1. The first issue arising out of this appeal relates to the computation of claim of the assessee under section 80HHC. The question to be decided is whether the word 'turnover' as specified in sub-section (3) of section 80HHC could include the element of excise duty and sales-tax collected by the assessee on its sales in India.
2. The facts of the case are in a short compass. The assessee derived income from the export of goods manufactured by it as well as from the sale of such goods in India. In view of these facts, the assessee was entitled to relief under section 80HHC in accordance with formula laid down in sub-section 3(b) of the aforesaid section. In order to arrive at the claim, the assessee did not include the amount of excise duty and sales-tax collected by it in respect of sales made within India in the total turnover. The Assessing Officer did not agree with the manner in which the computation was made by the assessee, inasmuch as, according to him, the total turnover should have included the amount of excise duty and sales-tax. He, therefore, recomputed the claim under section 80HHC by including the amount of sales-tax and excise duty in the total turnover. On appeal, the order of the Assessing Officer was confirmed. Aggrieved by the same, the present appeal has been preferred by the assessee.
3. The contention of the learned counsel for the assessee is that though generally, the sales-tax and excise duty are treated as part of the turnover, yet, the meaning of the word 'turnover' has to be seen in the context in which it has been used by the Legislature. Since the excise duty and sales-tax are not leviable on export, the same do not form part of the export turnover. According to him, if such levies are not includible in the export turnover, the same should also not be included in the total turnover. In support of this contention, he relied on the decision of the Tribunal, Calcutta Bench in the case of Chloride India Ltd. v. Dy. CIT [1995] 53 ITD 180.
4. On the other hand, the contention of the learned departmental representative is that the statutory levies are part of the trading receipts as held by the Hon'ble Supreme Court in the case of Chowringhee Sales Bureau (P.) Ltd. v. CIT [1973] 87 ITR 542. Therefore, these have to be included in the total turnover. He also drew our attention to various decisions of the Supreme Court relied upon by the CIT(A), viz., George Oakes (P.) Ltd. v. State of Madras [1962] 13 STC 98, McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148/22 Taxman 11 and Hindustan Sugar Mills v. State of Rajasthan AIR 1978 SC 1496. He further submitted that the turnover has to be understood in the sense what has to be paid by the purchaser to the seller. He also referred to the Explanation (b) to sub-section (4A) of section 80HHC wherein the words 'export turnover' have been defined. He pointed out that the Legislature has only excluded freight and insurance. According to him, if the Legislature intended to exclude the excise and sales-tax, it could have made a suitable provision. With reference to the decision of the Calcutta Tribunal in the case of Chloride India Ltd. (supra), it was submitted by him that the said decision does not apply since it related to the assessment year 1986-87. Hence, he concluded that the turnover should include the excise duty or sales-tax.
5. Rival contentions of the parties have been considered carefully.
Before interpreting the relevant provisions of section 80HHC it has to be borne in mind that such provisions are beneficial provisions, inasmuch as they were enacted to promote export of goods or merchandise out of India. In this connection, reference may be made to the following observations of their Lordships of the Supreme Court in the case of Bajaj Tempo Ltd. v. CIT [1992] 196 ITR 188/62 Taxman 480 : "A provision in a taxing statute granting incentives for promoting growth and development should be construed liberally; and since a provision for promoting economic growth has to be interpreted liberally, the restriction on it too has to be construed so as to advance the objective of the provision and not to frustrate it." 6. Sub-section (1) of section 80HHC provides that profits derived from export of goods or merchandise out of India shall be deducted while computing the total income of the assessee. Sub-section (3) provides the manner of computing such profits. We are concerned with the situation where the assessee exports goods out of India as well as sells within India. Sub-section 3(b) provides the manner in which the relief is to be computed. It reads as under : "(3) For the purpose of sub-section (1), profits derived from the export of goods or merchandise out of India shall be, -(a) ** ** ** (b) in a case where the business carried on by the assessee does not consist exclusively of the export out of India of the 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." In this sub-section, following formula has been laid down to arrive at the profit derived from the export : The question before us is what should be the meaning of the words 'turnover' used by the Legislature in the aforesaid sub-section. In this connection, it is pertinent to note that the meaning of the words has to be understood in the context in which it has been used by the Legislature. Reference may be made to the following observations of the Hon'ble Supreme Court in the case of Reserve Bank of India v. Peerless General Finance & Investment Co. Ltd. [1987] 61 Comp. Cas. 663 (SC) and [1987] 1 SCC 424.
