| SooperKanoon Citation | sooperkanoon.com/886280 |
| Subject | Direct Taxation |
| Court | Kolkata High Court |
| Decided On | Mar-30-2001 |
| Case Number | ITA No. 679/Cal/1996 30 March 2001 A.Y. 1992-93 |
| Reported in | (2001)73TTJ(Cal)349 |
| Appellant | Mcleod Russel (India) Ltd. |
| Respondent | Dy. Cit |
| Advocates: | Kaushik Mukherjee, for the Assessee J. C. Mishra, for the Revenue |
| Cases Referred | Union of India v. Filip Tigo De Gama |
Pramod Kumar, A.M.
This assessees appeal is directed against the order dated 8-1-1996, passed by the learned Commissioner (Appeals) Calcutta XII, in the matter of order under section 143(3) for the assessment year 1992-93. Although the assessee has raised as many as nine grounds of appeal, the grievances of the assessee can be summed up in four categories, namely, (a) grievances against Commissioner (Appeals)s not allowing 100 per cent depreciation on Vibro Fluid Bed Drier costing Rs. 34,07,135; (b) grievances against Commissioner (Appeals)s upholding addition of Rs. 5,16,493 to the closing stock, on account of cess(c) grievances against Commissioner (Appeals)s holding that section 80HHC deduction is to be worked out after apportioning the income under rule 8; and (d) grievances against Commissioner (Appeals)s. holding that commission paid to sales agents is to be excluded for determining export turnover for the purpose of section 80HHC. We, accordingly, proceed to take up these four sets of grievances of the assessee one by one.
2. The assessee-company is in the business of growing, manufacturing and selling tea. During the course of assessment proceedings, assessees claim of 100 per cent depreciation on Vibro Fluid Bed Drier (hereinafter referred to ass VFBD) was restricted to 25 per cent depreciation, as applicable on normal machinery, by the assessing officer in appeal, the assessee submitted that VFBD was an energy saving eligible for 100 per cent depreciation under clause III 3(iii) A of by Appendix I of the Income Tax Rules, 1962. It was also submitted that the assessing officer had not disputed that installation of VFBD has resulting in energy savings and, therefore, VFBD are entitled to 100 per cent depreciation on specilised boilers and furnaces. The Commissioner (Appeals), however, was of the opinion that not every energy saving device is entitled to 100 per cent depreciation but only such energy saving devices were entitled to 100 per cent of depreciation which are, specialised boilers and furnaces of the nature referred to in III, (3)(iii)A of Appendix I or waste heat recovery equipment referred to in the nature referred to in III. 3(iii) A of Appendix I. Accordingly, the Commissioner (Appeals) upheld the disallowance of depreciation by the assessing officer, aggrieved by which the assessee is in appeal before us. Rival contentions are heard, records perused and authorities cited at the bar deliberated upon.
3. We find this issue is squarely covered by earlier decisions of this Tribunal, including by the case of Dy. CIT v. Assam Brook Ltd. (ITA No. 370/Cal/1996), in which it has been held that VFBD is eligible for 100 per cent depreciation. We see no reasons to take a contrary view and, accordingly, we direct the assessing officer allow 100 per cent depreciation on the Vibro Fluid Bed Drier. In the result the assessee succeeds on this count and thus ground Nos. 1 and 2 are allowed.
4. Second grievance of the assessee is against Commissioner (Appeals)s upholding the addition of Rs. 5,16,493 to the closing stock on account of cess. During the course of assessment proceedings, it was observed by the assessing officer that though cess on green leaf is direct cost of production, it has not been taken into account in the valuation of closing stock. During the relevant previous year, cess of Rs. 63,49,107 was paid on 1,59,95,882 kgs. of green leaves, and pro rata cess for 8,83,696 kgs. in closing stock came to Rs. 5,15,498 which was added to the closing stock of the assessee. In appeal, learned Commissioner (Appeals) upheld the addition on the ground that unlike excise duty, which is paid on production, cess is paid on the green leaves at the time of purchase and, therefore, cess ought to be taken into account for valuation of closing stock even at purchase price. Aggrieved by the order of the Commissioner (Appeals) assessee is in appeal before us.
