BY THE BENCH: - (1.) THIS is an appeal by the assessee against the order of the CIT(Central), Ludhiana, dated 5-3-1997, relating to assessment year 1992-93 passed under section 263 of the Income Tax Act, 196 1.
(2.) The only effective ground raised by the assessee in this appeal, reads as under "l. On the facts and in the circumstances of the case, the learned Commisioner, erred in setting aside the order passed by the assessing officer under section 263 of the Income Tax Act, 1961. " The facts of the case in brief are that the assessee was engaged in the business of manufacturing of drug intermediates called 6APA and 7ADCA, electronic chemicals and formulations. The assessee filed its return of income on 29-12-1992, declaring Nil income. However, the assessment was completed at an income of Rs. 22,31,889 vide order under section 143(3), dated 15-3-1995. The assessee claimed deduction of Rs. 1,33,09,439 under section 80HHC of the Income Tax Act which was allowed by the assessing officer as such, the deduction under section 80HHC was claimed by the assessee as per following calculations judgement_10038_tlit0_20030.htm 3.1 However, the learned CIT on 8-10-1995, issued a show-cause notice to the assessee requiring to show-cause as to why the assessment order dated 16-3-1995, should no't be set aside treating the same as erroneous and prejudicial to the interest of the revenue on account of omission of the assessing officer to work out the correct deduction under section 80HHC and allow the same at the time of assessment. In the show-cause notice the learned Commissioner pointed out that : (i) While making the assessment order, the assessing officer did not apply his mind with respect to the claim for deduction under section 80HHC which has been allowed by him as claimed without verifying as to whether or not the said claim was in accordance with the relevant provisions of law. (ii) While working out the deduction under section 80HHC, whereas negative figure of profit was there, it was adopted as 'NIL' figure, which was in contravention of the relevant provisions of the Income Tax Act. 3.2 It was in the background of the above mistakes pointed out by the learned Commissioner; he proposed to exercise his power under section 263 of the Income Tax Act. 3.3 In response to the show-cause notice the assessee vide letter dated 15-9-1995, submitted as under : "Reassessment year 1992-93, proceedings under section 263 of the Income Tax Act, 1961, regarding under section 80HHC. 1. Kindly refer to your letter No. CIT(C)/JB-13/263/150/95-96/2468, dated 9-10-1995, proposing to reduce the deduction under section 80HHC of the Income Tax Act, 1961, allowed by the assessing officer in the order passed under section 143(3) on 15-3-1995. It has been stated in your above referred notice that the order passed by the assessing officer is erroneous as well as prejudicial to the interest of revenue for reason that while working cut the deduction under section 80HHC, whereas negative figure of profit was there, it was adopted as NIL figure, which was in contravention of the relevant provisions of the Income Tax Act and the same has resulted in excess claim for deduction under section 80HHC having been allowed by the assessing officer. 2. In this regard you are requested to kindly note that the deduction under section 80HHC was correctly computed at Rs. 1,33,09,439 (copy enclosed Annex.-I) and certified by the auditors of the company (copy enclosed-Annex. 2). You are requested to please note that sub-section (3) of section 80HHC of the Income Tax Act, 1961, provides the manner of computing deduction. Sub-section (3) has three clauses (a), (b) and (c). While clause (a) deals with the profit on export of goods which are manufactured by the assessee, clause (b) deals with profit on export of trading goods and clause (c) deals -with profit on export of goods which are manufactured/traded by the assessee. However, at the end of sub-section (3) a proviso is added to the effect that the profits computed under clause (a) or clause (b) or clause (c) above shall be further increased by the amount which bears to 90 per cent of cash assistance and duty drawback, etc., the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee. , 3. It will appear from the above that Firstly, the deduction under section 80HHC has to be completed under any of the three clauses of sub-section (3) of section 80HHC and then the same is to be increased by the amount, if any, calculated as per the above referred proviso. The proviso clearly indicates that it will only increase the deduction, if any, computed under any of the three clauses of sub-section (3) of section 8HHC. In other words, the proviso will operate only to increase the deduction. Since the proviso has been placed in sub-section (3) of section 80HHC after the three clauses and uses the words 'shall be further increased', the result of computation under any of the three clauses cannot reduce the benefit granted by the proviso. Secondly, all the three clauses of sub-section (3) use the word Profit. The word 'Profit' denotes a surplus and not a deficit and accordingly if the result of computation under any of the three clauses is negative, the same will have to be ignored since all the three clauses operate to compute only profit and not a negative figure. In case the result of computation under any of the three clauses is negative, the same cannot, accordingly, effect or set off or reduce the eligible profits in other clauses.
(3.) THE word 'Profit' does not include "Loss" An interpretation that profits will not include losses in reckoning relief under section 80HHC finds support from the following (i) Precedent in law Under section 14(2)(a) of the Indian Income Tax Act, 1922, the expression 'Profits' was used in the context of exclusion of a partner share in an registered firm in the computation of income in his assessment. A question arose whether the partner would be entitled to the share of loss because the exclusion related to profits and gains and not specific losses. In the case of Ramniklal Tribhowandas v. V.R. Amin, First Income Tax Officer (1961) 42 ITR 92 (Bom), it has been held by the Bombay High Court that 'profits' and 'gains' used in the section would mean only positive profits and gains and not loss. (ii) Comparative law Where the law requires that loss should be treated as negative income or that it should be reckoned as such, it has specifically stated so, for exemption, Expln. 2 to sub-section (2) of section 64 provides that for the purpose of section 63 'income' includes loss. THE word 'profits' even more specifically than the word 'income' indicates a surplus rather than a deficit, By defining "income" to include losses in the context of aggregation, the legislative intent and practice, it is clear, is to specifically stipulate the same whenever losses are sought to be included. (iii) Prior provision THE Direct Tax Laws (Amendment) Act, 1989, has substituted the word 'profit' for the pre-existing word 'income' and it has been explained that this has been done to rationalise the provision and to avoid confusion (as per para 10.7 of CBDT's Circular No. 559, dated 4-5- 1990, copy of the relevant extract enclosed as Annex. 3). THE purpose, it can reasonably be inferred, is to use the more explicit word 'profit' instead of the less clear expression 'income' which may comprehend loss as well.;