1. Various grounds have been raised by the assessee in this appeal.
Most of the grounds relate to the computation of relief under section 80HHC. Hence, we shall deal with such grounds first.
2. The first aspect of the issue relates to the meaning of the word 'turnover' for the purposes of sub-section (3) of section 80HHC. The brief facts of the case are that the assessee is a dealer in iron ore.
It sells goods in the course of exports as well as within the territory of India. If discloses total sale proceeds at Rs. 14,72,52,512 as shown in the P & L a/c. The export turnover had been shown at Rs. 14,33,27,937 as is apparent from Note No. 15 appended to the statement of accounts. After applying formula under sub-section (3), the assessee claimed relief under section 80HHC at Rs. 15,090,357 as is apparent from the computation of income at page 1 of the paper book. But the Assessing Officer was not satisfied with such working. He was of the view that total turnover for the purposes of section 80HHC(3) should include all the receipts by the assessee on account of ore screening charges, barge hire charges, truck transport charges, transhipper income, ore rising and transport charges and other income as credited by the assessee to the P & L a/c. He, therefore, computed the total turnover at Rs. 21,48,70,288. Accordingly he modified the relief. The CIT (Appeals) has confirmed the order of the Assessing Officer. In this regard, the CIT (Appeals) relied on the definition of "total turnover" given in clause (bb) of Explanation to section 80HHC which provides that the turnover includes profit on sale of licence, cash assistance and any duty of customs or excise repaid pr repayable as draw back. He, therefore, inferred that only such receipts could be excluded from the turnover and therefore, all other receipts by the assessee had to be included in the quantum of total turnover. Aggrieved by this over, the assessee preferred this appeal before the Tribunal.
3. The learned counsel for the assessee Shri Dastur vehemently assailed the order of the CIT (Appeals) by submitting that the total turnover would include the sale proceeds only. According to him, the receipts which had no nexus with the sale proceeds could not be included in the word 'turnover'. He therefore, referred to page 21 of the paper book which incorporates the P & L a/c. of the assessee. He pointed out that all the receipts by way of ore screening charges, barge hire charges, truck transport charges, transhipper income, ore rising and transport charges and other income had no relation to the sale of goods made by the assessee either locally or in the course of export. He pointed out that these charges are against the services rendered by the assessee for others. For example, he submitted that the assessee had raised ores in the mines belonging to other assessees and for that services it had received a sum of Rs. 3,35,97,838. Similarly, transhipper income amounting to Rs. 2,06,65,568 relates to the service charges for carrying ores for other parties from barge to ship. It was further argued by him that the same meaning should be given to the export turnover as well as total turnover. In this connection, he relied on the decision of the Supreme Court in the case of K.N. Guruswamy v.State of Mysore AIR 1954 SC 592. It was further submitted by him that the 'total turnover' as defined in clause (ba) which only states what is not to be included and it does not state what is to be included. On the other hand, the definition of export turnover in clause (b) of the said Explanation is inclusive definition which says sale proceeds received in or brought into by the assessee of any goods or merchandise but does not include freight or insurance attributable to the transport of the goods or merchandise beyond the custom station. In support of his contention, he also referred to the Board circular No. 621 and the decision of the Tribunal, Calcutta Bench in the case of Chloride India Ltd. v. Dy. CIT [1995] 53 ITD 180. Alternatively, it was contended by him that in case these receipts are to be included in the turnover then the corresponding expenses in respect of such receipts should be allowed to be deducted.
4. On the other hand, the learned departmental representative supported the order of the CIT (Appeals). He referred to the definition of total turnover given in clause (ba) of the Explanation to support the stand of the revenue that it is the freight or insurance attributable to the transport of goods or merchandise beyond the custom station that are excluded from the total turnover. According to him, the necessary corollary is that all other receipts remained to be included in the definition of 'total turnover'. He also referred to the proviso to clause (ba) of the said Explanation effective from 1-4-1991 which states that the total turnover shall not include any sum referred to clauses (iiia), (iiib) and (iiic) of section 28. From this proviso, he inferred that such receipts were included earlier which should have been excluded only with effect from 1-4-1991. It was further submitted by him that the provisions like section 80HH and 80-I refers to a particular undertaking but such is not the position with reference to section 80HHC. According to him, it is the turnover of the entire business which has to be taken into consideration and, therefore, whatever is received by the assessee would be included in the total turnover. In this connection, support was also drawn by him from the observations of the Special Bench decision in the case of International Research Park Laboratories Ltd. v. Asstt. CIT [1994] 50 ITD 37 (Delhi).
