COMMISSIONER, INCOME TAX, THIRUVANANTHAPURAMversusK. RAVINDRANATHAN NAIR

    1
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        COMMISSIONER, INCOME TAX, THIRUVANANTHAPURAM                              A
                                v.
                    K. RAVIND RANATHAN NAIR

                               NOVEMBER 13, 2007
                                                                                  B
             [S.H. KAPADIA AND B. SUDERSHAN REDDY, JJ.)


             Income Tax Act, 1961:
             s.80HHC(3)(a), (b) and (c) and Clause (baa) to the Explanation       c
        to s.80HHC-Assessment Year 1993-94-Processing charges-,
        Inclusion of, in the 'total turnover '-Held: Processing charges forlfl
        part of gross total income hence includible in total turnover in th~
        formula under s.80HHC.
              s.80HHC(3)-Assessment Year 1993-94-Export of both self-: D
        manufactured goods and trading goods-Deduction under
        s.80HHC(3)(c)-Entitlementfor-Held: Losses suffered by assessee
        in export oftrading goods can be set ofjladjusted against profits from
        export of manufactured goods and vice versa-If after such
        adjustments, there is positive profits, assessee is entitled to deduction-- E
        If there is loss, he is not entitled to any deduction.
              The questions for consideration in these appeals are whether
        processing charges earned by assessee were includible in the "total
        turnover" in the formula in s.80HHC(3) oflncome Tax Act, 1961, F
        for the assessment year 1993-94, for computing deduction under s.
        80HHC and whether in the computation of deduction, under,
        s.80HHC(3)(c) losses suffered by the taxpayer in the export of
        trading goods can be set off/adjusted against profits from export of
        manufactured goods and vice versa and whether the assessee would' G
        be entitled to deduction if after such adjustments/set off the net figure
        is a loss.
             Allowing the appeals filed by the Department except CA

                                          1097                                    H
   1098         _SUPREME COURT REPORTS                [2007] 11 S.C.R.


A No.3167 of 2007 and remitting the matter to the A.O. for fresh
  disposal and dismissing CA No.3167 of2007, the Court
       HELD: 1. The formula in s.80HHC(3) of the Income Tax Act
  provided for a fraction of export turnover divided by total turnover
B to be applied to Business Profits calculated after deducting 90% of
  the sums mentioned in clause (baa) to the Explanation to s.80HHC.
  The profit incentives and items like rent, commission, brokerage,
  charges etc. though formed part of gross total income bad to be
  excluded as they were "independent incomes" which had no element
C of export turnover. (Para 18) (1112-F-G]
       1.2. Under s.80HHC(l) it is provided that in computing the
  "total income" a deduction of the profits derived by the assessee
  from the export of goods shall be made. The words "profits derived
  from exports" in the said sub-section was substituted for the words
D ''whole ofincome" by Direct Tax Laws (Amendment) Act, 1989 w.e.t:
  1.4.89. The expression "derived from" in the said sub-section is
  narrower than the expression "attributable to", therefore, it is only
  "profits derived from exports" which become the basis for working
  out the said formula in s.80HHC(3) of the Act.
E                                               [Para 17) (1111-E-G]
         1.3. Before giving Deduction, under s.80HHC(3)(a), (b) or (c),
  the gross total income of the assessee being profits from business
  had to be arrived at in terms of clause (baa) to the said Explanation.
F While cakulating "Business Profits" the same bad to be done in
  terms of s. 28 to s.44D of the I. T. Act alone. Other provisions like
  ss. 70 and 71 of the I. T. Act were excluded. Therefore, if the said
  processing charges were part of gross total income of the taxpayer
  being profits from business then it had to be included in the total
  turnover in the above formula. The deduction has to be from profits
G as understood in the commercial sense. Moreover, under clause
  (baa)(l), 90% of any amount reforred to in clause (iiia), (iiib) and
  (iiic) of s.28 of the l.T. Act or any receipts by way of brokerage,
  commission, interest, rent, charges or any other receipt of a similar
  nature included in such profits. The said expression "included in such
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                              C.I.T., THIRUVANANTHAPURAM v. K.                      1099
                                     RAVINDRANATHANNAIR
                   profits" indicated that the said processing charges formed part of A
                   the gross total income being business profits.
                                                         (Para 17) (1111-H; 1112-A-D],
                         1.4. The processing charges, which was part of gross total'
                   income, was an independent income like rent, commission, brokerage '
     ..;           etc. and, therefore, 90% of the said sum had to be reduced from the B
                   gross total income to arrive at the Business Profits and since the '
                   said processing charge was an important component of Business            1




                   Profits, it also had to be included in the total turnover in the said
                   formula to arrive at business profits in terms of clause (baa) to the .
                   said Explanation. [Para 19) (1112-H; 1113-A]                            C
                         2.1. During assessment year 1993-94, s.80HHC(3) constituted '
                   a Code by itself. Subsequent amendments have imposed restrictions/
                   qualifications by which the said provision has ceased to be a code
                   by itself. In the above formula there existed four variables, namely, D
                   business profits, export turnover, total turnover and 90% of the sums
                   referred to in clause (baa) to the said Explanation. In the computation
                   of deduction unders.80HHC all four variables bad to betaken into
                   account. [Para21) [1113-E-F)
                        2.2. If all the above four variables are kept in mind, it becomes       E
                   clear that every receipt is not income and every inco1J1e would not
                   necessarily include element of export turnover. This aspect needs
                   to be kept in mind while interpreting clause (baa) to the said
                   Explanation. The said clause stated that 90% of incentive profits
                   or receipts by way of brokerage, commission, interest, rent, charges         F
                   or any other receipt of like nature included in Business Profits, had
                   to be deducted from Business Profits computed in terms of ss.28 to
                   44D of the l.T. Act. [Para 21] [1113-G-H; 1114-A]
                       Commissioner of Income Tax, Coimbatore v. Mis. Lakshmi G
                   Machine Works, (2007) 6Scale168, relied on.
                         3. The nature of every receipt needs to be ascertained in order
                   to find out whether the said receipt forms part of/or that it has an
                   attribute of an export turnover. When an indirect tax is collected by
                                                                                                B
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    1100         SUPREME COURT REPORTS                [2007] 11 S.C.R.