5. Shri Mukherjee, learned counsel for the assessee, has submitted that the payment of cess was not debited to the profit & loss account but the same has been claimed as a deduction for computation of business income. In view of the specific provisions of section 43B of the Income Tax Act, learned counsel has placed reliance on Honble Supreme Courts judgment in the case of Chainrup Sampatram v. CIT : [1953]24ITR481(SC) wherein it has been observed that 'the true purpose of crediting the value of unsold stock is to balance the cost of those goods entered on the other side of the account at the time of their purchase, so that the cancelling out of the entries relating to same stock from both sides of the account would leave only the transaction on which there have been actual sales in the course of the year showing the profit or loss actually realised on the years trading'. It was further submitted that cess payment does not form part of the cost of production since the same is not debited to the profit & loss account and that allowance of deduction on cess paid does not have any bearing on the issue of its inclusion in the closing stock. Without prejudice to these arguments, it was also submitted that in case cess is to be included in the value of closing stock, a further deduction with respect to the same should be allowed in the relevant previous year in view of the express provisions of section 43B. Reliance was placed on decisions of the Tribunal in case of ITO v. Food Specialities Ltd. , Excide Industries Ltd. v. Dy. CIT (ITA No. 152/Cal/1996) and Dy. CIT v. Williamson Magor & Co. Ltd. (ITA No. 771/Cal/1995), Shri J.C. Mishra, learned Departmental Representative, on the other hand, strongly supported the orders of the authorities below. Reliance was placed on Honble Supreme Courts judgment in the case of CIT v. British Paints Ltd. : [1991]188ITR44(SC) in support of the proposition that in case method of accounting adopted by the assessee does not disclose true and proper income, assessing officer is not only entitled but has a duty to resort to appropriate computation to determine true income. Shri Mishra submitted that the method of accounting adopted by the assessee does not disclose the true profits of the company and as such the assessing officer was not only empowered, but also duty-bound, to take corrective steps against such maneuvering by the assessee. It was submitted that a method of accounting which shows value of closing stock lesser than least of cost of the assessee or market price cannot be capable of disclosing true profits. The learned Departmental Representative thus supported inclusion of cess in the value of closing stock of the assessee and urged us to reject assessees appeal against the same.
6. We find that it is an admitted position that cess is not paid on tea manufactured but on the green leaves which are processed to manufacture the tea. Therefore, unlike the excise duty which comes to the picture only after goods are manufactured, cess is an integral part of the cost of production. None of the erudite submissions by learned counsel dispute this factual position nor they even attempt to explain as to why, on these facts, cess is not debited to the profit & loss account. If it is not in dispute that cess leaves is a part of the cost of production, as is the position in this case, such an expenditure not being debited to the profit & loss account cannot constitute a part of any acceptable method of accounting. We find nothing on record to justify any deviation from this basic principle. We may refer to the observations in the order of the Special Bench in the case of Indian Communications Network (P) Ltd. v. IAC , a case which have been referred to and relied upon by the assessee himself, which are reproduced below :
'We cannot help but lay stress on the bringing to tax of the correct income of an assessee relevant to an assessment year and this can only come about if income and expenditure pertaining to a year are duly accounted for in the said year'. (at para. 33)
7. The assessee has not debited the cess paid in the profit & loss account but yet claimed the deduction of the same amount by the virtue of section 43B of the Income Tax Act, 1961.
Therefore, effectively assessee has claimed deduction of cess payment from computation of profit from business even without debiting the related expenditure. It is in the background of these facts that the assessee has placed great reliance on Honble Supreme Courts judgment, in the case of Chainrup Sampatram (supra), in support of the claim that since cess was not debited to the profit & loss account, it should not be taken into account for computing the value of closing stock.
8. It may also be relevant to mention that according to 'Accounting Standard 2-Valuation of Inventories' published by the Institute of Chartered Accountants of India, 'inventories should be valued at lower of historical cost and net realisable value'. (There are, of course, some exceptions to this policy, as listed in para 29.1 to 29.4 of the aforesaid standard, but none of these exceptions deals with situations before us). In para. 6.2 of this accounting standard, historical cost has been defined as an appropriate combination of the (a) cost of purchase; (b) cost of conversion; and (c) other costs incurred in the normal course of business in bringing the inventories upto their present location and condition. In para. 6.3 of the statement costs of purchases is defined to consist of the purchase price including duties and taxes, freight inwards and other expenditure directly attributable to acquisition less trade discounts, rebates, duty drawbacks and subsidies, in which they are accounted, whether immediate or deferred, in respect of such purchases. It is, therefore, clear that valuation of inventory, in accordance with the Accounting Standard 2, necessarily requires taking into account of duties and taxes in connection with purchases.
