P.R. PRABHAKARversusCOMMISSIONER OF INCOME TAX, COIMBATORE

                        P.R. PRABHAKAR                                       A
                                v.
            COMMISSIONER OF INCOME TAX, COIMBATORE

                              JULY 18, 2006

               [S.B. SINHA AND DALVEER BHANDARI, JJ.]                        B

      Income Tax Act, 1961:

       ss. BOHHC(J) and (3)-"lncome arising out of business of export"-
Claim for deduction-Assessee carrying on business of ex;ort of its own C
products as also procuring export contracts for other exporters on
commission-Derived income by way of commission but incurred loss as
exporter of goods-Claimed deduction in respect of income from commission
in terms of s.80HHC-Held, the expression "income arising out of business
ofexport" brings within its sweep not only export of any goods or merchandise D
manufactured or processed by assessee but also of trading goods-Tribunal
rightly held assessee entitled to claim deduction-Amendments by way of
CBDT Circular No. 621 dated 19.12.1991 which were made effective from
1.4.1992, cannot be interpreted to have retrospective operation-Central
Board of Direct Taxes-Circular No. 621 dated 19.12.1991.
                                                                             E
      Interpretation of Statutes-Tax statutes-Exemption provisions-
Interpretation of

      Appellant-assessee, who was carrying on business of export of its own
products as also procuring export contracts for other exporters on
commission, derived an income by way of commission and incurred a loss in F
export of goods, in the assessment year 1990-91. He claimed a deduction in
respect of the income ~rom commission in terms of s.SOHHC of the Income
Tax Act, 1961. The Assessing Officer and the Commissioner of Income Tax
(appeals) disallowed the claim, but the Income Tax appellate Tribunal held in
favour of the assessee observing that the commission received by the assessee G
from other exporters was to be taken into consideration for the purpose of
allowing deduction. However, the High Court answering the reference in favour
of the Revenue, held that the income derived by the assessee towards
commission/brokerage for procuring orders of export for others was not

                                   645                                      H
    646                      SUPREME COURT REPORTS (2006] SUPP. 3 S.C.R.

A   eligible to exemption from tax u/s 80HHC of the Act. Aggrieved, the assessee
    filed the present appeal.

          It was contended for the appellant that earning of commission being a
    part of the export business, the income derived therefrom should be calculated
    for computing profit or loss for the purpose ofs.80HHC of the Act; and that
B   the circular issued by CBDT having clarified that the amendment would have
    a prospective operation with effect from 1.4.1992, the High Court erred in
    holding that the same would operate retrospectively.

          Allowing the appeal, the Court

C          HELD: 1,1. On a plain reading of Sub-sections (1) and (3) ofs.80HHC
    of the Income Tax Act, 1961, it is evident that it applies to the assessee engaged
    in the business of export out of India including trading of goods. The
    expression 'business of export' must be given its due meaning. It not only
    speaks of 'export out of India' but also includes 'trading of goods'. The
D   expression "income arising out of business of export" brings within its sweep
    processed not only the export of any goods or merchandise manufactured or
    by the assessee but also of trading goods. The Parliament, therefore, intended
    to provide incentive when a positive profit is earned by an exporter. By reason
    of the amendment the Parliament did not intend that the income derived by
    way of brokerage/commission by the assessee should not be reckoned for the
E   purpose of computing profit or loss earned by a person engaged in the business
    of export but by reason thereof the deduction to the extent of 10% held to be
    allowable thereby. (651-C-D; 652-E; 653-B]

          IPCA laboratory ltd. v. Dy. Commissioner of Income Tax, Mumbai,
    ]2004( 12 SCC 742 and Income Tax Officer, Bangalore v. Mis !ndujlex Products
F   (P) ltd., (2005) IO SCALE 132, relied on.