A the taxpayer on behalf of the Government the tax recovered is for
  the Government. It may be an income in the conceptual sense or
  even under the I.T. Act but while working out the formula under
  s.80HHC(3) and while applying the four variables one has to
  ascertain whether the receipt has an attribute of export turnover.
B An indirect tax like excise duty does not have that element of export
  turnover as understood in the above formula.
                                      [Para23] [1114-G,H; 1115-A,B]
      Commissioner of Income Tax, Coimbatore v. Mis. Lakshmi
C Machine Works, (2007) 6Scale168, held inapplicable.
       4. A plain reading of s.80HHC makes it clear that in arriving
  at the 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. If after such adjustments there is a
D positive profit, the assessee would be entitled to deduction under
  s.80HHC(l ). Inhere is a loss he will not be entitled to any deduction.
                                                   [Para27] (1116-A,B]
         A.M Moosa v. Commissioner of Income Tax, (200) 294 ITR 1
E · SC, relied on.
        CIVIL APPELLATE JURISDICTION : Civil Appeal No. 5173 of
    2007.
      From the final Judgment and Order dated 13.02.2003 of the High
p Court ofKerala at Ernakulam in ITA No. 105 of2000.
                                   WITH
        C.A. Nos. 5174-5176, 5178, 5179 & 5181 of 2007, 3687 & 3167
    of2006.
G        Vikas Singh, ASG.; Dr. R.G. Padia & T.L.V. Iyer, Tufail A. Khan,
    Arijit Prasad, Rudreshwar Singh, B.V. Balaram Das, G. Prakash,
    Subramonium Prasad, Jay Kishor, E.M.S. Anam, Mukul Gupta, Mithilesh
    Singh, Ramesh Babu M.R., Sanjay Kunur and Ramesh N. Keshwani (for
    Keswani & Co.) for the Appearing parties.
H
           C.I.T., THIRUV ANANTHAPURAM v. K.                          1101
          RA VINDRANATHANNAIR [KAPADIA, J .]
     The Judgment of the Court was delivered by                               A
     KAPADIA, J. Processing
       Civil Appeal No. 5173 of 2007 arising out of S.L.P.(C)
       No.24617 of 2003,
       Civil Appeal No. 5174 of 2007 arising out of S.L.P.(C)                 B
       No.5647 of 2004,
       Civil Appeal No. 5175 of 2007 arising out of S.L.P.(C)
       No. 6267 of 2004,
       Civil Appeal No. 5181 of 2007 arising out of S.L.P.(C)
                                                                              c
       No.12325 of 2004.
     Leave granted.
      2. This is a batch of civil appeals filed by the Department. For the D
sake of convenience we state the facts occurring in Civil Appeal No.
5173 of 2007 arising out of S.L.P.(C) No.24617 of 2003 -
Commissioner, Income Tax, Thiruvananthapuram v. K.
Ravindranathan Nair. Assessee-respondent has a factory in which he
processes cashew nuts which are grown in his fann. Thereafter he exports
                                                                             E
the cashew nuts as an exporter. For processing, the assessee has compIete
infrastructure. He has plant and machinery in his factory. At the same time,
the assessee processes cashew nuts which are supplied to him by the
exporters on job-work basis. After processing, the assessee returns the
processed cashew nuts to the exporters. He earns processing charges. F
Therefore, the assessee is an exporter and a job worker.
      3. Computation of Export Incentive under Section 80IffiC(3) of the
Income Tax Act, 1961 ("LT. Act", for short), is the issue for determination
in this batch of civil appeals.
                                                                              G.
      4. The assessee made a claim for Export Incentive under Section
80HHC(3) in his returns filed for the assessment year 1993-94. The
assessee did not include processing charges (receipts) in his total turnover.
In his return, he indicated his business profits at Rs.1,94,08,220. The
figure of Rs.1,94,08,220 included the processing charges (receipts) H
                                                                                 \
    1102           SUPREME COURT REPORTS                  [2007] 11 S.C.R.

