Sec 80HHC - deductions when there is a loss - word 'or' has been used intentionally and it cannot be substituted with 'and' : ITAT
November, 12th 2007
The main point raised in this appeal is against the reduction in the claim of deduction u/s. 80HHC. The facts are that the return of income was filed claiming deduction u/s. 80HHC at Rs. 7,38,416/-. During the course of assessment proceedings the Assessing Officer noted that there was a net profit of Rs. 14,54,272/- on total export turnover of Rs. 2,48,26,964/-. The net profit included Duty draw back turnover of Rs. 21,10,298/- and DEPB of Rs. 6,63,942/-. The Assessing Officer on verification of export in Form No. 10CCAC observed that the assessee has Loss on export turnover at Rs. 10,19,985/-. He considered Taxation Laws (Amendment) Act 2005, in which amendment has been carried out to section 80HHC. Since the assessee's export turnover was below Rs. 10 Crores and there was loss on the total export turnover, he noted that the assessee was entitled to set off of 90% of any one of the export incentives specified u/s. 28(iiia) to (iiie) as per the 5th proviso to sub-section (3) of Section 80HHC. Accordingly, the amount of deduction u/s. 80HHC was scaled down to Rs. 4,39,641/- as against the assessee's claim of Rs. 7,38,420/- :-
As per the Trading and Profit and loss account, a sum of Rs. 21,10,298/- has been credited under the head Custom drawback which falls u/s 28(iiic) of the Act. The other item is sum of Rs. 6,63,942/- credited in the profit and loss account representing DEPB amount which is taxable u/s.28(iiid). Whereas the assessee has claimed that 90% of both the Custom drawback and DEPB be adjusted against the loss so as to compute the quantum of deduction u/s.80HHC, the Revenue has made out a case that only one of the two items viz. Duty draw back or DEPB is to be considered. Since the amount of Duty draw back at Rs.21.10 lakhs is higher than the amount of DEPB, such higher amount was considered by the Assessing Officer.
Assessee did not get any relief in the first appeal and is before the ITAT
The ITAT analysed the legal position as:- As per the pre-amended provisions of section 80HHC the assessee was entitled to deduction as per Clause (a) or (b) or (c) of section 80HHC (3) and the first proviso provided that the profits so computed shall be further increased by the amount which bears to 90% of the sum referred to in Section 28 (iiia) and (iiib) and (iiic). Some benches of the Tribunal took a view that if there is a loss, then such amount should be ignored and the assessee would be entitled to deduction with reference to incentives as enumerated in the proviso to sub- section (3). The net effect of such a view was that in a case where there were no "profits of business" for deduction u/s. 80HHC(3), the assessees were still entitled to deduction in terms of proviso under sub-section (3). However, this view did not find favour with the High Courts including the jurisdictional High Court in Rohan Dyes and Intermediates Ltd. Vs. CIT in which it was held if the ultimate figure computed u/ s.80HHC (3) is a loss, the assessee would not be eligible for deduction u/s.80HHC with reference to incentives referred to in section 28(iiia)(iiib) (iiic) There was a lot of hue and cry on such a view which was reiterated by the Special Bench of the Tribunal in B. Sorabji vs. ITO . In order to tone down the rigour of such view, representations were made to the Government and eventually second to fifth provisos to section 80HHC (3) were inserted by the Taxation Laws (Amendment) Act 2005 with retrospective effect. Other ongoing controversy regarding the taxability of Duty Entitlement Pass-Book (DEPB) and Duty Free Replenishment Certificate (DFRC) was also put to rest by the insertion of claused (iiid) and (iiie) to section 28 by the same Amendment Act with retrospective effect.
In the present appeal we are concerned with an assessee who has loss u/ s. 80HHC(3) with incentives and is claiming deduction u/s.80HHC in the light of the amendment carried out by way of 5th proviso to section 80HHC (3). There is no dispute on any aspect other than the interpretation of the said 5th proviso.
The effect of five provisos to section 80HHC (3). Whereas the first four provisos deal with a case a in which the assessees have profit as computed u/s.80HHC (3), which is further bifurcated into two categories of assessees having export turnover not exceeding and exceeding Rs.10crores during the previous year. On the other hand, the 5th proviso deals with the cases in which the assessee has a loss under clause (a) or (b) or (c) of section 80HHC (3).
1. First proviso provides that the profits computed under clause (a) or (b) or (c) of sub-section (3) shall be further increased by the amount to 90% of any sum referred to in clause (iiia) and (iiib) and (iiic) of Section 28. It means that the amount of Profits of business' has to be increased by 90% of three export incentives taken together as enumerated in section 28 (iiia) to (iiic). So what is referred to here is the sum total of these three incentives.
2. Second proviso to sub-section (3) provides that in the case of an assessee having export turnover not exceeding Rs.10 crores during the previous year, the profits computed under sub-section (3) of Section 80HHC, or after giving effect to the first proviso shall be further increased by the amount which bears to 90% of any receipts referred to in clause (iiid) or (iiie) of section 28 as the case may be, the same proportion as export turnover bears to the total turnover of the business carried on by the assessee.
