Complied by                     
Parag Raval                    
B. Com., F.C.A., AICWA 

Second Study Circle Meeting

Eighth Study Circle Meeting was held on 11th January, 2001 leaded by Shri Bhavin S. Fozdar to discuss "Deduction u/s. 80HHC of the I.T. Act, 1961". Opinion of the leader Shri Bhavin S. Fozdar on the subject are briefly summarized hereinbelow for the benefit of members.


Poser No.1 :

ABC Ltd. has earned profit of Rs. 50 lacs from its export business during the previous year relevant to A.Y. 2000-2001. It has no income from any other source. ABC Ltd. has carried forward business loss of Rs. 10 lacs and unabsorbed depreciation of Rs. 15 lacs of earlier years. The Company seeks advise on computation of deduction u/s. 80HHC for A.Y. 2000-2001.

Leader's Opinion :

Carried forward losses and depreciation of earlier year are not to be set off for computing profits for purposes of Sec. 80HHC. Relying upon the decision of Bombay HC in CIT V/s. Shirke Construction Equipments Ltd. (246 ITR 429) the leader pointed out that the Legislature has provided for an artificial formula only in Sec. 80HHC(3) under which the profits of the business are required to be computed on the basis of section 28 to 44D. It excludes Sec. 72. This is because the legislature wants the profits of the current year to be taken into account. Leader explained issues involved in Cambay Electric Supply Ind. Co. Ltd. (113 ITR 84) and opined that it has no application to the facts of the case because in applying artificial formula u/s. 80HHC(3), business profits shall be computed with reference to section 28 to 44D of the Income-tax Act.

Then leader discussed the issue whether sec. 80AB control Section 80HHC or not. Leader opined that despite the fact that though sec. 80AB contemplates a non obstante clause, the said Sec. 80AB will be subject to Sec. 80HHC to the extent of export profits being worked out from business profits. While Sec. 80AB refer to computation based on income, Sec. 80HHC refers to computation based on export turnover.

He also discussed the case of CIT v/s. V.T. Joseph (225 ITR 731), wherein the Kerala High Court has taken the view that Sec. 80AB controls Sec. 80HHC. However, he drew attention to the decision of another bench of the Kerala HC in the case of CIT v/s. A.V. Thomas and Co. Ltd. (225 ITR 29) wherein high court has rightly taken the view that Sec. 80AB refers to computation based on income whereas Sec. 80HHC refers to computation based on export turnover and hence, section 80AB does not control section 80HHC. Bombay High Court in case of Shirke Construction Ltd. (246 ITR 429) has expressed the view that they do not agree with the decision of Kerala High Court in case of C.I.T. v/s. V.T. Joseph (225 ITR 731), however, they agree with the ratio of the judgement of the same court in case of C.I.T. v/s. A.V. Thomas & Co. Ltd. (225 ITR 29).

Leader also drew attention to the fact that language used in section 80HH, 80P, 80M is different from sec. 80HHC former set of section start with words "where gross total income of an assessee includes any income by way of these words do not find place in sec. 80HHC. Hence, condition for claiming deduction which is there in other sections 80P, 80HM, 80M is not there in sec. 80HHC. 

Leader also discussed the facts of the case of CIT v/s. Kotagiri Ind. Co.op. Tea Factory Ltd. 224 ITR 604 (SC) & CIT v/s. Distributors (Baroda) Pvt. Ltd. 155 ITR 120 (SC) and opined that both these decisions have no application to the facts of this case.

The leader invited the attention to the decision taken by Andhra Pradesh HC in the case of CIT v/s. Gogineni Tobacco Ltd. (238 ITR 970) wherein the court has also laid down that in computing the total income of the assessee, the deductions from profits shall be in accordance with and subject to the provisions of Sec. 80HHC, meaning thereby that out of the income declared, the deduction u/s. 80HHC is to be allowed first before working out the income under the other provisions of the act, (i.e., before allowing unabsorbed business loss and depreciation). Similar views have been expressed in the decisions of the case of Shalini Trading Co. Pvt. Ltd. (24 BCAJ 1063, (1992-93) Mum. Tribunal) and Arun Mills Ltd. (26 Taxman 116, A`bad Tribunal). However, he respectfully stated that in all these decisions liberal views have been taken.


