1. PRATIBHA SYNTEX LTD. V/S. J.C.I.T. [81 ITD 118] ] [AHD]

The controversy as to whether while working out deduction under section 80HHC negative result in other segment of formula is to be ignored and deduction be worked out with reference to amount calculated under proviso has once again come up before the tribunal.

In this case, the assessee company was a manufacturer exporter of synthetic fabrics and printed and dyed sarees. For the assessment year 1996-97, assessee claimed deduction under section 80HHC as manufacturer exporter. As working of deduction in respect of profits from manufacturing activity showed "loss", the assessee ignored the same and claimed deduction w.r.to 90% of export incentive in terms of proviso to section 80HHC(3). The computation parameters for deduction were as under :

Manufacturing export profit (-) 5.83 Cr.
Export Incentives 7.16 Cr.
Deduction claimed 7.16 Cr.

The A.O. disallowed claim for deduction under section 80HHC. According to the A.O., business activity of the assessee (being manufacturing segment) did not result into profit. Hence, at the outset provisions of section 80HHC(1) granting deduction did not apply to the assessee. A.O. further held that in absence of positive result in main segment, effect to the provisions of proviso cannot be granted.

The tribunal, however, did not approve department's view point. The tribunal allowed the assessee's claim for deduction w.r. to Rs. 7.16 cr.

The Tribunal held as under :
(i) Profits derived from business of exports for the purposes of section 80HHC(1) are to be arrived at in terms of formula under section 80HHC(3).
(ii) Section 80HHC(3) provides for two components of workings - one under main provision and the other under proviso.
(iii) Negative result under first component does not represent profit or loss of the export business. The overall result of computation alone can give result from export business.
(iv) Profit worked out under main provision in respect of manufacturing activity needs to be `further increased' by amount worked out in the proviso.
(v) Having regard to the language of section 80HHC(3) read with proviso, "Profits of business" under section 80HHC(3)(a) if gives - ve result, it is to be ignored.
(vi) Profits derived from export in such case would comprise of amount calculated under the proviso.
(vii) The interpretation is fully supported by rule of literal as well as purposive interpretation.
(viii) Section 80HHC(1), 80HHC(3) and proviso all talk about "profit". Had legislature used word "income" u/s. 80HHC(3), it may have included `loss' also for aggregation purpose.
(ix) Section 80HHC read with proviso envisages profits as positive figures. There is no occasion for any adjustment if figure worked out under Explanation (baa) is negative.

Note :
Attention is invited to the judgement of Bombay High Court in IPCA Laboratories Ltd. [251 ITR 401] wherein the Bombay High Court interalia, held that provisions of section 80HHC(1) do not apply in the case of overall result of the activity is negative profit. The Court further observes that negative result under one segment needs to be adjusted against result of other segment to give effect to the entire formula prescribed. Though in view of Bombay High Court's decision in IPCA Laboratories [251 ITR 401], the present tribunal decision may not be authentic enough on deduction of Rs. 7.16 Cr. (it is to be net of loss under manufacturing activity) - but, still an authority on the point that even in spite of negative result prior to the proviso, the net result will still be exempt.

2. A.C.I.T. V/s. INDIA MAGNUM FUND [81 ITD 295] [MUM]

The assessee was in the business of securities and stocks. Being a mutual fund, its income was not chargeable to tax under the provisions of section 10(23D). The assessee, filed return of income with a view to claim refund of tax deducted at source. The Assessing Officer noticed that the assessee's annual turnover had far exceeded the sum of Rs. 40 lakhs laid down under the provisions of section 44AB of the Act. The A.O, therefore initiated penalty proceedings under section 271B of the Act. The assessee contended before the A.O. that by virtue of provisions of section 10(23D), its income was not taxable. Hence, the assessee was not liable for tax audit envisaged under section 44AB of the Act. The learned Assessing Officer, however, did not accept these contentions of the assessee. The A.O. was of the view that section 44AB nowhere mentions of taxable income or tax liability. Even the levy of penalty under section 271B was linked to the turnover of the assessee and not to any tax liability. The A.O. further observed that provisions of section 44AB applied to business turnover and it was not in dispute that the assessee was trading in securities and stocks and but for the assessee being a mutual fund, its income should have been taxable. As charging provisions of the Act come first and the provisions of exemption later, the assessee was clearly required to file the tax audit report as it had considerable business turnover. The learned Assessing Officer also did not accept the contention of the assessee that the assessee had a reasonable cause for having been under a bonafide belief that it was not required to have its accounts audited under section 44AB of the Act.

The assessee preferred appeal before the learned C.I.T(A).

The C.I.T(A) held that technically section 44AB did apply to the assessee. However, there was reasonable cause for the assessee not having had its accounts audited under section 44AB. He therefore cancelled the penalty.

Revenue filed an appeal before the Tribunal.
The tribunal dismissed department's appeal. The tribunal held that section 44AB becomes operative when there is computation of profits and gains of business or profession as a part of total income. If there is no computation of total income or, for that matter, no computation of profits and gains of business or profession as a part of computation of total income, the provisions of section 44AB would simply not take off.

The tribunal concluded as under :
"Provisions of section 44AB cannot and do not have any application in relation to incomes which are enumerated under Chapter III and are expressly excluded from total income. To reiterate, section 44AB is operational only when profits and gains of business or profession are to be computed for the purpose of computation of total income to meet the requirements of the provisions of section 4. That being so, any income which is designated as "incomes which do not form part of total income" have nothing to do and cannot be subjected to the provisions of section 44AB."

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