"Interpretation must depend on the text and context. They are the basis of interpretation. One may well say if the text is the texture, context is what gives the colour. Neither can be ignored.
Both are important. That interpretation is best which makes the textual interpretation match the contextual." If viewed from this angle, we are of the view that excise duty and sales-tax could not form part of the total turnover. The reason is obvious. The only intention of the Legislature in applying the aforesaid formula is to find out the profits derived from the export.
Therefore, the turnover should be restricted to such receipts only which have element of profit in it. It is the only actual sale price which is relevant and, therefore, anything charged by the assessee by way of statutory levies, such as excise duty and sales-tax in addition to the sale price has to be ignored because these statutory levies collected by the assessee have no element of profit. According to the accounting principles also, it does not form part of the trading and profit and loss account, inasmuch as these levies are charged separately in addition to the price and the same are separately credited to their respective accounts. Such amounts whenever paid to the Government are debited to such accounts and the balance amount is shown in the balance sheet as liability. Therefore, in our view, these statutory levies have no effect on the determination of profits of the business. It is for this reason, we are of the view that the word 'turnover' could not include the element of excise and sales-tax. Such interpretation would advance the object to be achieved by the Legislature. If construed otherwise as contended by the revenue, it would defeat the object to be achieved as it would reduce the real profits earned by the assessee on exports out of India. The same conclusion, though on different footing has been arrived at by the Tribunal, Calcutta Bench in the case of Chloride India Ltd. (supra).
The meaning given to the word 'turnover' in various sales-tax enactments cannot be imported into the provisions of section 80HHC as the object of the sales-tax enactment and provisions of section 80HHC are entirely different. Hence, we decide this issue in favour of the assessee.
7. The next issue also relates to the computation of relief under section 80HHC. The question to be decided is whether the words 'profits of business' as specified in sub-section 3(b) could include the dividend earned by the assessee. The assessee while computing its claim under section 80HHC included the dividend income in the profits of the business. The Assessing Officer did not agree with the assessee and excluded the dividend income from the profits of the business and recomputed the claim of the assessee. This order of the Assessing Officer has been confirmed by the CIT(A).
8. The contention of the learned counsel for the assessee is that the dividend income has been earned out the business investments in securities at the instance of the Reserve Bank of India and, therefore, the same should have been treated as the business income. In this connection, he referred to the decision of the Calcutta High Court in the case of CIT v. East India Hotels Ltd. [1994] 207 ITR 881, Gujarat High Court decision in the case of CIT v. Cotton Fabrics Ltd. [1981] 131 ITR 99/6 Taxman 231. In this connection, he also invited our attention to the clause (baa) of the Explanation given after sub-section (4A) of section 80HHC. He also referred to Form No.10-CCA(C) and the Commentary of Sampat Iyengar, Vol. 1, page 432.
9. On the other hand, the learned departmental representative submitted before us that the dividend income was assessable under the head 'Income from other sources' and, therefore, could not be treated as profits of the business for the purpose of section 80HHC. It was submitted by him that the Gujarat High Court decision relied upon by the assessee is not with reference to section 80HHC. It was also submitted by him that since the assessee has already got the deduction under section 80M no further deduction could be granted under section 80HHC. In support of his contention, he relied on the decision of the Apex Court in the case of Escorts Ltd. v. Union of India [1993] 199 ITR 43. It was also submitted by him that the dividend cannot be said to be the income derived from export. In this connection, he relied upon the decision of Karnataka High Court in the case of CIT v. Siddaganga Oil Extractions (P.) Ltd. [1993] 201 ITR 968/67 Taxman 426 and the decision of the Tribunal, Bangalore Bench reported in Hunsur Plywood Works Ltd. v. Dy. CIT [1996] 54 TTJ (Bang.) 260.
