to the assessee, is of a binding nature on the department.
10. The circular as referred to above, the relevant paragraphs, are reproduced below, for the sake of convenience : 3. Several doubts have been expressed about how the deduction under Section 80HHC is to be allowed. Representations received by the Board show that there is lack of uniformity amongst authorities in respect of allowing the aforesaid deduction.
4. Sub-section (3) of Section 80HHC statutorily fixes the quantum of deduction on the basis of proportion of the profits of business under the head "Profits and gains from business or profession" irrespective of what could strictly be described as "profits derived from the export of goods or merchandise out of India". The deduction is computed in the following manner:- 5. The Finance Act, 1990, has amended Section 28 by inserting therein, Clauses (iiia), (iiib) and (iiic) with retrospective effect with a view to ensuring that cash compensatory support (CCS), duty drawback (DDK) and the profit on sale of import entitlement licences (I/L) shall be taxable under the head "Profits and gains from business or profession". In view of this amendment, it is clarified that the three export incentives shall have to be included in the profits of the business for computing the deduction under Section 80HHC. 6. The term "export turnover", under the existing provisions, means the sale proceeds (excluding freight and insurance) receivable by the assessee in convertible foreign exchange, in other words, the FOB value of exports. The Finance Act, 1990, has restricted the definition of the term "export turnover" to mean the FOB sale proceeds actually received by the assessee in convertible foreign exchange within six months of the end of the previous year or within such further extended period as the Chief Commissioner/Commissioner may allow in this regard.
7. 'Total turnover" was not defined earlier. There has been lack of uniformity amongst the assessing authorities and many assessing authorities are treating export incentives to be a part of the total turnover. The Finance Act, 1990, has, therefore, clarified the position by inserting the definition for the term "total turnover" in the Explanation below Section 80HHC. According to this definition, "total turnover" shall exclude cash compensatory support, duty drawback and profit on sale of import entitlement licences.
8. To sum up, the deduction shall be allowed in the following manner:- 9. Thus, in the case of an assessee doing export business exclusively, "export turnover" and "total turnover" would be identical, if the entire sale proceeds are brought into India in convertible foreign exchange within the prescribed time limit. In that case, the entire profit under the head "Profits and gains of business or profession" (which will include the three export incentives) will be deductible under Section 80HHC. However, to arrive at the amount deductible under Section 80HHC in the case of an assessee doing export business as well as some other domestic business, the fraction of "export turnover" to "total turnover", will be applied to his profits computed under the head "Profits and gains of business or profession" (which again will include the three export incentives). The operation of Section 80HHC read with Section 28, as amended by the Finance Act, 1990, can be illustrated by way of the following examples : (a) FOB exports 100 100 100 100 (b) Domestic sale - 50 100 200 (c) Total turnover [(ia) + (ib)] 100 150 200 300 ------------------------------------ (assumed figures) 10 15 20 30(iii) CCS, DDK, I/L 10 10 10 10 Total profits business 20 25 30 40 ------------------------------------ proceeds, i.e., 25 x 100 30 x 100 40 x 100 Rs. 100 lakhs is 150 200 300 brought into stipula- 20.00 16.67 15.00 13.33 ted period only 50% of the 20 x 50 25 x 50 30 x 50 40 x 50 export proceeds, 100 150 200 300 i.e., Rs. 50 lakhs is 10.00 8.33 7.50 6.67 brought into 11. The caption to the section leads Deduction in respect of profits related to export business, indicating that, the intention of the Legislature is to give boost to exports, by providing relief from taxation to exporters, enabling them to retain the generated funds, for furthering the export trade. The reading of the section indicates that, the deduction is permissible in respect of profits derived from the export business, that involves export out of India of goods or merchandise.
The beneficiaries could either be a company or a person, other than a company. The benefit under this section is extended to an exporter and to the supporting manufacturer who sell goods or merchandise to an Export House or Trading House. There is no doubt that, benefit of deduction under this section is available only on the profits derived from the export of goods or merchandise. The benefit is not available to export of those items, which could not be classified as goods or merchandise. The beneficiaries under this section, have been placed in two categories. In both of the categories, the emphasis is on the export out of India of the goods or merchandise to which this section applies, indicating that, the benefit of deduction would be allowed, only in relation to those goods or merchandise which are exported. The first category covers where the business carried on by the assessee consist exclusively of the export out of India of the goods or merchandise to which this section applies. The second category covers where the business carried on by the assessee does not consist exclusively of the export out of India of such goods or merchandise to which this section applies.
