Case: Income Tax Officer, Bangalore Vs. M/S. Induflex Products (P) Ltd

where the export out of India is of goods or merchandise 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 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 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 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.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 as reduced by the profits derived from the business of export out of India of trading goods as computed in the manner provided in clause (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 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;(f) trading goods means goods which are not manufactured or processed by the assessee." 4. The aforementioned provision was brought in the statute book for the purpose of providing incentive to export houses but the same would not mean that even if the assessee incurs a loss instead of profit, he would be entitled to the benefit thereof.5. From a perusal of the aforementioned provision, it is evident that the profits derived from the export of goods which would be subject-matter of exemption thereunder must be the profits out of the business carried on by the assessee. The expression "profits" used in the aforementioned provision connotes positive profit. It is a profit earned from the said business alone which can be the subject-matter of exemption. A fortiori if a profit is not earned, the question of claiming exemption would not arise. 6. The question came up recently before this Court in IPCA Laboratory Ltd. Vs. Dy. Commissioner of Income Tax, Mumbai [(2004) 12 SCC 742] . In that case, the taxable income before the deductions under Chapter VI-A came to Rs.4.39 crores. The Appellants therein, however, claimed various deductions in terms of Section 80HHC to the extent of Rs.3.78 crores. It was found that the sum of Rs.3.78 crores claimed for deduction was the profit for exports of self-manufactured goods. It was further found that from the exports of trading goods there was a loss of Rs.6.86 crores. The question which arose for consideration was as to whether the Appellants were entitled to deduction under Section 80HHC in respect of the sum of Rs.3.78 crores ignoring the loss of Rs.6.86 crores. This Court repelled the contention that even when the profits are to be reduced by the losses in cases where an export house has disclaimed its turnover in favour of a supporting manufacturer, the turnover of the exporter gets reduced to the extent disclaimed opining that in computing total income the entire turnover is taken into account even though there is a disclaimer. The Court further negatived the submission of the assesee that even loss is a negative profit. 7. IPCA Laboratory (supra) is an authority for the proposition that adjusted profit of business would be a profit as reduced by the profit derived from business of exports out of India of trading goods. It is no doubt true that the term profit implies positive profit which has to be arrived at after taking into consideration the profit 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. In the event, if it is found that a loss has occurred, sub-section (3) of Section 8-HHC will have no application. 8. However, it does not appear from the records as to whether such an exercise was undertaken or not. The Appellants themselves in the list of dates averred that for the assessment year 1994-95, the Respondent had earned profit in its export business. 9. Yet again in the order dated 03.03.1999 passed under Section 263 of the Income Tax Act by the Commissioner of Income Tax, the contention of the assessee was noticed in the following terms: "The learned Counsel for the assessee who appeared on the appointed day, contended that, though the assessee figure earned export profit, it resulted in the negative figure owing to the provisions in Sec. 80 HHC(3), that, in such a situation, the profit should be taken at Nil and relief should be allowed having regard to the export incentives (viz., advance licences); that as section 80 HHC is benefit giving section it should be liberally construed; that the Appellate Tribunal in the case of A.M. Mossa vs. CIT ITAT Cochin Bench ITA No. 498/Coch/1995, support this view, and that the assessment order is not erroneous." 10. It may, therefore, be necessary, in our opinion, to consider this aspect of the matter as to whether the Appellant had shown any positive profit or not as such clear finding does not appear to have been arrived at by the High Court.

Court's decision (1 = petition accepted / positive for appellant, 0 = rejected / negative): 1

Reasoning from the judgment:
1[ds]4. The aforementioned provision was brought in the statute book for the purpose of providing incentive to export houses but the same would not mean that even if the assessee incurs a loss instead of profit, he would be entitled to the benefit thereof.5. From a perusal of the aforementioned provision, it is evident that the profits derived from the export of goods which would be subject-matter of exemption thereunder must be the profits out of the business carried on by the assessee. The expression "profits" used in the aforementioned provision connotes positive profit. It is a profit earned from the said business alone which can be the subject-matter of exemption. A fortiori if a profit is not earned, the question of claiming exemption would not arise.IPCA Laboratory (supra) is an authority for the proposition that adjusted profit of business would be a profit as reduced by the profit derived from business of exports out of India of trading goods. It is no doubt true that the term profit implies positive profit which has to be arrived at after taking into consideration the profit 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. In the event, if it is found that a loss has occurred, sub-section (3) of Section 8-HHC will have no application.Yet again in the order dated 03.03.1999 passed under Section 263 of the Income Tax Act by the Commissioner of Income Tax, the contention of the assessee was noticed in the followinglearned Counsel for the assessee who appeared on the appointed day, contended that, though the assessee figure earned export profit, it resulted in the negative figure owing to the provisions in Sec. 80 HHC(3), that, in such a situation, the profit should be taken at Nil and relief should be allowed having regard to the export incentives (viz., advance licences); that as section 80 HHC is benefit giving section it should be liberally construed; that the Appellate Tribunal in the case of A.M. Mossa vs. CIT ITAT Cochin Bench ITA No. 498/Coch/1995, support this view, and that the assessment order is not erroneous.It may, therefore, be necessary, in our opinion, to consider this aspect of the matter as to whether the Appellant had shown any positive profit or not as such clear finding does not appear to have been arrived at by the High Court.