A amounting to Rs.1,54,68,811. However, the assessee did not include the
  processing charges amounting to Rs.1,54,68,811 in his total turnover. He
  contended that although the processing charges (receipts) amounting to
  Rs.1,54,68,811 constituted part of business profits as computed under
  Section 28 of the LT. Act, since Section 80HHC (3) was the formula to
B work out export incentive, the said figure ofRs.1,54,68,811 was not
  includible in the total turnover in the formula under the said Section
  80HHC(3) of the LT. Act. According to assessee, Section 80HHC(3)
  provided for computation of export incentive/concession to be computed
  by allocating business profits in the ratio of export turnover+ by total
c turnover. This argument was not accepted by the Department.
         5. The narrow dispute which arises for determination is: whether the
  Department was right in including processing charges, amounting to ·
  Rs.l,54,68,811, in the total turnover while arriving at export profits under
  Section 80HHC(3) of the Act, as it stood at the material time.
D      .              . .
         6. According to A.O., the gross total income of the assessee was
  Rs.1,94,08,220 from which an amount ofRs.1,74,13,200 (90%) was
  deducted in terms of clause (baa) to the Explanation to Section 80HHC
  to arrive at the Business Profits (See: page 52 of the S.L.P. paper book).
E        7. _Shri T.L:V. Iyer, learned senior counsel appearing on behalf of
   respondent-assessce, submitted that Section 80HHC(3) of the LT. Act
   provided for export incentives. According to learned counsel, the object
    behind enactment of the said sub-section was to encourage exports. He,
   therefore, submitted tha~ the above formula should be read to exclude
 F processing charges from the total turnover in the above formula even though
   such charges constituted part of the business profits required to be
   calculated in terms _of the provisions of Section 28 to 44D of the LT. Act.
   According to learned counsel, the word ''turnover" includes all receipts
   from sale of goods and not from sale of services. According to learned
 G counsel, the assessee had two independent businesses, in one case he
   processed and exported his own products and in the other he processed
   the raw material (cashew nuts) supplied by third parties which he
   processed for earning process charges. According to learned counsel,
   income from works contract by way of processing charges were not
-H
                C.I.T., THIRUV ANANTHAPURAM v. K.                         1103
               RAVINDRANATHANNAIR [KAPADIA,].]
    includible in the denominator, in the above fonnula, namely, total turnover. A
    According to learned counsel, if processing charges were to be included
    in total turnover then the export incentives would stand reduced and that
    would defeat the very object behind enactment of Section 80HHC(3) of
    the LT. Act. Further, according to learned counsel, Section 80HHC(3)
    had granted export incentives only in respect of receipts in foreign exchange B
f   from sale of goods and from processing provided such processing was
    done to goods which the taxpayer exported. That, he was not the exporter
    of goods which were only processed for third parties and, therefore, such
    processing charges were not includible in the total turnover even though,
    such charges were includible in the "business profits" under clause (baa) c
    to the said Explanation. In this connection, learned counsel contended that
    such processing charges had no nexus with the activity of exports and,
    therefore, such charges were not includible in the total turnover. In this
    connection, reliance was placed on the judgment of this Court in the case
    of Commissioner of Income Tax, Coimbatore v. Mis. Lakshmi D
    Machine Works, (2007) 6 Scale 168.
          8. Mr. Vikas Singh, learned Addi. Solicitor General appearing on
    behalf of the Department, contended that in view of Explanation (ha) read
    with Explanation (baa) to Section 80HHC of the LT. Act when the said
    processing charges were includible in the business profits the same were E
    also simultaneously includible in total turnover in the abO'Ve formula.
    According to learned counsel, Section 80HHC provided for export
    profits; that, in order to compute the quantum of eligible deduction under
    Section 80HHC of the LT. Act, the Department was right in including
    the processing charges in the Business Profits and if such charges F
    constituted part of Business Profits then such charges cannot be excluded
    from total turnover. That, Business Profits, under the above fonnula, was
    required to be calculated in accordance with clause (baa) to the said
    Explanation. According to learned courisel, keeping in mind the provisions
    of Explanation (ha) and Explanation (baa) it is clear that what was G
    includible in the Business Profits in the above formula had to be included
    also in the total turnover. Therefore, according to learned counsel, the
    Tribunal as well as High Court had erred in holding that processing charges
    were not includible in the total turnover. In this connection, learned counsel
                                                                                   H
    1104          SUPREME COURT REPORTS                     [2007] 11 S.C.R.


A placed heavy reliance on the judgment of the Rajasthan High Court in
  the case of Commissioner of Income-Tax v. Sharda Gum and
  Chemicals, (2007) 288 ITR 116 (Raj).
       9. For the sake of convenience we quote hereinbelow Section
    80HHC as it stood at the material time which reads as follow:.
B
           "Deduction in respect ofprofits retained for export business
           80HHC. (1) Where an assessee, being an Indian company or a
           person (other than a company) resident in India, is engaged in the
           business of export out of India of any goods or merchandise to
c          which this section applies, there shall, in accordance with and
           subject to the provisions of this· section, be allowed, in computing
           the total income of the assessee, a deduction of the profits derived
           by the assessee from the export of such goods or merchandise :

D          Provided that ifthe assessee, being a holder of an Export House
           Certificate or a Trading House Certificate (hereafter in this section
           referred to as an Export House or a Trading House, as the case
           may be,) issues a certificate referred to in clause (b) of sub-section
           (4A), that in respect of the amount of the export turnover specified
E          therein, the deduction under this sub-section is to be allowed to a
           supporting manufacturer, then the amount of deduction in the case
           of the assessee shall be reduced by such amount which bears to
           the total profits derived by the assessee from the export of trading
           goods, the same proportion as the amount of export turnover
F          specified in the said certificate bears to the total export turnover
           of the assessee in respect of such trading goods.
           (IA) Where the assessee, being a supporting manufacturer, has
           during the previous year, sold goods or merchandise to any Export
           House or Trading House in respect of which the Export House
G          or Trading House has issued a certificate under the proviso to sub-
           section (1 ), there shall, in accordance with and subject to the
           provisions ofthis section, be allowed in computing the total income ·
           of the assessee, a deduction of the profits derived by the assessee
           from the sale of goods or merchandise to the Export House or
H
1
       C.l.T., THIRUV ANANTHAPURAM v. K.                        1105
      RA VINDRANATHANNAIR [KAPADIA,J.]
    Trading House in respect of which the certificate has been issued A
    by the Export House or Trading House.
    (2)(a) This section applies to all goods or merchandise, other than
    those specified in clause (b), if the sale proceeds of such goods
    or merchandise exported out oflndia are received in, or brought
    into, India by the assessee (other than the supporting manufacturer) B
    in convertible foreign exchange , within a period of six months from
    the end of previous year or, where the Chief Commissioner or
    Commissioner is satisfied (for reasons to be recorded in writing)
    that the assessee is, for reasons beyond his control, unable to do
    so within the said period of six months, within such further period C
    as the Chief Commissioner or Commissioner may allow in this
    behalf.
    (b) This section does not apply to the following goods or
    merchandise, nan1ely:--                                   D
    (i) mineral oil; and
    (ii) minerals and ores (other tha.'1 processed minerals and ores
    specified in the Twelfth Schedule).
                                                                        E
    Explanation 1.-The sale proceeds referred to in clause (a) shall
    be deemed to have been received in India where such sale process
    are credited to a separate account maintainoo for the purpose by
    the assessee with any bank outside India with the approval of the
    Reserve Bank of India.
                                                                         F
    Explanation 2.-For the removal of doubts, it is hereby declared
    that where any goods or merchandise are transferred by an
    assessee to a branch, office, warehouse or any other establishment
    of the assessee situate outside India and such goods or
    merchandise are sold from such branch, office, warehouse or G
    establishment, then, such transfer shall be deemed to be export out
    of India of such goods and merchandise and the value of such
    goods or merchandise declared in the shipping bill or bill or export
    as I-ferred to in sub-section (1) of section 50 of the Customs Act,
    1962 (52 of 1962), shall, for the purposes of this section, be H
    1106           SUPREME COURT REPORTS                     [2007] 11 S.C.R.