He also referred to the decision of this Bench in the case of Sudharshan Chemical Industries Ltd. [IT Appeal No. 1288 (Pune) of 1992, dated 19-9-1996]. He drew our attention to the observations of this Bench in the aforesaid case appearing at page 4 of the order to the effect that the turnover should have an element of profit. He further relied on the decision of the Tribunal, in the case of Indian Spices Co. v. ITO [1995] 54 ITD 68 (Cochin). He, therefore, concluded that the CIT (Appeals) was justified in confirming the order of the Assessing Officer.
5. Rival contentions of the parties as well as the case law have been considered carefully. The Legislature has explained the words 'export turnover' and 'total turnover'. What is the meaning of the turnover has not been defined by the Legislature. Therefore, it has to be understood in the common parlance. In the commercial word, the 'turnover' is understood as the sale proceeds of the goods. However, under various statutes of sales-tax wherever the Legislature intended it had enlarged scope of the word 'turnover' by including various amounts received by the assessee in connection with such sale proceeds. For example, the excise, sales-tax or any other amount charged in connection with such sales. In the absence of any such definition, the turnover has to be understood equivalent to the sale proceeds of the goods sold by the assessee. Clause (b) to the Explanation of section 80HHC says that the export turnover means the sale proceeds but does not include the freight or insurance attributable to the transport of goods on merchandise beyond the custom station. It only shows that probably the turnover could include the sums charged by the assessee in respect of goods sold. Clause (ba) explains the turnover in a negative manner which also states that it shall not include freight or insurance attributable to the transport of the goods or merchandise beyond the custom station. The combined reading of clauses (b) and (ba) to the Explanation does not show that it would include anything which has no nexus with the sale proceeds. In the present case, we are concerned with the receipts having no connection with the goods sold. These are the charges against the services rendered by the assessee in respect of goods belonging to other parties. In our view, it would be too extreme to include such service charges within the meaning of turnover. In this connection, we may refer to the decision in the case of International Research Park Laboratories Ltd. (supra) wherein it has been observed that the commission received by the assessee in respect of export orders could not be included in the total turnover. If the commission which has a link to the export of goods could not be included in the turnover, we are afraid, how the charges received by the assessee for the services rendered by it with reference to the goods belonging to the other party could be included in the word 'turnover'. The decision of this Bench in the case of Sudharshan Chemicals Industries Ltd. (supra) relied on by the learned departmental representative is also distinguishable on facts of the case, inasmuch as, in that case, we were concerned with the issue whether the sales-tax, excise duty could be included within the meaning of 'total turnover'. It was in that context, the Bench observed that the charges like excise duty and sales-tax have no element of profit and, therefore, if included in the total turnover would not advance the object of the Legislature. We, therefore, set aside the order of the CIT (Appeals) on this issue and direct the Assessing Officer to modify the computation accordingly.
6. The next aspect of the issue is whether the amount received by the assessee on income-tax refund as well as advances/loans to M/s.
Dudhsagar Investment Pvt. Ltd. which is a sister concern of the assessee could be included in the 'profits of the business' for the purposes of computing relief under section 80HHC(3). The Assessing Officer has assessed the interest income on income-tax refund amounting to Rs. 11,58,945, interest on loan advanced to sister concern amounting to Rs. 8,40,000 as assessable under the head 'Income from other sources' and, therefore, the same could not be included in the profits of the business for the purpose of computing relief under section 80HHC(3). This order has been confirmed by the CIT (Appeals).
7. The learned counsel for the assessee made two submissions with reference to interest of income-tax refund, viz : (1) the interest received on income-tax refund is not chargeable to tax at all since it partakes the character of tax and is therefore, a capital receipt. In this connection, he referred to the decision of the Supreme Court in the case of Donald Miranda v. CIT [1961] 42 ITR 166. (2) In case, it is held as taxable income, it should be held as assessable under the head 'Profits and gains from business or profession'. Similarly, with reference to the interest on loan to sister concern, it was submitted by him that it was out of the business funds and therefore, should have been assessed as business income. At this stage, the Bench enquired whether it was surplus fund of the assessee which had been advanced as loan to the sister concern. It was stated by Mr. Dastur that it was a surplus fund of the company which was advanced to the sister concern.
