Judgment:
1. This appeal has arisen out of the order dated 30th May, 1995 passed by the CIT(A)-V, Calcutta for the assessment year 1992-93. There are two grounds on which this appeal has been filed which are as under : "1. That on the facts and in the circumstances of the case the learned CIT(A) erred in confirming that gross brokerage and commission of Rs. 18,28,760 was correctly taken into consideration by the Assessing Officer instead of net figure of Rs. 15,45,551 in computing admissible deduction under section 80HHC. 2. That the learned CIT(A) erred in confirming non-allowance of deduction of Rs. 1,34,417 representing the cost of Import Entitlement against gross import premium of Rs. 22,05,466 in computing admissible deduction under section 80HHC." 2. In this appeal the point at issue for consideration is whether the deduction of 90 per cent as per Explanation (baa) at the end of sub-section (4A) to section 80HHC of the items mentioned therein should be of the gross amount or of the net amount. In order to deal with the grounds of appeal it is useful to refer the relevant facts of the case.
3. The assessee is a partnership firm. It carries on business of manufacture of leather goods and exporting of the same, export trading goods, brokerage and commission earned in India and also in foreign countries, money lending, etc. The assessee filed a return relating to the assessment year 1992-93 and in computing the total income, it claimed deduction under section 80HHC of the Income-tax Act (hereinafter referred to as 'the Act'). The assessee claimed, amongst others, deduction of Rs. 1,25,30,667, while the Assessing Officer in assessing the total income restricted the claim under section 80HHC to Rs. 1,22,65,620 only. In computing the admissible deduction under section 80HHC, the Assessing Officer reduced the business income amongst others, the gross brokerage and commission totalling Rs. 18,28,760 instead of net brokerage and commission of Rs. 15,45,551, the amount which was considered by the assessee after deducting a sum of Rs. 2,83,209 towards incurring expenditure to earn it. Similarly, the Assessing Officer reduced Rs. 23,39,883 on account of the import licence premium instead of the net amount of Rs. 22,05,466 taken by the assessee after deducting a sum of Rs. 1,34,417 as cost of import entitlement.
4. The Assessing Officer considered that as per Explanation (baa) in section 80HHC of the Act out of the receipts inter alia of import licence premium or of any receipts by way of brokerage, commission, etc. a sum of ad hoc 10 per cent deduction will be made to account for expenditure necessary to earn the incomes. There is no need for further deduction of any expenses for earning this type of income. There is no justification for further deducting the expenditure incurred for earning this type of income. Accordingly, the Assessing Officer recomputed the deduction under section 80HHC by taking gross amount instead of the net amount as taken by the assessee.
5. In the appeal filed by the assessee before the CIT(A), the action of the Assessing Officer has been held as reasonable and justified. Hence the assessee is in appeal before us.
6. We have already produced the grounds of appeal, and as may be observed the question involved is common as to whether the 90 per cent of the amount referred to in Explanation (baa) of section (4A) of section 80HHC of the Act in respect of the items mentioned therein is to be reduced by 90 per cent of the gross amount of or 90 per cent of the net amount and accordingly, we shall deal with both the grounds together.
7. The learned counsel for the assessee, Shri S. N. Mondal submitted that for the purpose of determining the claim of deduction in respect of profits retained for export business, the profit of the business has to be computed under the head "Profits & gains of business or profession" as reduced by 90 per cent of receipts on account of brokerage, commission, import licence premium subsidy, etc. or other receipts of similar nature including such profits in terms of section 80HHC(4A) Explanation (baa) of the Act. He mentioned that the indenting commission and kharajat expenses incurred for earning the brokerage and commission income are directly related to the brokerage a/c. and consequently those expenses are to be considered as direct expenses, and not common expenses. Sri Mondal submitted that the profits of the business as per Explanation (baa) has to be computed in accordance with the provisions contained in sections 30 to 43D vide section 29 of the Act. i.e. the profits of the business would be net profit after deduction of all expenses. Therefore, what is included in the profits of the business in Explanation (baa), computed in accordance with the provisions of sections 30 to 43D is the net amount of brokerage and commission and not the gross amount. He further submitted that similarly, the cost of import entitlement is to be deducted. Sri Mondal further mentioned that the intention of insertion of clause (baa) of the Explanation to section 80HHC is to exclude brokerage, commission, etc. which do not have element of turnover but included in the profit & loss account, but there is nothing to show that there was any intention to ignore the direct expenses necessary to cam such income, a part of the common expenses was also considered as attributable to the earning of such income and deduction of 10 per cent is considered as part of the common expenses. By providing for deduction of 10 per cent for common expenses it was not the intention not to allow the deduction of the direct expenses incurred to earn any such income. Sri Mondal further submitted that the language of Explanation (baa) to section 80HHC does not indicate to hold that 90 per cent of the gross income and not net income is included in the profits of the business which is to be deducted from the profits of the business. Sri Mondal urged that the authorities below were not justified in deducting 90 per cent of the gross amount of brokerage and commission and gross import licence premium instead of the net amount as claimed by the assessee after deducting the direct expenses in cost incurred. On the other hand, the learned DR Shri A. K. Das justified the method of computation as adopted by the Assessing Officer and accordingly supported the orders of the authorities below.