A          deemed to be the sale proceeds thereof.
           (3) For the purposes of sub-section (1),--
           (a) where the export out of India is of goods or merchandise
           manufactured or processed by the assessee, the profits derived
B          from such export shall be the amount which bears to the profits of
           the business, the same proportion as the export turnover in respect
           of such goods bears to the total turnover of the business carried
           on by the assessee;
           (b) where the export out of India is of trading goods, the profits
c
           derived from such export shall be the export turnover in respect
           of such trading goods as reduced by the direct costs and indirect
           costs attributable to such export ;
           I where the export out of India is of goods or merchandise
D          manufactured or processed by the assessee and of trading goods,
           the profits, derived from such export shall,--
           (i) in respect of the goods or merchandise manufactured or
           processed by the assessee, be the amount which bears to the
           adjusted profits of the business, the same proportion as the adjusted
E
           export turnover in respect of such goods bears to the adjusted total
           turnover of the business carried on by the assessee; and
           (ii) in respect of trading goods, be the export turnover in respect
           of such trading goods as reduced by the direct and indirect costs
F          attributable to export of such trading goods :
           Provided that the profits computed under clause (a) or clause (b)
           or clause (c) of this sub-section shall be further increased by the
           amount which bears to ninety per cent of any sum referred to in
G          clause (iiia) (not being profits on sale of a licence acquired from
           any other person), and clause (iiib) and (iiic) of section 28, the same
           proportion as the export turnover bears to the total turnover of
           the business carried on by the assessee.                         ·
           Explanations. - For the purposes of this sub-section,--
H
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        /
                   C.I.T., THIRUV ANANTHAPURAM v. K.                           1107
    i
                  RAVIND RAN ATHAN NAIR [KAPADIA,J.]
                (a) 'adjusted export turnover' means the export tumove~ as A
                reduced by the export turnover in respect of trading goods;
                (b) 'adjusted profits of the business' means the profits of the
                business as reduced by the profits derived from the business of
                export out of India of trading goods as computed in the manner
                                                                                B
                provided in clause (b) of sub-section (3);
                I 'adjusted total turnover' means the total turnover of the busin~ss
                as reduced by the export turnover in respect of trading goods;
                (d) 'direct costs' means costs directly attributable to the trading    c
                goods exported out of India including the purchase price of such
                goods;
                (e) 'indirect costs' means costs, not being direct costs, allocated
                in the ratio of the export turnover in respect of trading goods to
                the total turnover;                                                 D

                (f) 'trading goods' means goods which are not manufactured or
                processed by the assessee.
                (3A) For the purposes of sub-section (IA), profits derived by a
                supporting manufacturer from the sale of goods or merchandise E
                shall be,--
                (a) in a case where the business carried on by the supporting
                manufacturer consists exclusively of sale of goods or merchandise
                to one or more Export Houses or Trading Houses, the profits of F
;:...           the business [***];
                (b) in a case where the- business carried on by the supporting
                manufacturer does not consist exclusively of sale of goods or
                merchandise to one or more Export Houses or Trading Houses,
                the amount which bears to the profits of the business[***] the, G
                same proportion as the turnover in respect of sale to the respective
                Export House or Trading House bears to the total turnover of the
                business carried on by the assessee.
                (4) The deduction under sub-section (1) shall not be admissible H
    1108            SUPREME COURT REPORTS                   [2007] 11 S.C.R.


A           unless the assessee furnishes in the prescribed fonn, along with
            the return of income, the report of an accountant, as defined in
            the Explanation below sub-section (2) of section 288, certifying
            that the deduction has been correctly claimed in accordance with
            the provisions of this section.
B
            (4A) The deduction under sub-section (lA) shall not be admissible
            unless the supporting manufacturer furnishes in the prescribed fonn
            along with his return .ofinconie,--
            (a) the report of an accountant, as defined ~il the Explanation
c           below sub-section (2) of section 288, certifying that the deduction
            has been correctly claimed _on the basis of the profits or the
            supporting manufacturer in respect of his sale of goods or
            merchandise to the Export House or Trading House; and

D           (b) a certificate from the Export House or Trading House
            containing such particulars as may be prescribed and verified in
            the manner prescribed that in respect of the export turnover
            mentioned in the certificate, the Export House or Trading House
            has not claimed the deduction under this section :
E            Provided that the certificate specified in clause (b) shall be duly
             certified by the auditor auditing the accounts of the Export House
             or Trading House under the provisions of this Act or under any
           · otherlaw.                                                ·