9. It will be useful to recall that in Chainrup Sampatrams case (supra), the assessee-firm case was carrying on business at Calcutta and, on account of panic in Calcutta in 1941, this firm moved some of its stocks of silver bars to a safe place in Bikaner, which was then in a princely Indian State. Since the assessee was valuing closing stocks at the market price, the assessee de facto offered increase in value of stocks (i.e., market price of closing stock less cost price of such stock) for taxation in the normal course. However, the plea of the assessee was that this profit arose on account of valuation of stock and since a part of the stock was lying outside British India i.e., in Bikaner, proportionate profit attributable to stocks lying outside British India should not be subjected to taxation under the Income Tax Act which, it may be mentioned, was applicable only in the parts of country which were directly under British Rule such as Calcutta and not on Indian States ruled by the native princes and Nawabs. The assessees plea was negated by the Income Tax Authorities as well as by the Tribunal and reference was also decided against the assessee by the Calcutta High Court, Honble High Court observed that notional profit represented by the appreciation in the value of stock in trade emerges out of the valuation and only when it so emerges, it accrues or arises. It was further observed that the source of profit is thus the valuation and the situs is where the valuation is made, since the place of valuation was location of assessee-firm, the profit was deemed to have been earned in British India. Aggrieved, the assessee was before the Honble Supreme Court. Thats how Honble Supreme Court came be in seisin of the limited question regarding taxability of Rs. 2,20,887 on account of increase in value of stocks lying outside what was then British India. It was in this context that Their Lordships observed as follows :
'While we agree with the conclusion that no part of profits of firm in the accounting year can be said to have accrued or arisen at Bikaner, the reasoning by which the learned judges arrived at that conclusion seems to us, with all respect, to proceed on a misconception. It is wrong to assume that the valuation of closing stock at market rate has, for its object, bringing into charge any appreciation in the value of the closing stock. The true purpose of crediting, the value of unsold stock is to balance the cost of goods sold entered on the other side of the account at the time of their purchase, so that the cancelling out of the entries relating to the same stock from both the sides would only leave the transactions on which there have been actual sales in the course of the year showing the profit and loss actually realised on the years trading. As pointed in para, 8 of the Committee on Financial Risks attached to the holding of Trading Stocks 1919, 'As the entry for stock which appears in a trading account is merely intended to cancel the charge for the goods which have not been sold, it should necessarily represent the cost of the goods. If it is more or less than the cost, then the effect is to state profit on the goods, which have actually been sold, at the incorrect figure..................... From this rigid doctrine, one exception is generally recognised on prudential grounds and is now fully sanctioned by the custom, viz., the adoption of market value at the date of making up its accounts, if that value is less than the cost'.
'In the present case, although it would appear that the cost price of the silver despatched to Bikaner was less than the market price at the end of the year, the reference did not raise any questions regarding the basis on which the amount in dispute, viz. Rs. 2,20,887 was arrived at. On the other hand, the question referred assumed that the said sum was correctly computed and put in issue only its assessability in law ............'
Emphasis here italicised in prints
10. We find that the learned counsel has picked up a sentence from the judgment and tried to canvass that this sentence by itself, and in isolation of all other observations in the judgment, is a complete exposition of law on this subject. It is not even the counsels submission that this sentence, in anyway, reflects, ratio decidendi of the aforesaid judgment this sentence is admittedly nothing more than an obiter dicta. In this context, we are only reminded of the observations of Justice Bhat, in the case of SRF Finance Ltd. v. CBDT (1995) 211 ITR 961, which are reproduced below :
'It is a well settled rule of construction that judgments must be read as a whole and observations from the judgments should be considered in the light of the questions which were before the court. As observed by the Supreme Court in CIT v. Sun Engineering Works (P) Ltd. : [1992]198ITR297(SC) , it is neither desirable nor permissible to pick out a word or a sentence from the judgment of the Supreme Court, divorced from the context of question under consideration and treat it to be the complete law declared by the Supreme Court. A decision of Supreme Court takes its colours from the question involved in the case in which it is rendered and, while applying it to a later case, the courts must carefully try to ascertain the true principles laid down by the decision. It is not proper to regard a word, section clause or a sentence occurring in a judgment of the Supreme Court, divorced from its context, as containing, full exposition of law on a question when the question did not even fall to be answered in that judgment.'