8. We have carefully considered the submissions of the learned representatives and the material placed before us. It will be useful to state the object of section 80HHC of the Act before we take up the issue before us., The object of section 80HHC of the Act is to give incentive to accelerate exports by granting exemption on the export related profits for encouraging exports outside of India and earning of foreign exchange for the country. This section is on the statute book from the assessment year 1983-84 but there have been amendments to this section various times and the basis for deduction was being changed over the years. Section was lastly amended by the Finance (No. 2) Act, 1991. Now section 80HHC provides incentive by giving exemption of profits derived by an assessee from exports of qualified goods in toto while computing the total income. In the light of the above background we should understand the scope and object of section 80HHC. This section must be interpreted keeping in view the object of the intention of the legislature, i.e. to confer a benefit on profits accruing to an assessee with reference to export turnover. Under sub-section (3) of section 80HHC a mechanism is provided to determine how the quantum of profits derived from exports under section 80HHC is to be determined.
There are three possibilities which are envisaged, viz. :- (a) Where the assessee exports only such goods or merchandise as are manufactured or processed by him.
(b) Where the assessee exports outside India only trading goods, i.e. goods manufactured by others and bought by him as a trader and (c) Where the assessee exports outside India both goods or merchandise manufactured by him and trading goods.
The tax concession provided under section 80HHC is in tended to compensate an exporter for the comparative disadvantage faced by an assessee in the international market. However, it was realised that the existing formula might give a distorted figure of export profits when receipts like interest, commission, brokerage, rent, etc. which do not have an element of turnover are included in the Profit & Loss A/c.
Therefore, by way of an amendment by Finance (No. 2) Act, 1991, an Explanation at the end of sub-section (4A) to section 80HHC has been added as clause (baa) in the Explanation with effect from 1-4-1992 and the commission, brokerage, interest, rent, charges and items mentioned in section 28(iiia), (iiib) and (iiic), namely profit on sale of licence, cash assistance and duty drawback receivable are not to be treated in toto as profits of the business relatable to exports and only 10 per cent thereof should be considered as profit of the business and the balance 90 per cent should not be included in the profits. In providing 10 per cent deduction, the intention is that it is attributable as a part of the common expenses in earning such income, is mentioned in the memorandum explaining to the provisions in Finance (No. 2) Act, 1991 [190 ITR (Statute) at page 300].
9. In the light of the scheme of section 80HHC which provides the mechanism to determine the quantum of profits derived from exports which are eligible for deduction we have examined the Explanation (baa) to section 80HHC of the Act. It is observed that the reason for exclusion of 90 per cent of brokerage, commission, rent, etc. is that these do not have an element of turnover which is involved in the computation of the profit under section 80HHC(3). As the turnover cannot include commission, brokerage, etc. the amount of brokerage and commission in full could be excluded, but to give benefit to the assessee exporter 10 per cent of the brokerage, commission, etc. is included in the profits of the business which is allowed as a deduction on account of common expenditure. Therefore, the brokerage, commission, etc., the items mentioned in the Explanation (baa) are included in the profit of the business could be after deduction of direct expenditure incurred to earn such income as brokerage, commission, interest, etc.
Further as per Explanation (baa), 90 per cent of the brokerage, commission, rent, interest, etc. included in the profits of the business as computed under the head 'Profits & gains of the business or profession' is to be deducted. It is clear that the profits have to be computed in accordance with the provisions contained in sections 30 to 43D vide section 29 of the Act, i.e. the profits of the business would be the net profit after the deduction of all expenses. Therefore, what is included in the profits of the business computed in accordance with the provisions of sections 30 to 43D is the net amount of brokerage and commission, import licence premium, etc. and not the gross amount.
Further the direct expenses incurred to earn the income could not be refused to be deducted unless there is specific prohibition which we do not find. In order to earn some income some common expenses are also incurred and that is the reason we consider that it will be equitable and fair that apart from the actual direct expenses incurred to earn such income, the 10 per cent further deduction is given as common expenses attributable to the earning of such income. It could not be said that by providing deduction of 10 per cent for common expenses not to allow deduction of the direct expenses incurred by an assessee to earn such income.
10. In the light of the above discussion, we are of the view that under Explanation (baa) of section 80HHC of the Act 90 per cent of the net amount referred in clauses (iiia), (iiib) and (iiic) of section 28, viz. profit on sale of licence, cash assistance and duty drawback receivable or of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of similar nature included in the profit is to be deducted. Therefore, decision of the authorities below that out of the receipts the ad hoc 10 per cent deduction is made to account for expenditure necessary to earn these incomes and there is no need for further deduction of any expenses for earning type of income, of the items mentioned in Explanation (baa) is not correct and justifiable.
11. We hereby hold that the assessee is entitled to deduction of 90 per cent of the net amount of brokerage and commission after deducting the direct expenses incurred for earning said income of Rs. 2,83,209 and is also entitled to deduct the cost of import entitlement of Rs. 1,34,417 from the gross amount of the import entitlement sold of Rs. 23,39,883.
The Assessing Officer is directed to recompute the benefit under section 80HHC of the Act on the above basis.