There was no fault on the part of the assessee in paying advance tax. The dispute arose consequent to reassessment under section 143(3) read with the section 147. As per explanation 2 to section 234(1), interest cannot be charged for the first time if the assessee could not have anticipated the enhancement of income, even if the assessee had taken due care and diligence. As there was no default in paying advance tax in regular assessment, hence, interest under section 234B could not be levied upon assessee in reassessment proceedings.—Vide Datamatics Ltd. v. Asstt CIT (2007) 15 SOT 588 (Mum-Trib) 111 TTJ(Mum-Trib)55.

Datamatics Ltd. vs Assistant Commissioner Of Income … on 14 February, 2007

ORDER K.P.T. Thangal, Vice President

1. These appeals by the assessee and the Revenue, pertaining to asst. yr. 1993-94, are disposed of by this consolidated order, for the sake of convenience.

ITA No. 6616/Mumbai/2003:

2. When the matter was taken up for hearing learned Counsel for the assessee sought permission of the Bench to raise the following additional grounds:

1. That, on the facts and in the circumstances of the case, the lower authorities erred in reopening the assessment by issuing notice under Section 148 and completing the assessment under Section 143(3) r/w Section 147, without providing the assessee with a copy of the recorded reasons for reopening the assessment, in total disregard of the decision of the Hon’ble Supreme Court in the case of GKN Driveshafts (India) Ltd. v. ITO (2003) 179 CTR (SC) 11 : (2003) 259 ITR 19 (SC), although the assessee prayed for a copy of the same after filing the return in due compliance of the notice under Section 148.

2. That, on the facts and in the circumstances of the case, the learned CIT(A) erred in directing the AO to recompute the interest under Section 234B as per his direction instead of deleting the interest charged in the AO’s order under Section 143(3) r/w Section 147 dt. 24th Feb., 2003.

which, according to the learned Counsel, does not call for any finding of new facts but purely a question of law and is admissible in the light of the decision of the Hon’ble Supreme Court in the case of National Thermal Power Co. Ltd. v. CIT .

3. We heard the rival submissions. Since this ground goes to the root of the matter and challenges the very validity of the assessment order itself and there is no new fact to be brought on record, we are of the view that the additional grounds sought to be taken by the assessee are to be admitted.

4. It is the case of the assessee that the assessment reopened under Section 147, issuing notice under Section 148, completed without providing the assessee a copy of the recorded reasons for reopening the assessment is bad in law and to be held as invalid reopening in view of the decision of the Hon’ble Supreme Court in the case of GKN Driveshafts (India) Ltd. v. ITO (2003) 179 CTR (SC) 11 : (2003)259 ITR 19 (SC). Learned Counsel submitted, the Hon’ble Supreme Court in this case held that if the assessee prayed for a copy of the reasons recorded after filing of the return, Revenue necessarily has to provide a copy and to hear the assessee on the point.

5. In the case of GKN Driveshafts (India) Ltd. v. ITO (supra), the Hon’ble Supreme Court held : “when a notice under Section 148 of the IT Act, 1961, is issued, the proper course of action for the noticee is to file the return and if he so desires, to seek reasons for issuing the notices. The AO is bound to furnish reasons within a reasonable time. On receipt of reasons, the noticee is entitled to file objections to issuance of notice and the AO is bound to dispose of the same by passing a speaking order.”

6. Considering the issue in detail, in the case of ITO v. Smt. Gurinder Kaur (2006) 105 TTJ (Del) 198 : (2006) 102 ITD 189 (Del), Tribunal held that noncommunication of the reasons is not fatal in the light of the decision of the Hon’ble Supreme Court in the case of S. Narayanappa v. CIT , rendered by a Bench of three Judges, which was not brought to the notice of their Lordships while considering the matter in the case of GKN Driveshafts (India) Ltd. (supra). Since the Tribunal has considered the decisions of the Hon’ble Supreme Court in the case of GKN Driveshafts (India) Ltd. (supra) and also the case of S. Narayanappa (supra), we are of the view that the plea of the assessee that non-communication of the reasons in spite of request of the assessee made after filing the return cannot be treated as fatal. Hence, the appeal of the assessee on this additional ground is dismissed.

7. Coming to the second additional ground, it is with regard to recomputation of interest under Section 234B as per the direction of the learned CIT(A) instead of deleting the interest charged in AO’s order under Section 143(3) r/w Section 147. This issue we will take up in due course.