11. In our considered view, the observations of Honble Supreme Court relied upon by the learned counsel, which obviously take its colour from the questions involved in the case in which these observations are made, are not relevant to the present context. Honble Supreme Court were deliberating upon the objective of valuation of a stock which, in the opinion of lower authorities, was said to be bringing to charge any appreciation in the value of closing stock and, unlike in the case before us, it was not in dispute that any expenditure associated with purchases has not been actually debited to the profit & loss account. We are unable to accept the suggestion that true principle emerging from this judgment is that irrespective of whether or not all the related expenditure have been debited to the profit & loss account, only debits to the profit & loss account can be taken into account for working out the value of closing stock. The words used by judges are not to be interpreted, as they are the words used in a statute. These words are not used after weighing pros and cons of all conceivable situations that may arise. These words merely constitute reasoning adopted by judges in the particular case, tailored to a given set of facts and circumstances. What is made binding is only the ratio decidendi and nothing more than that Ratio decidendi of a case can be defined as the material facts of the case plus decision thereon. The ratio decidendi of this case has been summed up in the ITR head notes which are as follows :
'It is a misconception to think that any profit arises out of the valuation of the closing stock and the situs of its arising or accrual is where the valuation is made. Valuation of unsold stock at the close of an accounting period is a necessary part of the process of determining the trading results of that period, and can in no sense be regarded as the 'source' of such profits. Nor can the place where such valuation is made be regarded as the situs of their accrual. The source of the profits and gains of a business is indubitably the business, and the place of their accrual is where the business is carried on. As such profits can be correctly ascertained according to the method adopted by an assessee only after bringing into the trading account his closing stock wherever it may exist, the whole of the profits must be taken to accrue or arise at the place of carrying on the business. '
'Held, that on the finding of the Income Tax Authorities that the silver bars lying at Bikaner had not been really sold but remained part of the unsold stock of the assessees business at the end of the accounting year the whole of, the profits of that year must be taken to have accrued or arisen at Calcutta where the business was carried on, no part of that business having admittedly been transacted at Bikaner. Consequently the sum of Rs. 2,20,887 was in law assessable to tax.'
In our considered view, the facts in this case are entirely distinguishable, inasmuch as, we are dealing with a situation wherein an admitted expenditure in the nature of cess on green tea leaves purchased, which should have been debited to a nominal account finding its way to the profit & loss account, has actually been debited to loans and advances.
12. We may also mention that after referring to very judgment relied upon by the assessee and host of other judicial precedents on the subject. Their Lordships of Honble Supreme Court, in a somewhat recent judgment in the case of CIT v. British Paints Ltd. (supra) observed :
'20. Section 145 of the Income Tax Act, 1961 confers sufficient powers upon the officer may it imposes a duty upon him to make such computation in such manner as he determines for deducting the correct profits and gains. This means that where accounts are prepared without disclosing the real cost of stock in trade, albeit on sound expert advice in the interest of efficient administration of the company, it is duty of the Income Tax Officer to determine the taxable income by making such adjustment as he deems fit.
