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Attorney(S)
  • D.A. Kamat
Judges
  • A. KALYANSUNDHARAMM.A. BAKSHI
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Citation Codes
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citation codes
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Attorney(S)
  • D.A. Kamat
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  • A. KALYANSUNDHARAMM.A. BAKSHI
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Smart Summary

Concise Structured Summary of the Opinion

Factual and Procedural Background

These two appeals concern the assessee for assessment years 1987-88 and 1988-89 and challenge the validity of an order passed by the Commissioner of Income-tax (CIT), Mumbai City-III, exercising powers under section 263 of the Income-tax Act, 1961. The substantive dispute arises from deductions claimed under section 80HHC.

The assessee had claimed deductions under section 80HHC of Rs. 15,353 and Rs. 72,054 for the two respective assessment years; the Assessing Officer (AO) allowed the deductions as claimed. The CIT examined the file, concluded that the deductions were excessive because total turn-over should be computed proportionately with reference to export turn-over, recalculated allowable deductions at Rs. 9,088 and Rs. 24,437 respectively, and issued a section 263 notice. After the assessee objected, the CIT rejected the objection and directed the AO to enhance the income by limiting the deduction under section 80HHC. The assessee appealed to the Tribunal against the CIT's action.

Legal Issues Presented

  1. Whether the CIT was justified in invoking section 263 to revise the AO’s order — i.e., whether the AO’s order was erroneous and whether the order caused prejudice to the revenue (the two conditions for exercise of section 263).
  2. How the term "total turn-over" in section 80HHC is to be interpreted for the purpose of computing export deduction: whether it includes all receipts of the business (including commission, income from ginning and pressing, miscellaneous receipts) or is confined to turnover from sale of goods (so that non-sale receipts are excluded).
  3. Whether the literal interpretation that excludes non-sale receipts from "total turn-over" (a view taken by several Tribunal benches) produces an absurd or unintended result such that a different construction should be adopted.

Arguments of the Parties

Appellant's (Assessee's) Arguments

  • The assessee's taxable income comprised profit derived on export turn-over, income from ginning and pressing, and some miscellaneous income.
  • Deduction under section 80HHC was calculated by the assessee based on export turn-over; the income from ginning and pressing was not included in calculating total turn-over.
  • The CIT erred by treating all receipts as total turn-over; the word "turn-over" should be related to sale of goods and other receipts should not be included when computing total turn-over for section 80HHC.
  • Counsel relied on several Tribunal decisions (Special Bench in International Research Park Laboratories Ltd.; Pune Bench in Salgaonkar Mining Industries; Madras Bench in Jeyar Consultant & Investment (P.) Ltd.) that accepted the assessee's approach that non-sale receipts (e.g., commission) are to be included in profits but not in total turn-over.
  • Accordingly, the assessee sought cancellation or modification of the CIT's order under section 263.

Respondent's (Departmental) Arguments

  • The Departmental Representative relied on the orders of the revenue authorities (i.e., supported the CIT's view or the departmental position that total turn-over includes all receipts).

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
International Research Park Laboratories Ltd. v. Asstt. CIT [1994] 50 ITD 37 (Special Bench, Delhi) Held that commission/other receipts are included in profits of business but are not to be included in calculating total turn-over for section 80HHC. The Tribunal's Special Bench decision represents one possible view; the Assessing Officer followed this view when allowing the assessee full deduction.
Salgaonkar Mining Industries v. Commissioner Of Income-Tax [1997] 61 ITD 105 (Pune Bench) Accepted the position that certain non-sale receipts are not to be included in total turn-over for section 80HHC computation. The Tribunal's decision was cited as supporting the assessee's calculation and demonstrates that a contrary view to the CIT's existed in Tribunal jurisprudence.
Jeyar Consultant & Investment (P.) Ltd. v. Assistant Commissioner [1993] 46 ITD 71 (Mad.) Adopted a similar approach that distinguishes between "profits" and "total turn-over" for section 80HHC, excluding certain receipts from total turn-over. Used by the assessee to show that the AO's view had support from Tribunal benches and therefore was not necessarily erroneous.
K.P. Varghese v. ITO [1981] 131 ITR 597 / 7 Taxman 13 (Supreme Court) Laid down the interpretive principle that where a literal interpretation of a statutory provision produces a manifestly absurd or unjust result, the Court may modify the language to achieve the Legislature's obvious intention and a rational construction. The court invoked this principle to demonstrate that the literal (tribunal-favouring) interpretation — which would make total turn-over equal to export turn-over and yield an arguably absurd result — can be avoided by construing "total turn-over" to include all receipts; the K.P. Varghese principle supported considering a non-literal construction.