8. Now coming to the first ground of objection by the assessee, it is directed against the order of the CIT(A) in confirming the disallowance under Section 80-O of the IT Act, 1961, in respect of receipts earned by the assessee from rendering technical services outside India, for which consideration received in convertible foreign exchange, on the ground that as the assessee has claimed deduction under Section 80HHF in respect of the same receipts by applying the provisions of Sub-section (5) of Section 80HHE.

9. In this case the assessee filed the original return on 30th Dec, 1993 declaring income at Rs. 90,94,860. The return was accompanied by Tax Audit Report under Section 44AB in Form Nos. 3CA and 3CD. Assessee filed the revised return on 1st Feb., 1995 bringing down the income to Rs. 13,68,930, consequentially resulting refund of Rs. 68,06,075. The assessment was rectified under Section 154 on 18th Aug., 1995 determining income at Rs. 14,16,194. After giving effect to the CIT(A)’s order, revised income was determined at Rs. 13,68,930.

10. Subsequently, it was noticed, assessee has claimed deduction under Section 80-O amounting to Rs. 1,59,32,301 being 50 per cent of Rs. 3,18,64,600. Assessee claimed deduction on gross basis without taking into account the expenses for earning such income. For the reasons recorded, the Addl. CIT observed that income has escaped assessment within the meaning of Section 147. Consequentially, notice under Section 148 was issued on 22nd May, 2001. Consequent to the above notice, assessee filed the return on 28th June., 2001 declaring income at Rs. 1,47,03,210. While filing the return in response to the above notice, assessee did not claim deduction under Section 80-O; instead claimed deduction under Section 80HHE amounting to Rs. 25,88,463 only. Assessee was asked to explain as to why deduction claimed under Section 80-O amounting to Rs. 1,59,32,301 being 50 per cent of Rs. 3,18,64,600 should not be restricted after deducting all the expenses, particularly in the light of the decisions of the Hon’ble Supreme Court in the case of Distributors (Baroda) India Ltd. v. Union of India and in the case of CIT v. Kotagiri Industrial Co-operative Tea Factory Ltd. .

11. In response to the above, assessee submitted, briefly, as under:

First the assessee objected to the reopening itself. Without prejudice to the above, assessee, on merit, submitted that deduction under Section 80-O should be allowed on gross basis. It was further submitted that when the return filed in response to notice under Section 148, assessee claimed deduction under Section 80HHE amounting to Rs. 25,88,463 as certified by the accountant in Form No. 10CCAF. It was submitted, for the purpose of deduction, the figure of total turnover to be taken as the denominator in the formula is the total turnover of all the units of the assessee, which comes to Rs. 3,51,73,607. However, in the case of CIT v. Rathore Brothers , the Hon’ble Madras High Court held that where the business of each unit of the assessee is distinct and separate and independent and separate books of account are also maintained for each unit, the total turnover of each unit is to be taken separately for the purpose of computing deduction. If this is the basis, then, it was contended the total turnover of export units at SEEPZ that is eligible for deduction under Section 80HHE would be Rs. 2,13,57,740. It was submitted, since inception the assessee was keeping separate P&L a/c for each unit always. Only on finalisation of consolidated accounts, common set of balance sheet and P&L a/c prepared. It was contended that in view of the decision of the Hon’ble Madras High Court in the case of Rathore Brothers cited (supra), assessee submitted a revised claim for deduction under Section 80HHEby treating each unit as a separate and distinct business.