10. Rival contentions of the parties have been considered carefully. In our view, there is no merit in the contention of the assessee. The provisions of section 3(b) specifically refers to the profits of business as computed under the head 'Profit and gains of the business or profession'. In our opinion, the dividend earned by the assessee cannot be included in the profits of the business as they are assessable under the head 'Income from other sources' even presuming that dividend may be business income. Therefore, we are unable to accept the contention of the assessee. The order of the CIT(A) is, therefore, upheld on this issue.
11. The next issue relates to the computation of income under section 115J. The brief facts of the case are these : Assessee's previous year ends on 30th June every year. In this connection, it may be mentioned that the Legislature had made necessary amendment in order to have a uniform previous year in respect of the assessees. The Legislature prescribed financial year as the previous year. The Companies Act, 1956 was also amended accordingly. However, on the representations, the Legislature permitted the companies to take different previous year.
Therefore, the assessee has continued to maintain its previous year ending as June of each year. However, for the purpose of income-tax, he has prepared profit and loss account for the previous year ending 31-3-1989. It was the practice of the assessee to provide depreciation in the books of account on straight-line method. Even after the assessment year 1989-90, the assessee is still taking the same method in respect of assets acquired before 2-4-1987. However, in respect of the assets acquired after 2-4-1987 it has changed the procedure, i.e., started providing depreciation on written down value method. However, while preparing the profit and loss account for the period 31-3-1989, the assessee provided depreciation in respect of all assets on written down value method. The auditors have pointed out that by this procedure, the profits have been lowered by Rs. 1,48,25,627. Thus, the assessee computed the book profit for the purpose of section 115J at Rs. 3,55,89,906. However, the Assessing Officer disagreed with the computation made by the assessee. According to him, the assessee was not permitted to change the method of providing depreciation. He, therefore, reworked out the book profits at Rs. 55,40,918. On appeal, the CIT(A) has confirmed the order of the Assessing Officer.
12. The contention of the learned counsel for the assessee that by virtue of the provisions of sub-section (1A) of section 115J the assessee has to prepare the profit and loss account, in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956. Since the Companies Act permitted the assessee to adopt any of the method providing depreciation, i.e., straight, line method or written down value method, the assessee is justified in providing depreciation by way of written down value method while preparing the profit and loss account for the purpose of section 115J. On the other hand, the learned departmental representative has supported the order of the CIT(A) by submitting that once the assessee has exercised an option of providing depreciation by straight line method, he cannot be permitted to change the method of providing depreciation for the purpose of section 115J.13. Rival submissions of the parties have been considered carefully.
The only question before us for consideration is whether the assessee can be permitted to prepare the profit and loss account for the purpose of computing book profit under section 115J by a different method than the method adopted by the assessee for corporate accounting.
Sub-section (1A) of section 115J provides as under : "115J(1A) Every assessee, being a company, shall for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956." This provision was not on the statute originally. It was enacted later on by the Finance Act, 1989 with effect from 1-4-1989. Therefore, it is necessary to decide this issue keeping in view the intention of the Legislature. After giving our due consideration to the assessee before us, we are of the view that the assessee is not permitted to deviate from the method adopted by the assessee for corporate accounting. Under the Companies Act, the assessee is bound to prepare its accounts in accordance with provisions of Parts II and III of Schedule VI to the Companies Act, 1956. When the Legislature enacted section 115J originally it intended to tax 30% of the profits as per P & L a/c of the assessee, subject to the adjustments as described in Explanation to sub-section (1). There was therefore, no question of preparing a separate profit and loss amount, inasmuch as accounting period was fixed as a financial year by way amending in both the Acts, i.e., Income-tax Act and the Companies Act, 1956. That is why, in the Explanation to sub-section, the words "profits as shown in the P & L a/c for the relevant previous year" were used. However, subsequently, the Legislature permitted the companies to adopt the accounting year different from the financial year in view of various representations made by the companies. Therefore, it became necessary to insert sub-section (1A) to section 115J in order to arrive at the correct book profit of the financial year, inasmuch as the previous year under the Act was the financial year. It is in this context that the word 'prepared' in sub-section (1A) has to be understood.
