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REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 8912 OF 2003

JEYAR CONSULTANT & INVESTMENT  PVT. LTD. .....APPELLANT(S)

VERSUS

COMMISSIONER OF INCOME TAX, MADRAS .....RESPONDENT(S)

J U D G M E N T

A.K. SIKRI, J.

What is  the correct  method of  computation of  deductions  

under Section 80HHC(3) of the Income Tax Act, 1961, in the given  

facts and circumstances, is the question which needs an answer  

in the present appeal.

2) The given facts and circumstances, as they appear on record, are  

stated in the summary form herein below:   

Finance  Act  of  1983  introduced  Section  80HHC  of  the  

Income Tax Act, providing incentives to exporters and deductions  

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for persons involved in the export business.  Section 80HHC(3)(b)  

provided the formula for the computation of deduction for persons  

who do not have business exclusively of export out of India, that  

is to say,  in cases where the assessee is having turnover and  

income  from   business  in  India  as  well  as  from  the  export  

business.   For  the  sake  of  convenience,  relevant  portions  of  

Section 80HHC are extracted hereinbelow:

“80HHC.   Deduction  in  respect  of  profits  retained  for  export  business.-(1)  Where  an  assessee,  being  an  Indian  company  or  a  person  (other  than  a  company)  resident  in  India, is engaged in the business export out of  India of any goods or merchandise to which this  section applies, there shall, in accordance with  and subject to the provisions of this section, be  allowed, in computing the total  income of the  assessee, a deduction of the profits derived by  the assessee from the export of such goods or  merchandise:

Provided that if the assessee, being a holder of  an Export House Certificate or a Trading House  Certificate (hereinafter in this section referred to  as  an  Export  to  in  clause  (b)  of  sub-section  (4a), that in respect of the amount of the export  turnover specified therein, the deduction under  this sub-section is to be allowed to a supporting  manufacturer, then the amount of deduction in  the case of the assessee shall be reduced by  such amount which bears to the total profits of  the export business of the assessee the same  proportion  as  the  amount  of  export  turnover  specified in the said certificate bears to the total  export turnover of the assessee.

xx xx xx

3)  For  the  purposes  of  sub-section  (1),  profits  derived  from  the  export  of  goods  or  

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merchandise out of India shall be -

(a) in a case where the business carried on  by  the  assessee  consists  exclusively  of  the  export out of India of the goods or merchandise  to which this section applies, the profits of the  business as computed under the head “profits  and gains of business or profession”.

(b) in a case where the business carried on  by the assessee does not consist exclusively of  the  export  out  of  India  of  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.”

3) On 05.07.1990, the Central Board of Direct Taxes (CBDT) issued  

Circular No.564 dated 05.07.1990 giving detailed guidelines as to  

how the deductions under Section 80HHC are to be calculated.  

The formula prescribed by CBDT circular is as follows:

Profit of the Business X Export Turnover Total Turnover

4) The appellant company is engaged in the business of export of  

Marine  products  and  also  financial  consultancy  and  trading  in  

equity  shares.   Its  total  business  does  not  consist  purely  of  

exports  but  includes business within the country as well  which  

situation is covered by Section 80HHC(3)(b), noted hereinabove.

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5) The Assessing Officer while dealing with the assessments of the  

appellant in respect of the Assessment Year 1989-1990 took the  

view that  the  deduction  was not  allowable  on  the  ground that  

there is no relationship between the Assessee Company and the  

Processors.  The appellant carried the said order in appeal.  The  

appeal  against  the  assessment  order  was  dismissed  by  the  

Commissioner of Income Tax (Appeals), Madras vide order dated  

17.08.1991.  The appellant filed an appeal before the Income Tax  

Appellate  Tribunal.   By  its  judgment  dated  24.04.1992,  the  

Appellate Tribunal  set  aside the order of  the Assessing Officer  

and came to a conclusion that the appellant was entitled to full  

relief under Section 80HHC and directed the Assessing Officer to  

grant relief to the assessee.

