THE COMMISSIONER OF INCOME TAX V. M/S B.PURNAIAH

RC/81/1996

AI Insights

The case revolves around the interpretation of Section 80HHC of the Income Tax Act, 1961, concerning the eligibility of rental income for deductions intended for profits derived from export activities. The Commissioner of Income Tax, Guntur, challenged the deductions claimed by M/s. Bommidala Purnaiah, a partnership firm engaged in tobacco trade, which included rental receipts from godowns. The ITAT had previously allowed these deductions, citing a Special Bench decision. However, the High Court, referencing Supreme Court and other High Court decisions, emphasized that only profits directly derived from export activities qualify for deductions under Section 80HHC. The court rejected the assessee's argument that the entire business income should be considered for the deduction, affirming that the rental income lacks the necessary direct nexus to the export business.

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 680405 (HC-ANDHRA_PRADESH)
• Appeal Type: Others
• Pronouncement Date: 07-08-2013
• Assessment Year: misc
• Other Referred Cases: International Research Park Laboratories Ltd. v. A.C.I.T., Commissioner of Income Tax v. Sterling Foods, Commissioner of Income Tax v. Jindal Fine Industries
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: HIGH COURT
• Keywords: Deduction; Export business; Income Tax; Rental income; Section 80HHC
• Section: 143(3); 263; 80HHC