F           Explanation.-For the purposes of this section,--
            (a) 'convertible foreign exchange' means foreign exchange which
            is for the time being treated by the Reserve Bank of India as
            convertible foreign exchange for the purposes of the Foreign
            Exchange Regulation Act, 1973 (46of1973), and any rules made
G           thereunder;
            (aa) 'export out oflndia' shall not include any transaction byway
            of sale or otherwise, in a shop, emporium or any other
            establishment situate in India, not involving clearance at any
H           customs station as defined in the Customs Act, 1962 (52 of 1962);
   C.I. T., THIRUVANANTHAPURAM v. K.                           1109
  RAVINDRANATHANNAIR [KAPADIA,J.]
(b) 'export turnover' means the sale proceeds, received in, or A
brought into, India by the assessee in convertible foreign exchange
in accordance with clause (a) of sub-section (2) of any goods or
merchandise to which this section applies and which are exported
out of India, but does not include freight or insurance attributable
to the transport of the goods or merchandise beyond the customs B
station as defined in the Customs Act, 1962 (52of1962);
(ba) 'total turnover' shall not include freight or insurance
attributable to the transport of the goods or merchandise beyond
the customs station as defined in the Customs Act, 1962 (52 o~ C
1962):
Provided that in relation to any assessment year commencing on
or after the 1st day of April, 1991, the expression total turnovet
shall have effect as if it also excluded any sum referred to in clauses
(iiia), (iiib) and (iiic) of section 28;                                D
(baa) 'profits of the busint>ss' 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) E
and (iiic) of section 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
(2) the profits of any branch, office, warehouse or any other F
establishment of the assessee situate outside India;
[***]
[***]
I 'Export House Certificate' or 'Trading House Certificate' means G
a valid Export House Certificate or Trading House Certificate, as
the case may be, issued by the Chief Controller of Imports and
Exports Government of India;
(d) 'supporting manufacturer' means a person being an Indian H
                                                                                  _\~
                                                                                   '
                                                                                       "
    1110           SUPREME COURT REPORTS                   [2007] 11 S.C.R.

A          company or a person (other than a company) resident in India,                '           ~