Poser No. 2 :

XYZ Ltd. has been engaged in the activity of manufacturing dyes and intermediates. During the accounting year ending 31st March, 2000, the company has export turnover of Rs. 2 crores, local turnover of Rs. 3 crores and processing charges income of Rs. 50 lacs. Profit and Loss Account of the company shows a profit of Rs. 30 lacs. Company's C.A. has advised that 90% of processing charges (i.e. Rs. 45 lacs) will be deducted from Rs. 30 lacs for the purpose of calculation of profit of the business as defined in explanation (baa) to sub-section (4B) of Sec. 80HHC. Company seeks your advise (please refer to decision of Bom. H.C. in the case of CIT v/s. K. K. Doshi & Co. (245 ITR 849).

Leader's Opinion :

In the case cited in the poser the assessee was engaged in the manufacture and export of polished diamonds out of India. During the period when he was not engaged in the business of exports and manufacturing, he offered his services on job-work basis to outsiders. A.O. delinked gross profit earned by assessee by way of service charges from export activities. The Court held that the profits earned by the assessee on account of service charges could not be said to have a direct nexus with the export activities of the assessee, and, therefore, the service charges cound not be considered as part of the business profits while working out deduction u/s 80HHC.

However, the leader emphasized that processing charges is a part of business income and hence it becomes a part of total turnover of the business and hence 90% of processing charges should not be deducted from the profit under the head profits and gains of business or profession under clause (i) of explanation (baa), because processiong charges is not in the nature of miscellaneous income as defined in that clause.


Poser No. 3 :

PQR Ltd. has export turnover of Rs. 100 lacs and local turnover of Rs. 150 lacs excluding excise duty of Rs. 20 lacs and sales-tax of Rs. 10 lacs. What would be the total turnover of the assessee for the purpose of Sec. 80HHC ? Whether it would be Rs. 250 lacs or Rs. 280 lacs ?

Leader's Opinion :

The decision of Bombay High Court in the case of CIT v/s. Sudarshan Chemical Ltd. (112 Taxman 511) is believed to be the good decision in this respect wherein it has been stated that export turnover is numerator and total turnover is denominator. If denominator includes excise duty and sales-tax and if numerator excludes excise duty and sales-tax, then the formula becomes unworkable. In the circumstance, in order to ascertain the export profits, the above two items cannot be introduced artificially to inflate total turnover in order to reduce the benefits which an assessee is entitled to. U/s. 80HHC emphasis is on profit derived from the exports. Such profits cannot be reduced artificially by including statutory levies in the denominator i.e. total turnover. Turnover should be restricted to such receipts which have the element of profit in it. Hence, excise duty and turnover should not be included in turnover which has no element of profit in it. Even as per accounting principles they do not form part of Profit and Loss Account, they are shown as liability in the balance-sheet. Moreover, Sec. 80HHC is a separate code by itself. Hence, the general definition of the word `turnover' or the case law dealing with the said definition under Sales-tax Act, which is a state levy, cannot be imported into Sec. 80HHC.

The leader also invited the attention of the member towards contrary decision taken in the case of Gujarat Flouro Chemicals Ltd. (ITA No. 231/Ahd/2000) wherein it has been held that excise duty and sales-tax form part of trading receipts. This decision applied the ratio of trading receipts adopted by Supreme Court in the case of Chowanghee Sales Bureau (87 ITR 542) and Sinclaire Murray & Co. (97 ITR 615) though rendered in the context of sales-tax rules.

This decision held that payment of excise and sales-tax are allowed u/s. 43(B), and thus it has essential character of business receipt and business expenditure. It also held that total turnover has specifically excluded freight and insurance attributable to transport of goods beyond custom station. There is no legislative intention to exclude realization on account of sales-tax or excise duty from the scope of total turnover.


Poser No. 4 :

DEF Ltd. is engaged in the activity of export of textiles (manufactured goods) during the year ending on 31/03/1999. During the assessment, additions are made for unexplained cash credits u/s. 68. Whether income assessed on account of such additions would be eligible for computation of deduction u/s. 80HHC? Would it make any difference if DEF Ltd. was trading exporter (100%)?