It was further submitted, in the original return filed on 30th Dec, 1993, deduction under Section 80-Owas claimed on ‘net of direct expenses basis’ at Rs. 81,72,372 and it was revised claiming deduction under Section 80-O on ‘gross basis’ based on the decision of the Tribunal, Mumbai Bench, in the case of J.B. Boda & Co. (P) Ltd. v. ITO (1992) 41 ITD 36 (Bom). It was further submitted, since contrary view has been taken by the Special Bench of the Tribunal in the case of Petroleum India International v. Dy. CIT , deduction under Section 80-O had not been claimed. But it was submitted, assessee intended to keep the issue alive since Special Bench decision of the Tribunal is before the Hon’ble High Court in appeal. It was further submitted, unlike Section 80-IA(9), there is no bar in Section 80-Ofrom claiming benefits under both the sections, viz. Sections 80-0 and 80HHE; as such, to consider the revised claim for deduction under both the sections. In support of the above submission, assessee relied upon the decision of the Hon’ble Supreme Court in the case of Continental Construction Ltd. v. CIT . It was submitted, the scheme for granting deduction under Section 80-O, which is to promote the export of services to earn foreign exchange, should be interpreted liberally. As such, expenses not directly connected with the services rendered outside India should not be deducted while arriving at the claim for deduction under Section 80-O. Assessee supported the above contention in the light of the decisions of the Tribunal reported in M.N. Dastur & co. Ltd. v. Dy. CIT (1991) 42 TTJ (Cal) 231 : (1991) 40 ITD 521 (Cal) and M.N. Dastur & Co. Ltd. v. Dy. CIT (1997) 58 TTJ (Bang) 748 : (1997) 62 ITD 113 (Bang) and also the decision of the Mumbai Bench of the Tribunal in the case of J B Boda & Co. (P) Ltd. (ITA No. 1850 & 51 of 1991). It was contended that the expenses incurred in India in Indian currency could not be computed with reference to convertible foreign exchange received from or brought into India while computing deduction under Section 80-O for the purpose of expenses. It was contended that the self-contained provisions of Section 80-O make Section 80AB totally inapplicable for computing the deduction.

Subsequently, the assessee was asked to furnish details of expenses incurred in each unit separately. It was further submitted before the AO that reference application preferred by the Revenue against the order of the Tribunal in the case of CIT v. Asian Cables Corporation Ltd. was rejected by the jurisdictional High Court, wherein the Revenue challenged the decision of the Tribunal that deduction under Section 80-O should be allowed on the basis of gross receipt and not on the basis: of net receipt (after reducing expenses).

12. The above claim of the assessee with regard to deduction under Section 80-O was rejected by the AO in view of the Special Bench decision of the Tribunal in the case of Petroleum India International v. Dy. CIT cited (supra) and also the decision of the Calcutta Bench of the Tribunal in the case of M.N. Dastur & Co. Ltd. v. Dy. CIT (supra) overruled by the jurisdictional High Court as reported in CIT v. M.N. Dastur & Co. (P) Ltd. (2000) 159 CTR (Cal) 417 : (2000) 243 ITR 10 (Cal). While coming to the above conclusion, AO also relied upon the decision of the Hon’ble Madras High Court in the case of CIT v. M.K. Raju Consultants (P) Ltd. and also the decision of the Hon’ble Delhi High Court in the case of CIT v. Chemical & Metallurgical Design Co. .

13. Coming to the deduction under Section 80HHE, the claim of the assessee was also rejected by the AO for the reasons stated herein, briefly, as under:

Assessee was carrying on business of export as well domestic and the turnover for the purpose of computation of deduction under Section 80HHE should be worked out on the basis of total turnover and not export turnover alone. In support of the above, AO relied upon the decision of the Special Bench of the Tribunal in the case of International Research Park Laboratories Ltd. v. Asstt. CIT (1994) 50 TTJ (Del)(SB)661 : (1994) 501TD 37 (Del)(SB); the decision of the Calcutta Bench of the Tribunal in the case of Dy. CIT v. Chloride Industries Ltd. (2001) 70 TTJ (Cal) 407 : (2000) 111 Taxman 81 (Cal) (Mag); and also the decision of the Hon’ble Kerala High Court in the case of CIT v. Parry Agro Industries Ltd. . Aggrieved by the above order, assessee approached the first appellate authority.

14. Assessee, before the CIT(A), relying upon the decision of the Hon’ble Supreme Court in the case of Continental Construction Ltd. v. CIT (supra), contended that there is no bar to allow deduction under two sections forming part of Chapter VI-A, in respect of same receipts. It was submitted, deduction under Section 80HHE as well as Section 80-O should be allowed.

15. This claim of the assessee was rejected by the learned CIT(A) vide para 4 of his order in the light of specific provisions contained in Sub-section (5) of Section 80HHE, which states that where the assessee has claimed a deduction and allowed in respect of profits of the business referred to in Sub-section (1) for the very same year, no deduction shall be allowed in relation to such profits under any other provision of this Act for the same or any other assessment year.