6) On  remand,  the  Assessing  Officer  passed  fresh  order  dated  

28.05.1992 giving effect to the orders of the ITAT.  While giving  

the effect, the Assessing Officer found that the appellant had not  

earned any profits from the export of Marine products and in fact,  

from the said export business, it had suffered a loss.  Therefore,  

according  to  the  Assessing  Officer,  as  per  Section  80AB,  the  

deduction under Section 80HHC could not exceed the amount of  

income included in the total income.  He found that as the income  

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from export of Marine product business was in the negative i.e.  

there was a loss, the deduction under Section 80HHC would be  

nil,  even when the assessee is entitled to deduction under the  

said provision.  With this order, second round of litigation started.  

The  assessee  challenged  the  order  passed  by  the  Assessing  

Officer before the Commissioner (Appeals)  contending that the  

formula which was applied by the Assessing Officer was different  

from the formula prescribed under Section 80HHC of the Act and  

it was also in direct violation of CBDT Circular dated 05.07.1990.  

The Commissioner (Appeals), however, dismissed the appeal of  

the assessee principally on the ground that under Section 246 of  

the Income Tax Act, an order of the Assessing Officer giving effect  

to the order of the ITAT is not an appealable order.  The assessee  

approached the ITAT questioning the validity of the orders passed  

by the Assessing Officer and Commissioner (Appeals).  However,  

ITAT also dismissed the appeal  of  the assessee vide its  order  

dated 31.03.1993 and upheld the order of the Assessing Officer.  

Challenging the order of the ITAT, the assessee approached the  

High Court, under Section 256(2) of the Act seeking reference to  

it.   Order  dated  03.02.1994  was  passed  by  the  High  Court  

directing ITAT to frame the reference and place the same before  

the High Court.   On this  direction of  the High Court,  the ITAT  

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referred the following question to the High Court:

“Whether on the facts and in the circumstances of  the case, the Tribunal  was right in law in holding  that  the  deduction  admissible  to  the  assessee  under Section 80HHC is nil?”

7) The High Court has now pronounced on the aforesaid question  

referred  to  it  by  the  impugned  judgment  dated  20.08.2002  

answering this question against the assessee holding as under:

“5.  In this case, the assessment admittedly had  not  earned  any  profits  from the  export  of  the  Marine  products.   On  the  other  hand,  it  had  suffered  a  loss.   The  deduction  permissible  under Section 80HHC is only a deduction of the  profits  of  the assessee from the export  of  the  goods or  merchandise.   By the very  terms of  Section  80HHC,  it  is  clear  that  the  assessee  was not entitled to any benefit thereunder in the  absence of any profits.

The question referred to  us  therefore is  answered against the assessee and in favour of  the revenue.”

8) Special leave petition was filed against the judgment of the High  

Court in which leave was granted on 10.11.2003.  This is how the  

appeal has come up for hearing.

9) Mr. Nikhil  Nayyar, learned counsel appearing for the assessee,  

submitted  that  the  aforesaid  reasoning  of  the  High  Court  is  

palpably wrong in holding that when there are losses suffered in  

the  export  business,  no  deduction  under  Section  80HHC  is  

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permissible.  According to him, while forming this opinion the High  

Court looked into sub-section (1) of Section 80HHC alone as is  

clear  from the  order  of  the  High  Court,  and  did  not  take  into  

consideration  provisions  of  sub-section  (3)  thereof.   His  

submission was that  no doubt,  this  Court  in the case of  IPCA  

Laboratory  Ltd. v.  Deputy  Commissioner  of  Income  Tax,   

Mumbai1 held  that  the  benefit  of  Section  80HHC shall  not  be  

given in cases where there was loss.  He, however, pointed out  

that the judgment in IPCA Laboratory Ltd. (supra) was explained  

and  clarified  subsequently  by  this  Court  in  A.M.  Moosa  v.  

Commissioner  of  Income  Tax,  Trivandrum2 wherein  it  was  

made clear that in arriving at profits earned from export of both  

self-manufactured  goods  and  trading  goods,  the  profits  and  

losses in both the trades have to be taken into consideration.  If  

after  such  adjustments  there  is  a  positive  profit,  the  assessee  

would  be entitled  to  deduction under  Section 80HHC(1)  and if  

there is a loss, he will not be entitled to any deduction.  He, thus,  

submitted that the term “profit of business” would not confine to  

profit from export business but income both from export business  

as  well  as  from  domestic  business,  had  to  be  taken  into  

consideration.  Therefore, even if there was a loss from the export  

1 (2004) 12 SCC 742 2 (2007) 9 SCR 831

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business, but there was profit from the business done within the  

country  and  on  adjustment  of  loss  from  the  export  business  

against  the  profits  from  the  business  in  India,  in  the  balance  

sheet, it was still profit resulting into positive income, the benefit of  

Section 80HHC was admissible.

