Case Law Details
Facts
• The taxpayer is engaged in the business of manufacture of empty hard gelatin capsules and PVDC capsules.
• The taxpayer had set up four industrial undertakings in Mumbai and two in Pune.
• One undertaking in Mumbai and one in Pune were eligible for deduction under section 80-IA and section 80HHC of the Income-tax Act (“ITA”).
• During the assessment year 2003-04, the taxpayer claimed deduction under section 80-IA at 30 percent of the profits and gains derived from the business and deduction under section 80HHC at 50 percent of the profits derived from the export of goods or merchandise determined on the basis of the formula set out in section 80HHC.
• The Assessing Officer (“AO”) disagreed with the quantum of deduction computed by the taxpayer under section 80HHC. The AO held that since deduction under section 80-IA is claimed and allowed, section 80-IA(9) of the ITA requires that the quantum of deduction allowable under any section under heading „C? of Chapter VI-A of the ITA has to be computed not on the total profits of the business but on the profits of the business as reduced by the profits of business allowed as deduction under section 80-IA(1) of the Act.
• The Commissioner of Income-tax (Appeals) (“CIT(A)”) allowed the appeal filed by the taxpayer. However, the Income-tax Appellate Tribunal (“Tribunal”) reversed the decision of the CIT(A).
• Aggrieved by the decision of the Tribunal, the tax payer filed an appeal before the High Court.
Issue before the High Court
• Whether the Tribunal was justified in holding that section 80-IA(9) of the ITA mandates that the amount of profits allowed as deduction under section 80-IA(1) of the ITA of the Act has to be reduced from the profits of the business of the undertaking while computing deduction under any other provisions under heading „C? in Chapter VI-A of the ITA?
Observations and Ruling of the High Court
• The High Court observed that the object of amending section 80-IA by Finance Act 1998 by introducing sub section 9 in section 80-IA was to prevent the taxpayers who were taking undue advantage of the provisions of the Act and to ensure that deductions allowed under section 80-IA and various sections under heading „C? of Chapter VI-A are restricted to the profits of the business of the undertaking/enterprise.
• The High Court further observed that the deduction under section 80HHC(1) is statutorily required to be computed on the profits of the business as reduced by the amounts specified in clause (baa) of section 80HHC. Unless, it is specifically provided by the statute, the profits of the business for the purpose of section 80HHC cannot be reduced by any amount save and except the amount specified in clause (baa) of section 80HHC itself.
• Section 80-IA(9) seeks to restrict the “allowance of deduction” and not the “computation of deduction” under any other sections under heading „C? of Chapter VI-A.
• The deduction that is allowable under other provisions under heading „C? of Chapter VI-A would be allowed to the extent of profits as reduced by the profits allowed under section 80-IA(1).
• The High Court accordingly held that section 80-IA(9) does not affect the computation of deduction under various provisions under heading „C? of Chapter VI-A, but it affects the allowability of deductions computed under various provisions under heading „C? of Chapter VI-A. So that the aggregate deduction under section 80-IA and other provisions under heading „C? of Chapter VI-A do not exceed hundred percent of the profits of the business of the taxpayer.
Conclusion :-The above ruling lays down that restriction under section 80-IA(9) affects the allow ability of total deduction from the profits of the eligible undertaking/unit and not the computation of deduction under various provisions under heading „C? of Chapter VI-A.
Source: Associated Capsules Private Limited Vs. DCIT (Appeal No. 3036 of 2010) (Bom HC) dated 10 January 2011