The word 'exclusive' is stated to mean, debarring from participation, of the nature of monopoly, sole, select [Chamber's Twentieth Century Dictionary, 1972 Edition, page 456). If we have to strictly interpret the Sub-section (3) of Section 80HHC, then the first category should cover only those cases, where, the assessee is carrying on exclusive export trade and no other activity in India. The second category should cover only those cases, where the assessee is selling goods or merchandise in India and export them, more specifically, the trade of identical goods or merchandise in India, as the ones that are exported by him, because otherwise the apportionment of profit between export and local sale is impossible.
To put it in other words, if the assessee is in exclusive trade or goods or merchandise, then, he would get the benefit of deduction under this section. To be eligible for deduction in the second category, the assessee, should be in the business of trade of goods or merchandise in India and for exports. In cases, where, the assessee carries on export of goods or merchandise and does not carry on trade of goods or merchandise in India, but some other business that does not involve trade, then he could not be stated to fall in the second category.
Thus, the Act envisages or places beneficiaries who, could be either, the person who carries an exclusive export activity of the goods or merchandise or the person who, in addition to the export of goods or merchandise, also carries on domestic trade of goods or merchandise.
In case of the former, i.e., exclusive export of goods or merchandise, since the profit would be entirely from the export of such goods or merchandise, the entire profit would be eligible for deduction under this section. In the case of the latter, i.e., partly export of goods or merchandise and partly domestic sale of goods or merchandise, then, the apportionment of the profit between the export and the domestic, is made in the same ratio of the export turnover to the total turnover.
The term 'turnover', is used to indicate "the number of times that various assets, such as raw-materials or other items of inventory are replaced during a stated period, usually a year". The term 'export turnover' has been defined to mean the sale proceeds received or brought into India, indicating that, it refers to the sale value of the goods or merchandise exported out of India. The term 'total turnover', has not been specifically defined and needs to be derived from the provisions of the Act. In the case of assessees, who in addition to export of goods or merchandise, also carry out domestic sale of such goods or merchandise to which this section applies, the export turnover, needs to be related to the total turnover.
When export turnover is stated to represent the sale proceeds of goods or merchandise, that are exported and since, it is the sale proceeds that need to be related to the total turnover, then, it is obvious that, total turnover must represent total of the sale proceeds of goods or merchandise, that are exported and sold in India. In our view, no other interpretation of this provision is possible, because, otherwise, comparison of the export turnover with the total turnover, would be an impossible proposition. Further, reference throughout the section is to the goods or merchandise and it is obvious that, only items of sale of goods or merchandise as are relevant to the section, the total value of which would be considered for the 'total turnover'.
In our view, the purpose of introducing the concept of total turnover by the Legislature is based on the vision of the situation of an assessee, dealing in identical goods or merchandise, both for exports as well as domestic sale and thus making it difficult for an assessee to identify the element of profit between exports and domestic trade, to which the section is directed. Therefore, with a view to avoid litigation on the question of reasonability of export profits, while allowing the deduction under this section, a formula was devised of relating the export profits as a proportion of export turnover to the total turnover. The second category, in our view, would come into play only when, there are export of goods or merchandise along with trade of goods or merchandise, more specifically of identical goods or merchandise and not to a situation where, the export is of goods or merchandise, but the local activity of business is non-trade.