21. Any system of accounting which exclude, for the valuation of stock in trade, all costs other than costs of raw materials for the goods in process and finished products, is likely to result in a distorted picture of the true state of business for the purpose of computing the chargeable income .................... The profits of one year is likely to be shifted to another year which is incorrect method of computing profits and gains for the purpose of assessment. Each year being a self-contained unit and the taxes of a particular year being payable with reference to the income of that year, as computed in terms of the Act, the method adopted by the assessee has been found to be such that income cannot be properly deduced therefrom. It is, therefore, not only the right but also duty of the assessing officer to act in exercise of his statutory power ........... for determining what, in his opinion, is the correct taxable income. '
13. We are, therefore, of the considered view that the assessing officer had the power, as indeed a duty, to determine the taxable income by making such adjustments as are appropriate to work out true profits. Accordingly, we see nothing wrong in the action of the assessing officer in making adjustments in the value of the closing stock, with a view to compute correct profits of the assessee-company. We now come to alternate submission of the learned counsel that if we are to uphold the adjustment in valuation of closing stock, a further deduction with respect to the same should be allowed in the relevant previous year in view of the express provisions of section 43B interpreted by the Tribunal in Indian Communication Networks case (supra), Food Specialities Ltd.s case (supra) and Excide Industries Ltd. v. Dy. CITs case (supra). It appears that allowing a further deduction with respect to cess component in the closing stock, will nullify the net impact of increase in value of closing stock due to the cess payment attributable to the closing stock.
14. We may, however, mention that the assessee has taken a plea that the cess is allowable as deduction in the relevant previous year, i.e., the year in which it is paid, under the provisions of section 43B of the Act which overrides all other provisions of the Act and also operates de hors the method of accounting regularly employed by the assessee. This principle is upheld by a three member Bench of this Tribunal in the cases of ITO v. Food Specialities Ltd. (supra) and Indian Communication Network (P) Ltd. v. IAC (supra). In this context, we may refer to the following observations of Honble Supreme Court in the case of Collector of Central Excise v. Dunlop India Ltd. : 1985ECR4(SC) :
'We desire to add and as was said in Cassell & Co. Ltd. v. Broome (1972) AC 1027 (HL), we hope it will never be necessary for us to say so again that in the hierarchical system of courts which exists in our country, it is necessary for each lower tier, including the High Court, to accept loyally the decisions of the higher tiers. It is inevitable in a hierarchical system of courts that there are decisions of the supreme appellate Tribunal which do not attract the unanimous approval of all members of the judiciary. But the judicial system only works if someone is allowed to have the last word and that last word, once spoken, is loyally accepted' (See observations of Lord Hailsham and Lord Diplock in Broome v. Cassell). The better wisdom of the court below must yield to the higher wisdom of the court above. That is the strength of the hierarchical judicial system.'
In view of the above observations of Honble Supreme Court and in view of the fact, the order of the Tribunal, in the cases of Food Specialities Ltd. (supra) and Indian Communication Network (P) Ltd. (supra) was delivered by a Bench larger than this Division Bench, we respectfully follow the aforesaid decisions and allow this ground of appeal of the assessee.
15. In the light of these discussions, we are of the considered view that the addition of Rs. 5,16,493 made by the learned assessing officer, and which has been sustained in appeal by the learned Commissioner (Appeals), should be deleted; order accordingly. The ground Nos. 3 and 4 of the assessee are, in substance, allowed.
16. Next grievance of the assessee, which is articulated through ground No. 5, is against Commissioner (Appeals)s holding that section 80HHC deduction is to be worked out after apportioning the income under rule 8. However, no specific arguments are advanced in support of this ground. We have noticed that in view of insertion of clause 4B in section 80HHC, with retrospective effect from 1-4-1992, any income not chargeable to tax is to be excluded for the purpose of income under section 80HHC(1). Memorandum explaining the provisions in the Finance Bill, 1999, make it amply clear that the purpose of inserting this sub-section was not to allow deduction under section 80HHC in respect of agricultural income component of the total income of a tea producing company. We, therefore, see no merit in grievance of the assessee and, accordingly, decline to interfere in the matter. This ground of the assessee, thus fails.
