Deduction u/s 80HHC can be allowed only if there is a positive profit

THIS is a rare case where the assessee lost consistently at all stages from AO, through, Commissioner (Appeals), ITAT, High Court and now the Supreme Court. For the assessment year 1992-93, the assessee appellant had claimed deduction under Section 80-HHC of the Income Tax Act. The assessing officer disallowed the claim on the ground that the 'profits of the business' computed under Section 80-HHC indicated a negative figure. An appeal was preferred before Commissioner of Income-Tax (Appeals), who also was of the same view and dismissed the appeal. The assessee failed before the ITAT also and the following questions were referred to the High Court. Whether, on the facts and circumstances of the case, 1. the Tribunal was justified in entertaining the additional ground raised by the assessee on an issue which had not been disputed earlier before the assessing officer or the first appellate authority? 2. the Tribunal is right in law in holding that the payment received from the export houses under the agreements could not partake the nature of receipt towards "charges" mentioned in clause (baa) of Explanation to Sec.80HHC? 3. on an interpretation of Sec. 8OHHC(3) would the assessee be entitled to the deduction in an amount equal to 90% of the sums referred to in clause (iiia) (not being profits on sale of a licence acquired from any other person) and clause (iiib) and clause (iiic) of section 28, the same proportion as the export turnover bears to the total turnover to the business carried on by the assessee? 4. the Tribunal is right in its interpretation of the term 'profits of business'? 5. the assessee is entitled to the benefits of sec. 80HHC of the Income Tax Act? The High Court held that the view taken by the assessing officer, CIT (A) and ITAT was in order. Accordingly, the reference was answered in favour of the department and against the assessee. The assessee after failing from AO to High Court is now before the Supreme Court. The Supreme Court's findings 1. Section 80-HHC has been incorporated with a view to providing 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. 2. If the wordings of the section are clear, then benefits, which are not available under the section, cannot be conferred by ignoring or misinterpreting words in the section. 3. In this case we are concerned with the wordings of sub-section (3) (c) of Section 80-HHC. Sub-section (3)(a) deals with the case where the export is only of self-manufactured goods. Sub- section (3)(b) deals with the case where the export is only of trading goods. 4. Thus, when the legislature wanted to take exports from self- manufactured goods or trading goods separately, it has already so provided in sub-sections (3)(a) and (3)(b). 5. It would not be denied that the word "profit" in Section 80-HHC (1) and Sections 80- HHC(3)(a) or (3)(b)means a positive profit. In other words, if there is a loss then no deduction would be available under Section 80-HHC (1) or (3)(a) or (3)(b). 6. 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. 7. Sub-section (3)(c) deals with cases where the export is of both self-manufactured goods as well as trading goods. The opening part of sub-section (3)(c) states "profits derived from such export shall". 8. A plain reading of sub- section (3)(c) shows that "profits from such exports" has to be profits from exports of self-manufactured goods plus profits from exports of trading goods. The profit is to be calculated in the manner laid down in 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. 9. It is clear from a reading of sub-section (1) of Section 80-HHC (3) that a deduction can be permitted only if there is a positive profit in the exports of both self-manufactured goods as well as trading goods. If there is a loss in either of the two then that loss has to be taken into account for the purposes of computing profits. 10. Section 80-HHC does not provide that its provisions are to prevail over Section 80-AB or over any other provision of the Act. Section 80-HHC would thus be governed by Section 80-AB. 11. Section 80-AB 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 losses have to be taken into consideration. 12. Even under Section 80-HHC (3) (c) (i) the profit is to be adjusted profit of business. The adjusted profit of the business means a profit as reduced by the profit derived from business of exports out of India of trading goods. 13. Thus if there is loss then those losses in export of trading goods have to be adjusted. They cannot be ignored. A plain reading of Section 80-HHC makes it clear that in arriving at profits earned from export of both self-manufactured goods and trading goods, the profits and losses in both the trades have to be taken into consideration. 14. If after such adjustments there is a positive profit, the assessee would be entitled to deduction under Section 80-HHC(1). If there is a loss he will not be entitled to any deduction. The Supreme Court noted that the Supreme Court had in IPCA Laboratory Ltd. Vs. Dy. Commissioner of Income Tax - 2004-TIOL-26- SC- IT and Income Tax Officer, Bangalore Vs. Induflex Products (P) Ltd - 2005-TIOL-159- SC-ITheld that the profit as contemplated under Section 80-HHC (1) and Section 80-HHC (3) means positive profit. In this case, the court was in respectful agreement with the view in the above cases and so dismissed the appeals.