The Judgment of the Court was delivered by

V.S Sirpurkar, J.:— This common tax case reference pertains to two assessment years 1989–90 and 1990–91 and hence technically two tax cases have been filed they being T.C Nos. 948 and 949 of 1995. The referred common questions are as follows:

“1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in its conclusion that in respect of income derived from (a) interest receipts, (b) Modvat credits, and (c) International Price Rationalisation the assessee was entitled to deductions under sections 80HH and 80-1 of the Income-tax Act, 1961?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in its conclusion that the total turnover in section 80HHC of the Act is only the turnover relating to the export business of the assessee and not the turnover relating to other business of the assessee?”

2. The following facts will help us to understand the controversy. The assessee is a company carrying on business of forgings. The assessee had established three units, viz., Unit-I, Unit-II and Unit-Ill, in the forgings shop division and admittedly the assessee-company was an export-oriented company, exporting the forgings and the company received income under the following heads:

1. Interest receipts,

2. Modvat credits,

3. International Price Rationalisation.

3. It was the case of the assessee before the assessing authority that all the receipts stated above were part of the receipts relating to the industrial undertaking of the assessee and, therefore, full deduction was claimed under section 80HH and section 80-1 of the Income-tax Act. The assessing authority, however, did not accept the claim of the assessee on the ground that these receipts did not form part of the profits and gains. An appeal came to be filed before the Commissioner of Income-tax (Appeals) who confirmed the order of assessment and negatived the claim of the assessee. However, in the appeal filed before the Appellate Tribunal, the claim of the assessee was accepted to the extent that it was held by the Tribunal that the assessee had received interest on bank deposits which were made in connection with the opening of the letters of credit with the banks for the purpose of the export business of the assessee and as such for obtaining these letters of credit, the assessee had deposited the margin money. The Tribunal further held that as the opening of the letters of credit was exclusively in connection with the assessee's business/export of forgings manufactured by the assessee, the interest earned by the assessee was to be treated as arising out of the industrial undertaking of the assessee. Similarly, in respect of the delayed payment of the importers of the assessee's goods, the assessee used to receive interest on the price for the delay and the Tribunal held that the said receipt of interest on the delayed payments was also in connection with the assessee's business of manufacturing of forgings and exports thereof. Therefore, even that interest amount was treated as arising out of the industrial activity of the assessee.

4. In respect of the Modvat credits, since the assessee had been using the raw material as its input on which the excise duty was levied under the Modvat scheme the assessee was entitled for the credit of the excise duty which was paid on raw material while the finished products were liable for full excise duty. The assessee in its activity of manufacture of forgings had received Modvat credits in respect of excise duty paid on the raw materials and claimed benefits under sections 80HH and 80-1 of the Act. The Tribunal accepted even this as income derived from the industrial undertaking.

5. Lastly, the Tribunal also accepted the amounts earned by way of International Price Rationalisation. The assessee used to purchase the raw materials which were being used in the process of manufacture of forgings which finished products were exported to the foreign countries. In order to make the assessee's products internationally competitive, the Government of India had formulated a scheme called International Price Rationalisation and under the said scheme, in order to encourage exports and to reduce the cost of production of the assessee's goods, the assessee was paid a sum of Rs. 6 per kg in respect of the raw materials purchased and as such, it was held to have been received by the assessee as income from the industrial undertaking. The Tribunal, therefore, granted relief under sections 80HH and 80-1 of the Act for this amount also.

6. The major issue on which the relief was granted by the Tribunal was in respect of a sum of Rs. 6,84,461. This claim was made on the basis of a certificate issued by the chartered accountant in Form No. 10CCAC and the annexure thereto. The Assessing Officer while assessing for the year 1989–90 granted relief for the sum of Rs. 3,49,132. Similarly, for the next assessment year also, the relief was granted by the Assessing Officer adopting the same method. The dispute related to what should be held as total turnover of the assessee.

