IN HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO. 761 OF 2002 M/s. Shivani Exports registered partnership firm having its registered office at 705, Magestic Shopping Centre, 144 Girgaum, Bombay-400 004. ..Appellant vs. 1. Assistant Commissioner of Income Tax Circle 19(1) having office at Aayakar Bhavan, Maharshi Karve Marg, Bombay-400 020 2. Union of India, through Ministry of Law, Aayakar Bhavan, Maharshi Karve Marg, Bombay-400 020 ..Respondents Ms. A. Vissanji for Appellant. Mr. A.R. Malhotra for Respondents. CORAM : NITIN JAMDAR & M.S.KARNIK, JJ. DATE : 8 JANUARY 2020 ORAL JUDGMENT :- Appellant carried on business of exports of cut and polished diamonds. Appellant, apart from work of 1/9 ::: Uploaded on - 15/01/2020 ::: Downloaded on - 16/01/2020 09:41:33 ::: 202 itxa 761-02.doc cutting and polishing diamonds, also undertook work of other exporters on contract basis. By Assessment Year 1991-92, period relevant for this appeal, Appellant received amount of Rs.22,48,436/- which was credited by Appellant under head Factory labour charges . Appellant also received amount of Rs.73,078/- as Labour charges commission since Appellant had given work of cutting and polishing diamonds on sub-contracts. 2. Appellant filed return of income on 31 October, 1991 declaring income of Rs.2,23,810/- after claiming deduction of Rs.14,60,274/- under Section 80 HHC of Income Tax Act, 1961. Assessing Officer by order dated 18 March, 1993 excluded amount of Factory Labour Charges and Labour Charges Commission totaling Rs.23,01,514/-. Having restricted deduction under Section 80 HHC to Rs.11,18,588/-, Assessing Officer passed order on 18 March, 1993. 3. Appellant filed appeal with Commissioner of Income Tax (Appeals), which was allowed in favour of Appellant by order dated 25 October, 1994. Respondent- Revenue filed Appeal No.CIT(A)XIX/IT.147/93-94 before Income Tax Appellate Tribunal and Tribunal allowed Appeal of Revenue by order dated 23 April, 2002. Hence, present Appeal is filed by Appellant-Assesssee. 2/9 ::: Uploaded on - 15/01/2020 ::: Downloaded on - 16/01/2020 09:41:33 ::: 202 itxa 761-02.doc 4. Appeal was admitted on following substantial question of law :- Whether on facts and circumstances of case Respondent No.1 is justified in excluding from total business income labour charges amounting to Rs.22,28,436/- and Labour Commission of Rs.73,078/- for purpose of calculating deductions under Section 80 HHC of Act ? 5. We have heard Ms. A. Vissanji for Appellant and Mr. A.R. Malhotra for Respondents. 6. For sake of convenience we have reproduced impugned order which reads thus : Revenue is in appeal arising out of order of CIT(A) dated 25.10.1994 and only ground raised is as under. On facts and in circumstances in case, CIT(A) has erred in allowing Assessee s claim for deduction U/s 80 HHC on Labour Charges and Labour Commission totaling to Rs.23,01,514/- received by them from local parties . 2. As per A.O. s Order U/s 143(3) dated 18.3.1993, Labour Commission and Labour Charges received by Assessee of Rs.23,01,514/- had no connection with export business, therefore, while calculating deduction U/s 80 HHC, it was held that assessee was not entitled for said claim. assessee has claimed deduction U/s 80 HHC at Rs.14,18,224/- against which Assessing Officer has allowed deduction at Rs.11,18,580/-. 3/9 ::: Uploaded on - 15/01/2020 ::: Downloaded on - 16/01/2020 09:41:33 ::: 202 itxa 761-02.doc 3. In first appeal, learned CIT(A) has referred Board s circular No.564.571 and 621 and observed that as per section 80(II)C(3), profit derived from export of goods or merchandise outside India is to be amount which bears to profits and gains of business same proportion as export turnover bears to total turnover of business. Accordingly, she has held that profit of business have to be computed on proportion of business have to be computed on proportion of expert turnover and total turnover with reference to that profit as would be computed under head Profit and Gains of Business or Profession . She has concluded that there was no jurisdiction for excluding such ancillary receipts and directed to allow deduction to assessee. 