17. We now come to the last grievance which is against Commissioner (Appeals)s holding that commission paid to sales agents is to be excluded for determining export turnover for the purpose of section 80HHC. Brief facts of the case, as relevant for the purpose of this ground of appeal, are that the appellant-company engages brokers and agents in United Kingdom for the purpose of sale of tea outside India and, during the relevant previous year, an expenditure of Rs. 88,00,577 was incurred on such commission and brokerage paid to M/s George Williamsons & Co., London. In the normal course, this payment was required to have been made by way of appropriate remittance from India but with a view to avoid inordinate processing delays, the RBI is said to have permitted the tea companies to bring in the sale proceeds net of commission. In other words, this commission and brokerage is deducted from the export proceeds itself and the two-way traffic is avoided in the sense that instead of first bringing in entire export proceeds in India and then making outward remittance, only the net amount is brought in India. The assessee had taken the export turnover as inclusive of this brokerage and commission, i.e., at gross value but the assessing officer held that, as per the statutory definition under the Income Tax Act, 'export turnover means the sale proceeds received in or brought into India in convertible exchange'. Since only the net amount was brought in India, the assessing officer took the export turnover by including only net export proceeds. In first appeal, the learned Commissioner (Appeals) held that statutory definition of expression export turnover as referred to by the assessing officer is so clear and free of ambiguity that it admits no scope of resorting to any principles of interpretation of statutes. The action of the assessing officer was thus upheld. Aggrieved by the order of the Commissioner (Appeals), the assessee is in appeal before us.
18. Shri Kaushik Mukherjee, learned counsel for the assessee, submitted that in view of the law laid down by Honble Supreme Court in the case of J.B. Boda & Co, (P) Ltd. v. CBDT : [1997]223ITR271(SC) , two-way traffic of money is unnecessary and to insist upon a formal inward remittance of the entire sale proceeds and then outward remittance of commission and brokerage will be an empty formality and meaningless ritual. Reliance was also placed on Tribunals order in the case of Capt. K.C. Saigal v. ITO which, even prior to Honble Supreme Courts judgment cited above, held that even if money has been deducted from remittance to be made to the foreign principal, having regard to the spirit of the provisions', it has been treated as received in or brought into India in convertible foreign exchange. The learned counsel has also placed reliance on Central Board of Direct Taxes Circular No. 731, dated 20-12-1995 : 217 ITR 5 in support of the proposition that making an outward remittance of commission after receiving the entire sales proceeds in convertible foreign exchange, and receiving the sale proceeds not of commission and brokerage, are one and the same thing and that merely because the assessee had chosen a particular method, he should not be put to discrimination insofar as tax benefits are concerned. The learned counsel also referred to the judgment of Honble Supreme Court, in the case of Union of India v. Filip Tigo De Gama AIR 1990 SC 981, in support of the proposition that when law-maker drafts the law, he cannot take into account every conceivable practical aspect and it is for the courts to interpret the law in such manner so as to strike a balance between letter and spirit of the statute. A reference was then made to the Supreme Court decisions in Bajaj Tempo Ltd. v. CIT : [1992]196ITR188(SC) and CIT v. Straw Board .s : [1989]177ITR431(SC) in support of the proposition that a provision intended for promoting economic growth has to be interpreted liberally and the restriction on it has to be construed so as to advance the objective of the section and not to frustrate it. In the background of these legal submissions, learned counsel pointed out that the Commissioner (Appeals) was in error in holding that the expression export turnover will not include commission and brokerage which has been deducted from export proceeds by the overseas agents. It was thus prayed that the assessing officer be directed to compute deduction under section 80HHC by taking into account export turnover at gross export amount which will be inclusive of commission and brokerage deducted by agents abroad. On the other hand, Shri J.C. Mishra, learned senior Departmental Representative has laid great stress on the fact that the words 'received in or brought into India' having been introduced with effect from 1-4-1991, there is no scope of including any amount, which has not been actually and physically received in or brought into India, in export turnover. However, when a proposition was put to him by the Bench as to whether but for the words introduced with effect from 1-4-1991, in principle, export turnover could be taken at gross sale amount (i.e. net export proceeds plus the commission and brokerage deducted by the agents abroad), the learned Departmental Representative, merely expressed his inability to answer any hypothetical questions and again concentrated upon grammatical and plain meaning of the expression received in or brought into India. The learned Departmental Representative further submitted that the Honble Supreme Courts judgment in J.B. Boda & Co. (P) Ltd.s case (supra) was in the context of section 80-0 and, therefore, this has no relevance to the issue before us because when legal provision of section 80HHC are not in pari materia with the provisions of section 80-0, ratio of any decision in the context of section 80-0 will not have any application in the context of section 80HHC. Learned Departmental Representative concluded by saying the interpretation canvassed by the assessee is clearly contrary to the plain and unambiguous provisions of section 80HHC and even if it is considered just and equitable, it is unsustainable in law. The learned Departmental Representative thus urged us to reject the assessees appeal on this count also. In accordance with our directions, the learned counsel has also filed a note on objectives, as set out in the 'Memorandum explaining the provisions in the Finance Bill, 1990', of amendment in section 80HHC whereby words received in or brought into India were brought in the definition of export turnover with effect from 1-4-1991. Learned senior Departmental Representative, in response to this note, has reiterated his earlier submissions reproduced above.