7. The Assessing Officer took the total turnover to be the turnover from all the sources of business as the assessee was also doing the business of selling motorcycles, spare parts thereof and television sets. The contention of the assessee was that the total turnover must be confined to the turnover of the product which the assessee was exporting. However, even the Commissioner (Appeals) confirmed the view taken by the Assessing Officer and took the view that the turnover of the whole business including the business of sale of motorcycles, motorcycle spare parts and television sets.

8. The Tribunal, however, accepted the claim of the assessee and proceeded to hold that it was only the total turnover of the forging business which was liable to be taken into consideration for arriving at a profit which was liable to be held as a proper deduction under section 80HHC. Relying on the language of sub-section (3) of section 80HHC, the Tribunal interpreted the words therein to mean that in a formula to be used under that section which was Export turnover/Total turnover x Business profits = Available deduction under section 80HHC, the total turnover should not be the turnover relating to the other business of sale of motorcycles, spare parts thereof and television sets. It is obvious that if the total turnover was considered to be that which included even the turnover of the business other than the forging business then, the denominator would be more and the profits would be less which would be liable for deduction under that section. The Tribunal found that subsection (3) of section 80HHC was applicable to the present case as the assessee in addition to the export-oriented business of forgings had other business also and was earning income therefrom. The Tribunal also realised that apart from the export of the forgings the assessee had the advantage of the local sales of those forgings also. The contention of the assessee was that the forging division was entirely separate from the other division of the company which was engaged in the business of sale of motorcycles, motorcycle spare parts and television sets and it was the further contention of the assessee that the accounts were completely separate. Therefore, the assessee's contention was that only the turnover of the forgings meaning the export sales of forgings as also the local sales of the forgings was the only turnover which was liable to be used in the aforementioned formula which would be less than the turnover of the whole business of the assessee including that of the sale of motorcycles, spare parts thereof and television sets. In short, according to the assessee, more profits were liable to be arrived at by showing a lower turnover as the denominator in the formula and thereby more profit was liable to be allowed in favour of the assessee which was an allowable deduction. Since this argument was accepted by the Tribunal the Department required the reference of the questions mentioned above resulting in the present references.

9. We shall consider the first question first. This pertains to the amounts received by the assessee-company under three heads, viz.,

(a) Interest receipts;

(b) Modvat credits; and

(c) International Price Rationalisation.

10. Interest receipts:

The interest receipts are also of two descriptions. Firstly interest received on account of the deposit made by the assessee-company with the banks for obtaining letters of credit and, secondly, interest earned by the assessee-company on the deposit of margin money for letters of credit.

11. Mrs. Chitra Venkataraman, learned senior standing counsel for the Department, very heavily criticised the deduction granted to the assessee-company on account of this interest receipts. She points out that the words used in section 80HH are:

“Where the gross total income of an assessee includes any profits and gains derived from the industrial undertaking… 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 from such profits and gains of an amount equal to twenty per cent, thereof.”

12. Learned counsel invites our attention that the emphasised words would suggest that the deductible income must have been “derived” from the industrial undertaking. Learned counsel claims that the words “derived from the industrial undertaking” would suggest that the said income must be solely relatable to the industrial undertaking and the interest earned by the assessee on its deposits though for getting letters of credit from its banks cannot be held to be the profits and gains derived from the industrial undertaking and would obviously be income from other sources.

13. Learned counsel buttresses her contention on the basis of the decision reported in Commissioner Of Income Tax, Karnataka v. Sterling Foods, Mangalore, [1999] 237 ITR 579 (SC). In that case, the apex court while negating the claim of the assessee has held that there must be for the application of the words “derived from”, a direct nexus between the profits and gains and the industrial undertaking. Learned counsel further pointed out that the apex court in that case also considered the decision reported in Cambay Electric Supply Industrial Co. Ltd. v. Cit , [1978] 113 ITR 84 (SC) where it was held that the expression “attributable to” was used when the Legislature intended to cover receipts from sources other than the actual conduct of the business.