Judgement Text

"IN THE HIGH COURT OF JUDICATURE, ANDHRA PRADESH AT HYDERABAD (Special Original Jurisdiction) PRESENT THE HON’BLE THE CHIEF JUSTICE SRI KALYAN JYOTI SENGUPTA AND THE HON’BLE SRI JUSTICE K.C. BHANU REFERRED CASE NO.81 OF 1996 DATED:7.8.2013 Between: Commissioner of Income Tax Guntur … Applicant And M/s. Bommidala Purnaiah Guntur … Respondent THE HON’BLE THE CHIEF JUSTICE SRI KALYAN JYOTI SENGUPTA AND THE HON’BLE SRI JUSTICE K.C. BHANU REFERRED CASE NO.81 OF 1996 ORDER: (per the Hon’ble the Chief Justice Sri Kalyan Jyoti Sengupta) This matter has been referred by the Revenue for opinion of this Court on the following question. “Whether, on the facts and circumstances of the case, the ITAT is correct in law in holding that the rental receipts arising from lease of godowns shall qualify for deduction under Section 80HHC of the Income Tax Act?” Before we express our opinion, answering in either way, we note short facts hereunder. The assessee is a partnership firm carrying on business in tobacco trade. For the assessment year 1986-87, the assessment was completed under Section 143(3) of the Income Tax Act, 1961 (for short, ‘the Act’), on 29.2.1988, whereas for the assessment years 1987-88 and 1988-89, assessments were completed on 28.2.1989. While scrutinizing the assessment records, the Commissioner noticed that the assessee claimed deduction under Section 80HHC of the Act, amounting to Rs.3,06,171.42 for the assessment year 1986-87; Rs.15,13,082/- and Rs.14,99,213/- for the assessment years 1987-88 and 1988-89 respectively and the same were allowed by the Assessing Officer while completing the aforesaid assessments. He noted that the assessee, while arriving at the quantum of deduction, took the income under the head ‘business’ as a whole, including rental receipts arising from lease of godowns. According to the Commissioner of Income Tax, the rental receipts etc., arising from lease of godowns do not have any nexus to the main business activity of purchase and sale of tobacco. He noted that Section 80HHC(3)(b) of the Act provides that where the business carried on by the assessee does not consist exclusively of the export out of India of the goods or merchandise, the export profits shall be the amount which bears to the profits of the business, the same proportion as the export turnover bears the total turnover of the business carried on by the assessee. According to him, the relief envisaged under Section 80HHC of the Act is with reference to the income derived from the business in export trade alone and cannot be related to any other lines of business carried on by the assessee, other than export trade. As such, the assessee’s claim under Section 80HHC of the Act on the total income derived from business other than export trade, is not in conformity with the provisions of law, and the rent receipts therefore do not form part of business income for the purpose of deduction under Section 80HHC of the Act. Consequently, the Commissioner was of the view that the Assessing Officers erroneously allowed the assessee’s claim for deduction under Section 80HHC of the Act in toto, for all the assessment years, as such the same is prejudicial to the interest of the Revenue. He accordingly after issuing show cause notice to the assessee and after considering the objections of the assessee to the proposed action under Section 263 of the Act, set aside the assessment orders and directed the Assessing Officer to examine the assessee’s claim for deduction under Section 80HHC of the Act afresh in the light of his observations in the said order under Section 263 of the Act. On appeal, the Tribunal, following the Special Bench decision of the Tribunal, in the case of International Research Park Laboratories Ltd. v. A.C.I.T.[1], accepted the contention of the assessee that it is the whole of the business income of the assessee that has to be taken into consideration for computing deduction under Section 80HHC of the Act, and accordingly reversed the order of the Commissioner under Section 263 of the Act. Learned counsel Mr. J.V. Prasad, appearing for the Revenue contends that the question referred for the opinion of this Court should be answered in the negative and in favour of the Revenue. He has drawn our attention to Section 80HHC of the Act, which was in operation at the relevant assessment years. He submits that the intention of the Legislature for providing deduction in respect of those profits derived from export business is to give incentives to the exporters and only the amount of the exports can be taken into account for the purpose of deduction and no other income from the business activity shall be allowed for deduction. According to him, the income received from the business property of the assessee do not form part of the export business as the business of the assessee is purchase and sale of tobacco, and export of tobacco products, and the rental income do not form or even accrue in the business activity. In support of his contention, learned counsel for the Revenue has referred to the decision of the Supreme Court in the case of Commissioner of Income Tax v. Sterling Foods[2] and a Division Bench judgment of the Punjab and Haryana High Court in the case of Commissioner of Income Tax v. Jindal Fine Industries[3]. Learned counsel for the assessee has drawn our attention to clause (b) of sub-section (3) of Section 80HHC of the Act which was in operation at the relevant assessment years. He submits that if sub- section (1) and sub-section (3) clause (b) of Section 80HHC of the Act are read together, it would appear that the entire business income of the assessee has to be considered for deduction in respect of profits derived from the export business. He says that the question raised by the Revenue is not an appropriate one and the real question should be, ‘whether the business income as derived from its activity by the assessee should be taken as a whole, namely, while taking income from export, income from rental should be taken together or not?’ We have heard both the learned counsel and we are unable to accept the contention of learned counsel for the assessee that the question framed by the Tribunal is not an appropriate one and the question should have been framed otherwise. We are of the view that it is the mindset of the Tribunal to formulate the question, not of the assessee. At the time of formulation of question by the Tribunal, the assessee should have raised this point and objected to the same. At this stage, this objection cannot be entertained by the Court. The Court is to give opinion on the question referred. Before we proceed further, we set out Section 80HHC of the Act, which was in operation at the relevant assessment years. “Deduction in respect of profits retained for export business. 80HHC. (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 an amount, not exceeding fifty per cent of the profits derived by the assessee from the export of such goods or merchandise: Provided that an amount equal to the amount of the deduction claimed under this sub-section is debited to the profit and loss account of the previous year in respect of which the deduction is to be allowed and credited to a reserve account to be utilized for the purposes of the business of the assessee. (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. (b) This section does not apply to the following goods or merchandise, namely:- (i) mineral oil; and (ii) minerals and ores, (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. Explanation: For the purposes of this section, -- (a) ‘convertible foreign exchange’ means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange Regulation Act, 1973 (46 of 1973), and any rules made thereunder; (b) ‘export turnover’ means the sale proceeds receivable by the assessee in convertible foreign exchange of any goods or merchandise to which this section applies and which are exported out of India, but does not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act, 1962 (52 of 1962).” While bearing in mind the language and purport of the Section, this Court is to express opinion whether rental income derived from lease of the property by the assessee shall be deducted under Section 80HHC of the Act, treating the same as export profits. The scope of Section 80HHC of the Act is very clear. We gather on a reading of the Section that the object of the Legislature is to give incentive to exporters and such deduction shall be given only in case of exports of goods or merchandise. In this case, the business activity carried on by the assessee is purchasing and selling tobacco either in domestic market or exporting. The income must have direct relation or nexus to exports consequently profits and gains therefrom for allowing deduction under Section 80HHC of the Act. The assessee in order to claim deduction has to satisfy that there has been income from export and there should be profit therefrom and then not exceeding fifty per cent of the profits derived by the assessee from export of such goods or merchandise. Sub-section 3(b) of Section 80HHC of the Act has clarified how the deduction as to be computed where the income of the assessee is a mixed one, both from exports as well as others. In our considered view, clause (b) of subjection (3) does not envisage deduction of any income other than the profit from export as mentioned in Section (1) of Section 80HHC of the Act. We find some weight in the argument of Mr. J.V. Prasad, learned counsel for the Revenue, that in order to get benefit under Section 80HHC of the Act, the assessee has to satisfy that there must be direct nexus between the profits and gains and the industrial undertaking. The Supreme Court in the case of Sterling Foods (supra 2), at page 584, has laid down the above ratio, which we quoted as follows: “…There must be, for the application of the words ‘derived from’, a direct nexus between the profits and gains and the industrial undertaking.” In the case on hand, the assessee has admittedly carrying on business of purchase and selling tobacco and rental income was received by way of leasing out the property to third parties. It may be one of the component of the income from the business, but it cannot be an income which will give raise to claim deduction under Section 80HHC of the Act. On fact, the Punjab and Haryana High Court in the case of Jindal Fine Industries (supra 3) held that if the business activity does not exclusively consist of exports outside India of goods or merchandise, and had a mixture of export as well as domestic activities, the assessee would be entitled to have deduction as per clause (b) of sub- section (3) of Section 80HHC of the Act, on a prorata basis. It was further held as follows: “A plain reading of clause (a) of sub-section (3) of section 80HHC of the Act shows that for the purposes of sub-section (1), profits derived from the export of the eligible goods or merchandise out of India in a case where business carried on by the eligible assessee consists exclusively of the export out of India of the goods or merchandise shall be the profits of the business as computed under the head ‘Profits and gains of business or profession’.” It was further held therein that ‘in a case where the business carried on by the eligible assessee did not consist exclusively of export out of India of the goods or merchandise but includes domestic sales as well, then clause (b) of sub-section (3) it shall be 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 eligible assessee.’ Thus, it is clear from the above decisions the emphasis is on the income and consequential profit from the exports and exports alone, and only in that situation deduction under Section 80HHC of the Act can be allowed. In view of the aforesaid discussion, we express our opinion that the ITAT is not correct in law in holding that the rental receipts arising from lease of goods shall qualify for deduction under Section 80HHC of the Income Tax Act, 1961. Hence, we answer the question in negative, and in favour of the Revenue. The reference is allowed in the manner as above. ________________________ K.J. SENGUPTA, CJ ______________________ K.C. BHANU, J 7.8.2013 bnr [1][1994] 50 ITD 37 (Del) [2] [1999] 237 ITR 579 (SC) [3] [2008] 307 ITR 307 (P&H) "