Deduction u/s 80HHC is to be allowed to the extent of Gross Total Income

Deduction u/s 80HHC is to be allowed to the extent of Gross Total Income

Brief of the case

In the case of V. M. Salgaocar & Brother Pvt. Ltd vs. The Asst. Commissioner of Income Tax, Goa High Court has held that deduction u/s 80HHC is to be allowed to the extent of gross total income and not to the extent of business profit only.

Facts of the case

1. The assessee is engaged in the business of export of processed iron ore which is manufactured and produced by the appellant as well as ore in which the appellant trades. the Assessing Officer has determined the income chargeable under
2. The head “Profits and gains of business or profession” at Rs.17,63,97,551/-. income chargeable under the head “Income from House property” was determined at Rs.13,008/- and the income chargeable under the head “Income from other sources” at Rs.2,14,84,346/- the gross total income was determined by the Assessing Officer was a sum of Rs.19,78,94,900/-. when it came to giving a deduction on the said amount, the Assessing Officer had restricted the deduction under Section 80HHC to Rs.17,40,33,719/-.
3. Aggrieved by the said determination, the assessee had preferred an appeal to the Commissioner of Income Tax (Appeals) who by order dated 30.09.2004 rejected the appellant’s contention having regard to the judgment of the Apex Court in Ipca Laboratory Ltd., V/s Deputy CIT 266 ITR 521 where the provisions under Section 80AB were applicable. The learned Senior Counsel further submits that relying upon the judgment of the Andhra Pradesh High Court in CIT V/s Visakha Industries Ltd., 251 ITR 471, the Commissioner of Income Tax (Appeals) held that the deduction under Chapter VI-A is to be computed with reference to the profits of a particular undertaking and not with reference to the gross total income of the assessee.
4. Aggrieved by the said order, the assessee had preferred an appeal before the Tribunal which met with the same fate and dismissed such appeal.

Aggrieved by the decision of Tribunal assessee has filed an appeal in High court.

Issue

Whether once the Assessing Officer determined the quantum of deduction u/s 80HHC which the appellant is entitled to be a sum of Rs. 19,92,39,981/- was it justified to restrict such amount to Rs.17,40,33,719/- which according to him was the profit of the business.

Assessee’s contention

1. that first one has to compute the income that is earned from different sources under each of the heads and thereafter, the relevant set off of the loss from one source or head against the income from another source or another head is to be given effect to in terms of Sections 70 to 74 of the said Act. The learned Senior Counsel further submits that the resulted figures are the aggregated and gross total income determined which is specially defined in Section 80B(5). Thereafter, according to the learned Senior Counsel in Chapter VI-A of the Act, the deductions are allowed and sub section (1) of Section 80A provides that in computing the total income of an assessee, there shall be allowed from his gross total income in accordance with and subject to the provisions of the Chapter which are the deductions specified in Section 80C to Section 80U.
2. That sub section (2) provides that the quantum of deduction allowable is the aggregate amount of deductions under the Chapter which shall not in any case, exceed the gross total income of the assessee. The learned Senior Counsel further pointed out that Part ‘C’ of the said Chapter determine specified deductions allowable and that in such part, Section 80HHC provides for a deduction in respect of the profits derived from the export of the goods or merchandise.
3. sub -section (1) as it stood then provides that where an assessee is an Indian Company engaged in the business of export out of India of any goods or merchandise, there shall be in accordance with and subject to the provisions of the Section in computing the total income of the assessee be allowed, a deduction of the profits derived by the assessee from the export of such goods or merchandise. The learned Senior Counsel pointed out that the respondent by applying the methodology provided in Section 80HHC(3) has determined the profits derived from the export of goods and merchandise at Rs.19,92,49,981/-. But however, the respondents have erroneously restricted the deductions in terms of Section 80HHC(1) to a sum of Rs.17,40,33,719/- by relying upon Section 80AB of the said Act.
4. Section 80AB was introduced by the Finance Act, 1980 w.e.f. 01.04.1981. By relying upon the Circular No. 281 of 1980 dated 22.09.1980 which has no application to interpret the relevant provisions of the said Act the learned Senior Counsel further pointed out that in the context of Sections 80IA and 80O of the said Act, this Court had occasion to consider whether the deductions under these provisions are to be restricted to the income under the head “Profits and gains of business or profession” or is to be allowed to the extent of the gross total income.
5. In this connection, in the case of CIT V/s Tridoss Laboratories Limited, by judgment dated 04.02.2010 this Court had dismissed the appeal of the revenue on a similar issue. The learned Senior Counsel further pointed out that the said principles were reiterated by this Court in CIT V/s Eskay Knit India Limited by judgment dated 25.03.2010 in Income Tax Appeal No. 184 of 2007. The learned Senior Counsel thereafter has taken us through another judgment of this Court in CIT v/s J. B. Boda and Company Private Limited dated 18.10.2010 in Tax Appeal No. 3224 of 2009 wherein this Court has upheld the view taken by the Tribunal that there was no basis in law to restrict the deduction to the extent of the business income.
6. That the Tribunal in para 8 of its order accepts that the deduction is to be allowed is to the extent of the profits and gains of export business but after having said so impliedly restricts it to the income assessed under the head “profits and gains of business or profession” overlooking that the profits and gains of the export business are computed by the Assessing Officer himself at Rs.19,92,49,981/- and as such the appellants are entitled for a deduction of the said sum in terms of Section 80A(2) by restricting its claim to Rs.19,78,94,900/-.