The strict interpretation of the section would mean that, (a) the deduction is allowable to an assessee, who is carrying on one and the only activity of export of goods or merchandise and (b) the deduction is allowable to an assessee, who does not fall in (a) above, but, who in addition to exporting of goods or merchandise, deals in identical goods or merchandise for the local market in India, thus calling for the apportionment of the proxit relatable to exports, from out of the total profits. However, considering the intention of the section, which is to boost exports, to earn convertible foreign exchange, strict interpretation especially in category (a) would result in miscarriage of justice, because, any interpretation of a statute levying taxes, if made unworkable, then, such an interpretation should be avoided. In a situation, where there are export of goods or merchandise, but, it is not the only activity of the assessee, he should not be denied the benefit of deduction under this section, merely for the reason that, his activity cannot be construed to be an exclusive export activity. As observed earlier, the export activity, if it is exclusively exports of goods or merchandise, then, the assessee, in our view, should be allowed deduction out of the profits of the exports.
In our view, if an assessee, carrying on trade in several goods or merchandise, but exports one item of goods or merchandise say 'leather garments' exclusively, i.e., the leather garments are not sold in India, then, the export of leather garment must be treated as exclusive export activity. In the above example, if the assessee also sells leather garments locally in the domestic market, then it could no longer remain an exclusive export activity. In the former case of exclusive export of leather garments, the profit therefrom, if available after identification, i.e., a separate branch or unit exclusively carrying orvonly export, with separate books of accounts maintained, then, the profit of the unit or branch should qualify for deduction in the first of two categories. In the case of the latter, i.e., leather garments being sold in India and abroad and entire activity is handled by an unit or a branch, with independent books of accounts, then apportioning the profit in the ratio of export turnover to total turnover of that branch or unit, would not pose any problem and the relief provided, would be according to law.
However, in the abovestated example, if the assessee also carries on domestic trade of 'brass wares' and thus the figure of turnover of brass wares is to be made part of the total turnover and the entire profit would include profit from sale of brass wares too. If the apportionment of profit to export of leather garments is to be made with reference to export turnover of leather garments and the total turnover of leather garments plus the brass wares, it could very well be imagined that, the result would be based on wrong comparison. This kind of comparison, would in effect give raise to wrong results, because the rate of profit from leather garments and brass wares can never be the same, except in cases of sheer coincidence, which in our view, could happen in fiction.
In the event of the rate of profit from brass wares is lower than from leather garments, it would result in reduced relief under this section and if the rate of profit from brass wares is greater than from leather garments, it might result in allowing of relief under this section at a figure larger than the profit from the exports, i.e., some part of the domestic profit might get allowed as a deduction in the guise of export profits, which is not the intention of the Legislature. This could be examined with an example with figures. Export of leather garments is Rs. 100 lakhs, local sale of leather garments is Rs. 50 lakhs and profit from the business is say, Rs. 30 lakhs. According to the formula of profit of Rs. 30 lakhs is to be apportioned in the same ratio of export sale of Rs. 100 lakhs and total turnover of Rs. 150 lakhs, which would be 2:3, i.e., export profit to local profit would be Rs. 20 lakhs : Rs. 10 lakhs. If in the above example, there is exclusive export of Rs. 100 lakhs and the profit derived is Rs. 20 lakhs, then, according to the first category, the whole profit of Rs. 20 lakhs would be allowed as a deduction. The above example shows that, if the case is treated as an exclusive export, the dehduction that is permissible under this section, which is directly relatable to the export profit, is easily identified as Rs. 20 lakhs. However, in the case of export and local trade of the volume stated earlier with the ratio of profit of 2:3, then, export profit is Rs. 20 lakhs, which is the same figure as in the case of exclusive export. In fact, in our view, the first category acts as a measure of check of the maximum relief and the relief available under the second category, under no circumstances can exceed the relief that could be allowed under the first category. In our view, if such check is not carried out, then, it would only result in allowing of relief than what an assessee, is otherwise is entitled to.
In the above example, the assessee, also has local sale of brass wares for Rs. 50 lakhs, on which profit is Rs. 5 lakhs, which is 10 per cent of the sales. The total turnover would now become Rs. 200 lakhs and the total profit figure would be Rs. 35 lakhs. The ratio of apportionment of profit on export of Rs. 100 lakhs, is 100:200, i.e., at 50 per cent of the profits, is relatable to export profits. This would mean that, export profit would be taken at 50 per cent of Rs. 35 lakhs, i.e., Rs. 17.5 lakhs. This would result in assessee getting a lesser deduction to the tune of Rs. 2.5 lakhs, because the profit rate on leather garments is 20 per cent of the sale value.