           manufacturing (including processing) goods or merchandise and
           selling such goods or merchandise to an Export House or a Trading
           House for the purposes of export."
                                                                                                    '
        10. Section 80HHC has been the subject-matter of frequent                                       '
B
  amendments. The said section was inserted in 1983. It was substituted in                  -t-
  1985. Thereafter, it was amended in 1986, 1988, 1989, 1990, 1991,                                 '~
  1992, 1994, 1999, 2000, 2003 and 2005. Therefore, while considering
  the applicability of Section 80 HHC, it is very important to keep in mind
  the working of the said section as applicable in a given assessment year.
c
        11. In this civil appeal we are concerned with the assessment year
    1993-94.
         12. At this stage, we may mention that, according to High Court, in
D order to include any amount in the; total turnover the said amount must
  either be the purchase price or the sale price or an item incidental to the              .....
  transfer of the goods dealt with by the assessee. According to High Court,
  the assessee had processed raw cashew nuts belonging to third parties in
  his factory for which he received the said charges; that, the purpose behind
E the  said formula was to find out the profits attributable to export turnover
  i.e. profit on export sales. Further, according to High Court, in the above
  formula business income was to be computed in order to determine the
  quantum of eligible deduction. That, in the said formula, business income
  in the context of total turnover was income generated on purchase and
  sales. That, in the context of Section 80HHC the total turnover referred
F
  to sales and purchase turnover and it did not include receipts in the nature
  of income which income was not attributable to sales. Further, according
  to High Court, even under the Circulars (Circular No.621 dated
  19.12.91) issued by CBDT a clarification was issued to the effect th(!t to
  arrive at the quantum of eligible deduction under Section 80HHC, in the
G
  case of an assessee having export and domestic business, a fraction of
  export turnover to total turnover had to be applied to Business Profits                      ,.
  computed under Section 28 of the LT. Act. According to High Court,
  such processing charges with which we are concerned had no connection
  with the word "sale", therefore, they were not liable to be included in the
H
  >L _: r :· ! t~V.:n,~THIRlfV A'.N1\Nf.i-iX:P0RA'.M:'\>~K.J.1'.'.                              \lfl\I
              RAVINDRANATHANNAIR [KAPADIA,J.]
totaltuniover:iJ .. rminl:I JJL? 1rii l'I i!4>rl\ ·.1dJ;b i•> cm:'1J ni JG bvi-rr£ :KI ,l.A_
">d•;r ' .... :".J'.i,_ud or;r•t>hr,l~-:, :J'. r!N ,vbnu-:n .b":iJOH :id ,1f;-:L i:;in 1nic1 ~nc
 .;·b :1Hj ~~ir;9.~~~~e9_b~,~e)~Q~ffiJ~?~~n~ ~~1~.w.aJ1~~
~~~g7si~~~~0~,in8.1~4i,b1~m~':.t0mliMTI8Y2~~·-~ R~B~~eLP~i~01P.~
~?tJW~S~~ ?;~ 1~~~, Rb ~iY~1 ~Pma!J:iu 1uo oi .:·1,jdr.-irt r .tr.:fJu~:;x,, 'JLJN
u·:r1:14. ThiStbatch of!dVii api5eaIStpe,Jrtainstfo:asses·sme'ilt yelf 19931 28
                                                         1
                                                                                       1



94; lthetefore, we have-quoted tfie'said-sectioii ar~frstoo'd:dn ilie•ihliteii~l
date:i.i t.,001~.. JbmJ 2J: d!ru1c; :r;r..,.<t :.i<l 0J ?.£d :·oiI')JJD'.:lb 1r.rli Jrn:;;111qrni
tn-;mi~ ··u::'to ,'f'l}'. 1 : i ~(u·~rl) ~ciJ!'l·J ··:,;hm1 1'J ro~tOl.1.'JWJt: !rfrJ!".JffffiO')
'i 1   Jj · 1q~ ~~~t;ti,~1l ~-~1H~9~0P.ni!·J ~~!;~~~. llRf:;a_~J?Ng~!lg,ffe~st.i.'W·1
10 J.~:~¥ _3!J,.-i9f~J?-ti,~~:P~Pi'J"f~~<(;~ ~~ p~j~RtJx~111ot!2f.lSfe®lP.;!~~l{l ,i_;
                                 ..                                           • c

L~J)~son~ti. ~~~~RIJ.·~OJ!Ijfq) _proy;~~.~a. fpJ; th~ fqll~~~g f9PE.¥h~; (n.c
·'.'. 1,r~·;:;:~P?o~~s,'oir~~~I'~~s~~1~~- ,: '.)m . ;·J :-t~~tio1t't~m~v~f Lu!:..n:·- r10i ~2~nqy,'J
 _;_:, 1 .•J1!0k\ .-'c,:t;;; ··1 ·;1 r_,,1 ;,rt·;:.im L·~k1Jtotahtymover ri;;q h•)rrrot -".J~.ftF.11::..

  .1mr6. ,;s~btioit'i 8014Hc1 ii~a ~; I-I1!~dsNore!vriia1 ficifcfN"Bt~Va11&
 L.
·'&efiuJUbri 1i'n' f~sf)fcl~rofits1ietaiife~f~PefP6P/ bWsih~iI'''.1 r~t~~f~ co
Head Note was inserted by Finance Act, 1985 w.e.f. 1.4.86'.:t5hdef f11]
o~gY?~c~eHi~.OJl ~j~~rt~; ~Yr..f.~apc.e. i).q~, ,J~&3; .fue_,~eS\c\ °NP~~ ~tated
'\<j,e,t/1jfj{o!!rf-.1J_,!iesp<?:_<:j19f!,~P<!fl)lf!?J<?Ve_Jj;:~ IJi~~efgi;~;:~~~JX-e.!Y b.~s!s
 ~~d, fy<]~ te~~..~1p~gv('.r"~~o ~'re!ep}~qp. 1o~pw,Q~J:C?r;tt,}(}JOr~ J?~€tl>§:li '·:E
 i:J~ 1Ji!t:<t::rndef 1 sg6i1cin:soi-Iit~(i) 1 rbtr:the··i:t?){2t'i!wfl"s:rzrir'f/16/iJ
P.ro~iae~ 'th~t iD::coMplitiRg1iliet'!fotaf m.2dme'' ~~q~ailcH<fn1>c>rlli~·~;Hfi71
aeriVed by 1 t~ 1llis~ssee"froih '~lie export'm1g'8dd~ sh'aW Beµt~ae~'Th.di~
~at !l:e\vords "piofiti denvetr fi.onfexP.Qrts;,;lri 'ille ~~Ci ·su6.~§~ciitfri>W¥J
substitilt&f¥or' tlte·woras1 ~'wnofo· Bf fin'.2omJm b'y1 DiNcitt<ix 'fatv~ :p
(Ariieriilihent)' J\cr, l 989'W.e?t i~4 :s<}_<Th.e- ~'x'pressi6~ "Cteti\rba' froni';'-1~
th~:said ·si'il).!sectidH i~ hflir6wer iliart iliteSlpressia1l 1 "~hti~MabieW~;;
th.erefore;it is oiilr"Jsmfils raerivM 'fraiifikxport5'fl{vllie1t'1ec3mgtt?e HJilsi~
f6t 1 ~rking -<>1fffue''sa1d1 rro~ul¥ ilfSectioii180Hifc(,3)··titcth'610X6t_.1
Siinilady; 'oy Fitia~ce-P:crt, 1f991j w.e~f.''f}4 .?2;'.fo!-'th~ ttir5t:nrhe,,'TI\~ .6
                                                                 1




dpt~ssiOn~''i:>rbfits'of the :6usiness''.1 stobdia~t{ried 'fo \lliefuFtWe'_t'fii-b]zis
of the business" as cohlput~a(under1he;l\eiltl ~'prbfit~' aHkf1galhs ~&r
b.~!~e.~~"1 .w,t~%-~Fp~i?JJ~.2;8_.!f?; i1P 9f\th~ !-W. l~ct, /Tuef:~{<?f~ 1 ( qefore
zj)j{igJ?.~~uc~~~J?-_,,-~y£ 1~ep~~on8Q.tJH9,(3)(~).:CbJ q~l(<;) PHp~I.T'.·'.A~t­
t~t:.:€WPS~ ~o.~I Y,19991~ pf~~~. ~s~~~~:~ll}g 2rf.fi!s1fr9.~ ;hY.-Sm~s~ .\1~5!:t91 1FI
   1112           SUPREME COURT REPORTS                    [2007] 11 S.C.R.

A be arrived at in tenns of clause (baa) to the said Explanation. However,
  one point needs to be noted, namely, while calculating "Business Profits"
  the same had to be done in tenns of Section 28 to Section 44D of the
  LT. Act alone. Other provisions like Sections 70 and 71 of the LT. Act