10) He further argued that the objective behind Section 80HHC was  

to give incentive to those export houses who were earning foreign  

exchange.   Even  if  there  was  loss  from the  export  business,  

assessee had earned the foreign exchange and once it was found  

that overall there were profits, the following formula contained in  

Section 80HHC became applicable:

Profit of the Business X Export Turnover Total Turnover

11) He  also  referred  to  the  “Provisions  Relating  To  Direct  Taxes”  

stated in the Finance (No.2) Bill, 1991 presented in the Budget of  

1991-1992 and referred to the provisions contained therein which  

relates to incentives for earning foreign exchange.  It makes the  

following reading:

“20.   Under  the  existing  provisions  of  Section  80HHC  of  the  Income  Tax  Act,  exporters  are  allowed.   In  the  computation  of  their  total  income, a deduction of the entire profits derived  from export of goods or merchandise other than  mineral oil, minerals and ores.  The deduction is  subject to the condition that the sale proceeds of  

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such goods or merchandise are received in, or  brought  into,  India  in  convertible  foreign  exchange.

In  view  of  the  fact  that  significant  value  addition  is  achieved  when  a  mineral  is  processed or when a stone is cut and polished, it  is  desirable  to  encourage  their  export.   It  is,  therefore,  proposed  to  extend  the  benefit  of  deduction under Section 80HHC to exporters of  processed  minerals.   The  list  of  processed  minerals, in respect of which this concession is  being  extended,  is  being  provided  in  a  new  schedule to the Income-Tax Act.

The proposed amendment will take effect  from  the  1st day  of  April,  1991  and  will,  accordingly, apply in relation to the assessment  year 1991-1992 and subsequent years.”

12) Mr.  Gupta,  the  learned  senior  counsel,  appearing  for  the  

Revenue,  on the other  hand,  supported the view taken by the  

High Court.  He also specifically referred to the conclusion arrived  

at by the Tribunal in support of his plea that in the instance case,  

formula sought to be involved would not apply.  He pointed out  

that in the present case, there was no income from  indigenous  

business  but  it  was  only  in  the  form  of  brokerage,  dividend,  

interest etc. which, in no case, be described as “turnover” and be  

part  of  “total  turnover”.  He referred to the same document viz.  

“Provisions Relating to Direct Taxes” where following clarification  

also appears:

“It is, therefore, proposed to clarify that “profits of  the business” for the purpose of Section 80HHC  

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will  not  include  receipts  by  way  of  brokerage,  commission, interest, rent, charges or any other  receipt of a similar nature.  As some expenditure  might  be  incurred  in  earning  these  incomes,  which  in  the  generality  of  cases  is  part  of  common expenses, it is proposed to provide ad  hoc 10 per cent deduction from such incomes to  account for these expenses.”   

13) We have considered the submissions of  counsel  appearing on  

both sides.

14) There are two facets of this case which need to be looked into.  In  

the first instance, we have to consider as to whether view of the  

High  Court  that  the  deduction  is  permissible  under  Section  

80HHC only when there are profits from the exports of the goods  

or merchandise  is correct or it would be open to the assessee to  

club  the  income  from  export  business  as  well  as  domestic  

business and even if there are losses in the export business but  

after setting off those losses against the income/profits from the  

business  in  India,  still  there  is  net-profit  of  the  business,  the  

benefit  under  Section  80HHC  will  be  available?   The  second  

question would arise is as to whether formula applied by the fora  

below is correct?  In other words, while applying the formula, we  

have to see what would comprise “total turnover”?