Court's Reasoning and Analysis

The Tribunal first set out the statutory formula in section 80HHC for determining deduction: (Profits of the business × Export turn-over) ÷ Total turn-over. It is agreed that profits of the business include all receipts (including commission, ginning and pressing income and miscellaneous receipts). The parties agreed on export turn-over figures; the dispute centered on the meaning of "total turn-over."

The assessee's position (supported by several Tribunal benches) is that "turn-over" is related to sale of goods and non-sale receipts should not be included — so total turn-over would be equivalent to export turn-over where there were effectively no domestic sales. The CIT's position is that "total turn-over" means the entire receipts of the business (i.e., includes non-sale receipts such as ginning and pressing income).

The Tribunal noted that accepting the assessee's approach (so that export turn-over and total turn-over are the same) would produce an absurd and unjust result: it would allow exporters deduction in respect of profits that are attributable to other non-export activities as well. The court referred to the dictionary meaning of "turn-over" (Webster's) to support that "turn-over" can mean the money receipts of a business for a given period, which would include all receipts.

The court observed that although several Tribunal benches had followed the assessee's literal interpretation, the interpretive rule from K.P. Varghese permits departure from a plain literal reading where it leads to manifest absurdity. Applying that principle, the Tribunal recognized that a view that includes all receipts within "total turn-over" is a possible, rational construction consistent with the legislative intention to confine deduction to export-related profits.

However, when assessing the validity of the CIT's exercise of powers under section 263, the court emphasized the statutory threshold: two conditions must be satisfied for section 263 to be invoked — (1) the order sought to be revised must be erroneous, and (2) the order must be prejudicial to the revenue. The Tribunal found that although the CIT's view was arguable, the AO had adopted a view supported by the decisions of the Tribunal (Special Bench and other benches). Where two reasonable views are possible and the AO adopted one view supported by precedent, the AO's order cannot be characterized as erroneous merely because it is adverse to the revenue.

Consequently, the Tribunal concluded that the CIT's action under section 263 was not warranted: the AO's order was not erroneous in the sense required by section 263 even if the revenue suffered prejudice by reason of a view favourable to the assessee. The Tribunal therefore cancelled the CIT's section 263 orders and restored the Assessing Officer's orders.

The Tribunal further noted that subsequent legislative amendments to section 80HHC by the Finance Act (No. 2) of 1991 (effective 1-4-1992) have put to rest the controversy regarding meanings of export profits, profits and gains of business, and total turn-over.

Holding and Implications

Holding: The Tribunal allowed the appeals of the assessee and cancelled the orders of the CIT under section 263, restoring the orders of the Assessing Officer which had allowed the section 80HHC deductions as originally claimed.

Implications:

  • Direct effect on the parties: The CIT's directions to the AO to enhance income and limit the section 80HHC deduction were set aside; the AO's allowance of the claimed deductions stands restored.
  • On precedent and broader law: The Tribunal recognized two competing lines of authority (several Tribunal benches adopting the assessee's literal approach and the alternative construction that treats total turn-over as inclusive of all receipts). The Tribunal declined to fault the AO's order where it followed an established Tribunal view, and therefore did not treat the CIT's contrary conclusion as sufficient to invoke section 263. The opinion also records that subsequent legislative amendments (Finance Act (No. 2) of 1991, effective 1-4-1992) addressed and settled the controversy going forward.

This summary is based exclusively on the contents of the provided opinion and does not introduce information not contained in that text.

Show full summary ...

    Patel Cotton Co. Ltd. v. Assistant Commissioner of Income-tax

    Per M.A. Bakshi, JM - The dispute in these two appeals of the assessee for assessment years 1987-88 and 1988-89 is relating to the validity of the order passed under section 263 of the Income-tax Act, 1961, by the CIT, Mumbai City-III, Mumbai. The related dispute is on account of deduction under section 80HHC.