19. It is no doubt true that, as urged by the learned Departmental Representative, first principle of interpretation of statutes is that a statute should be read in its ordinary, natural and grammatical sense but then there are some well settled exceptions to this principles of liberal construction. In Interpretation of Taxing Statutes (1998 Edition, p 19; Butterworths), Justice Katju has listed exceptions to the principles of literal construction and observed that the trend in interpretation has been to find out the intention of the legislature, and for this purpose sometimes the literal meaning is avoided. While literal interpretation is the general rule with regard to taxation laws, it does not mean that it should be adopted even if it leads to a discriminatory or incongruous result because the object of the rules of interpretation is to give effect to the object of enactment having regard to the language used. In his classic book Discipline of Law, Lord Denning has stated that intention seeking is preferred to strict construction, and that the literal interpretation is in disuse. While this observation may not apply fully in interpreting taxing statutes, the emphasis today is certainly in seeking to find the intention of the legislature even while interpreting taxing laws. Thus in Keshavji Raviji & Co. v. CIT : [1990]183ITR1(SC) , Honble Supreme Court held that where interest was paid by a firm to the assessee, and the assessee also paid interest to the firm, the net amount paid to the partner to the firm could alone be included under section 40(b) of the Income Tax Act in computing the firms profit. In this case, Supreme Court relied on equity rather than strict interpretation, because the latter would have defeated the object of legislation. Where plain meaning leads to an absurdity or to incongruous results, it can surely be Departed from, we may, in this context, refer to following observations in Maxwell on the Interpretation of Statutes (12th Edn., p. 43) :
'The so-called golden rule is really a modification of the literal rule. It was stated in this way by Parke B.: It is very useful rule, in the construction of a statute, to adhere to the ordinary meaning of the words used, and to the grammatical construction, unless that is at variance with the intention of legislature, to be collected from the statute itself, or leads to any manifest absurdity or repugnance, in which case the language may be varied or modified, so as to avoid any such inconvenience, but no further. If, said Brett L.J., the inconvenience is not only great, but what I may call an absurd inconvenience, by reading an enactment in its ordinary sense, whereas if you read it in a manner in which it is capable, though not in its ordinary sense, there would not be any inconvenience at all, there would be reason why you should not read it according to its ordinary grammatical meaning'.
20. Justice G.P. Singh, in his book Principles of Statutory Interpretation (p. 2 of 6th Edn. 1997 Reprint; Wadhva & Co.), has observed that: ....................... ......' A statute is an edict of the legislature and the conventional way of interpreting or construing a statute is to seek the Intention of its maker. A statute is to be construed according to the intent of them that make it and the duty of the judicature is to act upon the true intentions of the legislaturethe mens or sentential legis. ' Later in this compendium, learned author has stated that 'in all real controversies of construction if it was open to consult the legislature as to its intention, the answer of most of the legislature in all probability will be such a problem never occurred to us, solve it as best as you can, consistent with the words used, and the purpose indicated by us in the statute. 'We do feel that bare mechanical interpretation of the words and application of a legislative intent devoid of concept of purpose will reduce most of the remedial and beneficent legislation to futility. In the light of these discussions, we entirely agree with the learned counsel that when law-maker drafts the law, he cannot take into account every conceivable practical aspect and it is for the courts to interpret the law in such manner so as to strike a balance between letter and spirit of the statute. We also agree that a provision intended for promoting economic growth has to be interpreted liberally and the restriction on it has to be construed so as to advance the objective of the section and not to frustrate it.