15) Before we provide the answer to the first question, it  would be  

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appropriate to take note of the judgments in IPCA Laboratory as  

well as  A.M. Moosa.  In  IPCA Laboratory, the appellant was a  

holder  of  an  Export  House  certificate  issued  by  CCI&E.   It  

exported self-manufactured goods as well as goods manufactured  

by supporting manufacturers i.e. trading goods.  In the previous  

year  relevant  to  AY  1996-97  its  taxable  income,  before  the  

deductions under Chapter VI-A, IT Act was Rs.4.39 crores.  It had  

earned  a  profit  of  Rs.  3.78  crores  from  the  export  of  self-

manufactured goods.  However, from the exports of trading goods  

there  was  a  loss  of  Rs.6.86  crores.   The  appellant  issued  

certificates of disclaimer in favour of supporting manufacturers in  

respect of the entire export of the trading goods.  In its return for  

AY 1996-97, it claimed deduction under Section 80-HHC, IT Act in  

the sum of Rs. 3.78 crores.  But, holding that there was a net loss  

from  export  of  goods,  the  Assessing  Officer  disallowed  the  

deduction. This order of the Assessing Officer was unsuccessfully  

challenged by the appellant as all the authorities upto the High  

Court  upheld  that  order.   This  Court  also,  in  the  aforesaid  

judgment,  concurred  with  the  view taken  by  the  courts  below.  

Before this Court, specific reliance was placed on sub-section (3)  

of Section 80HHC and on that basis, it was contended that in a  

case  where  the  assessee  exported  goods  manufactured  by  

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himself  as well  as trading goods, profits from the two types of  

exports were to be considered separately and the profit in respect  

of one could not be negated or set off against the loss from the  

other.  It  was pleaded that when the main purpose behind that  

Section was to given incentive for earning for an exchange, the  

Section must be given an interpretation which would further that  

object.  It was also argued that the expression “profit” occurring  

under Section 80HHC(1), so also in Section 80HHC(3), should be  

construed  to  mean  positive  profit  and,  therefore,  in  Section  

80HHC(3)(c)  it  would not  include losses and if  there were any  

losses, they were to be ignored.  Another submission was that  

even when the profits were to be reduced by the losses, in cases  

of  disclaimer  of  its  turnover  by  an  assessee  export  house  in  

favour of a supporting manufacturer,  the turnover of  the export  

house got reduced to that extent.  Therefore, it could not be taken  

into  consideration  for  the  purposes  of  computing  profits  under  

Section 80HHC(3)(c)(ii).   Reliance was also placed on Circular  

No.421  dated  12.06.1985  of  the  CBDT  to  show  that  Section  

80HHC was incorporated with a view to providing incentives to its  

exporters with requisite resources of modernization, technological  

upgradation, product development and other activities.

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16) None of the aforesaid arguments weighed with this Court.  While  

dismissing the appeal of the appellant, the Court laid down the  

following law:

“Although  Section  80-HHC  has  been  incorporated with a view to provide incentive to  export houses and a liberal interpretation has to  be given to such a provision,  the interpretation  has to  be as per  the wordings of  that  section.  When the legislature wanted to take exports from  self-manufactured  goods  or  trading  goods  separately,  it  has  already  so  provided  in  sub- sections (3)(a) and (3)(b).   The word “profit” in  Section  80-HHC(1)  and  Sections  80-HHC(3)(a)  and (b) means a positive profit.  In other words, if  there  is  a  loss  then  no  deduction  would  be  available  under  Section 80-HHC(1)  or  (3)(a)  or  (3)(b).  In arriving at the figure of positive profit,  both the profits  and the losses will  have to be  considered.  If the net figure is a loss then the  assessee will not be entitled to a deduction.  The  opening words “profit derived from such exports”  occurring in Section 80-HHC(3) together with the  work “and” occurring between clauses (i) and (ii)  thereof clearly indicate that the profits have to be  calculated by counting both the exports.

Under Section 80-HHC(1), the deduction is  to be given in computing the total income of the  assessee.  In computing the total income of the  assessee both profits as well as losses will have  to be taken into consideration.  Sections 80-AB  and  80-B(5)  are  relevant.   Section  80-AB  has  been  given  an  overriding  effect  over  all  other  sections in Chapter VI-A.  Section 80-HHC would  thus be governed by Section 80-AB which makes  it clear that the computation of income has to be  in accordance with the provisions of the Act.

