The Hindu Business Line : A positive judgment to negative absurdity

THE Supreme Court decision in the IPCA Laboratories Ltd vs DOT (2004 135 Taxman 594 SC) case indicates how taxpayers try to take unintended benefits relating to exemptions provided under the Income-Tax Act. The appellants were an export house, exporting self-manufactured goods as also goods made by supporting manufacturers. In the assessment year (AY) 1996-97, for which year the appeal relates, a return showing nil income was filed. The taxable income was worked out at Rs 4.39 crore, before deduction permissible under Chapter VI-A. The assessee earned Rs 3.78 crore in respect of exports of self-manufactured goods and claimed, inter alia, deduction for this in terms of Section 80HHC of the I-T Act.

Further, it was found that from the export of trading goods, there was a loss of Rs 6.86 crore. The appellant had issued certificates of disclaimer in favour of the supporting manufacturers in respect of the entire export of trading goods. The assessing officer (AO), therefore, held that there was a net loss from export of goods and disallowed the deduction of Rs 3.78 crore. The assessee's claim was rejected up to the High Court stage. The matter was then taken to the Supreme Court.

The apex court said that Section 80HHC was incorporated to provide 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 are clear, then benefits, which are not available under the section, cannot be conferred by ignoring or misinterpreting the section.

According to the court, sub-section (3)(a) deals with cases where the export is only of self-manufactured goods, and sub-section (3)(b) with export of trading goods only. Thus, when the Legislature wanted to take exports from self-manufactured goods or trading goods separately, it was already so provided in sub-sections (3)(a) and (3)(b).

It would not be denied that the word `profit' in Sections 80HHC(l) and 80HHC(3)(a) and (3)(b) means a positive profit. In other words, if there is a loss, then no deduction would be available under Section 80HHC(l), (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.

Subsection (3)(c) deals with cases where the export is of both self-manufactured and trading goods. The opening part of sub-section (3)(c) states "profits derived from such export shall... " Then follows (i) and (ii). Between these, the word `and' appears. A plain reading of sub-section (3)(c) shows that "profits from such exports" have to be profits of exports of self-manufactured goods plus profits of exports of trading goods. The profit is to be calculated in the manner laid down in sub-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 that a deduction can be permitted only if there is a positive profit in the exports of both self-manufactured goods and trading goods. If there is a loss in either of the two, then that loss has to be taken into account for computing profits.

Making a reference to Section 80AB in Chapter VI-A (which also contains Section 80HHC), the court has said that Section 80AB 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 the losses have to be taken into consideration.

Under Section 80HHC(3)(c)(i), the profit is to be `adjusted profit of business', which means 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 by profits under sub-section (3)(c)(ii). Here 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. Therefore, a plain reading of Section 80HHC makes it clear that in arriving at profits earned from export of both self-manufactured 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. If there is a loss he will not be entitled to any deduction.

The following pleas taken before the court have been found to have no substance:

It was said that `profit' in Section 80HHC would mean only positive profit and would not include losses. The court has said that in Section 80HHC(l), it is admittedly used to indicate positive `profit' because the deduction will only be of a positive profit.

Sub-section (3) is the sub-section which provides how profits are to be worked out in computing total income. For purposes of such computation, both profit and losses have to be taken into account. The word `profit' in Section 80HHC(3) will mean profits after taking into account losses, if any.

More important, the term `profit' in Section 80HHC, both in sub-sections (1) and (3), means a positive profit worked out after taking into consideration the losses, if any.

It was then said that if the profits are to be reduced by the losses in cases where an export house makes a disclaimer, the turnover disclaimed cannot be taken into account for working out the profit.

This argument, too, was not accepted. The court said that if such an argument is accepted, it would lead to an absurd result. It would mean that where there is no disclaimer, the export house would not be entitled to any deduction in cases where there is a loss but because a disclaimer has been made both the export house and the supporting manufacturer would become entitled to deductions.

The proviso to sub-section (3) of Section 80HHC allows a disclaimer only to enable the export house to pass on deductions. It in no way reduces the turnover of the export house. In computing total income, the entire turnover is to be taken into account even though there is a disclaimer.

On consideration of all the facts and law, the court has said that only if a positive figure emerges after taking into account the profits and losses from self-manufactured and trading goods, the assessee would be entitled to claim deduction under Section 80HHC.

This decision shows how taxpayers can at times be unreasonable, even as they complain about unreasonableness of the tax department.

(The author is a former chairman of CBDT.)

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