21. We now come to the expression export turnover which has been defined in Explnation (b) to section 80HHC as meaning 'the sales proceeds, received in, or brought into India, by the assessee in convertible foreign exchange in accordance with clause (a) of sub-section (2) of any goods or merchandise to which this section applies and which are exported out of India, but does not include freight and insurance attributable to the transport of goods or merchandise beyond the custom station as defined in the Customs Act, 1962'. It may be mentioned that words received in or brought into India were inserted in Explanation (b) vide Finance Bill, 1990, and while introducing this amendment in this statute, memorandum explaining the provisions inter alia stated :
'.......... One of the conditions for allowing deduction under both the above sections is that the receipts should be in convertible foreign exchange. However, the deductions are allowable even if the foreign exchange is not brought into India. In the absence on such a condition, one of the main purpose of allowing such concessions, namely to augment the foreign exchange earnings of the country is being defeated. It has, therefore, been proposed that for obtaining the deduction under section 80HHC and 80HHD, the taxpayer will be required to bring into India the sales proceeds or merchandise .........'.
22. It is, therefore, clear that the amendment was brought in for furtherance of the main purpose of allowance of deduction, i.e., augmentation of foreign exchange reserves of the country. This amendment was introduced in background of the fact that while some assessees were claiming the deduction under section 80HHC, the related export proceeds were not brought into India. The mischief that was thus sought to be remedied by this amendment was that those exporters who do not bring in export proceeds into India are not allowed to avail tax benefits, because the very purpose of giving tax benefits to them, i.e. augmentation of foreign exchange reserves of the country, was not served. We may now turn to the ratio decidendi of Honble Supreme Court in J.B. Bodas case, (supra). Their Lordships were in seisin of a case of an Indian resident reinsurance broker, operating in India on behalf of principals abroad, who was required to collect the reinsurance premium from ceding insurance companies in India and remit the same to his principal and then entitle himself to a commission in percentage terms and in convertible foreign exchange. Instead of first remitting this reinsurance premium abroad and then making claim for the commission earned, this broker remitted the net amount, i.e., reinsurance premium received minus the commission earned on collecting the reinsurance. The entire transaction, however, was with formal approval of the Reserve Bank of India. On these facts, Their Lordships observed as follows :
'.......... It is common ground that the entire transaction is effected through the media of RBI and is expressed in foreign exchange and in effect the retention of fees is in dollars for the services rendered. This, according to us, is receipt of income in convertible foreign exchange. It seems to us is that two-way traffic is unnecessary. To insist on a formal remittance to the foreign reinsurers first and thereafter to receive the commission from foreign reinsurer, will be an empty formality and meaningless ritual, on the facts of this case ...........'
To our mind, the true principle which emerges from this judgment of the Honble Supreme Court, is that where more than one transaction of the same set of parties are clubbed together and only net payment is made or received, instead of merely taking into account the net figure of that transaction, due regard should be given to all components which have led to this net figure. In our considered view, this is the principle underlying the above judgment and based on which Their Lordships have come to the conclusion that two-way traffic is unnecessary and that to insist on a formal remittance to the foreign insurer first and thereafter to receive the commission from foreign insurer, will be an empty formality and meaningless ritual. Applying this principle to the case before us, we cannot but conclude that the expression export turnover will include the expenditure incurred on such commission and brokerage paid to agents abroad, subject to the necessary verifications including that of availability of necessary general or specific approvals from the Reserve Bank of India to the assessee. In other words, export turnover will have to be taken at gross figure i.e., inclusive of brokerage and commission allowed to the foreign agents as per Reserve Bank permissions, and not at the net figure of inward remittance. In taking this view, we are also supported by our understanding of intent of the legislature and of the mischief which was sought to be remedied by the legislative amendments and, also by the principle of striking a balance between letter and spirit of law. On the application of this proposition to the case before us, however, we find that facts regarding commission and brokerage and RBI approvals for the same have not been examined at any stage. We, therefore, restore this matter to the file of the assessing officer to examine the facts in the light of our observations earlier in this paragraph. The ground Nos. 6 & 7, therefore, succeed in principle.
23. Ground No. 8 is only an alternate ground and would have required adjudication only on rejection of ground No. 6 and 7. Since these two grounds are allowed, ground No. 8 becomes infructuous and is dismissed accordingly.
24. Ground No. 9 is general in nature and does not warrant and adjudication. Dismissed accordingly.
25. In the result, the appeal is partly allowed.