14. In Cambay Electric Supply Industrial Co. Ltd.'s case, [1978] 113 ITR 84, the apex court was considering two conflicting decisions of the High Court in the case of the same assessee. While the earlier decision of the High Court was that to obtain the benefit of section 80HH the assessee had to establish that the profits and gains were derived from its industrial undertaking and it was just not sufficient that the commercial connection was established between the profits earned and the industrial undertaking. It was held by the Division Bench further that (page 582 of 237 ITR):

“The industrial undertaking itself had to be the source of the profit. The business of the industrial undertaking had directly to yield that profit.”

15. The High Court subsequently had taken a contrary view basing itself on the amendment to section 28. Realising this contrary stand taken by the High Court, the apex court set aside the subsequent contrary judgment. The apex court then went on to find in paragraph 11 in the following words (page 584 of 237 ITR):

“The use of the words ‘derived from’ in item 11-AA(2) suggests that the original source of the product has to be found. Thus, as a matter of plain English, when it is said that one word is derived from another, often in another language, what is meant is that the source of that word is another word, often in another language. As an illustration, the word ‘democracy’ is derived from the Greek word ‘demos’ the people, and most dictionaries will so state. That is the ordinary meaning of the words ‘derived from’ and there is no reason to depart from that ordinary meaning here.”

16. The apex court further observed in paragraph 12 as follows (page 584 of 237 ITR):

“There must be, for the application of the words ‘derived from’, a direct nexus between the profits and gains and the industrial undertaking.”

17. As regards the facts of the case concerned, the apex court held in that case that the nexus was not direct but only incidental. There the apex court was considering the case of an assessee who was engaged in processing prawns and other seafood which it exported and in that it also earned some import entitlements granted by the Central Government under the Export Promotion Scheme. Such import entitlements could be used by the assessee itself or could also be sold to others. The assessee had sold the import entitlements which it had earned to others and the total income for the assessment included the sale proceeds of such import entitlements in respect of which relief was granted under section 80HH of the Income-tax Act. The High Court had held in favour of the assessee. However, the Supreme Court found that such sale of the import entitlement could not be said to be an income directly attributable to the industrial undertaking. The Supreme Court observed (page 584):

“The industrial undertaking exports processed sea food. By reason of such export, the Export Promotion Scheme applies. Thereunder, the assessee is entitled to import entitlements, which it can sell. The sale consideration therefrom cannot, in our view, be held to constitute a profit and gain derived from the assessee's industrial undertaking.”

18. Learned counsel, therefore, very vehemently argued that the letters of credit had to be opened if the assessee wanted that facility and the assessee had deposited certain amount as margin money and the assessee was earning interest thereupon. Learned counsel pointed out that for any other business, the said letters of credit could have been opened and for opening such letters of credit the assessee had to deposit the margin money with its bankers and it would earn interest thereupon. Merely because the letters of credit were for the purpose of business of forgings, it could not be said that the interest earned was directly attributable to the industrial undertaking of the assessee. Learned counsel contends that such interest would be only incidental to the assessee's business activity of manufacture of forgings and export thereof.

19. Learned counsel also invited our attention to the Division Bench decision of this court reported in CIT v. Pandian Chemicals Ltd., [1998] 233 ITR 497 (Mad). In that case, the assessee had made deposits with the Tamil Nadu Electricity Board and was earning interest thereupon. It was no doubt true that for getting power connection, every industrial undertaking had to make the deposits with the Electricity Board. However, it was held by the Division Bench that the interest derived from such deposits could not be said to have been derived from industrial undertaking. The court further held that the immediate and effective source of the interest was the deposit and not the industrial undertaking. Relying upon a number of other decisions, the court observed as follows (page 504):

“… the word ‘derived’ is not a term of art and its use in the definition indeed demands an enquiry into the genealogy of the product, but the enquiry should stop as soon as the effective source is discovered and the profit or gain can be said to have been ‘derived’ from an activity carried on by a person, if the said activity is the immediate and effective source of the said profit or gain… there must be a direct nexus between the activity and the earning of the profit or gain and the income, profit or gain cannot be said to have been derived from an activity merely by reason of the fact that the said activity may have helped to earn the said income or profit in an indirect or remote manner.”