        International Research Park laboratories ltd. v. Assistant
    Commissioner of Income-Tax, 212 ITR I, upheld. ·

           1.2. The purport and reason for enacting Section 80HHC of the Income
G   Tax Act indisputably wa.; to provide incentive to export houses. It is now a
    well-settled principle of law that although the exemption provisions are to be
    construed strictly as regards the applicability thereof to the case of the
    assessee but once it is found that the same is applicable, the same are required
    to be interpreted liberally. It is also trite law that an exemption is to be granted
H   unless it is expressly taken away. (652-F-H; 653-A]
        P.R. PRABHAKAR r. COMMR. OF INCOME TAX, COIMBATORE [SINHA, J.J     64 7

      Tata Iron & Steel Co. ltd v. State of Jharkhand and Ors., 120051 4 A
SCC 272; Government of India and Ors. v. Indian Tobacco Association, (20051
7 SCC 396; Commissioner ofCentral facise, Raipur v. Hira Cement, JT (2006)
2 SC 369 and Adityapur Industrial Area Development Authority v. Union of
India & Ors., (2006) 5 SCALE 321, relied on.

      2. Indisputably, the CBDT issued circular No. 621dated19th December,         B
1991 by way of explanatory notes to the provision. Paragraph 32 of the said
circular provides for modification of provisions relating to exemption of income
from exports. The amendment by inserting sub-section (3) in the said provision
was carried out so as to compensate the exporter from the comparative
disadvantages faced by him in the international market. The amendments in          C
no uncertain terms were to take effect from 1st April 1992 i.e. for the
assessment year 1992-93 and subsequent '1ssessment years. The High Court
committed a serious error in opining that the same would a~.ply to the
assessment year in question. Where, however, the provisions were to operate
with retrospective effect the same had been categorically stated. The circular
issued by the CBDT is binding on the Department.1651-D-E; 652-A; C-DI              D
     Mercantile Bank ltd, Bombay v. The Commissioner of Income Tax,
Bombay City-!11, (2006) 5 SCALE 244 and Union of India and Anr. v. Azadi
Bachao Ando/an and Anr., 12004] 10 SCC 1, referred to.

      CIVIL.APPELLATE JURISDICTION : Civil Appeal No. 877 of2006.                  E
      From the Judgment and Order dated 18.5.2004 of the High Court of
Judicature at Madras in Tax Case No. 65/2000.

     C.A. Sundaram, R.K. Singh, H. Gupta, Deepa Rai and K.V. Mohan for
the Appellant.                                                                     F
     Rajiv Dutta, M.F. Humayunisa, Saket Singh and B.V. Balaram Das forthe
Respondent.

     The Judgment of the Court was delivered by
                                                                                   G
      S.B. SINHA, J. The Appellant carries on business of export of its ownn
products as also procuring export contracts for other exporters on commission.
In the Assessment year 1990-1991, he derived an income of Rs. 56,69321 '- by
way of comission, whereas as an exporter of goods incurred a loss of Rs.
6,372/-. The value of the total exported goods outside India by the Appellant
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    648                     SUPREME COURT REPORTS [2006] SUPP. 3 S.C.R.

A during the said assessment year was Rs.3,67,600/-. He claimed a deduction in
    respect of aforementioned income in terms of Section SOHHC of the Income
    Tax Act, 1961 (for short "the Act"). Exemption claimed under the
    aforementioned provision was disallowed by the Assessing Officer on the
    premise that they having incurred loss in respect of export business were not
B   entitled thereto. An appeal preferred thereagainst was rejected by the
    Commissioner of Income Tax (Appeal). The Income Tax Appellate Tribunal,
    however, on further appeal preferred by the Appellant opined that the
    commissioner received by the Appellant from the other exporters is to be
    taken into consideration for the said purpose.

C         The Respondent aggrieved by and dissatisfied with the said decision
    field an application for reference to the High Court and by an order dated
    13.9.1996 the following questions were referred by the Tribunal:

            "I. Whether on the facts and in the circumstances of the case, the
            Tribunal was right in law in holding that the assessee is entitled to
D           deduction under Section SOHHC of the Income-Tax Act even though
            the export business resulted in a loss of Rs. 6,372/-?