8. On the other hand, the learned departmental representative, vehemently opposed the contention of the assessee's counsel that interest on income-tax refund is not taxable. He submitted that interest on income-tax refund is income chargeable to tax and, does not partake the character of the tax as contended by the assessee's counsel. In this connection, he referred to the following decisions : 2. J.K. Spg. & Wvg. Mills Co. v. Addl. CIT [1976] 104 ITR 695 (All.); He further submitted that the decision of the Supreme court cited by the learned counsel for the assessee is distinguishable on facts of the case, inasmuch as the tax paid by the assessee was deductible expenses and, therefore, whenever it was received back, it was held to be income. It was further argued by him that the loan was advanced to sister concern out of surplus fund as admitted by the learned counsel for the assessee and, therefore, it was clearly assessable under the head 'income from other sources'.
9. Both the parties have been heard. We are unable to accept the contention of the assessee that interest accruing on income-tax refund is not chargeable tax at all. In view of the Madras High Court judgment in the case of Smt. B. Seshamma (supra). In this connection, we may refer to the decision of the Supreme Court in the case of Dr. Shamlal Narulav. CIT [1964] 53 ITR 151, wherein similar contention was raised on behalf of the assessee. It was contended before the Hon'ble Supreme Court that in a case where possession of the Land Acquired had been taken before award, the interest under the land acquisition Act would be capital receipt inasmuch as, it would partake the character of the compensation for depriving the owner of the land of his right to possession. Such a contention of the assessee was rejected by their Lordships and it was held that such interest was of revenue nature liable to tax. We are also unable to accept the second contention of the assessee. Once the income-tax has been paid by the assessee it ceases to be the money of the assessee. Whatever refund is issued after final assessment it would be a general debt due to the assessee arising under the statue and interest arising on such debt cannot be said to have any connection with the business activities carried on by the assessee. Therefore, in our considered view, such interest is assessable as income from other sources. In order to constitute the business income, there must be nexus between the income earned and the activities carried on by the assessee. In our opinion there is no nexus between the interest earned on income-tax refund and the business activity carried on by the assessee. For the similar reasons, we also hold that interest accrued on the loans advanced to sister concern is liable to be assessed under the head 'Income from other sources'. If the amounts are lying surplus with the assessee and the same are invested or given by way of loan, then the interest on such amounts would have no nexus with the business activities. In a particular set of facts, interest of deposits, etc., may be business income provided there is nexus between such income and the business activities. Since in our opinion, there is no nexus between the interest income and the activities carried on by the assessee, it cannot be assessed as business income. Therefore, we hold that interest arising out of income-tax refund as well as on loans advanced to sister concern are assessable under the head 'Income from other sources'. We, therefore, uphold the order of the CIT (Appeals) on this issue.
10. In the course of hearing, a question had arisen whether in case the interest income is held to be the business income could it be included within the scope of 'profits of business' for the purpose of sub-section (3) of section 80HHC. Extensive arguments were advanced on behalf of the both the parties in this regard. However, we need not express our opinion since we have held that interest income is assessable under the head 'Income from other sources'.
11. The next aspect of the issue relates to the scope of the words 'profits of business' appearing in sub-section (3) of section 80HHC. On behalf of the assessee before the Assessing Officer it was contended that the profits of the business should be determined without deducting the unabsorbed investment allowance, depreciation, etc. This contention has been rejected by the Assessing Officer in view of the specific provisions of section 80AB. It was held by him that relief under section 80HHC has to be computed on the total income as reduced by unabsorbed losses and allowances of earlier years and also the deduction under sections, 32, 32A and 80G of the Act. The CIT (Appeals) has confirmed the order of the Assessing Officer on this issue in view of specific provisions of section 80AB. Aggrieved by the same, the assessee is in appeal before the Tribunal.
12. It was vehemently argued by the learned counsel for the assessee that the provisions of section 80AB are not applicable to the deduction under section 80HHC. According to him, it is only the profits and gains of the year which is to be computed under the head "Profits and gains of business or profession". Such profit has to be taken for the purpose of said section 80HHC. It was further submitted by him that the provisions of section 80HHC do not provide that export profit should be included in the gross total income and the provisions of section 80AB are applicable only where the income in respect to which the deduction has to be allowed is included in the gross total income. According to him, the deduction under section 80HHC is to be allowed irrespective of the profit or loss. In this connection, he drew our attention to the provisions of section 80HHC as were enacted originally. It was pointed out by him that initially the deduction was based on the basis of turnover made by the assessee and it had no connection or nexus with the income derived from exports. The only object of the Legislature was to promote the exports and the incentives had been granted from time to time irrespective of the income earned by the assessee. He also referred to the provisions of section 280ZC. In support of his contention, he also relied on the decision of the Special Bench in the case of International Research Park Laboratories Ltd. (supra). On the other hand, the learned departmental representative has supported the order of the CIT (Appeals). It was contended by him that the provisions of section 80AB are clearly applicable.