3. The third and fourth provisos deal with the assessees having export turnover exceeding Rs. 10 crores, which provide that the profit computed under sub-section (3) or after giving effect to the first proviso shall be further increased by the amount which bears to 90% of any receipt referred to in clause (iiid) or (iiie) of Section 28. The net effect of the first four proviso of subsection (3) of section 80HHC dealing with the assessee's having profit computed under sub-section (3) is that the profit computed as per clause (a) or clause (b) or clause (c) of sub-section (3) or after giving effect to first proviso which means such profit as 'further increased' by the amount which bears to 90% of sum referred to in clauses (iiia), (iiib) and (iiic) of Section 28, shall be 'further increased by' the amount which bears to 90% sums referred to clauses (iiid) or clause (iiie) if the asscssee has evidence to prove that he had an option to choose either the duty draw back or DEPB scheme or DFRL being the Duty Remission Schemes and the rate of draw back credit attributable to the custom duty was higher than the rate of credit allowable under DEPB or DFRC scheme.
4. On the contrary fifth proviso deals with the cases of assessees having computation under clause (a) or (b) or (c) of section 80HHC(3) as loss which provides that such loss shall be set off against the amount which bears to 90% of any sums referred to in any clause (iiia) or (iiib) or (iiic) as the case may be or clause (iiid) or clause (iiie) as the case may be of section On a conjoint reading of the five provisos it becomes vivid that the first four provisos deal with the cases in which there is a Profit and the fifth proviso deals with a case in which there is a Loss as per sub-section (3). First set of four provisos is independent of the fifth proviso and both the sets operate in different compartments. It IS only the method of computation of the quantum of deduction governing the cases in which there is a profit or loss which has been enshrined in 5 provisos attached to sub-section (3) along with the 'profits of business' as explained in Explanation (baa) below sub-section (4).
The Tribunal held, "In such a procedural portion of the provision, what is to be seen and followed is the method so stated as per the language of section. There is no question of looking into what ought to have been done while calculating the amount of deduction by disregarding the method specifically provided in subsection (3) along with these provisos. It is a settled legal position that equity is hardly relevant for the interpretation of a taxing statute."
Coming back to the facts of the case, the Tribunal noted that in the case of an assessee having Loss under sub-section (3), the Hon'ble Courts initially denied the benefit of deduction u/s.80HHC straight away. It was only with a view to relax such a view and allow benefit to such assessees that the fifth proviso was inserted by the Amendment Act of 2005. In the absence of such proviso there is absolutely no question of granting any deduction under this section when there is a Loss under sub-section (3). Thus, when the Government has come out with insertion of the fifth proviso thereby allowing benefit to the assessee, one cannot expect to read more than what is actually contained in it.
The tribunal took note of the meaning assigned to "profits of the business" in Explanation (baa) below section 80HHC (4) which is relevant for the purposes of sub-section (3) in as much as it is a starting point for calculating the quantum of deduction under this section. This Explanation states that the 'profits of business' means the profits of the business as computer under the head "Profits and gains of business or profession" as reduced by 90% of any sum referred to in clause (iiia), (iiib), (iiic), (iid) and (iiie) of Section 28 etc. Here also the intention of the egislature becomes manifest that while working out the amount of "profits of the business" 90% of all items as referred to in clause (iiia) to (iiie) of section 28 are to be considered cumulatively. Commas have been used after clauses (iiia), (iiib), (iiic), (iiid) and thereafter the word 'and' is used before (iiie). Therefore, it becomes crystal clear that the words 'or', 'and' or 'commas' have been deployed in different parts of section 80HHC to represent the intention of the Legislature for working out the quantum of deduction under this section. It is highly illogical to substitute the word "or" with "and" and vice versa in any part of the section.
The things become more clear when we examine Circular No.2 of 2006 dated 17.01.2006 providing as under:-
"Profits on sale of Duty Entitlement Pass Book Scheme (DEPB) credits or Duty Free Replenishment Certificate (DFRC) will be treated at par with duty drawback for the purposes of proportionate increase of profits derived form exports computed under clause (a) or clause (b) or clause (c) of sub-section (3) of section 80HHC in the case of, (i) an exporter having export turnover not exceeding Rs.10crores; (ii) in the case of an exporter having export turnover exceeding Rs.10 crores if-
(a) he had an option to choose either duty drawback or duty entitlement pass book scheme; and (b) the rate of drawback credit attributable to the customs duty was higher than the rate of credit allowable under duty entitlement pass book scheme. OR (c) he had an option to choose either duty drawback or duty free replenishment certificate; and (d) the rate of drawback credit attributable to the customs duty was higher than the rate of credit allowable under duty free replenishment certificate."
From the perusal of the extract of the above circular, it is clearly borne out that here the reference is made to the cases where the assessee has Profit u/ s.80HHC(3) and the profit on sale of DEPB or DFRC has to be treated at par with the duty drawback. There is no reference to Loss cases falling within the ambit of fifth proviso in this circular for treating profit on sale of DEPB or DFRC on par with the duty drawback.
In view of this, the Tribunal noted that the word "or" has been intentionally used between clauses (a) and (b) in the fifth proviso to section 80HHC, which cannot be substituted with the word "and".