2006 (6) TMI 248 - AT - Income Tax

Deduction u/s 80-IB - duty drawback - excluding the excise duty in the total turnover - working out the deduction u/s 80HHC - HELD THAT - In the instant case, the assessee purchased raw material which is an integral activity of running the industrial undertaking and therefore has to pay the excise duty/custom duty. Then, the assessee has sold its finished product by way of export which is again a vital activity for running the industrial undertaking. The duty drawback resulted from undertaking the direct activities of industrial undertaking itself like Modvat and from no other activity which can be said to be a mere incidental activity to the industrial undertaking. Duty drawback has a direct nexus with the essential and vital activities required to be carried out for running of the industrial undertaking. Accordingly, in our considered view the same should form part of the profits for computing the amount of deduction u/s 80-IB of the Act and cannot be excluded. Our above view also finds support from the decision of the Hon ble Madras High Court in the case of CIT v. Madras Motors Ltd./M.M. Forgings Ltd. 2002 (3) TMI 10 - MADRAS HIGH COURT . Therefore, the ground of appeal of the Revenue is dismissed. Excluding the excise duty in the total turnover - We find that this issue stands covered by the decision in CIT v. Sudarshan Chemicals Industries Ltd. 2000 (8) TMI 73 - BOMBAY HIGH COURT and the decision in the case of CIT v. Chloride India Ltd. 2001 (12) TMI 34 - CALCUTTA HIGH COURT . It was held that in computing the special deduction u/s 80HHC, in respect of profits from export business, while determining the proportion of export turnover to total turnover, since octroi, sales tax and excise duty are excluded from the export turnover, they should be excluded from the figure of total turnover . Therefore, the ground of appeal of the Revenue is dismissed. Deduction u/s 80HHC - business profits - HELD THAT - In our considered opinion, the Assessing Officer cannot determine the business profits by reducing the deduction allowable u/s 80-IB as the Explanation ( baa ) does not provide so. Further, section 80B(5) defines gross total income as the total income computed in accordance with the provisions of the Income-tax Act before making any deduction under this Chapter. It is while computing the total income of the assessee according to the Income-tax Act the deduction is to be allowed under sections 80-IB and 80HHC to the extent of the gross total income of the assessee under this Chapter. Thus it is to be ensured that the total deduction allowed under Chapter VI-A does not exceed the gross total income of the assessee. To this effect is the decision in the case of Mittal Clothing Co. 2005 (6) TMI 480 - ITAT BANGALORE . Thus, we set aside the order of the CIT(A) and the Assessing Officer and direct the Assessing Officer to compute the deduction u/s 80HHC on the basis of export profit determined in accordance Explanation (baa ) of the Act. The ground of appeal of the assessee is, therefore, allowed. In the result, the appeal of the assessee is allowed - In the overall result the appeal of the assessee is allowed and that of the Revenue is dismissed.

Summary

Issues Involved:
1. Deduction under section 80-IB in respect of duty drawback.
2. Exclusion of excise duty in the total turnover for the purpose of working out the deduction under section 80HHC.
3. Computation of business profits as per Explanation (baa) to section 80HHC.
4. Acceptance of new claims in appellate proceedings.

Issue-wise Detailed Analysis:

1. Deduction under section 80-IB in respect of duty drawback:
The primary issue was whether duty drawback received by the assessee qualifies for deduction under section 80-IB. The Assessing Officer relied on the Supreme Court decision in CIT v. Sterling Foods, which held that import entitlements are not directly derived from the industrial undertaking. The assessee argued that duty drawback is different from import entitlements, as it is a reimbursement of customs duty paid on imported raw materials used in manufacturing exported goods. The CIT(A) and Tribunal supported the assessee's view, distinguishing duty drawback from import entitlements. The Tribunal held that duty drawback is directly linked to the industrial undertaking's activities and forms part of the income derived from such undertaking, thus qualifying for deduction under section 80-IB. This view was supported by similar decisions from other Tribunal benches and the Gujarat High Court.

2. Exclusion of excise duty in the total turnover for the purpose of working out the deduction under section 80HHC:
The second issue addressed whether excise duty should be included in the total turnover for calculating the deduction under section 80HHC. The Tribunal followed the decisions of the Bombay High Court in CIT v. Sudarshan Chemicals Industries Ltd. and the Calcutta High Court in CIT v. Chloride India Ltd., which held that excise duty should be excluded from the total turnover when computing the special deduction under section 80HHC. Consequently, the Tribunal dismissed the Revenue's appeal on this ground.

3. Computation of business profits as per Explanation (baa) to section 80HHC:
The third issue involved the computation of business profits for the purpose of section 80HHC. The Assessing Officer had reduced the business profits by the amount of deduction allowable under section 80-IB. The Tribunal found this approach incorrect, stating that Explanation (baa) to section 80HHC does not provide for such a reduction. Instead, the business profits should be computed without reducing the deduction under section 80-IB. The Tribunal directed the Assessing Officer to recompute the deduction under section 80HHC based on the export profit determined according to Explanation (baa).

4. Acceptance of new claims in appellate proceedings:
The final issue was whether a claim legally allowable can be raised at any time during appellate proceedings. Given the Tribunal's decision on the third issue, this matter became academic and did not require adjudication. The Tribunal allowed the assessee's appeal on this ground.

Conclusion:
The Tribunal dismissed the Revenue's appeal and allowed the assessee's appeal, affirming the assessee's entitlement to deductions under sections 80-IB and 80HHC as computed without the reductions applied by the Assessing Officer. The Tribunal's decision was based on the interpretation of relevant legal provisions and supported by precedents from higher courts and other Tribunal benches.