    2. Rival contentions have been heard and records perused.

    3. Relevant facts in this case are that assessee had claimed deduction under section 80HHC at Rs. 15,353 and Rs. 72,054 for assessment years 1987-88 and 1988-89 respectively. The Assessing Officer allowed the deduction as claimed by the assessee. The CIT on examination of the records was of the view that the assessee has been given excessive deduction as the same was to be computed proportionately with reference to the total turn-over vis-a-vis the export turn-over. According to the calculation made by the CIT, deduction allowable to the assessee was Rs. 9,088 and Rs. 24,437 for assessment years 1987-88 and 1988-89 respectively. He, accordingly, issued a notice to the assessee inviting objections as to why the order of the Assessing Officer may not be modified on the ground that the same was erroneous and prejudicial to the interest of the revenue. Assessee objected to the proposed action. The CIT, however, rejected the objection and directed the Assessing Officer to enhance the income by limiting the deduction under section 80HHC for the respective assessment years.

    4. Assessee is in appeal before us. The learned counsel for the assessee contended that the income of the assessee for the respective assessment years comprised of profit derived on export turn-over, income from ginning and pressing for factories and miscellaneous income. According to the learned counsel, deduction under section 80HHC has been calculated by the assessee on the basis of export turn-over and the income from ginning and pressing has not been taken into account in calculating the total turn-over. The CIT has considered all the receipts as the total turn- over, which, according to the learned counsel, is contrary to law. In this connection, our attention has been invited to the decision of the Pune Bench of the Tribunal in the case of Salgaonkar Mining Industries v. Commissioner Of Income-Tax [1997] 61 ITD 105 , in the case of Jeyar Consultant & Investment (P.) Ltd. v. Assistant Commissioner [1993] 46 ITD 71 (Mad.) and the decision of the Special Bench in the case of International Research Park Laboratories Ltd. v. Asstt. CIT [1994] 50 ITD 37 (Delhi) in support of the contention that whereas all business receipts are to be included in the total profits of a business the total turn-over is the turn-over on account of sale of goods and the other receipts are not to be included in the total turn-over. It was, accordingly, contended that the order of the CIT may be cancelled or modified, as the case may be.

    5. The learned Departmental Representative, on the other hand, relied upon the orders of the revenue authorities.

    6. We have given our careful consideration to the rival contentions. In this case, the controversy relates to the deduction under section 80HHC which is the deduction provided out of export profits. There is no difficulty in calculating the deduction under section 80HHC in case assessee’s income is exclusively from exports. However, there have been occasions for dispute in regard to calculation of deduction under section 80HHC; in such cases where assessee derived income from exports and also had some income from other than export business. In this case, assessee has exported goods out of India. Besides, income has been derived from ginning and pressing of goods on account of various parties in India. There is some miscellaneous income also which is not substantial. In such a case like that of the assessee section 80HHC provides a formula for calculation of deduction. As per the formula the deduction has got to be calculated as under :

    Profits of the business × Export turn-over

    Total turn-over

    It is not disputed that in counting the profits of business the entire receipts have been taken into account by the assessee including the receipts on account of ginning and pressing. Assessee has exported goods out of India and there is no sale of goods in India except sale of empty drums, scrap for nominal amounts. There is neither any difficulty nor any dispute relating to the export turn-over. The area of dispute is relating to the calculation of total turn-over. The case of the revenue is that the entire receipts form the total turn-over of the assessee. On the other hand, assessee’s plea is that in view of the fact that assessee has not sold any goods in India, the total turn-over of the assessee is equivalent to the export turn-over. It has been contended that the word ‘turn-over’ is related to the sale of goods and that the other receipts do not fit-in within the definition of the turn-over. If the plea of the assessee is accepted then the export turn-over and total turn-over are same and assessee gets full deduction in respect of the entire profits of the business. On interpretation of section 80HHC as it existed before the amendment by the Finance (No. 2) Act of 1991, w.e.f. 1-4-1992, several Benches of the Tribunal have accepted the plea as canvassed in this case on behalf of the assessee. In the case of International Research Park Laboratories Ltd. (supra), the Special Bench of the Tribunal accepted the claim of the assessee. In that case, the commission was held to be included in the profits of the business but not in calculating the total turn-over of the assessee. Similar view has been taken by the Pune Bench in the case of Salgaokar Mining Industries Ltd. (supra) and the Madras Bench of the Tribunal in the case of Jeyar Consultant & Investment (P.) Ltd. (supra ).