16. We heard the rival submissions, gone through the orders of the Revenue authorities and the decisions cited. The second ground before the CIT(A) and the first ground before us is against the action of the AO, in computing the amount eligible for deduction under Section 80-O on the net receipt and not on gross receipt. The claim of the assessee is that it should be allowed deduction on gross receipt. However, we find considerable force in the reasoning of the CIT(A), wherein he rejected the assessee’s claim of deduction under Sections 80-O and 80HHE in view of Sub-section (5) of Section 80HHE, which reads as under:

80HHE(5) : Where a deduction under this section is claimed and allowed in respect of profits of the business referred to in Sub-section (1) for any assessment year, no deduction shall be allowed in relation to such profits under any other provision of this Act for the same or any other assessment year.

Explanation….

17. In the light of the clear provision quoted above, rejection of assessee’s claim for deduction under Section 80-0 was in the right perspective and this ground by the assessee fails and dismissed.

18. Coming to the second ground of objection (ground Nos. 2 and 3) by the assessee before us, it is without prejudice to the first ground, i.e. confirming the action of the AO that deduction under Section 80-O is to be allowed on the net receipt after deducting all the expenses and not on the gross receipt.

19. Since we have already held that assessee is not entitled for deduction under Section 80-O, there is no reason to entertain this ground as well. Hence this ground of the assessee also fails and dismissed.

20. The next ground of objection (ground Nos. 4 and 5) by the assessee is directed against the order of the CIT(A), in considering total turnover of all the units and not of the unit in SEEPZ for deduction under Section 80HHE.

21. According to the assessee, CIT(A) is wrong in confirming the order of the AO in considering total turnover of entire business instead of turnover of only the unit located at SEEPZ for the purpose of deduction under Section 80HHE. According to the assessee, CIT(A) failed to appreciate that where the two separate business of an assessee are properly demarcated in terms of location, operations and also where separate books of account are maintained for different units, it should be considered as separate entity and only turnover of SEEPZ unit should have been considered while calculating deduction under Section 80HHE.

22. The facts narrated by the AO have already been recorded hereinabove. In the reopened assessment proceedings, assessee claimed deduction of Rs. 25,88,463 under Section 80HHE, which was subsequently enhanced to Rs. 49,39,517 as per letter dt, 3rd Oct., 2002. The enhanced claim was made on the basis of the decision of the Hon’ble Madras High Court in the case of CIT v. Rathore Bros(supra). It was contended that assessee was maintaining separate books of account for the export business and other business. The claim of the assessee was rejected by the AO, briefly, for the following reasons:

First of all, the turnover for the purpose of computation for relief under Section 80HHE should be worked out on the basis of total turnover and not export turnover. Secondly, AO relied upon the decision of the Special Bench of the Tribunal in the case of International Research Park Laboratories Ltd. (supra), wherein it was held that if the business does not consist exclusively of exports, irrespective of whether the profit of export is ascertainable or not and if there is domestic turnover, Section 80HHC(3)(b) would become operational and according to Clause (b) the entire business must be aggregated and then only apportioned. Hence the assessee’s claim for considering the units as separate entity was rejected. While coming to the above conclusion, AO also relied upon the decision of the Calcutta Bench of the Tribunal in the case of Dy. CIT v. Chloride Industries Ltd. (supra), wherein it was held that where the business consists of export and local income, export business cannot be treated as separate business and for deduction under Section 80HHC(3)(b) entire business should be considered. AO also relied upon the decision of the Hon’ble Kerala High Court in the case of CIT v. Parry Agro Industries Ltd. (supra). Aggrieved by the above order, assessee approached the first appellate authority.

23. It was contended before the CIT(A) that the assessee has three business units physically located separately and entirely different and distinct services were provided. The unit which carried out the software business, in respect of which the assessee claimed deduction under Section 80HHE, was located entirely in the Software Export Processing Zone and no service from this zone was required to be provided to any domestic client. Due to contractual requirement of this export processing zone, the assessee has to maintain separate books of account for software business conducted from within the said zone and the question of pro rate turnover for deduction in respect of the profit therefrom does not arise. The two other business units of the assessee company were 100 per cent domestic business units and located outside the Software Export Processing Zone and are not engaged in any software activities. There is no overlapping or commonality between the activities carried out from the three units and they are mutually exclusive. Hence, it was contended, AO should have worked out the deduction under Section 80HHE on the basis of total turnover of export business located in SEEPZ only and with no reference to total turnover of the entire company. Assessee relied upon the decision of the Hon’ble Madras High Court in the case of CIT v. Rathore Brothers (supra).