  were excluded. Therefore, in our view, if the said processing charges were
B a part of gross total income of the taxpayer being profits from business
  then it had to be included in the total turnover in the above fonnula It is       ~·
  important that deduction has to be from profits as understood in the
  commercial sense. Moreover, under clause (baa)(l ), 90% of any amount
  referred to in clause (iiia), (iiib) and (iiic) of Section 28 of the LT. Act or
C any receipts by way of brokerage, commission, interest, rent, charges or
  any other receipt of a similar nature included in such profits. The said
  expression "included in such profits" indicated that the said processing
  charges fonned part of the gross total income being business profits. This             l
  has been clarified by clause (baa) to the said Explanation which inserted              '
                                                                                         r
D the definition of"profits from business" in the said Section 80HHC(3) of
  the LT. Act.
        18. In the present case the A.O. had worked out Business Profits                 .....
  of Rs.1,94,08,220 as gross total income on the basis of income received                'I

E from cashew business (See: pages 50 and 52 of the SLP Paper book).
  Even according to assessees, in the above fonnula his Business Profits
  included the above-mentioned processing charges. However, according
   to assessees, the said charges were not to be included in the total
  turnover. We are not inclined to accept the contention of the assessees.
  The above discussion indicates that the fonnula in Section 80HHC(3) of
F the LT. Act provided for a fraction of export turnover divided by total
  turnover to be applied to Business Profits calculated after deducting 90%
  of the sums mentioned in clause (baa) to the said Explanation. That, profit
  incentiv('.s and items like rent, commission, brokerage, charges etc. though
  fonned part of gross total income had to be excluded as they were
G "independent incomes" which had no element of export turnover. That,
  the said items dist<?,rted the figure of export profits.
        19. In our view, for the above reasons, the said processing charges,
  which was part of gross total income, was an independent income like
H rent, commission, brokerage etc. and, therefore, 90% of the said sum had
                                                                                         I
            C.I.T., THIRUV ANANTHAPURAM v. K.                          1113
           RAVINDRANATHANNAIR [KAPADIA, J.]
to be reduced from the gross total income to arrive at the Business Profits A
and since the said processing charge was an important component of
Business Profits, it also had to be included in the total turnover in the said
formula to arrive at business profits in terms of clause (baa) to the said
Explanation.
                                                                               B
       20. One point still remains for consideration. On behalf of assessees
it has been vehemently urged that the above-mentioned processing
charges, earned by the assessees by processing raw cashew nuts for third
parties, had no nexus with the export business and, therefore, such charges
were not includible in the total turnover. It was also further argued that C
export incentives were admissible only in respect of profits on export sales.
lti this connection, it was submitted that the assessees earned processing
charges from an activity which had no connection with exports. According
to assessees, no export turnover arose from processing of raw material
by the assessees for third parties and, therefore, the said receipts did not D
constitute an element of total turnover. Therefore, according to assessees,
the A.O. had erred in including the said charges in the total turnover.
According to assessees, profits derived from local sales were includible
in Business Profits but not in the total turnover.
       21. At the outset, we may state that, in the present case, we are E
 dealing with the law as it stood during assessment year 1993-94. At that
 time Section 80HHC(3) of the LT. Act constituted a Code by itself.
 Subsequent amendments have imposed restrictions/qualifications by which
 the said provision has ceased to be a code by itself. In the above formula
 there existed four variables, namely, business profits, export turnover, total F
turnover and 90% of the sums referred to in clause (baa) to the said
Explanation. In the computation of deduction under Section 80HHC all
four variables had to be taken into account. All four variables were required
to be given weightage. The substitution of Section 80HHC(3) secures
profits derived from the exports of eligible goods. Therefore, if all the four G
variables are kept in mind, it becomes clear that every receipt is not income
and every income would not necessarily include element of export turnover.
This aspect needs to be kept in mind while interpreting clause (baa) to
the said Explanation. The said clause stated that 90% of incentive profits
or receipts by way of brokerage, commission, interest, rent, charges or 'H
Mil4:    SGPREME~€0UR1!1RERORT.S11IT[2:001~ 11 S.C.R.
        [ :. /JCt.<l/.~~l >lltJ1Vft-JnAv1/5!G'v-r:l'/A}l
                                                           I
    >i ').! l f C~Wr.:,\THIRlJVA'.NANtHAPURAM-v>K1/                                                            ,1115
                 RA VINDRANATHANNAIR [KAPADIA,J.]
of/or that it has an attribute of an export tumoverJ iWhen an indirect:tax·i~ 'A
~oll_e9ted by_th~ taxpayer, on_ behalf qf the ,government the 1¥ re~overed
i~rr~r
         1
          tli~
               1
                go~~nlliierii.                     iJ~  1
                                                         ~1ri~~m~"        ili
                                                                              1

 ~Lr~()!t i' 1~'-JI •_.
                                       'Y  i11
                                             i¥fay                              tii~ 1 goiib~rtilllsense• or
                           ~··rp .. 1J"..•~ {Ji' · !'; r1U(J ":·. j_jr .< };:1ffi•' . J lft- 'ir' ~ ·j "1~
                                                                                      1

even under the I.T. Act 15ut while workirig out llie fonnUla under Section