    7. When we apply the principle laid down by the Tribunal in the aforementioned decisions, the result is as under :

    In assessee’s case profits of export business could be calculated as under:

    Profit of business × Export turn-over

    Total turn-over

    In the profits of business, the income derived from ginning and pressing will also be included. The export turn-over would be the same as disclosed by the assessee. The total turn-over will be equivalent to the export turn- over. The result would be that the entire profits of business would be the profits derived from exports. Obviously, the interpretation of section 80HHC as above produces absurd and unjust results which could never have been intended by the Legislature. The intention of the Legislature undoubtedly is to encourage export and for that deduction has been provided in relation to the profits derived from exports. It would never have been the intention of the Legislature to grant deduction to the exporters in respect of the other income also not related to exports. Though admittedly, the interpretation in the above-mentioned cases is purely on the basis of the plain literal interpretation of the statutory provisions of section 80HHC, yet in our view, the following rule of interpretation laid down by their Lordships of the Supreme Court in the case of K.P. Varghese v. ITO [1981] 131 ITR 597/ 7 Taxman 13 could have been of great assistance in interpreting the provision. Their Lordships of the Supreme Court held—

    "A statutory provision must be construed, if possible, in such a manner that absurdity and mischief may be avoided. Where the plain literal interpretation of a statutory provision produces a manifestly absurd and unjust result which could never have been intended by the Legislature, the Court may modify the language used by the Legislature or even do some violence to it, so as to achieve the obvious intention of the Legislature and produce a rational construction."

    There is no difficulty in appreciating that the entire income derived by the assessee from business would be the total income of the assessee for purposes of working out the profits derived from exports. There is no dispute or difference of opinion in regard to the meaning of export turn- over in this case. The dispute is relating to the meaning of total turn-over. It has been accepted in the aforementioned cases that the other income of the assessee would not be included in the definition of the total turn-over. The contention on behalf of the assessee is that the turn-over is related to sales and the term cannot be used with reference to other receipts. This interpretation canvassed on behalf of the assessee, in our view, is doubtful. The contention on behalf of the assessee is based on various decisions of High Courts and Tribunals under the Sales Tax Laws of respective States. Under the said laws turn-over is defined and since the tax is in regard to sales or purchases, the definition is always related to the sales or purchases. Therefore, to restrict the same meaning to the turnover as used in section 80HHC, in our view may not be well founded. It would be relevant to refer to the dictionary meaning of the word ‘turn-over’. As per Webster’s Comprehensive Dictionary page-1355, the meaning of the word ‘turn-over’ as is relevant for the present purpose is as under:

    "turn-over - the amount of business accomplished or of work achieved; turn out. A completed commercial transaction or course of business; also the money receipts of a business for a given period."

    It is clear that as per the dictionary meaning of the word ‘turn-over’, the entire receipts in business would fall within the meaning of the turn over. When we see the context with which section 80HHC has used the word ‘total turn-over’ coupled with the intention of the Legislature to grant deduction with regard to the export profits only there is no doubt in our minds that the total turn-over would mean the entire receipts of business not necessarily in regard to sale of goods. This is a possible view which has been taken by the CIT, Administration in this case in exercise of his powers under section 263 though the basis for adopting the principle has not been explained by him.

    8. However, in this case, the issue before us is as to whether the CIT was justified in exercising his powers under section 263 on the basis that the decision of the Assessing Officer in granting deduction to the assessee in respect of the entire profits was erroneous and prejudicial to the interest of the revenue. We have mentioned elsewhere in this order that the view taken by the Assessing Officer is in accordance with the Special Bench in the case of International Research Park Laboratories Ltd. (supra). We have also expressed the possibility of another view in this case which the CIT has taken. Admittedly, when there are two views possible in a case then mere fact that the Assessing Officer has taken one view would not render his order as erroneous though it may be prejudicial to the interests of revenue. For exercising powers under section 263, two conditions must be satisfied. Firstly, the order sought to be revised must be erroneous and secondly, by reason of the said order there must be prejudice caused to the revenue. In this case it may be that a prejudice is caused to the revenue by adopting a view favourable to the assessee, yet, the order cannot be said to erroneous as a possible view in accordance with the decisions of the Tribunal (supra) was adopted by the Assessing Officer. Considering the facts and circumstances of this case, we are of the view that the action of the CIT under section 263 was not warranted as the view taken by the Assessing Officer cannot be said to be erroneous in view of the decisions of the Tribunal quoted elsewhere in this order. We, accordingly, cancel the orders of the CIT under section 263 and restore the orders of the Assessing Officer.

    9. We may point out that the controversy with regard to the meaning of export profits, profits and gains of business and total turn-over has been put at rest by various amendments in section 80HHC by the Finance Act (No. 2) of 1991 w.e.f. 1-4-1992.

    10. In the result, appeals of the assessee are allowed.

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    Comments

    Patel Cotton Co. Ltd. v. Assistant Commissioner of Income-tax
    (May 28, 1997)