In the above example, if the sale of brass wares is Rs. 50 lakhs and the profit figure is Rs. 15 lakhs, then, the total profit figure would be Rs. 45 lakhs and the ratio of apportionment of the total profit to export trade in the ratio of export turnover to total turnover, would be 100:200, which would give a profit figure of Rs. 22.50 lakhs, which is more than the profit of Rs. 20 lakhs, as shown above. By this formula, the assessee, if allowed a deduction of Rs. 22.50 lakhs, then it would mean that, deduction to the extent of Rs. 2.5 lakhs, had been allowed from out of domestic profit, which deduction is adverse to the intention of the section.
In our view, therefore, the intention of the Legislature for the second category, is concerning the sale of goods or merchandise and that too only of those goods or merchandise, which are exported and sold in India and every other kind of business, is excluded from the purview of the second category. As had been observed earlier, in all other situations, the section would be unworkable and any or every action that makes the implementation of the statute, has to be necessarily discarded.
This strict interpretation, would result in non-allowing of relief to those assessees, who export goods or merchandise and have some income from commission in India, as is the present case before us. The assessee, on the strict interpretation of the section, would not be treated as to fall in the first category, because, he is not in exclusive export of goods or merchandise and would also be out of the ambit of the second category, because, local income is not from sale of goods or merchandise. Therefore, despite the fact, that, it had earned foreign exchange from the sale of goods or merchandise from exports, which condition or requirement of the section is satisfied, it would not be eligible for any deduction under this section. This would discourage assessees from doing any export business and in turn this would adversely affect this country's foreign exchange position. Since, the purpose of the section, is to give a boost to the export activities, strict interpretation of the first category, would result in denying the benefit of deduction under this section, for the sole reason that, the assessee, has some other income, from India.
The reasonable interpretation, in our view would be, if the person exports certain goods or merchandise, but do not sell the identical goods or merchandise in the domestic market, then, to the extent of the goods or merchandise that are exported, it would to be termed as exclusive export of goods or merchandise. Therefore, the reasonable interpretation that would make the section workable is to treat the export of sports goods on which it has received the sale proceeds in convertible foreign exchange, as exclusive export, because the sports goods are not sold in India.
The assessee, could not be stated to fall in the second category at all, because, the commission income in India, cannot be placed in the same category of sale of goods or merchandise, because, it is not so and therefore, the commission income, could not form part of the total turnover and the profit therefrom, could not be taken into consideration. This is obvious because, when the figure of income is excluded for comparison purposes, then, the profit from that income, also has to be excluded.
We would therefore summarize our observation on the applicability of the said section as under. One, exclusive export would mean sale of goods or merchandise out of India; two, not exclusive export would mean consideration of sale of identical goods or merchandise out of India and in India. We are not able to imagine a situation where, the sale of all kinds of goods or merchandise would result in the same quantum of profit, for being taken into consideration as total turnover, in the second category.
12. In the instant case, the assessee-company, has export sales of Rs. 46,87,945 and other incomes arising from its domestic activities, such as commission, consultancy, interest, lease-rentals. The cost of goods exported are of a value of Rs. 43,18,942, which has yielded a gross profit of Rs. 3,69,003. The CIT(A), had considered the net profit to the total credits to the profits & loss account for the year ended on 30-6-1987, which was 46 per cent and applied the same ratio to the total profits shown in the profit & loss account for the year ended on 31 -3-1989 and on this basis, he had concluded that, the profits from the export business were to the tune of Rs. 17,66,859. Carrying the above suggestion further, by apportioning the expenses relatable to the export business, the absorption of expenses for export, would be to the extent of 46 per cent of Rs. 42,87,508, which would be Rs. 19,72,254.
This would mean that, the assessee in its export business had suffered loss of Rs. 16,03,251 (Rs. 19,72,254 less gross profit of Rs. 3,69,003). Since, evidently, every trade would have some expenses on sales administration and the like and on the basis of the above comparative proportion of expenses, substantial expenses should be relatable to exports, leaving no profits derived from the export business, but only loss from exports. Since, the business of export of goods or merchandise, viz., of sports goods is exclusively for exports, i.e., there being no sale of sports goods locally in India, the case of the assessee would fall in the first category of Sub-clause (a) of Sub-section (3) of Section 80HHC. The above calculation shows that, the export has resulted in loss and therefore, the assessee is not entitled to any deduction under this section.