20. We agree with this decision, which is binding on us. The aforementioned decision has only been further strengthened by the subsequent decision of the apex court. We are, therefore, of the clear opinion that the interest which is earned by the assessee from the bank deposits would not have a direct nexus with the industrial undertaking of the assessee and would only be incidental income thereto and, therefore, such interest has to be ignored from the allowable profits under section 80HH. We answer the reference on this count against the assessee.

21. Let us now consider the interest earned by the assessee on the belated payments. There can be no doubt that this interest would, however, be directly relatable to the business of the assessee of forgings. If the purchasers of the forgings did not make the payments for the forgings and, then agree to pay the interest on the delayed payments, the said interest would have direct nexus with the business of forgings. The true test would be whether such interest would be available to the assessee otherwise also. The answer to the question would be certainly in the negative. The interest being directly relatable only to the amounts receivable by the assessee during the course of its business on account of the sale of forgings, this interest would have to be included as the profits and gains derived from the business of the assessee. We hold that this part of the interest would be entitled to be covered by section 80HH of the Act.

22. That takes us to the amounts received by the assessee under Modvat credits and International Price Rationalisation. In respect of both these payments, it will have to be found that they are directly relatable to the industrial under- taking alone and to no other activity other than the business activity of the assessee as regards the forgings. Truly speaking, the amount received by way of Modvat credits could not have been received by the assessee had the assessee not purchased the raw materials for running its industry of manufacturing the forgings. It is only on account of the purchase of the raw materials that it was required to pay the excise duty thereupon in respect of which, the assessee has earned Modvat credits. Therefore, that credit will have to be held as directly relatable to the industrial undertaking and the activity of the assessee-company and that would have to be held in favour of the assessee. Thus, the income from the Modvat credits would be entitled to be held as allowable deduction under section 80HH of the Act. The same logic applies to the income earned by the assessee under the International Price Rationalisation Scheme. The amount paid at the rate of Rs. 6 per kg. of raw materials purchased by the assessee is having the connection only with the industrial activity of the assessee-company. If the assessee had not purchased the raw material for its industrial activity and had not exported the finished forgings, the assessee would not be entitled to the said amount of Rs. 6 per kilo. There can be, therefore, no doubt that the amount earned by the assessee under the International Price Rationalisation Scheme is held to be an allowable deduction under section 80HH of the Act. Thus, we answer the reference on these counts in favour of the assessee.

23. That leaves us with the second question regarding the true import of the word “turnover” as used in sub-section (3) of section 80HHC. It would be better for us to quote the whole sub-section itself.

“80HHC. Deduction in respect of profits retained for export business.—…

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

24. The controversy is about the last words of clause (b) of sub-section (3) of section 80HHC, viz., total turnover of the business carried on by the assessee. There can be no doubt that the present case would be governed by clause (b) of sub-section (3) of section 80HHC as admittedly, the business of the assessee is not exclusively of the export out of India of the forgings. The forgings manufactured by the assessee were sold in India also and the assessee earned income from the local sales also. It is also an admitted position that the assessee sold motorcycles, motorcycle spare parts and television sets and earned substantial income out of it. While the contention of the assessee, as accepted by the Tribunal, is that the last words indicated above would mean a turnover of the business relating to forgings alone. The Revenue insists that the total turnover of the whole business, i.e, including the sale of motorcycles, motorcycle spareparts, television sets should also be included in the total turnover.