13. After considering the rival submissions of the parties, we are of the view that the submissions of the learned counsel for the assessee has some force. In our view, the provisions of section 80AB cannot be applied to the provisions of section 80HHC in spite of section 80AB being non obstante provision. For the benefit of our order, the provisions of section 80AB are reproduced as under : "80AB : Where any deduction is required to be made or allowed under any section (except section 80M) included in this Chapter under the head "C - deductions in respect of certain incomes" in respect of any income of the nature specified in that section which is included in the gross total income of the assessee, then, notwithstanding anything contained in that section, for the purpose of computing the deduction under that section, the amount of income of that nature as computed in accordance with the provisions of this Act (before making any deduction under this Chapter) shall alone be deemed to be the amount of income of that nature which is derived or received by the assessee and which is included in his gross total income." The effect of this section is that where any income in respect of which deduction is claimed falling under the heading 'C' of Chapter VI-A which is included in gross total income, it is for the purpose of computing deduction under that section, the amount of income of that nature shall first be determined in accordance with the provisions of this Act (before making the deduction under Chapter VI-A) and then such income shall be deemed to have been included in the gross total income.
The words 'for the purpose of computing deduction under that section' are of significant importance. That meants that section under the head 'C' of Chapter VI-A must require that income of a particular nature in respect of which deduction is claimed must be included in the gross total income. This has been provided by the Legislature because various sections in Chapter VI-A provide that a particular percentage of profits derived from a particular source has to be allowed as deduction if the same is included in the gross total income. In case there is no such profits, no deduction can be allowed. For example, various sections, such as section 80HH, 80HHA, 80HHB, 80-I etc., provide that gross total income should include income of the nature specified in those sections. It is with reference to such provisions that section 80AB provides that income of that nature is to be determined in accordance with provisions of this Act (before making any deduction under Chapter VI-A). So in our view, the necessary corollary is that where any provision under the head 'C' under Chapter VI-A does not provide for inclusion of income of the nature in respect of which deduction is claimed in the gross total income, then the provision of section 80AB would not be applicable. Section 80HHC does not provide that income from export should be included in the gross total income.
The Legislature has made departure from other sections. The reason is obvious. When this section was originally enacted the deduction was allowed with reference to turnover irrespective of any income. The intention of the Legislature was to promote export and in order to advance such intention, the Legislature deliberately did not provide the deduction which shall be allowed if export profits were included in the gross total income. It allowed the deduction on the basis of turnover even though there was no profit from the exports. However, such deduction was subject to section 80A(2). Though, subsequently, the Legislature has changed the basis, i.e. from turnover basis to profit basis, yet it does not provide that such income must be included in the gross total income. In view of the above discussion, we are of the view that section 80AB does not control the provisions of section 80HHC. The view which we have taken is also fortified by the view of the Special Bench in the case of International Research Park Laboratories Ltd. (supra).
14. But this is not the end of controversy. Still, further question is how the profits are to be determined for the purpose of sub-section (3) of section 80HHC. The stand of the assessee is that the profit should be arrived at before deducting the depreciation allowance, investment allowance, past losses and deduction under section 80H and section 80J while the stand of the department is that all such deduction of losses be deducted for determining the profits or the purposes of section 80HHC(3). We are concerned with the assessment year 1991-92. The relevant provisions of sub-section (3) are reproduced as under : "80HHC(3) : For the purposes of sub-section (1) profits derived from the export of goods or merchandise out of India shall be 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 assesses." The perusal of this sub-section itself shows that the profits of the business are to be computed under the head 'profits and gains of profession or business'. Therefore, the extreme view of both the Parties cannot be accepted. If the profits are to be computed under the head 'Profits and gains of business or profession' as provided by the Legislature, then depreciation allowance and investment allowance have to be deducted. However, the unabsorbed business losses of the earlier years and deduction under section 80G and 80-J cannot be deducted as such losses and deductions do not fall under the head 'Profits an gains of business or profession'. We, therefore, hold accordingly. The order of the CIT (Appeals) is modified accordingly and the Assessing Officer is directed to modify the relief in the light of the above observations made by us.