Moreover,  even under Section 80-HHC(3) (c)(i) the profit is to be adjusted profit of business  which  means  a  profit  as  reduced  by  the  profit  derived from business of exports out of India of  trading  goods.   Thus  in  calculating  the  profits,  

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under  Section  3(c)(i),  one  necessarily  has  to  reduce the profits under Section 3(c)(ii).  Section  80-HHC makes it clear that in arriving at profits  earned  from  export  of  both  self-manufactured  goods and trading goods, the profits and losses  in  both  the  trades  have  to  be  taken  into  consideration.  If after such adjustments there is  a positive profit the assessee would be entitled to  deduction under Section 80-HHC(i).  If there is a  loss he will not be entitled to any deduction.

In  Section  80-HHC,  the  word  “profit”  is  admittedly  used  to  indicate  positive  “profit”  because the deduction will only be of a positive  profit.   Section 80-HHC(3) provides how profits  are to be worked out in computing total income.  For  the  purposes  of  such  computation  both  profits and losses have to be taken into account.  Thus the word “profit” in Section 80-HHC(3) will  mean profits after taking into account losses, if  any.   The  term  “profit”  in  both  Sections  80- HHC(1) and 80-HHC(3) means a positive profit  worked  out  after  taking  into  consideration  the  losses,  if  any.   Thus  the  word  “profit”  has  the  same meaning in Sections 80-HHC(1) and (3).

The proviso to sub-section (1)  of  Section  80-HHC enables a disclaimer only to enable the  export house to pass on deductions.  It in no way  reduces the turnover of the export house.  The  disclaimer  is  only  for  purposes of  enabling  the  export house to pass on the deduction which it  would have got to the supporting manufacturer.  It  follows  that  if  no  deduction  is  available,  because there is a loss, then the export house  cannot  pass  on  or  give  credit  of  such  non- existing deduction to a supporting manufacturer.   

The  Board  circular  also  shows  that  only  positive profits can be considered for purposes of  deduction.”

17) We find that in  A.M. Moosa, this Court, in fact, reiterated  IPCA  

principles, as noted above.  That was a case where Assessing  

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Officer had disallowed the deduction claim of the assessee under  

Section 80HHC of the Act on the ground that the 'profits of the  

business computed under  Section 80HHC indicated a negative  

figure'.  This view was accepted by all the Courts and affirmed by  

this  Court  in  the  aforesaid  judgment.   Before  this  Court,  

submission  of  the  appellant/assessee  was  that  a  reading  of  

Section  80HHC would  show that  where  the  assessee  exports  

goods manufactured by him, he would be covered by sub-section  

(3)(a) and only the profits of such business would be taken into  

account.  Where the assessee exports only trading goods other  

than profits of these goods only would be taken into account of  

sub-section (3)(b).  It was submitted that sub-section (3)(c) dealt  

with a case where the assessee exported goods manufactured by  

him as well as trading goods.  In such a case, profits from export  

of goods manufactured by the assessee were to be considered  

separately and the profits from export of trading goods were to be  

considered separately.  If there were profits only in respect of one  

type of exports then this profit could not be negatived or set off  

from  the  loss  from  the  other  export.   This  contention  was,  

obviously,  not  accepted  and  brushed  aside  in  the  following  

manner:

“7.  The  stand  needs  careful  consideration.  Undoubtedly,  Section  80-HHC  has  been  

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incorporated with a view to providing incentive to  export  houses.  Even  though  a  liberal  interpretation has to be given to such a provision,  the interpretation has to be as per the wordings  of this section. If the wordings of the section are  clear,  then  benefits,  which  are  not  available  under  the  section,  cannot  be  conferred  by  ignoring or misinterpreting words in the section.  In this case we are concerned with the wordings  of  sub-section  (3)(c)  of  Section  80-HHC.  As  noted  earlier,  sub-section  (3)(a)  deals  with  the  case  where  the  export  is  only  of  self- manufactured  goods.  Sub-  section  (3)(b)  deals  with the case where the export is only of trading  goods. Thus, when the legislature wanted to take  exports from self- manufactured goods or trading  goods separately, it  has already so provided in  sub-sections  (3)(a)  and  (3)(b).  It  would  not  be  denied that the word "profit" in Section 80-HHC  (1) and Sections 80- HHC(3)(a) or (3)(b)means a  positive profit.  In other words, if there is a loss  then  no  deduction  would  be  available  under  Section 80-HHC (1) or (3)(a) or (3)(b). In arriving  at the figure of positive profit, both the profits and  the losses will have to be considered. If the net  figure is a positive profit, then the assessee will  be entitled to a deduction. If the net figure is a  loss then the assessee will  not be entitled to a  deduction.  Sub-section  (3)(c)  deals  with  cases  where  the  export  is  of  both  self-manufactured  goods  as  well  as  trading  goods.  The  opening  part of sub-section (3)(c) states "profits derived  from such export shall". Then follow clauses (i)  and  (ii).  Between  clauses  (i)  and  (ii)  the  word  "and" appears. A plain reading of sub- section (3) (c) shows that "profits from such exports" has to  be  profits  from  exports  of  self-manufactured  goods plus profits from exports of trading goods.  The profit is to be calculated in the manner laid  down in Sections (3)(c)(i)  and (ii).  The opening  words "profit derived from such exports" together  with  the  word  "and"  clearly  indicate  that  the  profits have to be calculated by counting both the  exports. It is clear from a reading of sub-section  (1) of Section 80-HHC(3) that a deduction can be  permitted only if there is a positive profit in the  exports of both self-manufactured goods as well  

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as trading goods. If there is a loss in either of the  two then that loss has to be taken into account  for the purposes of computing profits.

8.  Under Section 80-HHC(1), the deduction is to  be  given  in  computing  the  total  income of  the  assessee. In computing the total income of the  assessee both profits as well as losses will have  to be taken into consideration. Section 80-AB is  relevant. It reads as follows:

"80-AB. Where any deduction is required to  be  made  or  allowed  under  any  section  included in  this  Chapter  under  the  heading  '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  provision  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."

         (emphasis in original)

9.  Section 80-B(5) is also relevant. Section 80- B(5)  provides that  "gross total  income"  means  total  income computed in  accordance with  the  provisions of the Income Tax Act.

10.   Section 80-AB is  also in  Chapter  VI-A.  It  starts  with  the  words  "where  any  deduction  is  required  to  be  made  or  allowed  under  any  section  included  in  this  Chapter".  This  would  include Section 80- HHC. Section 80-AB further  

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provides  that  "notwithstanding  anything  contained in that section".  Thus Section 80-AB  has been given an overriding effect over all other  sections in Chapter VI-A. Section 80-HHC does  not provide that its provisions are to prevail over  Section 80-AB or over any other provision of the  Act. Section 80-HHC would thus be governed by  Section 80-AB. Decisions of  the Bombay High  Court  in  CIT v.  Shirke Construction Equipment  Ltd. (2000 (246) ITR 429) and the Kerala High  Court in  CIT v. T.C. Usha (2003 (132) Taxman  297)  to  the contrary  cannot  be said  to  be the  correct  law.  Section 80-AB makes it  clear  that  the  computation  of  income  has  to  be  in  accordance with the provisions of the Act. If the  income has to be computed in accordance with  the provisions of the Act, then not only profits but  also losses have to be taken into consideration.

11.  Even under Section 80-HHC (3) (c) (i) the  profit  is  to  be adjusted profit  of  business.  The  adjusted profit of the business means a profit as  reduced by the profit  derived from business of  exports  out  of  India  of  trading  goods.  Thus  in  calculating the profits under sub-section (3)(c)(i)  one necessarily has to reduce profits under sub- section (3)(c)(ii). As seen above, the term "profit"  means positive profit. Thus if there is loss then  those losses in export of trading goods have to  be  adjusted.  They  cannot  be  ignored.  A plain  reading of Section 80-HHC makes it clear that in  arriving at profits earned from export of both self- manufactured  goods  and  trading  goods,  the  profits and losses in both the trades have to be  taken  into  consideration.  If  after  such  adjustments  there  is  a  positive  profit,  the  assessee would be entitled to deduction under  Section 80-HHC(1). If there is a loss he will not  be entitled to any deduction.