            2. Whether on the facts and in the circumstances of the case the
            Tribunal is right in law in holding that commission and brokerage for
            procuring export contracts for other exporters is exempt under section
E           SOHHC of the Act on the ground that the same is export profits?"

          By reason of the impugned judgment the High Court opined that income
    derived by the Appellant towards commission/borkerage for procuring orders
    of export for others is not eligible to exemption from tax under Section 80HHC
    of the Act. Referring to the circulars issued by the Central Board of Direct
F   Taxes (CBDJ), the High Court held that although the said provision was
    amended with effect from I .4. I992 by inserting an explanation whereby and
    whereunder the profit derived out of such commission/brokerage was confined
    to 10% of the income, the same, being clarificatory in nature, would have
    retropective effect. On the said findings, answers to both the questions were
G   rendered in the negative and in favour of the Revenue.

         Mr. C.A. Sundaram, learned senior counsel appearing on behalf of the
    Appellant principally raised two contentions before us:

           (i)   The CBDT circular clarified that the amendment would have a
                 prospective application with effect from 1.4.1992 the High Court
H
        P.R. PRABHAKAR v. COMMR. 9F INCOME TAX, COIMBATORE [SINHA, J.]       649
             committed a serious error in holding that the same would operate        A
             retrospectively being clarificatory in nature.
       (iO   Earing of commissio,n being a part of the export business, the
             income derived therefrom should be calculated for the purpose
             of computing profit or loss in regard to the applicability of Section
             80HHC of the Act.                                                       B
       Mr. Rajiv Dutta, learned senior counsel appearing on behalf of the
Respondents, on the other hand, would submit that on a plain reading of the
said provision it would be evident that income from commission/brokerage
could not have been given any exemption for the purpose of invoking the .
provision of Section 80HC of the Act as it received statutory recognition only C
by reason of the said amendment which came into force with effect ffrom
1.4. 1992.

     Sub-sections (I) and (3) of Section 80HHC of the Income Tax Act read
as under:
                                                                                     D
       "(!)Where an assessee, being an lndiann 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 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 to the extent of profits, referred to in sub- E
       section (JB), derived by the assessee from the export of such goods
       or merchandise:

       Provided that if the assessee, being a holder of an Export House
       Certificate or a Trading House Certificate (hereafter in this sectiion F
       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 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 amountt which bears to the total profits G
       derived by the assessee from the export of trading goods, the same
       proportion as the amount of export turnover specified in the said
       certificate bears to the total export turnover of the assessee in respect
       of such trading goods."

                   xxx          xxx                                                  H
    650                    SUPREME COURT REPORTS [2006] SUPP. 3 S.C.R.

A         "(3) For the purposes of sub-section (I),-

          (a) where the export out of India is of goods or merchandise
          manufactured or processed by the assessee, the assessee the profits
          derived from such export shall be the amount which bears to the
          profits of the business, the same proportion as the export turnover in
B         respect of such goods bears to the total turnover of the business
          carTied on by the assessee;

          (b) where the export out of India is of trading goods, the profits
          derived from such export shall be the export turnover in respect of
          such trading goods as reduced by the direct costs and indirect costs
C         attributable to such export;

          (c) where the export out of India is of goods or merchandise
          manufactured or processed by the assessee and of trading goods, the
          profits dervied from such export shall,-

D         (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 export turnover
          in respect of such goods bears to the adjusted total turnover of the
          business carried on by the assessee: and

E         (ii) in respect of trading goods, be the export turnover in respect of
          such trading goods as reduced by the direct and indirect costs
          attirbutable 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
F         which bears to ninety per cent of any sum referred to in clause (iii-
          a) (not being profit on sale of a licence acquired from any other
          person), and clauses (iii-b) and (iii-c) of Section 28, the same proportion
          as the export turnover bears to the total turnover of business carried
          on by the assessee.