8oili-Ic(3)6fth~fr.{~~1 aria \Vhi1~ 1 k~ri)rii\~ th1e four iaHab1i~ 16ne has
i9 '~~~itar~·w~tlier'1h'i¥~c~i~tii~f~                            ·ahli\Jlif~Jor~k~6rt ·hfrbt>ver. An ~B
            1                        1                1
n{dii~ct ~)iil(~~~bi~ <l& .:. d~~ riot h~~ftimfe1blliJrif of
 , ru: 'j C''.:.IJ[" •.'.JO tun lir·~:.,,. nu:', c' '11·,f11 !°' ·I •JiH '.''8 n~· .. :-
                                                                                             ex .   rf furn.over
as understood m the above formula. As stated'above, it is recoyered by
the taxpayer on behalf of the government. Therefore, in th:e· pr~ seht cases,
                                                                                                    1



our judgment ,ir1.G_-q_m_pti,sS,jpn.er,...11fi!n£<!'f'~ Tax, .(j~fmbq~(!!~. y;- Mis .
.lakshmi Maahiti,e)for;/cy,.f),OfJ1) 6.Sc~!e•168,_has_µ.p,.?J?P!ic~!!o~.: ·.<i '. C
1 1 111
 '. _  2~(~t1~iauig1y;fh~ ~p~gd&tjlid!iMlnt5' of_th~ HigR c6illFand t6e
triiJlriiai hlte1 ~~tliii<le fui<lfu'e abO~~·'civil apPeat~'fileaby'th~ DepiUtthefii
are accordingly allowed with n_o orqer.,~to c9_sts~,, . / \ " 1 , ~ , • 1 .•. _, . : \


          Civil Appeal No. 5178 of2007 arising o~.~~~·h·~.(~l~q.p747
          of 2004,                                    ~
                 Jt:Jfllt.:id ,,.... 1! ~n:.i m l.>~J. ..i'..,11'.J ·1;~i>'ffW1 , L . 1 -,y_,n ,,,,   I. rJr
         Civil Appeal No. 5179 of2007 arising out ofS.L.P.(C) No.13748
 '.Jbul:m0 r2 oolt.~ )J-'?,J<(·t; t-Q !"'\.'·· r 1,,,'.)~ rn·)lrc.1·/c:,. ·;d1 ,,, , : ~ :E
"·1brn.: f!(;tnuL:i, .<><.;i1•n!JiO:.i
                      ~       1            • t"•'fcirf·•,1.,•
                                       '1(J't '-"         .., !1·J, iJ, '1 · '~~Jdlf_,,.
                                                                                ... ,., • ·_i( 1r~(~".:,;)l
                                                                                       I
                                                                                                       ·    l,..-1
         Civil Appeal No. 3687of2005.: -1 i · :.i.i. 'i.! · >H! lu& fI(J'.J:I..1?.
 Il'nit~5.'.Le~v~.granJed..,,v:.irnr.it?·,, Ar- ~i·.,,'-11L, :."... ;..-,1-'.?f:. , ,

 nnq/26: A sHolfqd~~hdH:wllich~an~e~·taP&eiffrhhlati8H·in ffiis1 bai~h·of ~JF
             1

civil appeals filed by the Department is:                         ·'11 i<n;
        .m,iWHeill~Fiii ill~ ·tn.~iietoi&JHlpiitHtio~ :of aeaucti&ri;Un.<l~r Section
'1 ..  ,,,rr89W!q9)(o) 9.fjt!ie i:;L~Act,:l~sg~~~uff.~r~dbyJµt'. ~payer in
 b1;J;Jbe ~XPPU::Pf:tr~di.ng good~!~aI! ~,s~t q.ff/~djl!~ted ag~in~~ profits
   LT ·1rifr:Qm;e)(poi:t.ofaP.cm~f<!c!ur~g,gQQ.~'!?dyi~.~yersa ~d whether 1!G
             the assessee would be entitled to deduction if·af~r such
            .adjustments/set off the _net figure_is a loss."
 fi(,ff::;,5,~ "fLJ1.ATU jj(JrJ'J!J;, ·L fq rJ[;LllJlJ'lWU' lei ,·_.r ..WI 'A;' ; ' ~riJ:.: :· ,'! .
ni 1::.i~hlmarec~iltijudgmentof)his1Coln;t_inithe ,C(.ase of~4-:M.<1Moosa
VJ~Con;zmissi<;mrmof/1JcOme::ta~,1 [2007] .29;4JT'R·:l ·SC; ~is .Court vi de f+H
     1116            SUPREME COURT REPORTS                    [2007] 11 S.C.R.
                                                                                     I
 A para 11 has ruled as follows:
             ''A plain reading of section 80HHC makes it clear that in arriving
             at the profits earned from export of both self-manufactured goods
             and trading goods, the profits and losses in both the trades have
 B           to be taken into consideration. If after such adjustments there is a
             positive profit, the assessee would be entitled to deduction under      l-
             section 80HHC(l ). If there is a loss he will not be entitled to any
             deduction."

         28. Accordingly, civil appeals filed by the Department stand allowed,
 C the impugned judgments of the High Court are set aside and the matters
   are remitted to A.O. for fresh disposal of the cases in accordance with
   the judgment of this Court in A.A!. Moosa (supra). No order as to costs.
     Processing and Negative Profits (loss)
- D Civil Appeal No. of2007 arising out ofS.L.P. (C) No.12609 of2004.
            29. Leave granted.
            30. Assessee is a company engaged in cashew business.
E         31. For the assessment year 1993-94 assessee did not include
     processing charges in its total turnover for computing deduction under
     Section 80HHC of the LT. Act.
        32. Assessee adjusted its losses from export of trading goods against
  profits from export of manufacturing goods for determining its export
F profits.
          33. Therefore, two following questions arise for determination:
             "Whether processing charges were includible in the ''total turnover''
             in the formula in Section 80HHC(3), as it stood at the material
G            time, for computing deduction under Section 80HHC of the LT.
             Act."
             "Whether in the matter of computation of deduction, under Section
             80HHC(3)(c) .of the LT. Act, losses suffered by the taxpayer in
H            the export of trading goods can be set off/adjusted against profits
I
I




              C.l.T., THIRUVANANTHAPURAM v. K.                        1117
             RAVINDRANATHANNAIR [KAPADIA,J.]
           from export of manufactured goods and vice versa and whether A
           the assessee would be entitled to deduction if after such
           adjustments/set off the net figure is a loss."
          34. For the reasons given hereinabove, we answer both the above
    questions in favour of the Department and against assessee. Accordingly B
    civil appeal filed by the Department is allowed, the impugned judgment
    of the High Court is set aside and the matter is remitted to A.O. for fresh
    disposal of the case in accordance with law declared hereinabove on both
    the points. No order as to costs.
    Civil Appeal No.3167 of 2006                                             C
         35. In view of the Judgment in Commissioner of Income Tax,
    Coimbatore v. Mis. Lakshmi Machine Works, (2007) 6 Scale 168, Civil
    Appeal No.3167 of 2006 filed by the Department is accordingly dismissed
    with no order as to costs.                                              O
    D.G.                                             Appeals disposed of.