24. CIT(A) held, this plea of the assessee is devoid of much merit, particularly in view of the fact that the various judicial pronouncements have clearly held that since Section 80HHE is similar to that of Section 80HHC and Sub-section (3) of both the sections provides for computation of eligible amounts allowable for deduction, the decisions rendered by various judicial bodies in respect of Sub-section (3) of Section 80HHC would be clearly applicable. In view of the above, he held that the assessee is carrying on the business activities from different locations in the same city and whether that itself is sufficient to accept the claim of the assessee is required to be considered. In this regard, CIT(A) held, the decision of the jurisdictional High Court in the case of CIT v. Shirke Construction Equipments Ltd. (Bom) is relevant. He held that a bare reading of Section 80HHC(3) along with Clauses (ba) and (baa) of Explanation indicates that the profits of the business are required to be computed under the head “Profits and gains of business and profession”. Section 28 comes under the caption “Profits and gains of business”. Section 29 categorically states that income referred to in Section 28 shall be computed in accordance with the provisions contained in Sections 30 to 43D. The claim of the assessee was disallowed by the CIT(A) vide paras 13 and 14 of his order, observing as under:

13. If this decision is taken into account, it is clear that for the purpose of Section 80HHC or for that matter Section 80HHE the profits of the business has to be computed as a whole as that of the appellant and not in a piecemeal. In such circumstance, the total turnover also is required to be taken as the total turnover of business and cannot be restricted only in respect of the turnover of one portion of the business to which the provisions of the section apply. Similar view has been clarified in the CBDT Circular dt. 5th July, 1990 bearing No. 564. [(1990) 85 CTR (St) 53 : (1990) 184 ITR (St) 37\. In para 9 of the said circular the following clarification has been given…. However, in order to arrive at the amount deductible under Section 80HHC in the case of an assessee doing export business as well as some other domestic business, the fraction of ‘export turnover’ to ‘total turnover’ is to be applied to his profit computed under the head ‘Profits and gains of business and profession’. The same rationale has been upheld by the Tribunal Special Bench ‘D’ in their decision in the case of International Research Park Laboratories Ltd. v. Asstt. CIT (1994) 50 TTJ (Del)(SB) 661 as well as CIT v. Parry Agro Industries Ltd. (2002) 177 CTR (Ker) 257 which have been relied upon by the AO while disallowing the claim. In the said latter decision, the Hon’ble High Court have also held that if the total turnover is not taken with reference to the entire business, it would amount to rewriting the legislation. Furthermore, the Tribunal, Mumbai Bench in their order Ascho Industries Ltd. v. Jt. CIT ITA No. 2447/Mum/2000 dt. 14th Jan., 2003, have upheld this legal position.

14. In view of the above referred discussion, it is clear that both the ‘profits and gains of business and profession’ as Well as the total turnover for the purpose of working out the deduction under Section 80HHE of the Act are required to be taken as if whole business is one. It cannot be compartmentalised unit-wise as has been done in the return filed while making the claim. Therefore, the action of the AO to carry out necessary adjustment in working out the eligible amount for deduction is legally correct and is hence sustained. The appeal in respect of this ground is dismissed.

Aggrieved by the above order, assessee is in appeal before the Tribunal.