15. The next aspect of the issue is whether the provisions of section 80HHC should form part of Chapter VI-D. It has been argued by the learned counsel for the assessee that the provisions of section 80HHC have been wrongly placed under Chapter VI-A as it should have been a part of Chapter VI-D since the deduction is to be allowed in computing the income of the assessee under the 'profits and gains of business or profession'. It was further submitted by him that section 80HHC does not refer to the gross total income and the relief has to be computed for computing the total income. He drew our attention to the decision of the Hon'ble Supreme Court in the case of CIT v. V. Venkatachalam [1993] 201 ITR 737/70 Taxman 231 wherein the Supreme Court had observed that the provisions of section 80T are misplaced and should have been formed part of section 48 itself. On the other hand, this contention of the assessee has been opposed by the learned departmental representative and he relied on the decision of the Hon'ble Supreme Court in the case of M.S.P. Nadar Sons v. CIT [1993] 201 ITR 1044/68 Taxman 152 and in the case of H.H. Sir Rama Varma v. CIT [1994] 205 ITR 16. After considering the rival submissions of the parties, we do not find any force in the contention of the learned counsel for the assessee. The relief under section 80HHC is to be calculated with reference to sub-section (3). The sub-section (3) refers to the profits of the business as computed under the head 'Profits and gains of business'. In view of such provision, it cannot be said that the provision of section 80HHC are misplaced. The Legislature specifically provides that the profits and gains first has to be computed in accordance with the provisions contained under the head 'Profits and gains of business' and then such relief has to be computed. Therefore, the question of placing section 80HHC under Chapter VI-D does not arise. We have gone through the decisions of the Hon'ble Supreme Court relied upon by the assessee. In our opinion, that decision is clearly distinguishable as it was decided in a different context. Their Lordships had to consider aspect of "such income" appearing in section 80T. Their Lordships held that such income related to capital gains and therefore, probably the section ought to have been placed alongwith section 48. In that case, the assessee had earned capital gains of Rs. 1,02,740 and the department wanted to set off the business losses against such capital gain. Their Lordships held that the deduction under section 80T has to be allowed against the capital gain and the question of set off the business loss did not arise in view of the language employed in section 80T. It is in this context that the relevant observations were made by their Lordships of the Supreme Court. But the words 'such income' as used in section 80T do not find place in section 80HHC. On the other hand, the language of section 80HHC is unambiguous and clearly lays down that the profits of the business has to be computed first under the head 'Profits and gains of business'. Therefore, we are unable to accept the contention of the learned counsel for the assessee.
17. The next question relates to computation of disallowance under section 37(2A). The CIT (Appeals) has observed that for the purposes of computing disallowance under section 37(2A) the profits and gains of business have to be determined after taking into consideration the relief admissible under section 80HHC and after set off of unabsorbed depreciation and investment allowance and relief under section 80G.Against these observations, the assessee is in appeal before the Tribunal. The submission of the assessee is that for the purpose of computing disallowance under section 37(2A) the deduction as referred to by the CIT (Appeals) are not to be taken into consideration. On the other hand, the learned departmental representative supported the order of the CIT (Appeals).
18. Both the parties have been heard. In our view, there is some force in the contention of the learned counsel for the assessee. The provisions of section 37(2A) refers to the profits and gains of business or profession computed before making any allowance under section 32A or section 33 or section 33A or in respect of entertainment expenses. In view of this clear provision, the relief under sections 80HHC and 80G cannot be taken into consideration. It is only the investment allowance or deduction under sections 33 and 33A that has to be excluded from the income computed under the head 'Profits and gains of the business'. Even the unabsorbed business loss cannot be taken into consideration. Therefore, the order of the CIT (Appeals) is modified accordingly.
19. The next issue relates to the disallowance under Rule 6D. The assessee has placed reliance on the decision of the Tribunal in the case of S.V. Ghatalia v. Second ITO [1983] 4 ITD 583 (Bom.). On the other hand, the learned departmental representative has relied on the judgment of Hon'ble Andhra Pradesh High Court in the case of CIT v.Coromandel Fertilisers Ltd. [1996] 220 ITR 298. The Tribunal is now following the judgment of the Hon'ble Andhra Pradesh High Court in the case of Coromandel Fertilisers Ltd. (supra) and therefore, for the sake of consistency, this issue is decided in favour of the revenue.
20. The next contention of the learned counsel for the assessee is that the CIT (Appeals) had erred in not considering the additional ground of appeal raised before him regarding charging of interest under section 234B and direction to be given to the Assessing Officer to give benefit of carry forward relief under sections 80J and 80G of the Act. Since this issue has not been decided by the CIT (Appeals) we restore the matter to his file for consideration.
21. The last ground of the assessee is that it is entitled for the benefit of carry forward and set off unabsorbed losses and allowances arising from the appeals/rectification pending for the prior years.
This is consequential and the Assessing Officer is directed to provide necessary relief as the case may be.