Leader's Opinion :

The leader was of the view that if unexplained cash credit is found to be a business receipt than it would be eligible for computation of deduction u/s. 80HHC in case of assessee being a manufacturing concern because in such case profits of the business as defined in explanation (baa) would be increased by amount of unexplained cash credit. However, the reverse would be the case with the assessee where he is a 100% trading exporter because for trading exporter there is a fix formula under clause 3(b) of Section 80HHC for computation of deduction u/s. 80HHC and as per said formula deduction u/s. 80HHC.

The analogy was rest upon the decision of Mumbai HC in the case of Zenith Rubber and Plastic Works v/s. ITO (35 TTJ 259) wherein the amount of stock declared during search u/s. 132 was held to be a part and parcel of the business income and was considered to be profits and gains of business. Another is unreported decision of Ahmedabad. Tribunal in the case of Rajnikant M. Shah v/s. ACIT Central Circle 1(3) ABD (ITA No. 102/Ahd/93) wherein unexplained investments were proved to be made out of speculation income and hence were allowed to be set off against speculation loss.


Poser No. 5 :

XYZ Ltd., a public limited company is having three separate industrial undertakings. These industrial undertaking are engaged in the business of engineering goods, chemicals and textiles having turnover of Rs. 100 crores, Rs. 50 crores and Rs. 150 crores respectively. Thus, total turnover of the company is Rs. 300 crores. Turnover of Rs. 150 crores from textile business is exclusively from exports. Profits of the business of the company as a whole is Rs. 40 crores. Whereas the profits from engineering goods, chemicals and textiles is Rs. 7.5 crores, Rs. 2.5 crores and Rs. 30 crores respectively. Company is maintaining separate and independent records in respect of each business and profit and loss account and balance sheet of three business are separately prepared. What would be the deduction available to the company u/s. 80HHC?

Leader's Opinion :

Leader discusseds the decision in favour of the assessee as well as against the assessee. These decision were given for assessment years prior to assessment year 1992-93. Leader invited the attention of members to amendments made in sub-section 3 of section 80HHC w.e.f. 01/04/1991 and 01/04/1992. 

Leader discussed decision of Madras Tribunal in the case of V. D. Swami & Co. Ltd. v/s. Dy. CIT (44 ITD 91) according to which clause (a) would be applicable where export profit is easily identifiable. If such identification is not possible then clause (b) will be applicable for the grant of proportionate relief. Thus, benefit u/s. 80HHC would be available only u/s. 80HHC 3(a) first and applicability of sub-section (b) of Sec. 3 will arise only if sub-sec (a) of sec 3 is not applicable.

Conclusion from the identical facts has been derived by ITAT, A`bad `C' Bench in the case of Jayantilal J. Soni v/s. ITO (63 TTJ 661) wherein, inter alia, it has been concluded that the assessee is entitled to benefit of Sec. 80HHC in respect of entire income of its unit which is exclusively engaged in export business and there is no question of computation of income from export business based on total turnover under clause (b) of sub-section (3) of Sec. 80HHC. Analogy can also be absorbed from the decision of Delhi Tribunal in the case of Dy. CIT v/s. Eastern Leather Products Ltd. (68 ITD 358, for A.Y. 1992-93) wherein it was held that loss of one unit can not be set off against profits of export unit. The assessee was running two separate industrial units (one of which was export unit). Loss in one unit not connected with export unit was not allowed to be adjusted against profits of export unit for the purpose of allowing deduction u/s. 80HHC.

Contrary view has been taken by special bench of Delhi Tribunal in the case of International Research Park Laboratories Ltd. v/s. ACIT (50 ITD 37). It was held that expression `total turnover' used in Sec. 80HHC(3) unambiguously refers to the total turnover of the entire business and not to the total turnover of export business. That is, total turnover of the business includes not only the export turnover but also includes domestic turnover. This is to be done irrespective of the fact that export profit is separately ascertainable.


Poser No. 6(A) :

PQR Ltd., a supporting manufacturer, has sold goods worth Rs. 5 crores to DEF Ltd., an export house, on 20th March, 2000. DEF Ltd. has exported the said goods on 15th April, 2000 and all documents pertaining to export of goods were prepared on 15th April, 2000. DEF Ltd. has received remittance in respect of said export on 15th May, 2000. PQR Ltd. seeks your advice whether deduction u/s. 80HHC will be available to it for A.Y. 2000-01?