25. Recapitulating the events, learned Counsel for the assessee submitted that initially the assessee claimed deduction under Section 80-0, which was beneficial to the assessee, particularly as the judicial pronouncements were in favour of the assessee However, the judicial view changed thereafter and the matter now stands concluded against the assessee by the decision of the Hon’ble Madras High Court in the case of CIT v. M K Raju (P) Ltd. (supra) and also by the decision of the Special Bench of the Tribunal in the case of Petroleum India International v. Dy. CIT (supra), wherein it has been held that deduction under Section 80-O has to be allowed only after deducting direct as well as indirect expenditure from the gross foreign exchange received in India. Therefore, in the return filed in response to the notice under Section 148, assessee initially claimed deduction under Section 80HHE amounting to Rs. 25,88,463, to which it was entitled. Accountant’s certificate in Form No. 10CCAF was duly filed along with the return. Assessee computed the quantum of deduction under Section 80HHE by taking the figure of total turnover of all its units as the denominator, i.e. Rs. 8,51,73,607. Subsequently, in view of the decision of the Hon’ble Madras High Court in the case of CIT v. Rathore Brothers (supra), assessee, vide letter dt. 3rd Oct., 2002, claimed that its entitlement to deduction under Section 80HHE should be worked out on the basis of turnover of export units at SEEPZ and quantified the same at Rs. 2,13,57,740. Learned Counsel submitted, in the case of CIT v. Rathore Brothers(supra), the Hon’ble Madras High Court held that where the business of each unit is distinct and separate and where the assessee maintains independent and separate books of account for export as well as domestic sale, the turnover of each unit should be considered separately for the purpose of computing deduction under Section 80HHC. Learned Counsel further submitted, since inception the assessee maintained books of account of each unit (both export and domestic business units) separately and separate P&L a/c are prepared for each individual unit. Only on finalisation, the accounts of all the units are consolidated into one common set of balance sheet and P&L a/c. Therefore, the ratio of the decision of the Hon’ble Madras High Court in the case of CIT v. Rathore Brothers (supra) applies in its entirety.

26. Learned Counsel further submitted, this view canvassed by the assessee did not find favour with the Revenue authorities, particularly in view of the decisions of the Tribunal in the case of International Research Park Laboratory Ltd. (supra) Dy. CIT v. Chloride India Ltd. (supra) and the decision of the Hon’ble Kerala High Court in the case of CIT v. Parry Agro Industries Ltd. (supra). CIT(A) also placed reliance on the decision of the jurisdictional High Court in the case of CIT v. Shirke Construction Equipments Ltd. (supra). Learned Counsel submitted, subsequently however some of the Courts have taken a different view than that expressed by the Tribunal in the case of International Research Park Laboratory Ltd. (supra). Learned Counsel brought our attention to the decision of the Hon’ble Madras High Court in the case of CIT v. Rathore Brothers (supra), particularly the following observation:

Where the assessee had maintained separate accounts and it had maintained its trading receipts and P&L a/c separately for export sales and domestic sales and there was sufficient material supported by all the necessary documents to show that the deduction claimed was entirely due to export there was no warrant for disallowing any portion of the export earnings pro rata by invoking Clause (b) of Sub-section (3) of Section 80HHC of the IT Act, 1961. The purpose of the clause was to disallow a part of the allowance under that section only when the entire deduction claimed could not be regarded as being relatable to exports.

and also the decision of the same High Court in the case of CIT v. Madras Motors/M M Forgings Ltd. , wherein it was held as under:

The turnover from the business of the sale of motorcycles, motorcycle spare parts and television sets could not be included in the total turnover of the assessee for the purpose of computation of special deduction under Section 80HHC. The Tribunal was right in holding that the total turnover in Section 80HHC was only the turnover relating to export business of the assessee and not the turnover relating to other business of the assessee.

27. Learned Counsel submitted, the decision relied upon by the learned CIT(A) in the case of Shirke Construction Equipments Ltd. (supra) is on facts distinguishable. In that case the issues before their Lordships were-(a) whether Section 80AB could be applied to work out deduction under Section 80HHC; and (b) whether in determining the business profits under Section 80HHC, the unabsorbed business losses of earlier years should be set-off ? Learned Counsel submitted, none of these issues are involved in the instant case of the assessee. The sole issue is whether for the purpose of computation of deduction under Section 80HHE, the turnover of the entire business should be taken into account when separate accounts for software export are maintained by the assessee and there are no difficulties for ascertaining the export turnover.

28. Learned Counsel further submitted, all the decisions referred to above are in respect of allowance of deduction under Section 80HHC. The CIT(A), in para 11 of his order, observed that provisions of Sections 80HHE and 80HHC are similar and therefore the ratio of the decisions pronounced in respect of Sub-section (3) of Section 80HHC are equally applicable. Learned Counsel submitted, this observation of the CIT(A) is superfluous and without appreciating the import of the provisions of Section 80HHE. Learned Counsel submitted, the history of enactment of a particular piece of legislation is very crucial to understand the object and scope. He invited our attention to the speech of the Hon’ble Finance Minister in his Budget Speech for the year 1991-92, extending the tax concession available under Section 80HHC to the profits from export of software, as given in (1991) 96 CTR (St) 39 : (1991) 190 ITR (St) 111, relevant portion of which reads as under:

Our software industry has made considerable progress in recent years. However, there is still a vast unexploited potential for growth. It is time we make allout efforts to capture the overseas software market. With this objective, I propose to extend the tax concession under Section 80HHC of the IT Act to export of software. With this concession the exports of this industry should register rapid growth.