Sub-clause (b) of Sub-section (3) of Section 80HHC, provides the manner of arriving at the profit relatable to the export business, where, the assessee, carries on domestic trade of goods or merchandise, in addition to the export of goods and merchandise. The apportionment of the profit between the export business and the other, is to be made on the formula given below : As observed earlier, for applying Sub-clause (b) of Sub-section (3), the domestic turnover is necessary and domestic turnover could exist, only in cases of sale of goods or merchandise and not otherwise. In the instant case, the domestic income is from commission, consultancy, interest, etc., but there is no income because of sale of goods or merchandise. There being no domestic sale value of goods or merchandise, in the instant case, makes it impossible to apply the provisions of Sub-clause (b) of Sub-section (3). If the argument of the appellant company, is accepted and Sub-clause (b) of Sub-section (3) of the section is applied to the assessee, due to the absence of domestic trade of goods or merchandise, the figure of export turnover of Rs. 46,87,945, would also be taken as total turnover would be the same and the entire profit of Rs. 59,65,827 would become profit from export business, which is ridiculing the section as such. On this suggestion of the appellant, it would be entitled to a relief of an amount of Rs. 59,65,827, which is greater than the figure of export of Rs. 46,86,435 itself, which is an absurd proposition. This proposition would lead to preposterous results, because, when Sub-clause (a) is applied, the assessee is ineligible for any deduction, but would become eligible for deduction under Sub-clause (b), which would tantamount to allowing deduction of the profits from the domestic business, which goes quite adverse to the intention of the section.
If for the sake of argument, the figure of commission and other incomes are to be taken to represent turnover, then the total turnover figure would be Rs. 143.44 lakhs and the profit of Rs. 59.66 lakhs would need to be apportioned in the ratio of export turnover of Rs. 46.86 lakhs to the total turnover of Rs. 143.44 lakhs, to get at the rate of profit from exports, that would be 32.67 per cent. By this proposition, the export profit would be 32.67 per cent of the total profit of Rs. 59.66 lakhs, i.e., Rs. 19.49 lakhs. It can very well be appreciated that, the proposition as advanced by the assessee, is totally fallacious, because when the gross profit from the sale of goods or merchandise is Rs. 3.69 lakhs, the net profit could never be greater than the figure of gross profit.
The circular as issued by CBDT, which has been reproduced earlier, refers to the term "total turnover" as total of "export sale" and "domestic sale". In para 9 of the above circular, it has been clearly stated that, in case of exclusive export of goods or merchandise, 'export turnover' and 'total turnover' would be identical, making it all the more clear that, the reference in this section was always to the sale value of goods or merchandise. Therefore, even this circular is of no assistance to the assessee, because, the assessee has no domestic sale of goods or merchandise and hence, Sub-clause (b) of Sub-section (3), can never be made applicable to it. As observed earlier, since, the goods that are exported out of India, are not sold in India, it could be held to that extent, that, the goods or merchandise in which the assessee trades in, is exclusively for export and, Sub-clause (a) could be applied to it. This conclusion, in our view, is based on the proposition of reasonable interpretation of the section. In our view, in every situation of export business of goods or merchandise and domestic business of goods or merchandise, it would be necessary to carry out the evaluation of the profits from the export business primarily under Sub-clause (a) and then compare it with the amount of export profits arrived by applying the formula in Sub-clause (b), as otherwise, it might lead to a ridiculous result of deduction being allowed from out of profits of domestic trade, rather than from the profits derived from the export of goods or merchandise.