Revenue’s Contention

1. Section 80HHC of the said Act as well as the provisions of Section 80I to point out that the deductions which are allowed in terms of the said provisions are to be restricted to the profits and gains of income of the appellant and as such, the deductions are restricted by the authorities below cannot be faulted. The learned counsel further pointed out that the Andhra Pradesh High Court has clearly held that full deduction is not permissible and full deductions of net profit are not permissible and that the deductions are to be restricted only to the profits and gains in respect of the export business after computing the profits of export business.
2. That the Tribunal has rightly held that in case of deduction under Section 80HHC the incentive has been given to boost export activities and deduction should be restricted to the profits and gains of the export business as specified in the provisions of the said Act and not with reference to the gross total income of the assessee.

High Court decision / observations

1. we find that sub- section (2) of Section 80A clearly provides that the deductions shall not exceed such gross total income. In such circumstances, the only point for determination in the present appeals is whether the restrictions as determined by the Assessing Officer are in accordance with the provisions of the said Act. Part C of Chapter VI-A of the said Act provides for deductions in respect of the certain income and one of such Sections which fall within the said part is Section 80HHC which provides for deductions in respect of the profits determinable by the assessee from the export of goods or merchandise.
2. Sub Section (1) of Section80HHC as it stood then provides that the profit that an assesse Indian company engaged in the business of export of any goods or merchandise to which this section applies, there shall, in accordance with and subject to provisions of Section, a deduction of the profits derived by the assessee from such export of goods or merchandise be allowed in computing the total income of the assessee. Sub- section (3) sets out the manner in which the profits derived from export business of the goods or merchandise is to be determined.
3. In the present case, the respondent by applying the methodology as provided in Section 80HHC(3) has determined the profits derived from the export of goods or merchandise as far as the appellant is concerned to be a sum of Rs.19,92,39,981/-. Once the respondents themselves have arrived at the said figure after applying the methodology as provided in Section 80HHC(3) of the said Act, such amount of deduction has to be allowed.
4. we find that once the income has been determined by applying the methodology as provided in Section 80HHC(3) of the said Act, the question of restricting the deduction in terms of Section 80AB of the said Act would not arise. This is so in terms of Section 80AB of the Act, as the appellant is claiming deductions on its export profits alone, which is included in computing its gross total income. Section 80HHC (3) was introduced when the provisions of Section 80AB were already on the statute. Even upon reading the provisions of Section 80AB of the said Act, the determination of the amount as provided therein would have to be effected for the purpose of computing the deductions under each of the respective sections specified in Part C of the said Act.
5. As such, while computing the deduction under Sections 80HHB, 80HHC, 80HHD, 80I, 80IB, 80IA, 80IB etc., one would have to apply Section 80AB of the said Act. On perusal of Annexure A, we find that the deduction under Section 80HHC to which the appellant was entitled has been arrived at a sum of Rs.19,92,49,981/- by the respondents themselves. In terms of Section 80AB(2), the restriction of the deduction is to the gross total income and in such circumstances, the restriction to the total profit of business in a sum of Rs.17,40,33,719/- is not at all justified. The restriction is on the gross total income of Rs.19,78,94,900/- and as such we find that the restriction effected by the Assessing Officer on the deduction is not at all justified.

Analysed by CA Rahul Sureka