14. In the course of hearing, the Bench made a query from the learned counsel for the assessee whether the assessee could prepare the P & L a/c by different method than prepared for corporate accounting, where the previous year of the company was the financial year. The answer to such a query was in negative. The reason is obvious, because, the corporate accounting would be in accordance with the provisions of Part II and Part III of Schedule VI to the companies Act, as the assessee is bound to adopt the same. Therefore, the preparation of separate P & L a/c under sub-section (1A) has to be made where different previous year is maintained by the assessee. So, in our opinion, the assessee has simply to substitute the figures of all the income and expenditure which may relate to the financial year according to the same method as adopted by it for the corporate accounting. The object of the Legislature is only to find out the book profits according to the system adopted by the assessee. That can be achieved only if the P & L a/c is prepared in accordance with the method adopted by the assessee for corporate accounting. If the other method is permitted as contended by the learned counsel for the assessee, then in our opinion, the object of the Act would be frustrated.
15. In the present case, the assessee had been providing depreciation in the past as per straight line method. The assessee has changed the method of providing depreciation of assets acquired after 2-4-1987 to written down value method. However, in respect of the assets acquired prior to 2-4-1987 it has continued to provide depreciation on straight line method for the purpose of corporate accounting. But while preparing the P & L a/c for the purpose of section 115J it had worked out the depreciation on WDV method in respect of all the assets which has resulted in excess claim of depreciation by Rs. 1,48,25,267. The contention of the assessee that WDV is permitted under the Companies Act and, therefore, it can work out the depreciation on such method while preparing the P & L a/c as per Part II and Part III of the Schedule VI to the Companies Act cannot be accepted for the reasons given in the earlier paras. No doubt, the assessee has choice to provide the depreciation in the books as per either of the methods. But once, the option in exercised it cannot change for the purpose of section 115J(1A). In our considered opinion, the method of preparing the P & L a/c cannot be different from the method adopted for corporate accounting. The assessee has continued to adopt straight line method subsequently as admitted before us. Therefore, the contention of the assessee cannot be accepted as it would frustrate the object of the Legislature in enacting such provision. This issue is, therefore, decided against the assessee.
16. The next issue also relates to the computation of book profit under section 115J. The question is whether the fluctuation loss in the foreign exchange can be excluded from the P & L a/c prepared by the assessee in accordance with the provisions of Companies Act.
17. The assessee while preparing the P & L a/c for the purpose of section 115J debited the fluctuation loss in the foreign exchange.
However, the Assessing Officer excluded the same on the ground that it was capital in nature. The CIT(A) has confirmed the order of the Assessing Officer.
18. After hearing both the parties, we are of the view that there is a force in the contention of the assessee. The provision of section 115J defines book profits. According to this Explanation, book profit means the net profit as per P & L a/c prepared in accordance with Part II and Part III of the Schedule VI to the Companies Act, 1956. This P & L a/c subject to the adjustment specified in the Explanation. Except such adjustment, no other adjustments can be made. The basis of order of the CIT(A) is twofold, viz., that the expenditure is of capital in nature and should not have been debited to the P & L a/c and (2) section 43A specifically disallow the same. As far as section 43A is concerned, that is relevant for computing the profits under the head 'Profits and gains of business or profession' as is apparent from the provisions of section 29. The provisions of section 115J are non obstante vis-a-vis the Act. Therefore, the contention of the revenue that section 43A provides for disallowance of such expenditure and, therefore, the same has to be disallowed for the purpose of section 115J has to be rejected. Regarding the other basis of the CIT(A) there is no dispute to the fact that P & L a/c has been prepared in accordance with the provisions of the Companies Act. The learned departmental representative has also not pointed out any provisions of the Companies Act which prevent the assessee from debiting the loss from fluctuation of foreign currency to the P & L a/c. Therefore, the contention of the learned counsel for the assessee that the P & L a/c has been prepared in accordance with the provisions of the Companies Act has to be accepted. The adjustment provided in the Explanation do not provide exclusion of such loss. Therefore, we are unable to uphold the order of the CIT(A) on this issue. Hence, we decide this issue in favour of the assessee.
19. The last issue relating to the adjustment of the claim under section 80HHC in computing the book profit under section 115J is consequential. The Assessing Officer is directed to adjust the amount which may be worked out under section 80HHC in accordance with our order.