In the instant case, the AO, had not carried out this exercise, but, had considered turnover of another exporter as part of the turnover of the appellant company and then applied Sub-clause (b) of Sub-section (3) and gave deduction of Rs. 2,92,170. The CIT (A) too did not consider the section in its true perspective, but had proceeded on a tangent, disregarding the fact that, the assessee has earned a gross profit of Rs. 3,69,003 only on exports, also brushing aside existence of other expenses, after set off of which only, the net profit from export business could have been arrived at. In the facts and circumstances of the case, the appellant company has suffered a loss on its export or sports goods and therefore, is not eligible for any relief under this section at all. However, though according to the fact of the instant case, the assessee was not at all eligible to any deduction under Section 80HHC of the Act, the AO had allowed the relief of Rs. 2,92,170. The revenue, in the present appellate proceedings could not express its grievance or objection to the extent of the relief allowed by AO, despite the fact, such deduction or relief as allowed by AO, is quite contrary to the provisions of the Act. Though, we would very much like to delete the deduction as allowed by AO, but in view of the constraints or fetters placed on us by the provisions of the Act, we are compelled to sustain the deduction to that extent. We accordingly grant this issue in favour of the revenue and against the assessee.
13. The appellant company has challenged the disallowance of Rs. 30,634 out of bonus, by applying the provisions of Section 43B of the Act, for the sole reason that, the proof of payment was not placed before AO. In our view, since the amount represents bonus of the employees, though the assessee should have filed the proof of payment as made along with the return of income, it could have been considered and therefore, we remand this issue to the AO, to verify whether the payment had been made before the due date for filing the return and if it is so made, then allow deduction.
14. The assessee is aggrieved by the disallowance out of foreign travelling expenses to the tune of Rs. 6,16,351, on the reasoning that, the visits were to the countries other than Russia, to which country alone that, the assessee had exported goods. The plea of the counsel Shri Ganesan was that, the visits to UK were, in connection with the exploration of exports of coffee, sports goods, leather jackets, leather shoes & uppers, commodities. Similarly, the visits to USA were exploration of exports of leather items, sports goods, machinery, fashion garments and the like. The purpose of the visits to Bulgaria, Belgium, Spain, South Korea, Japan and Hong Kong was all for identical reasons. Shri Ganesan submitted that, at pages 6 & 7, the details of travelling had been placed and that, the objection of the AO, is not proper, for the assessee with a view to export sports goods, had to visit during the meeting held for the Olympic Games. Smt. Sinha, the Sr. DR, supported the order of the authorities.
The assessee had placed at page 6 a certificate from the Russian Trade Representation in India, wherein it has been specified that, the Managing Director Shri Ashwani Kumar had shown keen interest in international sports and as Member and the 1st Vice-President of the International Olympic Committee for a long time and that, his association with the International Olympic Committee has helped in the export of sports goods to USSR. The perusal of the details of travelling placed at page 7 indicate, that, for the visits to USSR by the Managing Director Shri Ashwini Kumar, foreign exchange had been obtained. However, the visits to other countries.mainly involve the airfare and minor incidental expenses, such as airport tax and the like. In the light of the fact that, the Managing Director is a Member of the International Olympic Committee, that, the visits could be in the capacity as member, we remand this issue to the file of AO, to verify whether, the visits are in the capacity of a Member of Olympic Committee or as Managing Director, for exploration of the foreign market. The AO shall examine the RBI permits of foreign exchange, in each of the foreign trips, allow the assessee sufficient opportunity and decide the issue, according to law.
15. Shri Ganesan did not seriously press the claim of disallowance out of farm house expenses, club expenses and accordingly, these two grounds of appeal are rejected. The disallowance out of repair expenses for the reason that, the vouchers were not produced, staff welfare expenses, which contained expenses of dry fruits and expenses on samples, were not seriously pressed and hence, we do not feel it necessary to interfere with the disallowance.
Shri Ganesan, had only submitted that, consequent to the disallowance, the income computed would get increased and the appellant company would have to be allowed extra amount as deduction under Section 80HHC and therefore, the expenses need not have been disallowed. In our view, this argument could not stand the test of law, because, the allowability or non-allowability of expenses is based on the fact of it having been incurred for the purposes of business. Unless the expenses are found as incurred for the purposes of the business, they could not be allowed to be deducted for computing the income from profits and gains of business or profession and therefore, the argument of the counsel is without any merit, hence rejected.
16. In the result, the appeal of the assessee, shall be treated as allowed in part, while that of the revenue allowed.