29. Learned Counsel submitted, it is significant that no such amendment was brought in Section 80HHC with a view to extend its benefits to software exports was proposed in the Finance (No. 2) Bill of 1991. On the contrary, an entirely new section was introduced, i.e. Section 80HHE, exclusively dealing with the deduction allowable to profits derived from the export of computer software [(1991) 96 CTR (St) 134 : (1991) 191 ITR (St) 220}. The intention of the legislature is clear. Had the legislature intended to allow deduction to profit derived from export of computer software on the same footing as provided for export of other goods and merchandise within the meaning of Section 80HHC, there was no need for introducing a new provision. As a matter of fact, there are certain striking and subtle differences between Sections 80HHC and 80HHE. Section 80HHC speaks of allowance of deduction “to the extent of profits, referred to in Sub-section (IB), derived by the assessee from the export of such goods or merchandise”. Clause (a) of Sub-section (2) of Section 80HHC states that “this section applies to all goods or merchandise, other than those specified in Clause (b)”. Clause (b) states that “this section does not apply to (i) mineral oil; and (ii) minerals and ores other than processed minerals and ores specified in the Twelfth Schedule”. On the other hand, learned Counsel submitted, deduction under Section 80HHE is available “to the extent of the profits, referred to in Sub-section (IB), derived by the assessee from such business”. The wordings are quite different. Section 80HHCrefers to goods or merchandise” whereas Section 80HHE refers to “such business”. Learned Counsel pointed out that computer software, as specified in Clause (i) of Sub-section (1) of Section 80HHE and defined in Expln. (b) to the said section, could very well be covered by the expression “goods or merchandise” within the meaning of Section 80HHC. One of the purposes for incorporating the new Section 80HHE was to extend the benefit of deduction to persons providing technical services outside India in connection with development or production of computer software. But this purpose would have been served by merely adding the word “services” to the expression “goods or merchandise” used in Section 80HHC. Instead of amending the Section 80HHC, new Section 80HHE was introduced. There is no reason to assume that this subtle difference in the language of two sections is without any merit or consequence. The legislature in its wisdom apparently used a different expression in Section 80HHE from the one used in Section 80HHC with specific objective. The modus operandi of computing relief under Section 80HHE has been so conceived as to exclude from consideration everything else except the profit/turnover of “such business”, i.e. the software business, the particular business of the assessee in which the export is made. By making the aforesaid alteration in the language of new section, legislature intended to indicate that profits/turnover of the goods or services, the export of which are not entitled to exemption under Section 80HHE, need not be considered for computation of deduction allowable under this section in all cases. Learned Counsel submitted, quite clearly, whether or not the assessee derives income from carrying on any other business is wholly extraneous to the scheme of granting deduction under Section 80HHE. It necessarily follows that in cases where the assessee has been engaged solely in the business of export of computer software or providing technical services abroad in connection with development or production of computer software and has maintained distinct separate account for such business, Sub-section (3) of Section 80HHC would have no application in working out the profit derived from such business. Learned Counsel further submitted, where the assessee also having domestic software business, such profit, i.e. profit from eligible business would be computed as per the provisions of Sub-section (3) of Section 80HHE. Naturally, even if the assessee had derived profit from the business of any other goods or merchandise. turnover from that business would not be considered for the purpose of determining profit derived from export of computer software within the meaning of Sub-section (3) of Section 80HHE. Furthermore, Sub-section (3) of Section 80HHE will be applicable only in cases where the accounts are so maintained that profit derived from export of computer software is incapable of precise ascertainment. Where the profit on software export business carried on by the assessee is precisely ascertained and segregated from other profits of business on the basis of duly audited accounts, full deduction under Section 80HHE should be allowed without being affected by the profits/turnover in domestic software business. Learned Counsel thus submitted that direction may be issued to allow deduction under Section 80HHE by computing the quantum of the same on the basis of turnover of its export unit at SEEPZ, as claimed by the assessee.