Leader's Opinion :

According to sub-section (1A) of Sec. 80HHC it can be smelt that deduction is allowable to supporting manufacturer if in the previous year he has sold goods to Export House or Trading House in respect of which Export/Trading House has issued a certificate to the manufacturer. An Export/Trading House can issue such certificate only when it has realized and brought in India convertible foreign exchange within the prescribed time frame. Hence, it can be concluded that when a supporting manufacturer has sold goods to Export/Trading House and though the same goods is sold by the Export/Trading House in next year but, proceeds thereof is brought in India in convertible foreign exchange within the prescribed time limit, the supporting manufacturer is entitled to claim deduction u/s. 80HHC in the year of sale upon the certificate thereto received by it from Export/Trading House.


Poser No. 6(B) :

If, in the above case, goods are exported before 31/03/2000, but Export/Trading House does not receive the export proceeds within stipulated time (i.e., by 30/09/2000) as defined in sub-section (2)(a) of Sec. 80HHC, whether supporting manufacturer will get the deduction u/s. 80HHC?

Leader's Opinion :

According to sub-section 2(a) of Sec. 80HHC it is a condition that sale proceeds of the goods exported out of India to be brought into India in convertible foreign exchange within a period of six months from the end of the previous year or within such further period as the competent authority may allow in this behalf. Obviously, this condition is not satisfied in the given case and hence, export house can not issue a disclaimer certificate mentioning the export turnover as required by clause (b) of sub-section (4A) of Section 80HHC and consequently the supporting manufacturer cannot get the deduction u/s. 80HHC.


Poser No. 7 :

XYZ Ltd. has a branch office in Dubai. It has transferred goods worth Rs. 1 crore to its branch in Dubai on 15/02/1998 the cost of which is Rs. 75 lacs. Branch in Dubai is selling the said goods after adding 20% mark-up. Out of the goods of Rs. 1 Crore, branch in Dubai has sold goods worth Rs. 60 lacs for Rs. 72 lacs during the accounting year 1998-99 and goods worth Rs. 40 lacs for Rs. 48 lacs during the accounting year 1999-2000. Advise the company as to the amount of deduction u/s. 80HHC for both the years. What would be the time limit available to XYZ Ltd. in respect of remittance to be brought into India?

Leader's Opinion :

According to Explanation 2 to sub-section 2(b) of Sec. 80HHC where any goods are transferred by an assessee to a branch, office, warehouse or any other establishment of the assessee situate outside India and such goods are sold by such branch etc., then, such transfer shall be deemed to be export out of India of such goods and value of such goods declared in the shipping bill or bill of export, shall be deemed to be the sale proceeds. From this it is evident that date of sale by the branch and the price at which the goods transferred to branch are relevant for claiming deduction u/s. 80HHC.

In the given case, thus, XYZ Ltd. can claim deduction u/s. 80HHC in A.Y. 1999-2000 for Rs. 15 lacs and in A.Y. 2000-2001 for Rs. 10 lacs. And time limit for remittance of foreign exchange into India should be reckoned from the date of sale by branch and not from the date of transfer of the goods to branch.


Poser No. 8 :

Whether 90% of any of the following items should be deducted from the profits and gains of business or profession for the purpose of computation of "profits of the business" as defined in explanation (baa) of sub-sec. (4B) of Sec. 80HHC?

Leader's Opinion :

(i) Bad Debts recovered :

According to explanation (baa) of sub-sec. (4B) of sec. 80HHC "profits of the business" means the profits of the business as computed under the head "profits and gains of business or profession" as reduced by -

1. 90% of any sum referred to in clauses (iiia), (iiib) and (iiic) of sec. 28 or of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits; and
   
   

2. the profits of any branch, office, warehouse or any other establishment of the assessee situate outside India;

Recovery of bad debits is specifically taxable under the head of "profit and gains of business or profession" vide sec. 41(1)(a) of the I.T. Act. Moreover, in view of the above definition it does not fall within Explanation (baa) of sub-sec. (4B) of Sec. 80HHC. Hence, 90% of bad debts recovery is not liable for deduction from the profits and gains of business and profession for the purpose of computation of "profits of the business".

(ii) Balances written off in respect of sundry creditors :

On the same grounds as in above, this being remission of trading liability which is taxable under the head of "Profits and gains of business or profession" vide Sec. 41(1)(a), 90% of this written back amount is not deductible from the profits and gains of business or profession for the purpose of computation of "profits of the business".

(iii) Discounts credited to Profit & Loss Account in respect of purchases :

This being directly linked to purchases obviously forms part of taxable income under the head of profits and gains of business or profession and hence 90% of it is not deductible for computation of "profit of the business".

(iv) Technical Know-how fees :

90% of such receipts is not deductible for computation of profits of the business because technical know-how acquired or developed while carrying on the business or running industrial activity would be treated as derived from industrial activity and will be treated as part of the profits and gains of business. Madras Tribunal has upheld the same in the case of Future Software (P) Ltd. (45 ITD 459). Moreover, ratio applied in the case of West Coast Paper Ltd (169 ITR 288) by Mumbai HC can be applied to the facts of this case.

(v) Grant received from government towards sales-tax, electricity etc. for setting up unit in backward area :

Supreme Court has in the case of Sahney Steel & Press Work Ltd. (228 ITR 253) held that Grants are in the nature of reimbursement of expenses and hence form part of business receipt which is not covered by Explanation (baa) of sub-sec. (4B) of Sec. 80HHC. 90% of such receipt is not to be deducted for computation of profits of the business.


Poser No. 9 :

Assessee has not paid any import duty on goods imported by it by availing benefit under export obligation scheme of Government of India. Assessee has passed a journal entry in respect of the said import duty benefit by debiting import duty account and crediting export incentive under duty free imports account. Whether such export incentive under duty free imports will fall in the definition of cash assistance u/s. 28(iiib)?

Leader's Opinion :

Quoting the decision of ITAT, A'bad 'A' Bench in the case of ACIT v/s. Pratibha Syntex Ltd. the leader opined that such export incentive under duty free imports will fall in the definition of cash assistance u/s. 28(iiib). Clause (iiib) refers to cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of the Government of India. Thus, clause (iiib) does not mean only receipt of cash assistance direct from the Government. The duty payable to Government of India but not paid under any scheme of Government is also cash assistance. The words "by whatever name called" expand the meaning of the term `cash assistance'. The additions of these words are not meaningless or an idle formality since such words are not found added elsewhere in the Act. Thus, it has to be held that clause (iiib) was inserted to ensure that all other relief given in any form to the exporters not specifically covered under clauses (iiia) and (iiic) should not be left out. Duty payable to the Government of India, but not paid under the scheme of the Government, is nothing but cash assistance in the hands of the assessee and the method of accounting adopted by the assessee for identifying and accounting the same in the books of account to claim the necessary deduction under sec. 80HHC can not be faulted. Accordingly, the duty benefit available to the exporter under any of the schemes of the Government of India falls under the provisions of Sec. 28(iiib) and Sec. 80HHC making the exporter eligible to claim the necessary deduction.


Poser No. 10 :

An assessee has received freely transferable import licences as an incentive for the goods exported. In which of the following years, income in respect of import licenses should be recognized ?

1. In the year of export
   
   

2. In the year of receipt of import licence.
   
   

3. In the year of sale of import licence
   
   

4. In the year of making an application for import licence.

Leader's Opinion :

Madras HC has expressed views in the case of CIT v/s. Ashoka Lungi Co. (120 ITR 413) that right to receive cash incentive arises on the date of application as in mercantile system right accrues in the year in which application is made. It was held that the assessee has maintained his accounts on the mercantile basis, irrespective of the receipt of any amounts as incentives, he would be liable to be assessed in case the amounts were due to the assessee during the accounting period. The scheme showed that import entitlements were allowed to the exporter on production of proof of goods outside India and hence cash incentives would accrue to the assessee as soon as the necessary proof is tendered. The fact that there was some delay on the part of the concerned authorities in making the actual disbursement will not stand in the way of the assessee being assessed with reference to the said amount, which became due to the assessee at the time of application itself as right to the amount was established on the date of the application itself.

The same is finding support from the decision of Punjab HC in the case of Punjab Bone Mills (96 Taxman 555). Supreme Court has also accepted special leave petition against this decision and has issued SLP notice.

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