COMMISSIONER OF INCOME TAX Vs. KANTILAL CHHOTALAL

JUDGEMENT

(1.) THE short point which arises for consideration in this appeal is : whether reassortment charges were includible in business profits while calculating export profits as per the formula : business profits X export turnover/total turnover.

(2.) THE facts of this appeal are as follows :

(3.) THE assessee has claimed that they were includible in the business profits. The assessee has claimed that, however, the said charges were not includible in the total turnover. The Tribunal had held in favour of the assessee. Hence, this appeal is filed by the Department. In the case of CIT vs. K.K. Doshi & Co. decided vide ITA No. 77 of 2000 [reported at (2000) 163 CTR (Bom) 472], this Court took the view that the business profits in the above formula will not include receipts by way of brokerage, commission, interest, etc. as they have no linkage with the export activities. In the said judgment, this Court has also discussed the subsequent amendment w.e.f. 1st April, 1992, by which it has been clarified that business profits will not include receipts by way of brokerage, commission, interest, labour charges or any other receipts of similar nature. The legislature has further provided for 10 per cent deduction from such income to account for expenses incurred in earning the above incomes. Therefore, in view of our judgment in ITA No. 77 of 2000 (supra), reassortment charges cannot be included in the business profits in the above formula. However, it has been vehemently urged in this appeal that while amending S. 80HHC and in particular business profits, the legislature has made it clear that the said amendments will take effect from 1st April, 1992, and shall apply to asst. year 1992 93 and subsequent assessment years. Hence, it was contended that the legislature has made the amendment prospective. It was urged that the amendment was not clarificatory. That it was expressly made prospective and, therefore, it cannot be invoked in this appeal which relates to asst. year 1988 89. We do not find any merit in the said contention. Firstly, it may be noted that the section had undergone various changes from time to time. Our attention was invited to the note on Finance Act of 1990 as reported in (1990) 182 ITR 306 (St). It was contended that in the same Amendment Act, the legislature has specifically provided for different types of amendments; some of which are expressly made retrospective. As an illustration, it was contended that in the Explanation a new clause was added by way of cl. (ba) defining the expression "total turnover" so as not to include freight or insurance attributable to the transport of the goods beyond the customs station. This clause was introduced with retrospective effect from 1st April, 1987, whereas the definition of business profits was amended w.e.f. 1st April, 1992. Hence, it was contended that in the same enactment, the legislature has provided for certain amendments which are retrospective in nature and others which are prospective in nature and, therefore, the proposed amendment by way of cl. (baa) which defines "business profits" will apply only from 1st April, 1992. We do not find any merit in the said contention. The memorandum explaining the provisions has discussed this point in detail. In (1991) 96 CTR (St) 51 : (1991) 190 ITR (St) at p. 300, it has been mentioned that the existing formula distorted the figure of export profits when receipts like interest, commission, etc. are included in the business profits and, therefore, to clarify the meaning of the business profits for the purposes of S. 80HHC the legislature has excluded the above items from business profits in the above formula. Therefore, the said amendment was clearly intended to remove the defect in the formula for calculating export profits even before 1st April, 1992. In fact, the legislature has clarified that receipts like interest, commission, etc. has no nexus with the export activity and by including such receipts in the business profits the existing formula became unworkable. Hence, by the amendment, such receipts were excluded. Moreover, the clarification has been introduced by way of cl. (baa) in the Explanation. Hence, the said amendment was clarificatory in nature. It cannot be disputed that there were several conflicting orders passed by the Department as the position was not clear. Hence, the amendment has come into force from 1st April, 1992. However, the said amendment is clarificatory in nature. Even without the amendment, with the inclusion of the above receipts in the business profits, the formula became unworkable because the assessee introduced receipts in the business profits which had no nexus with the export activity. In some cases, the result was that sale proceeds from export activity were nominal whereas the income from local sales was proportionately very large and on that basis the assessees who had composite business claimed the benefit of deduction under the said section. After 1st April, 1992, the anomaly is removed. Even before 1st April, 1992, the legislature never intended to include such receipts in the business profits. Similarly, prior to 1st April, 1992, there was one more distortion. In most cases, the Department used to include receipts whereby total turnover came to be artificially inflated. This brought down the export profits. Prior to 1st April, 1992, export turnover excluded freight or insurance. However, such exclusion was not provided for in total turnover. Therefore, by cl. (ba) of the Explanation, total turnover also excluded freight or insurance. Reading of cl. (b) and cl. (ba) of the Explanation clearly indicates that legislature has brought on par the components of export turnover and sale turnover. Both the numerator and the denominator show that they refer to sale proceeds. Any receipt which does not form part of sale proceeds cannot come within the ambit of the above ratio. This is also in view of the fact that proration applies to business profits in order to work out the export profits. Therefore, the numerator and the denominator are required to have common element which is the sale proceeds. In facts, by proviso in cl. (ba) to the Explanation, it is further provided that the expression "total turnover" shall have effect so as to exclude S. 28(iiia), (iiib) and (iiic) which refer to, inter alia, profits on sale of a licence granted under Imports (Control) Order, cash assistance, duty drawback, etc. This exclusion also show that the legislature clearly intended to exclude all receipts which have no nexus with sale proceeds from export activity. Hence, total turnover cannot include reassortment charges, labour charges, commission, interest, rent or receipts of similar nature. Therefore, total turnover will not include receipts like labour charges, reassortment charges; etc.