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12.   It  was  submitted  that  the  word  "profit"  in  Section 80-HHC must have the same meaning in  the entire section, and that as the word profit in  Section 80-HHC(1) means only positive profit, it  will  have  the  same  meaning  in  Section  80- HHC(3)(c).  It  is  submitted  that  thus  the  word  profit in Section 80-HHC(3)(c) would not include  losses and if there are any losses, they are to be  ignored. The plea is clearly without substance.  Firstly, it is not necessary that the word "profit"  must have the same meaning. The meaning of  the word "profit"  will  depend on the context  in  which  it  is  used.  In  Section  80-HHC  (1)  it  is  admittedly  used  to  indicate  positive  "profit"  because the deduction will only be of a positive  profit.  Section  80-  HHC(3)  is  the  sub-section  which provides how profits are to be worked out  in computing total income. For purposes of such  computation both profits and losses have to be  taken  into  account.  Thus  the  word  "profit"  in  Section 80-HHC(3) will mean profits after taking  into account losses, if any. More importantly, in  our  view,  the  term  "profit"  in  Section  80-HHC  both  in  sub-section  (1)  and  in  sub-section  (3)  means a positive profit  worked out after taking  into  consideration  the  losses,  if  any.  Thus  the  word "profit" has the same meaning in Sections  80-HHC(1) and (3).

13.   In  IPCA  Laboratory  Ltd.  Vs.  Dy.  Commissioner  of  Income Tax,  Mumbai,  (2004)  12 SCC 742), after analyzing the position in the  manner done above, it was held that the profit as  contemplated  under  Section  80-HHC  (1)  and  Section 80-HHC (3) means positive profit. Said  view  was  reiterated  in  Income  Tax  Officer,  Bangalore Vs. Induflex Products (P) Ltd., (2006  (1) SCC 458). We are in respectful  agreement  with the view.”

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18) It stands settled, on the co-joint reading of IPCA and A.M. Moosa,  

that where there are losses in the export of one type of goods (for  

example self-manufactured goods) and profits from the export of  

other type of goods (for example trading goods) then both are to  

be  clubbed  together  to  arrive  at  net-profits  or  losses  for  the  

purpose of applying the provisions of Section 80HHC of the Act.  

If  the  net  result  was  loss  from the  export  business,  then  the  

deduction under the aforesaid Act is not permissible.  As a fortiori,  

if there is net profit from the export business, after adjusting the  

losses from one type of export business from other type of export  

business, the benefit of the said provision would be granted.

19) It  is also to be borne in mind that  in both the aforesaid cases  

namely IPCA and A.M. Moosa, the Court was concerned with two  

business  activities,  both  of  which  related  to  export,  one  from  

export of self manufactured goods and other in respect of trading  

goods  i.e.  those  which  are  manufactured  by  others.  In  other  

words,  the  Court  was  concerned  only  with  the  income  from  

exports.  In  the  present  case,  however,  the  fact  situation  is  

somewhat  different.   Here,  in  so  far  as  export  business  is  

concerned, there are losses.   However, the appellant-assessee  

relies upon Section 80HHC(3)(b), as existed at the relevant time,  

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to contend that the profits of the business as a whole i.e. including  

profits  earned from the goods or  merchandise within  India  will  

also  be  taken  into  consideration.   In  this  manner,  argues  the  

appellant,  even if  there are  losses in  the export  business,  but  

profits of indigenous business outweigh those losses and the net  

result is that there is profit  of the business, then the deduction  

under Section 80HHC should be given.  However, having regard  

to the law laid down in IPCA and A.M. Moosa, we cannot agree  

with the learned counsel for the appellant.  From the scheme of  

Section 80HHC, it is clear that deduction is to be provided under  

sub-section (1) thereof which is “in respect of profits retained for  

export  business”.   Therefore,  in  the first  instance,  it  has to be  

satisfied that there are profits from the export business. That is  

the pre-requisite as held in IPCA and A.M. Moosa as well.  Sub-

section (3) comes into picture only for the purpose of computation  

of deduction.  For such an eventuality, while computing the “total  

turnover”, one may apply the formula stated in clause (b) of sub-

section (3) of Section 80HHC.  However, that would not mean that  

even if there are losses in the export business but the profits in  

respect  of  business carried out  within India are more than the  

export  losses,  benefit  under  Section  80HHC  would  still  be  

available.   In  the  present  case,  since  there  are  losses  in  the  

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export  business,  question of  providing deduction under Section  

80HHC  does  not  arise  and  as  a  consequence,  there  is  no  

question  of  computation  of  any  such  deduction  in  the  manner  

provided under sub-section (3).