G         Explanation.-For the purposes of this sub-section-

          (a) 'adjusted export turnover' means the export turnover as reduced
          by the export turnover in respect of trading goods;

          (b) 'adjusted profits of the business' means the profits of the business
H         as reduced by the profits dervied from the business of export out of
        P.R. PRABHAKAR v. COM MR. OF INCOME TAX, CO IMBATORE [SINHA, J.]   65 J

        India of trading goods as computed in the manner provided in clause       A
        (b) of sub-section (3);

        (c) 'adjusted total turnover' means the total turnover of the business
        as reduced by the export turnover in respect of trading goods:

        (d) 'direct costs' means costs directly attributable to the trading       B
        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 the
        total turnover;                                                           C
        (f) 'trading goods' means goods which are not manufactured or
        processed by the assessee."

      On a plain reading of the said provisions, it is evident that it applies
to the assessee engaged in the business of export out of India including          D
trading of goods. The expression 'business of export' must be given its due
meaning. It not only speaks of 'export out of India, but also includes, trading
of goods'.

       Indisputably, the CBDT issued a circular bearing No. 621 dated 19th
December, 1991 by way of explanatory notes to the said provision. Paragraph       E
32 of the said circular provides for modification of provisions relating to
exemption of income from exports. The amendment by inserting sub-section
(3) in the said provision was carried out so as to compensate the exporter from
the comparative disadvantages faced by him in the international market. The
formula, as was existing prior to 1991 as stated in the circular often used to
provide a distorted figure of export profits when receipts like interest,         F
commission, etc. which did not have an element of turnover were included in
the profit and loss account and, thus, it was clarified that "profits of the
business" for the said provision would not include receipt by way of brokerage,
commission, interest or any other receipt of a similar nature. It was, however,
categorically stated:                                                             G
        " ... As some expenditure might be incurred in earning incomes, which
        in the gene;rality of cases is part of common expenses, ad hoc I0 per
        cent, deduction from such incomes is provided to account for these
        expenses."
                                                                                  H
    652                     SUPREME COURT REPORTS [2006] SUPP. 3 S.C.R.

A         The amendments in no uncertain terms were to take effect from I st
    April, 1992, i.e. for the assessment year 1992-93 and subsequent assessment
    years. Where however, the provisions were to operate with retrospective
    effect the same had been categorically stated as, for example, in paragraph
    32.1 7 thereof, which is as under:

B           "This amendment takes effect retrospectively from Ist April, 1986, the
            day on which the substituted section 80HHC took effect. It will,
            accordingly. apply in relation to assessment year 1986-87 and
            susbequent years."

       The aforementioned circular dated 19th December, 1991 issued by the
C CBDT is binding on the Department. [See Mercantile Bank Ltd Bombay v.
  The Commissioner of Income Tax, Bombay City-lll, (2006) 5 SCALE 244 and
  Union of India Anr. v. Azadi Bachao Ando/an and Anr., [2004] 10 SCC l.]

          Once it is held that the amendment carried out in 1991 by reason of
D   Finance Act (No. 2), Act, 1991 was prospective in nature, ex facie the High
    Court committed a serious error in opining that the same being clarificatory
    in character would apply to the assessment year in question. By reason of
    the purported clarification issued by the CBDT in term of the said circular, the
    area of exemption had not been widened. It has, in effect and substance as
    would appear from paragraph 32.11, been curtailed.
E
          By reason of such amendment, the Parliament did not intend that the
    income dervied by way of brokerage/commission by the assessee should not
    be reckoned for the purpose of computing profit or loss earned by a person
    engaged in the business of export but by reason thereof the deduction to the
    extent of I0% held to be allowable thereby. We, therefore, cannot accept the
F   submission of Mr. Dutta that the income dervied by way of commission and/
    or brokerage by an assessee carrying on business of export became exigible
    to exemption to the extent of 10% for the first time with effect from 1.4.1992.