30. Replying to the above, learned Departmental Representative supported the orders of the Revenue authorities and submitted that the action of the Revenue authorities to take the total turnover for the purpose of computation of eligible amount for deduction under Section 80HHE as the total turnover of the entire business of the assessee company, instead of total turnover only in respect of the undertaking profit, is in accordance with law. Learned Departmental Representative further submitted that Section 80HHE on this point is very clear.

31. We heard the rival submissions, gone through the orders of the Revenue authorities and the decisions cited. We find that only in the case of CIT v. Parry Agro Industries Ltd. (supra) the Hon’ble Kerala High Court has discussed the issue clearly in the case of an assessee who is keeping separate accounts relating to export and domestic trade. After discussing the issue, the Hon’ble High Court held that in computing the deduction under Section 80HHC, the total turnover of the entire business, including the tea estates from which the export profits derived, should be considered together. The direction of the Tribunal to restrict the turnover only to the Assam tea estate, if the entire sales from the said unit were export oriented, Hon’ble High Court held, is not in accordance with law.

32. As rightly contended by the learned Counsel, the Hon’ble Madras High Court in the case of CIT v. Rathore Brothers (supra) held : “where the assessee had maintained separate accounts and it had maintained its trading receipts and P&L a/cs separately for export sales and domestic sales and there was sufficient material supported by all the necessary documents to show that the deduction claimed was entirely due to export; there was no warrant for disallowing any portion of the export earnings pro rata by invoking Clause (b) of Sub-section (3) of Section 80HHC of the IT Act, 1961. The purpose of the clause was to disallow a part of the allowance under that section only when the entire deduction claimed could not be regarded as being relatable to exports”. This decision of the Hon’ble Madras High Court supports the view canvassed by the assessee. The question referred to the Hon’ble High Court in the case cited supra was “whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that Clause (b) of Sub-section (3) of Section 80HHC of the IT Act, 1961, cannot be invoked in this case and the assessee is entitled to relief under Section 80HHC of the Act in respect of the entire export net profits ?”. The decision of the Hon’ble Madras High Court in the case of CIT v. Rathore Brothers (supra) was not accepted by the AO on the ground that Revenue had gone in appeal against the aforesaid order.

33. Similar view was again expressed by the Hon’ble Madras High Court in the case of CIT v. Madras Motors Ltd./M M Forgings Ltd. (supra). This was a case wherein the assessee’s business was not exclusively of the export out of India of the forgings. In other words, assessee was selling the forgings manufactured in India as well and earned domestic income. Dealing with the issue, the Hon’ble High Court held : “Sec. 80HHC of the IT Act, 1961, applies only to the goods which are not only exported out of India but the sale proceeds of which are receivable in convertible foreign exchange . The legislature has intended the situation where the business could relate to goods which would fetch foreign exchange but there could also be business in relation to these goods which may not be exported or which may not fetch foreign exchange. The thrust of the opening clause of Clause (b) of Sub-section (3) of Section 80HHC of the Act, has a stress on the words ‘does not consist exclusively of the export; The words ‘total turnover of the business’ would be controlled by and have to be read in the colour of the opening clause. The sub-section has been created only to see the ratio of the income out of the export to the total income out of the business in respect of those goods because of the obvious difficulty of segregating the profits earned out of export alone. The total turnover of the business would contemplate only the business regarding such goods part of which are exported and the others are not so exported. Hence, it is impermissible to apply the section even to goods which are outside the limits of Clause (a) of Sub-section (2)”. This decision also supports the view canvassed by the learned Counsel for the assessee.

34. Now coming to the argument of the Revenue that Sections 80HHC and 80HHE are similar and Sub-section (3) of both the sections, which provide for computation of eligible amount for deduction in terms of Sub-section (1) are identical; and, therefore, various judicial decisions pronounced in respect of Sub-section (3) of Section 80HHC are equally applicable for computation of eligible amount to be allowed as deduction under Section 80HHE(1), we are unable to agree with the blanket proposition. As rightly argued by the learned Counsel, Section 80HHC speaks of deduction to the extent of ‘profits, referred to in Sub-section (1B), derived by the assessee from the export of such goods or merchandise whereas Section 80HHE speaks of deduction to the extent of the profits, referred to in Sub-section (1B) derived by the assessee from such business. Perusal of Sub-section (2) of Sections 80HHC and 80HHEbrings out the difference, which reads as under: