1.1 S. 80HHC, inserted by the Finance Act, 1983 w.e.f. 1st
April, 1983 for grant of deduction in respect of the profits derived from
exports of goods and merchandise, has since undergone several changes. The
relevant part of the provision, at present, relevant to this discussion, reads
as under :
“Explanation : For the purposes of this Section, :
(baa) ‘profits of the business’ means the profits of the
business as computed under the head ‘Profits and gains of business or
profession’ as reduced by :
(1) ninety per cent of any sum referred to in clauses (iiia),
(iiib), (iiic), (iiid) and (iiie) of S. 28 or of any receipts by way of
brokerage, commission, interest, rent, charges or any other receipt of a similar
nature included in such profits; and
1.2 ‘Profits of the business’ as defined in clause (baa) of
the Explanation requires that the profits derived from exports is computed under
the head ‘Profits and gains of business and profession’ and such profits
determined in accordance with S. 28 to S. 44D is to be further adjusted on
account of clause (baa), namely, ninety percent of any receipts by way of
brokerage, commission, interest, rent, charges or any other receipt of a similar
nature included in such profits.
1.3 The issue that is being fiercely debated, is concerning
the true meaning of the terms ‘interest, etc.’ and ‘receipts’ used in Expln.
(baa). Whether the terms individually or collectively connote net interest, etc.
i.e., the gross interest income less the expenditure incurred for earning
such income ? A related question, in the event it is held that the terms connote
netting of interest, is should netting be allowed where the interest income is
computed as business income ?
1.4 The issue believed to be settled by the decision of the
Special Bench of the ITAT in the case of Lalsons, 89 ITD 25 (Delhi) became
controversial due to the decisions of the Madras and Punjab and Haryana High
Courts. Again, these decisions of the High Court were not followed by the
decision of the Delhi High Court, upholding the ratio of the Lalsons’ decision.
The peace prevailing thereafter has been short-lived in view of the recent
decision of the Bombay High Court, dissenting form the decision of the Delhi
High Court.
2. Shri Ram Honda Equip’s case :
2.1 The issue arose for consideration of the Delhi High Court
in Shri Ram Honda Power Equip, 289 ITR 475 wherein substantial questions of law
concerning the interpretation of S. 80HHC, Ss. (1) and (3) and clause (baa) of
the Explanation, were raised before the High Court as under :
(a) Does the expression ‘profits derived from such export’
occurring in Ss.(3) r/w Expln. (baa) restrict the profits available for
deduction in terms of Ss.(1) to only those items of income directly relatable to
the business of export ?
(b) Does the expression ‘interest’ in Expln. (baa) connote
net interest, i.e., the gross interest income less the expenditure
incurred by the assessee for earning such income ?
(c) If the expression ‘interest’ implies net interest, then
should netting be allowed where the interest income is computed to be business
income ?
2.2 The two broad issues identified by the Court from the
three questions referred to it were the determination of the nature of interest
income and the issue of netting of interest. The Court noted that the first step
was to determine whether in a given case the income from interest was assessable
as a ‘business income’, computed in terms of S. 28 to S. 44, or as an ‘income
from other sources’ determined u/s.56 and u/s.57 and to ascertain thereafter,
whether while deducting ninety percent of interest therefrom in terms of Expln.
(baa), gross or net interest should be taken in to account.
2.3 It was contended on behalf of the assessee that profits cannot be arrived at by any businessman without accounting
for the expenditure incurred in earning such interest; that the entire clause
(baa) had to be read along with the scheme of S. 80HHC(1) and (3) and given a
meaning that did not produce absurd results; that the interpretation should
reflect a liberal construction conforming to the object of encouraging exports;
that use of the term ‘included in such profits’ following the words ‘brokerage,
commission, interest, rent, charges or any other receipts of a similar nature’
was indicative that such amounts were the ‘net’ amounts and only net interest
was includible in the profits; hence once interest income had been computed as
business income, then netting had to be allowed.
2.4 It was further urged that as per the mandate of clause
(baa) the profits and gains of business or profession had to be first computed
as per S. 28 to S. 44, including S. 37, which envisaged accounting for the
expenditure incurred by an assessee for earning the income. The assessees also
relied on paragraph 30.11 of Circular No. 621, dated. 19-12-1991 which provided
for ad hoc 10 percent deduction to account for the expenses. It was
further urged that the Legislature wherever desired had used the expression
‘gross’ as in S. 80M, S. 40(b), S. 44AB, S. 44AD and S. 115JB, making it clear
that the Legislature in terms of S. 80HHC intended that the interest to be
accounted for in computing the profits should be net interest; that the language
of the Section was unambiguous and therefore there was no need to supply the
word ‘gross’ as qualifying the word ‘interest’. Therefore, applying the same
rule of causus omissus, such word could not be read into the Section.
Reliance was placed on the decision in Distributors (Baroda) (P) Ltd., 155 ITR
120 (SC).
2.5 On the issue of netting, it was submitted on behalf of
the Revenue that even where the interest income was determined to be business
income, netting should not be permitted; that there could be no casus omissus,
in other words, the Court ought not to supply words when none exist; that just
as the assessees argued the Legislature if intended would have used the term
‘net’ and would have said so and in the absence of such a clear enunciation, the
word ‘interest’ has to be interpreted to mean ‘gross interest’; that applying
the strict rule of construction in interpreting the statutes, the expression
‘interest’ occurring in clause (baa) could only mean gross interest and that the
treatment in either case should be uniform.
2.6 On behalf of the Revenue it was further urged that the Legislature had permitted the retention of 10% of interest income to compensate for expenses laid out for earning such income, therefore any further deduction of the expenditure incurred for earning such interest, if permit-ted, would amount to a double deduction which clearly was not envisaged; that clause (baa) of the Explanation to S. 80HHC envisaged a two-step process in computing profits derived from exports, first, the AO was required to apply S. 28 to S. 44 to compute the profits and gains of business or profession. In doing so, the AO might find that certain incomes, which had no nexus to the ex-port business of the assessee, were not eligible for deduction and therefore ought to be treated as income from other sources. Once that was done, then 90% of the receipts referred in clause (baa) had to be deducted in order to arrive at the profits derived from profits. Reliance was placed on the decision of K. Venkata Reddy v. CIT, 250 ITR 147 (AP) in support of this submission. Even if the interest earned was to be construed as part of the business income, the netting should not be permitted since the statute did not specifically say so relying on the judgments in IPCA Laboratory Ltd. v. Dy. CIT, 266 ITR 521 (SC), CIT v. V. Chinnapandi, 282 ITR 389 (Mad.) and Rani Paliwal v. CIT, 268 ITR 220 (P & H).
2.7 The Delhi High Court found merit in the contention of the assessee that not accepting that interest in the context referred to net interest, might produce unintended or absurd results. The Court referring to the decision of Keshavji Ravji & Co. v. CIT, 183 ITR 1 (SC) highlighted that the underlying principle of netting appeared to be logical as no prudent businessman would allow taxation of the interest income de hors the expenditure incurred for earning such income. The words ‘included in such profits’ following the words ‘receipts by way of interest, commission, brokerage, etc.’, was a clear pointer to the fact that only net interest would be includible in arriving at the business profit; once business income had been determined by applying accounting standards as well as the provisions contained in the Act, the assessee would be permitted to, in terms of S. 37, claim as deduction, expenditure laid out for the purposes of earning such business income. The Court noted with approval the proposition for netting of income found from Circular No. 621, dated 19-12-1991 of the CBDT.
2.8 The Court observed that object of S. 80HHC was to ensure that the exporter got the benefit of the profits derived from export and was not to depress the profit further; if the deduction of 90% was of the gross interest itself, the amount spent in earning such interest would depress the profit to that extent by remaining on the debit side of the P&L Account; therefore, it could only be the net interest which could be included in the profits; if netting were not to be permitted, the result would be that the profits of the exporter would be depressed by an item that was expenditure incurred on earning interest, which did not form part of the profit at all; such could not have been the intention of the Legislature.
2.9 The Court did not approve of the contention that the treatment of clause (a) of S. 80HHC(3) should be no different from clause (b) of the same sub-section as the said clause (baa) was relatable only to clause (a) of S. 80HHC(3) and not to clause thereof; the provisions operated in distinct areas and no inter-mixing was contemplated.
2.10 For all these reasons, the Court held that the word ‘interest’ in clause (baa) to the Explanation in S. 80HHC was indicative of ‘net interest’, i.e., gross interest less the expenditure incurred by the assessee in earning such interest. The Court affirmed the decision of the Special Bench of the ITAT in Lalsons Enterprises (supra) holding that the expression ‘interest’ in clause (baa) of the Explanation to S. 80HHC connoted ‘net interest’ and not ‘gross interest’.
2.11 The Court noted that in deciding the issue in Rani Paliwal’s case (supra), the Punjab & Haryana High Court, without any detailed discussion simply upheld the Tribunal’s order and therefore did not follow the ratio of the said decision in these words: “We are afraid that there is no reasoning expressed by the High Court for arriving at such a conclusion. For instance, there is no discussion of the CBDT Circular and in particular para 32.11 thereof which indicates that netting is contemplated in Expln. (baa). Also, it does not notice the effect of the words ‘included in such profits’ following the words ‘receipts by way of interest….’ in the said Explanation. We are therefore unable to subscribe to the view taken by the Punjab & Haryana High Court in Rani Paliwal (supra).” The Court accordingly differed with the views of the Punjab & Haryana High Court in Rani Paliwal’s case.
2.12 While differing with the decision of the Madras High Court in Chinnapandi’s case, the Court observed as under: “The Madras High Court in CIT v. V. Chinnapandi (supra) held that even where the interest receipt is treated as business income, the deduction within the meaning of Expln. (baa) is permissible only of the gross interest and not net interest. The High Court appears to have followed the earlier judgment in K. S. Subbiah Pillai & Co. (supra) without noticing that in K. S. Subbiah Pillai (supra), the interest receipt was treated as income from other sources and not as business income. Also, the High Court in V. Chinnapandi (supra) chose to follow Rani Paliwal (supra), which, as explained earlier, gives no reasoning for the conclusion therein. Also, V. Chinnapandi (supra) does not advert to either the CBDT Circular or the judgment of the Special Bench in Lalsons (supra), with which we entirely concur on this aspect.”
2.13 The Court accordingly held that the net interest i.e., the gross interest less the expenditure incurred for the purposes of earning such interest, in terms of Expln. (baa), only be reduced from the profits of the business in cases where the AO treated the interest receipt as business income.
Asian Star Co. Ltd.’s case:
3.1 Recently the issue again arose before the Bombay High Court in the case of CIT v. Asian Star Ltd. in appeal No. 200 of 2009. In a decision delivered on March 18/19, 2010 the Court was asked to consider the following question of law:
“Whether on the facts and in the circumstances of the case and in law, the Tribunal was correct in holding that net interest on fixed deposits in banks received by the assessee-company should be considered for the purpose of working out the deduction u/s.80HHC and not the gross interest?”
3.2 The assessee carried on the business of the export of cut and polished diamonds. A return of income for A.Y. 2003-04 was filed, declaring a total income of Rs. 13.91 crores, after claiming a deduction of Rs.13.22 crores u/s.80HHC. The assessee had debited an amount of Rs. 21.46 crores as interest paid/payable to the Profit and Loss Account net of interest received of Rs. 3.25 crores. The assessee was called upon to explain as to why the deduction u/s.80HHC should not be recomputed by excluding ninety percent of the interest received in the amount of Rs.3.25 crores. By its explanation, the assessee submitted that during the year, it received interest on fixed deposits. The assessee stated that it had borrowed monies in order to fulfil its working capital requirements and the Bank had called upon it to maintain a fixed deposit as margin money against the loans. The assessee consequently contended that there was a direct nexus between the deposits kept in the Bank and the amounts borrowed.
3.3 The Assessing Officer, found that the explanation of the assessee could not be accepted since a plain reading of Explanation (baa) to S. 80HHE suggested that ninety percent of the receipts on account of brokerage, commission, interest, rent, charges or receipts of a similar nature were liable to be excluded while computing the profits of the business. In appeal, the CIT (Appeals) held that the assessee had established a direct nexus between interest-bearing fixed deposits and the ‘interest charging’ borrowed funds and he directed the Assessing Officer to allow the netting of interest income and interest expenses. The view of the CIT (Appeals) was confirmed in appeal by the Income-tax Appellate Tribunal. The Tribunal held that the finding of the Appellate Authority was based on the existence of a nexus between borrowed funds and fixed deposits. The Tribunal followed its decision in the case of Lalsons Enterprises, 89 ITD 25 (Delhi).
3.4 The Revenue contended that for computing the profits and gains of the business for S. 80HHC, ninety percent of the receipts by way of interest had to be reduced from the profits and gains of business or profession and the ‘receipts’ to be so reduced were the gross receipts; consequently, the gross receipts by way of interest could not be netted against expenditure which was laid out for the earning of those receipts; the reduction provided by the law was independent of any expenditure that was incurred in the earning of the receipts; that non -operational income should be excluded as it had no nexus with the export turnover, while on the other hand, it depressed profits by including expenditure which had been incurred for those very items which led to a consequence which could not have been intended by the Parliament having regard to the beneficial object underlying the provision.
3.5 The summary of the assessee’s contentions was that (i) The words ‘any receipts’ denoted the nature and not the quantum of the receipt;
The expression, therefore, required the nature of the receipts to be examined; (iii) Explanation (baa) referred to any receipts of a similar nature ‘included in such profits’. The words ‘such profits’ meant profits and gains of business or profession computed u/s.28 to u/s.44D; (iv) Profits could only be arrived at after the deduction of expenditure from income and the net effect thereof constituted profits; (v) Explanation (baa) did not use the expression ‘gross or net’. However, having regard to the purpose and object of the provision and the nature of the language used in the Explanation, ninety percent of the receipts that was required to be excluded had to be computed with reference to inclusion of such receipts in profits and gains of business which in turn involved both credit and debit sides of the profit and loss account; (vi) For purposes of Explanation (baa), income from other sources would not come within the purview of the Explanation; Only business income had to be considered and interest in the nature of business income had to be taken into consideration; (vii)Receipts by way of interest in Explanation (baa) denoted the nature of the receipts and inclusion in ‘such profits’ would denote the quantum of the receipts; (viii) The words used by the Legislature suggested what was included in the total income or had gone into the computation of total income. Consequently, both debit and credit sides of the profit and loss account would have to be consid-ered; (ix) The words ‘such profits’ could only mean such profits as computed in accordance with the provisions of the Act; (x) The words ‘receipt’ and ‘income’ in Explanation (baa) were interchangeably used and consequently, receipts would have to be read as income; (xi) The correct interpretation was to take into consideration netting and exclude all expenses which had a direct nexus with the earning of the income; (xii) The provision being an incentive provision under Chapter VIA, must be beneficially construed in order to encourage exports; (xiii)
The word ‘profits’ denoted profits in a commercial sense; (xiv) the object of the exclusion contained in Explanation (baa) was to sequester certain non-operational income which did not bear a direct nexus with export income and as a consequence, the exclusion could not be confined only to credit side of the profit and loss account, but must extend equally to the debit side, subject to the rider that a clear nexus has to be established.
3.6 The Bombay High Court explaining the rationale underlying the exclusion noted that : Ss.(3) of S. 80HHC was inserted by the Finance Act of 1991, with effect from 1st April 1992; the adoption of the formula in Ss.(3) was to disallow a part of the concession when the entire deduction claimed could not be regarded as being derived from export; S. 80HHC had to be amended several times since the formula had resulted in a distorted figure of export profits where receipts such as interest, rent, commission and brokerage which did not have a direct nexus with export turnover were included in the profit and loss account and resultantly became a subject of deduction; by the amendment, the position that emerged was that receipts which did not have any element of or nexus with export turnover would not become eligible for deduction merely because they formed part of the profit and loss account; this aspect of the history underlying S. 80HHC, had been elaborated upon in the judgment of the Supreme Court in the case of CIT v. Lakshmi Machine Works, 290 ITR 667.
3.7 The Court further noted that; the Explanation (baa) had to be read in the context of the background underlying the exclusion of certain constituent elements of the profit and loss account from the eligibility for deduction; what Explanation (baa) postulated was that, in computing the profits of business for S. 80HHC, the profits of business had to be first computed under the head profits and gains of business or profession, in accordance with S. 28 to S. 44D; once that exercise was complete, those profits had to be reduced to the extent provided by clauses (1) and (2) of Explanation (baa); that such receipts by way of brokerage, commission, interest, rent, charges or other receipts of a similar nature, though included in the profits and gains of business or profession, did not bear a nexus with the export turnover and consequently, though included in the computation of profits and gains of business or profession, ninety percent of such receipts had to be excluded in computing the profits of business for S. 80HHC; the reason for the exclusion was borne out by the Circular issued by the CBDT on 19-12-1991 which noted that the formula then existing often presented a distorted figure of export profits when receipts like interest, commission, etc. which did not have an element of turnover were included in the profit and loss account; the Court was required to give a meaning to the provision consistent with the underlying scheme, object and purpose of the statutory provision; the Parliament considered it appropriate to exclude from the purview of the deduction u/s.80HHC, certain receipts or income which did not have a proximate nexus with export turnover though such items formed part of the profit and loss account and form a constituent element in the computation of the profits or gains of business or profession u/s.28 to u/s.44D. The interpretation which Court placed on the provisions of S. 80HHC and on Explanation (baa) must be consistent with the law laid down by the Supreme Court in the cases of CIT v. K. Ravindranathan Nair, 295 ITR 228 295 ITR 228 where the Supreme Court held that processing charges, though a part of gross total income constituted an item of independent income like rent, commission and brokerage and consequently, ninety percent of the processing charges had to be reduced from gross total income to arrive at business profits, and Lakshmi Machine Works (supra) where the issue before the Supreme Court was whether excise duty and sales tax were included in the total turnover for the purpose of working out the formula contained in S. 80HHC(3) and the Supreme Court held that the object of the Legislature in enacting S. 80HHC was to confer benefit on profits accruing with reference to export turnover and the Supreme Court in that case had observed that ‘commission, rent, interest, etc. did not involve any turnover’ and ‘therefore, ninety percent of such commission, interest, etc. was excluded from the profits derived from?the?export,’?just?as?interest, commission, etc. did not emanate from export turnover, so also excise duty and sales tax had to be excluded.
3.8 The Court explained the resultant position in law as that while prescribing the exclusion of the specified receipts the Parliament was, however, conscious of the fact that the expenditure incurred in earning the items which were liable to be excluded had already gone into the computation of business profits as the computation of business profits under Chapter IV is made by amalgamating the receipts as well as the expenditure incurred in carrying on the business; since the expenditure incurred in earning the income by way of interest, brokerage, commission, rent, charges or other similar receipts had also gone into the computation of business profits, the Parliament thought it fit to exclude only ninety percent of the receipts received by the assessee in order to ensure that the expenditure which was incurred by the assessee in earning the receipts which had gone into the computation of the business profits is taken care of; the reason why the Parliament confined the reduction factor to ninety percent of the receipts was stated in the Memorandum explaining the provisions of the Finance Bill of 1991; the Parliament, therefore, confined the reduction to the extent of ninety percent of the income earned through such receipts since it was cognizant of the fact that the assessee would have incurred some expenditure in earning those incomes and therefore it provided an ad hoc deduction of ten percent from such incomes to account for the expenses incurred in earning the receipts; the distortion of the profits that would take place by excluding the receipts received by the assessee which were unrelated to export turnover and not the expenditure incurred by the assessee in earning those receipts was factored in by the Parliament by excluding only ninety percent of the receipts received by the assessee; the Parliament thought it fit to adopt a uniform formula envisaging a reduc-tion of ninety percent to make due allowance for the expenditure which would have been incurred by the assessee in earning the receipts, though in a given case it might be more or less as it was considered to be reasonable parameter of what would have been expended by the assessee; in order to simplify the application of the law, the Parliament treated a uniform expenditure computed at ten percent to be applicable in order to ensure that there is no distortion of profits by exclusion of income not relatable to export profits.
3.9 In view of the objective of the Parliament behind the introduction of the Explanation (baa) and its desire to provide uniformity of the treatment and the fact that the deduction of S. 80HHC was related to export turnover, the Bombay High Court held that the ratio and the findings of the Supreme Court in the case of the Distributors (Baroda) P. Ltd. v. Union of India, 155 ITR 120 were not relevant in the context of the issue under consideration by the Court; it was in order to obviate a distortion that the Parliament mandated that ninety percent of the receipts would be excluded; consequently, while the principle which had been laid down by the Supreme Court in Distributors (Baroda)’s case must illuminate the interpretation of the words ‘included in such profits’, the Court could not, at the same time, be unmindful of the reduction which was postulated by Explanation (baa), the extent of the reduction and the rationale for effecting the reduction.
3.10 The Bombay High Court noted with approval the decisions of the High Courts in the cases of K. S. Subbiah Pillai & Co. (India) Pvt. Ltd. v. CIT, CIT v. V. Chinnapandi, Rani Paliwal v. CIT and CIT v. Liberty Footwears. In view of number of reasons advanced and after a careful consideration the Bombay High Court was not inclined to follow the judgment of the Division Bench of the Delhi High Court in CIT v. Shri Ram Honda Power Equipments as the simi-larity between the provisions of S. 80HHC and S. 80M which was relied upon in the judgment of the Delhi High Court missed the comprehensive position as it obtained u/s.80HHC.Such similarity of the provisions should not result into an assumption that the provisions were identical, when they were not as the Parliament had adopted a fair and reasonable statutory basis of what may be regarded as expenditure incurred for the earning of the receipts. Once the Parliament had legislated both in regard to the nature of the exclusion and the extent of the exclusion, it would not be open to the Court to order otherwise by rewriting the legislative provision. The Court observed with respect that the Delhi High Court had not adequately emphasised the entire rationale for confining the deduction only to the extent of ninety percent of the excludible receipts.
3.11 The displeasure of the Bombay High Court with the decision of the Special Bench in Lalsons Enterprises’s case, can best be explained in the Court’s own words “We are affirmatively of the view that in its discussion on the issue of netting, the Tribunal in its Special Bench decision in Lalsons has transgressed the limitations on the exercise of judicial power. The Tribunal has in effect, legislated by providing a deduction on the ground of expenses other than in the terms which have been allowed by the Parliament. That is impermissible. In the present case, it is necessary to emphasise that the question before the Court relates to the deduction u/s.80HHC. An assessee may well be entitled to a deduction in respect of the expenditure laid out wholly and exclusively for the purpose of business in the computation of the profits and gains of business or profession. However, for the purposes of computing the deduction u/s.80HHC, the provisions which have been enacted by the Parliament would have to be complied. A deduction in excess of what is mandated by the Parliament cannot be allowed on the theory that it is an incentive provision intended to encourage export. The extent of the deduction and the conditions subject to which the deduction should be granted, are matters for the Parliament to legislate upon. The Parliament having legislated, it would not be open to the Court to deviate from the provisions which have been enacted in S. 80HHC.”
3.13 The Bombay High Court allowed the appeal of the Revenue by holding that the Tribunal was not justified in coming to the conclusion that the net interest on fixed deposits in the bank received by the assessee should be considered for the purposes of working out the deduction u/s.80HHC and not the gross interest.
4.Observations:
4.1 The issue has been clearly identified and argued and is further highlighted by sharply contrasting views of the High Courts on the subject. The Apex Court alone can bring finality to this fiercely contested issue.
4.2 As we understand from the reading of the Bombay High Court decision, the case of an exporter for netting of interest, etc. having nexus with the export activity is fortified. It is in cases where such receipts have no nexus with the export activity that a shadow of serious doubt has been cast by the recent decision of the Bombay High Court.
4.3 In bringing a finality to the issue, in addition to the issues which are very succinctly brought to the notice of the Courts by the contesting parties, the following aspects will have to be conclusively adjudicated upon;
4.3.1 While in a good number of cases, it maybe true that the ends of the justice will be met by allowing a deduction of 10% of the income, such a benchmark will be found to be woefully inad-equate in cases where the activity is conducted in an orderly manner, as a business. For example, a broker or a commission agent paying a sizeable amount to a sub-broker or sub-agent or lender of funds advancing loans out of borrowed funds bearing interest. In the examples given, the expenditure surely would exceed the benchmark of 10% of income. The allowance of 10% of income, in such cases, cannot be considered to be reasonable by any standard. In such cases, at least, it will be fair to read that the receipt in question is the net receipt, more so as in the cases of person who had accounted only net receipt in the books.
4.3.2 The allowance of any direct expenditure may have always been presumed and it is for avoiding any controversy in relation to an indirect expenditure that the 10% allowance is granted by the Legislature.
4.3.3 The direct expenditure, if not allowed, will give absurd results inasmuch as the same has the effect of depressing the export profit, otherwise eligible for deduction. If such receipts were to be taken out of the business profits on the footing that they had no connection with the business profits or turnover, it would only be reasonable to hold that expenditure having nexus with such receipts should also be taken out of the business profits on the same footing.
4.3.4 The result surely will be different in case where the assesssee is found to have maintained separate books of account or where the accounting is net of direct cost.
4.3.5 The result will also be different in cases where the assessee on his own had treated the receipt as also the income under a separate head of income.
4.3.6 It is an accepted principle of interpretation that the law has to be read in the context in which has placed. RBI v. Peerless General Finance Investment Co. Ltd., 61 Comp Case 663. The Delhi High Court clarified that it was inclined to adopt this contextual approach further enunciated by the Madras High Court in CIT v. P. Manonmani, 245 ITR 48 (Mad.) (FB). The context in which the word ‘receipt’ is used in Expln. (baa) may mean such receipts as reduced by the expenditure laid out for earning such income. The possible way to reconcile this is as was done by the Delhi High Court by reading the expression ‘receipts by way of brokerage, commission, interest….’ as referring to the nature of receipt, which in the context of S. 80HHC connotes ‘income’.
4.3.7 Paragraph 32.10 of Circular No. 681, dated 19-12- 1991 reads as under: “The existing formula often gives a distorted figure of export profits when receipts like interest, commission, etc., which do not have element of turnover are included in the P&L Account. It has, therefore, been clarified that ‘profits of the business’ for the purpose of S. 80HHC will not include receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature. As some expenditure might be incurred in earning these incomes, which in the generality of cases is part of common expenses, ad hoc 10% deduction from such incomes is provided to account for these expenses.”
4.3.8 Circular No. 621 explained the provisions of the amendment and in so explaining has favoured netting, as has been highlighted by the Delhi High Court. If that is so, the full effect, though benefi-cial, shall be given to such interpretation advanced by the Circular of the CBDT in preference to the Notes and the Memorandum. Full effect may be given to the above-referred CBDT Circular which acknowledges that ‘receipts by way of brokerage, commission, interest’, etc., are ‘incomes’ and in order to give effect to this expression, the principle of netting will have to be applied.
4.3.9 Due weightage will have to be given to the true meaning of the words ‘included in such profits’ which precede the words ‘receipts by way of brokerage, commission and interest’.
4.3.10 The ratio of the decision of the Constitutional Bench of the Supreme Court in the case of Distributors (Baroda) (P) Ltd., though considered by the Courts, will have to be revisited in order to conclusively appreciate the meaning of the words and the expressions ‘receipts by way of’ ‘included in such profits,’ ‘such profits’ and ‘computed in accordance with the provisions of the Act’.
4.3.11 The three different expressions, namely, ‘any sums’, ‘receipts’ and ‘profits’, used by the Parliament will have to be reconciled.
4.4 This controversy has plagued a good number of cases and it will be in the fitness of the things that the Government adopts a reconciliatory approach and issues a dispensation or a directive for addressing the issue that does not clog the wheels of justice.