25. There can be no doubt that under the formula which emerges from the language of the sub-section export turnover becomes the numerator while the total turnover becomes the denominator. If the claim of the assessee is accepted as has been done by the Tribunal the denominator should only relate to the business of forgings thereby the denominator will be less and the result would be more deductible profits. Similarly, if the contention of the Revenue is accepted then, since the denominator would increase because of the turnover of sale of motorcycles, motorcycle spare parts, television sets, that is bound to result in a smaller quotient and ultimately the lesser deductible profits.

26. Mrs. Venkataraman very strongly urged that where the language of the sub-section is clear enough then, there would be no scope to accept the assessee's contention. Learned counsel urges that since the business of sale of motorcycles, spare parts thereof, television sets was a part of the business of the assessee, the total turnover of the business would certainly include the business of sale of motorcycles, spare parts thereof and television sets and as such, the turnover on that count would be liable to be included in the total turnover so as to increase the denominator. The Tribunal has taken into account the subsequent amendments to the section in order to arrive at the correct interpretation and on that basis has held that it was always in the mind of the Legislature that the total turnover would be restricted to the total turnover of the exportable goods. Learned counsel further submits that if a restricted meaning is given to the words then, it would be doing violence to the express language of the sub-section which will be impermissible by the established canons of interpretation.

27. The argument is undoubtedly extremely attractive but lacks substance. Even considering the express language the sub-section would have to be not only appreciated in the light of the language of that sub-section but that subsection will have to be read along with the other sub-sections like sub-sections (1) and (2). In the first place, considering the language of the sub-section itself, it cannot be forgotten that the sub-section itself mentions the goods or merchandise to which this section applies. It would obviously mean that the language of the sub-section itself refers to the whole section 80HHC. It will be then beneficial to see as to what is the scheme of section 80HHC of the Act in so far as the assessee like the present one is concerned.

28. It cannot be forgotten that the assessee's business is not exclusively of export in the sense that it has income out of the local sales of forgings also and as such, it would be governed by clause (b) of sub-section (3). However, that is not the be all and end all of the matter as the whole section pertains to defined goods. Sub-section (1) very clearly provides a rider for the application of section 80HHC in the opening words itself which are as follows:

“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 of 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:”

The goods or merchandise to which the whole section applies are to be found in clause (a) of sub-section (2). The language is extremely important and hence we would reproduce the said sub-section.

“(2) (a) This section applies to all goods or merchandise, other than those specified in clause (b), if the sale proceeds of such goods or merchandise exported out of India are receivable by the assessee in convertible foreign exchange.”

29. Therefore, it is crystal clear that the whole section 80HHC applies only to the goods which are not only exported out of India but the sale proceeds of which are receivable in convertible foreign exchange. When we sit to consider sub-section (3), clause (a) thereof speaks about the assessee who has an exclusive business of exports of such goods or merchandise. Clause (a) would apply where the assessee has no other business meaning all his income would be out of the export sales, the proceeds of which are receivable in convertible foreign exchange. There is again almost by way of abundant caution the user of the words “goods or merchandise to which this section applies.” Once we have this stage then the task of interpreting clause (b) of sub-section (3) becomes easier because even in clause (a) of sub-section (2) and clause (a) of sub-section (3) the same terminology is used in respect of the goods and merchandise. When a plain meaning has to be given to the opening part of the section, it is clear that the word “business” means the business relating to the goods to which the section applies and the thrust is on the word “exclusively”. The sub-section considers a situation where the assessee's business is of exports and the assessee's business is not that of export alone. However, one thing is certain that the business has to be only in respect of the goods or merchandise to which the section applies. As has been stated earlier, the thrust is on the word “exclusively”. The Legislature has rightly intended the situation where the business could be relating to the goods which would fetch the foreign exchange but there could also be the business in relation to these goods which may not be exported or which may not fetch foreign exchange. However, the whole sub-section speaks only about the goods, which are exportable, exported and fetch foreign exchange. It is, therefore, clear that the thrust of the opening clause of clause (b) of sub-section (3) has a stress on the words “does not consist exclusively of the export”. The sub-section takes into consideration the situation of income out of the export of the goods vis-a-vis income out of those goods other than by way of exports. The words “total turnover of the business” would then be controlled by and have to be read in the colour of the opening clause. The formula envisaged by the section would be “export turnover F total turnover D profits and gains of business”. The business contemplated in the section would be restricted to only the goods to which the section applies and, therefore, by necessary implication even the total turnover of the business would be the total turnover of the business of the goods to which the section applies. If we include the turnover of the goods to which the section does not apply, it would amount to doing violence to the language of the sub-section itself. The sub-section has been created only to see the ratio of the income out of the export to the total income out of the business in respect of those goods because of the obvious difficulty of segregating the profits earned out of export alone vis-a-vis the profits earned otherwise than by export. The total profits earned out of the business of such goods are not exemptible because those profits would include both profits out of exports and the profits earned otherwise than by export but one thing is certain that the business contemplated in the sub-section would be in relation to those goods alone to which the section applies as per clause (a) of sub-section (2). Once we read sub-section (1) of section 80HHC, clause (a) of sub-section (2) and clauses (a) and (b) of sub-section (3), there remains no doubt that the total turnover of the business would contemplate only the business regarding such goods part of which are exported and the others are not so exported. There is just no scope to include the turnover of the business of the goods which are not contemplated by the section. That way, though the Legislature has specified about the applicability of the section to the goods by clause (a) of subsection (2), we would be unnaturally making the section applicable even to the goods which are outside the limits of clause (a) of sub-section (2) and that will not be permissible.