4. On date of hearing i.e. on 15.4.2002, application for adjournment was moved from side of assessee, which was rejected on ground that only issue as per ground taken is covered by decisions of jurisdictional high court, therefore, no point in keeping this appeal pending. 5. On behalf of Revenue Ld. DR Mr. Joe Sebastin appeared and cited two decisions of Bombay High Court in favour of Revenue, firstly, K.K. Doshi and Company 245 ITR 849 and secondly. S.G. Jhaveri Consultancy 248 ITR 854. 6. In view of facts referred in above paras, we have found that issue is directly covered in favour of Revenue by decisions of jurisdictional High Court in case of K.K. Doshi and Company (Supra) and S.G. Jhaveri Consultancy (Supra). Respectfully following said decisions, we hereby reverse finding of CIT(A) and allow ground of Revenue. 7. In result, appeal of revenue is allowed. 4/9 ::: Uploaded on - 15/01/2020 ::: Downloaded on - 16/01/2020 09:41:33 ::: 202 itxa 761-02.doc 7. order passed by Tribunal is based on decisions rendered by this Court in case of K.K. Doshi and Co. v. Commissioner of Income-Tax 1 and S.G. Jhaveri Consultancy v. Commissioner of Income-Tax 2. Thus that is foundation of order. Assessment Year in question is of importance. Assessment Year is 1991-92. Section 80 HHC of Act was amended with effect from 1 April 1992 and explanation was brought in same. In case of K.K. Doshi and Co. (supra), issue arose whether service charges constitute business income for purposes of computing export profits under Section 80HHC. While deciding question, Division Bench made following observations :- object of section 80HHC is to ascertain export profits. It may be mentioned that in this case we are concerned with law prior to assessment year 1992- 93. Under section 80HHC(3), as it stood before April 1, 1992, profits derived from exports were computed in following manner : Export turnover Business profits X -------------------- Total turnover said formula, however, gave distorted figure of export profits when receipts like interest, commission, etc., which do not have element of turnover came to be included in profit and loss account. Every assessee tries to inflate, in above formula, business profits and correspondingly, he tries to reduce denominator, viz., 1 245 ITR 849 2 248 ITR 854 5/9 ::: Uploaded on - 15/01/2020 ::: Downloaded on - 16/01/2020 09:41:33 ::: 202 itxa 761-02.doc total turnover. It is for this reason that Legislature amended above formula by amending law from assessment year 1992-93 by clarifying that in above formula business profits will not include receipts by way of brokerage, commission, interest, rent charges or any other receipt of similar nature. However, as some expenditure might be incurred in earning above income by way of brokerage, commission, etc., ad hoc 10 percent deduction from such income was provided for to account for expenses. Similarly, under Explanation (ba) to Section 80 HHC, Legislature has explained that words total turnover shall not include freight or insurance. On other hand, vide clause (b) to Explanation to section 80HHC, Legislature has defined words export turnover to mean sale proceeds, but not freight or insurance. combined meaning of clauses (b) and (ba) to Explanation shows that business profits in above formula shall not include receipts by way of brokerage, commission, interest, rent charges or any other receipt of similar nature as they do not have any nexus with sale proceeds from export activities. Therefore, service charges cannot be considered as part of business profits while working out deductions under section 80HHC. judgment of Supreme Court in case of CIT v. Sterling Foods (1999) 237 ITR 579, dealt with provisions of section 80HH. In that judgment, Supreme Court was required to construe expression derived from in section 80HH. In that manner, assessee was engaged in processing prawns. It earned import entitlements from Central Government under Export Promotion Scheme. assessee was entitled to sell same. assessee sold said entitlements. In its total income for assessment year 1979-80, assessee included sale proceeds and claimed relief under section 80HH. High Court held that income which assessee made by selling 6/9 ::: Uploaded on - 15/01/2020 ::: Downloaded on - 16/01/2020 09:41:33 ::: 202 itxa 761-02.doc import entitlements was not profit and gain which assessee had derived from industrial undertaking. Division Bench held in favour of assessee on basis of retrospective amendment to section 28 of Act by Finance Act, 1990, making such receipts taxable as business profits. It was held by Supreme Court that word derived is followed by word from which meant arising from source. Supreme Court held on facts of that case that import entitlements did not originate from industrial undertaking of assessee, but it came from Export Promotion Scheme of Government. Supreme Court held that words derived from indicated direct nexus between profits and gains on one hand and industrial undertaking on other hand since under section 80HH expression used is derived from industrial undertaking . In that matter, on facts, Supreme Court held that since export entitlements were made available under Scheme of Government nexus between profits and industrial undertaking was only incidental and not direct. Accordingly, Supreme Court allowed appeal of Department. This judgment helps case of Department in this matter. Section 80HHC(1) clearly states that in computing total income of assessee, there shall be deduction of profits derived by assessee from export of goods. In other words, there should be direct nexus between profits on one hand and export activity on other hand. Applying ratio of judgment of Supreme Court to facts of our case, profits earned by assessee on account of service charges cannot be said to have direct nexus with export activities of assessee. Hence, to that extent, assessee was not entitled to claim deduction under section 80HHC. 7/9 ::: Uploaded on - 15/01/2020 ::: Downloaded on - 16/01/2020 09:41:33 ::: 202 itxa 761-02.doc Thus, Division Bench observing as above opined that though prior to amendment export profits included interest, commission, etc., which did not have element of turnover came to be included in profit and loss account. By way of amended provisions in Explanation (ba) to Section 80HHC of Income Tax Act, 1961 it was no longer permissible to do so. Division Bench opined that there was no nexus between profits on one hand and export activity on other hand, which was necessary. 8. question of retrospective operation of 1991 amendment to Section 80HHC arose for consideration of Supreme Court in case of P.R. Prabhakar v. Commissioner of Income-Tax. Supreme Court held that amendment could not be considered as retrospective. 9. Thereafter when challenge of Respondent- Revenue to decision of this Court in K.K. Doshi and Co. (supra) consideration of Supreme Court. Supreme Court disposed of said appeal by observing thus :- main point in this appeal is as to whether amendment to section 80HHC of Income-tax Act, 1961, brought about by Finance (No.2) Act, 1991, with effect from April 1, 1992, is prospective in nature or is retrospective. This court in case of P.R. Prabhakar v. CIT [2006] 284 ITR 548, relying upon Circular No.621 dated December 19, 1991, 8/9 ::: Uploaded on - 15/01/2020 ::: Downloaded on - 16/01/2020 09:41:33 ::: 202 itxa 761-02.doc issued by Central Board of Direct Taxes (CBDT), has held that amendment in question is prospective in nature and same is binding on Revenue. In view of Circular No.621 dated December 19, 1991 issued by Central Board of Direct Taxes and aforesaid judgment of this court, these appeals are accepted and orders passed by High Court of Bombay are set aside leaving parties to bear their own costs. appeals stand allowed in above terms. Supreme Court thus noted decision in case of P.R. Prabhakar (supra) and disposed of Appeal setting aside order passed in K.K. Doshi (supra) holding that amendment of 1 April, 1992 is prospective in nature. 10. In view of this dicta of Supreme Court in case of P.R. Prabhakar (supra) and K.K. Doshi (supra), foundation of decision of Tribunal does not survive and question of law as framed will have to be answered against Revenue. 11. In circumstances, declaring thus, Appeal is disposed of. (M.S.KARNIK, J.) (NITIN JAMDAR, J.) 9/9 Shivani Exports v. Assistant Commissioner of Income-tax, Circle-19(1), Bombay / Union of India