20) Therefore, we are of the opinion that the view taken by the High  

Court is correct on the facts of this case. With this, there may not  

be  need  to  answer  the  second  facet  of  the  problem  as  the  

question of computation of deduction does not arise. However, we  

find that even here, the approach of the ITAT is correct.  

21) In  the  present  case,  the  domestic  income in  respect  of  which  

benefit is sought is from dividend income, interest income, profit  

or sale of shares and fees received from arranging finance for the  

assessee's  clients.   The  Tribunal  has  recorded  this  aspect  as  

under:

13.  It  is,  however,  seen from the assessee's Profit  &  Loss Account for the year of account ending on 31.03.1989  that the aggregate sum of Rs.26,04,477 (which the assessee  has  labeled  as  total  turnover)  comprised  not  only  export  turnover of Rs.16,67,084 but also the following items which  cannot properly be regarded as turnover:

(1) Brokerage  received  for  arranging  Finance for the assessee's claims

: Rs.8,50,321

(2) Dividend : Rs.     5,247 (3) Interest : Rs.     7,212 (4) Profit on sale of shares : Rs.   74,913

Rs.9,37,693

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22) The  Tribunal  observed  that  aforesaid  four  items  are  income  

simplicitor  and  cannot  be  covered  by  the  expression  “total  

turnover”.   Following  discussion  of  the  Tribunal  in  this  behalf  

needs to be quoted:

“17.   Now  the  mode  and  mechanics  of  computing  the  deduction  admissible  to  an  assessee  falling  under  Section  80HHC(3)(b)  clearly  proceeds  on  the  basis  that  in  trading  transactions profit, or, as the case may be, loss  is embedded in the gross turnover.   The most  significant  conclusion  that  flows  from the  said  provision is that when Section 80HHC(3) talks of  turnover,  it  talks of  trading receipts  and not  of  receipts  which  are  of  the  nature  of  income to  start  with.   It  should,  therefore,  follow that  the  aggregate  sum  of  Rs.9,37,693/-  referred  to  supra cannot be regarded as turnover, and that  by  the  same  token,  it  should  be  left  out  of  reckoning for purposes of computing deduction  admissible  to  the  assessee  under  Section  80HHC.  If this exercise is done, we are back to  Proposition  No.1.   This  would  mean  that  the  deduction  admissible  to  the  assessee  under  Section 80HHC would be nil, especially in view  of  the  fact  that  the  export  business  of  the  assessee has resulted in a loss.

xx xx xx

19.  But a manufacturer may not invariably be  able  to  export,  in  their  entirety,  the  goods  or  merchandise manufactured.   He may export  a  part of them and sell the rest in India.  Given the  paramount  need  to  give  fillip  to  exports,  Parliament  clearly  intended  that  the  benefit  of  Section  80HHC should  not  be  denied  in  such  cases.  But the difficulty in such cases is that the  profits attributable to exports cannot be ascertain  with  precision.   This  is  because  not  only  the  

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manufacturing  activities  but  also  the  selling  activities (including the activities connected with  exports)  from  a  continuous,  integrated  whole.  Even  so,  the  intention  of  Parliament,  was  to  extend  the  benefit  of  Section  80HHC  to  the  extent of the profits generated by exports.  With  this end in view, Parliament incorporated a rule  of  thumb in Section 80HHC(3)(b).   As long as  the assessee has cleared profits in a particular  year of account, export profits are computed by  applying  to  total  profits  the  ratio  which  export  turnover bears to total turnover.”

23) We  are  in  agreement  with  the  aforesaid  view of  the  Tribunal.  

Therefore, even otherwise, the formula as sought to be applied by  

the appellant  does  not  become applicable  on  the  facts  of  this  

case.

24) Thus, from every angle the matter is to be looked into, the appeal  

lacks merit.  Same is, accordingly, dismissed with costs.

.............................................J. (A.K. SIKRI)

.............................................J. (ROHINTON FALI NARIMAN)

NEW DELHI; APRIL 01, 2015.

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