          The purport and reason for enacting Section 80HHC of the Income Tax
G Act indisputably was to provide incentive to export houses. It is now a well-
   settled principle of law that although the exemption provisions are to be
   construed strictly as regards the applicability thereof to the case of the
   assessee but once it is found that the same is applicable, the same are
   required to be interpreted liberally. [See Tata Iron & Steel Co. Ltd. v. State
  ·of Jharkhand and Ors., [2005] 4 SCC 272, Government of India and Ors. v.
H Indian Tobacco Association, [2005] 7 SCC 396 and Commr. of Central Excise,
        P.R. PRABHAKAR v. COMMR. OF INCOME TAX, COIMBATORE [SINHA, J.]    653
Raipur v. Hira Cement, JT, (2006) 2 SC 369.]                                      A
      It is also trite law that an exemption is to be granted unless it is
expressly taken away. [See Adityapur lndustril Area Development Authority
v. Union of India and Ors:, (2006) 5 SCALE 321]

      The expression "income arising out of business of export" brings within     B
its sweep not only the export of any goods or merchandise manufactured or
processed by the assessee but also of trading goods. The Parliament, therefore,
intended to provide incentive when a positive profit is earned by an exporter.
[See IPCA Laboratory Ltd. v. Dy. Commissioner of Income Tax, Mumbai,
r2004112 sec 742.J
                                                                                  c
       The question again came up for consideration before a Division Bench
of this Court in Income Tax Officer, Bangalore v. Mis. lndujlex Products (P)
Ltd., (2005) 10 SCALE 132, wherein: it was opined.

       " ... It is no doubt true that the term 'profit' implies positive profit
       which has to be arrived at after taking into consideration the profit      D
       earned from export of both self-manufactured goods and the trading
       goods and the profits and losses, in both the trades have, thus, to
       be taken into consideration ... "

      Indeed the question as to whether earning of income by way of E
commission/brokerage would attract Section 80HHC of the Act or not precisely
came up for consideration before a Special Bench of the Income Tax Appellate
Tribunal, Delhi Bench in International Research Park Laboraties Ltd. v.
Assistant Commissioner ofIncome-Tax, 212 ITR wherein interpreting the CBDT
circular, it was stated:
                                                                                  F
       "Now, we come to whether the commission received could form part
       of export profits. Here again, we are unable to see it differently. It is
       no doubt true that this commission is not turnover but it is a profit
       relatable to exports. Coming back to section 80HHC( I), if the assessee
       is an exclusive exporter without having any local sales, then the profit
       on commission is admittedly includible as profit of the business G
       computed under the head "Profits and gains of business or profession"
       and the whole of it would be eligible for exemption under clause (a)
       of sub-section (3) of section 80HHC. When such commission could
       be regarded as profit dervided from export for the purpose of clause
       (a), how can the same be excluded for the purpose of clause (b) H
    654                     SUPREME COURT REPORTS (2006] SUPP. 3 S.C.R.

A           unless it amounted to discrimination. The interpretation of clauses (a)
            and (b) must be harmoinous ar.d not discriminatory, cutting against
            each other. What is sauce for the goose is also sauce for the gander.
            Secondly, we have just mentioned that this profit is profit derived
            from export and export is the basis or the foundation of the nexus. The
            argument of Shri B.B. Ahuja and all his effort to show to us that it
B           has no reference to the export is, therefore, unacceptable to us. In our
            opinion, the argument advanced by Shri Ahuja overlooks the fact
            that the commission would not have come to the assessee had he not
            engaged in the export business. He sought to justify his argument by
            referring to subsequent amendments made from April I, 1992,
c           whereunder as we have pointed out above by adding clause (baa)
            to the Explanation at the end of sub-section (4A) with effect from
            April I, 1992, 90 per cent of this commission etc. is not to be regarded
            as profits derived from export business and this amendment as
            explained in the Memorandum of Bill was only to clarify the position."

D         It is stated at the Bar that the Revenue did not prefer any appeal
    thereagainst. We, for the reasons stated hereinbefore, agree with the law laid
    down by the Tribunal.

          For the views, we have taken, the judgment of the High Court cannot
    be sustained. It is set aside accordingly. The appeal is, accordingly, allowed.
E   The parties shall, however, pay and bear their own costs.

    R.P.                                                          Appeal allowed.