30. Once this situation is clear, there would be no scope for accepting the argument of the Revenue that the total turnover of business would include even the turnover of goods which are outside the scope of clause (a) of sub-section (2) Hence, we are of the clear opinion that the turnover from the business of sale of motorcycles, motorcycle spare parts, television sets cannot be introduced to inflate the total turnover artificially in order to reduce the benefit which the assessee is entitled to. That would be clearly going against the object of section 80HHC, which is solely to encourage the exports.

31. The Bombay High Court in a somewhat similar situation in the decision reported in CIT v. Sudarshan Chemicals Industries Ltd., [2000] 245 ITR 769, while interpreting the words “total turnover” has observed as follows:

“That the total turnover cannot include the sales tax and the excise duty and total turnover should be restricted only to such receipts which have an element of profit in it and it would be only the sale price which should be the relevant figure.”

32. In that case, the total turnover which is the denominator in the prescribed formula was tried to be inflated by including the sales tax and the excise duty into the same. Though the court was considering the amended section, its observations are apposite. The Bombay High Court in that case took into account the object of the section and observed as under (page 773):

“In the circumstances, we are of the view that in order to ascertain the export profits, the above two items cannot be introduced to inflate the total turnover artificially in order to reduce the benefit which an assessee is entitled to. Ultimately, the object of section 80HHC is required to be kept in mind in order to encourage exports.”

33. We are in total agreement with the above observations. The Tribunal has chosen to go to the amended section in order to interpret the unamended section applicable to the case at hand. That is clearly impermissible though the Tribunal has reached a correct conclusion and has accordingly interpreted the term total turnover. It was not necessary to go to the amended provision to see the intention of the Legislature unless the amendment was of clarificatory or explanatory nature. Even otherwise, as we have pointed out, the correct interpretation of the unamended section would depend upon the language of that section alone. We would, therefore, choose to affirm the final conclusion of the Tribunal on this issue though for reasons of our own. Learned counsel for the assessee while supporting the order of the Tribunal also invited our attention to Form No. 10CCAC and submitted that even the method of calculation in that form would suggest that the total turnover to be taken into account would be restricted only to the total turnover in respect of the goods to which the section applies. It will not be necessary for us to consider that argument because the interpretation of that term is clear from the language of clause (a) of sub-section (1), clause (a) of sub-section (2) and clauses (a) and (b) of sub-section (3).

34. In the circumstances, we answer the reference against the Revenue and in favour of the assessee.