2006 (3) TMI 553 - AT - Income Tax

Summary

Issues Involved:
1. Claim of deduction under section 80HHC
2. Claim of deduction under section 80-IA
3. Deduction of freight and insurance from export turnover
4. Prospective or retrospective application of section 80-IA(9A)
5. Mutual exclusivity of deductions under sections 80HHC and 80-IA
6. Applicability of section 80A on combined deductions
7. Levy of interest under section 234B

Issue-wise Detailed Analysis:

Issue 1: Claim of Deduction under Section 80HHC
The assessee contended that the CIT(A) erred in rejecting the claim of deduction under section 80HHC based on the computation of business profits and exclusion of freight and insurance from export turnover. The tribunal referred to its previous order, directing the Assessing Officer to verify if the freight and insurance were attributable to transport beyond the custom station. If so, they should not be added to the direct cost but if within the custom station, they should be added to the direct cost and not excluded from the export turnover. The issue was set aside for statistical purposes.

Issue 2: Claim of Deduction under Section 80-IA
The CIT(A) held that deduction under section 80-IA was not permissible as the assessee already claimed deduction under section 80HHC. The assessee argued that sections 80HHC and 80-IA are independent, and both deductions can be claimed. The CIT(A) relied on the Supreme Court's observation in Escorts Ltd. v. Union of India, which stated that two deductions on the same asset or expenditure are not allowed unless specifically provided. The tribunal noted that sub-section 9A of section 80-IA, effective from 1-4-1999, intended to prevent double deductions. The tribunal allowed the appeal, stating that deductions under sections 80HHC and 80-IA are permissible subject to the limitation under section 80A.

Issue 3: Deduction of Freight and Insurance from Export Turnover
The tribunal directed the Assessing Officer to verify whether the freight and insurance are attributable to the transport of goods beyond the custom station. If yes, it should not be added to the direct cost; if within the custom station, it should be added to the direct cost and not excluded from the export turnover. This ground was allowed for statistical purposes.

Issue 4: Prospective or Retrospective Application of Section 80-IA(9A)
The tribunal held that sub-section 9A of section 80-IA, introduced by the Finance Act (No. 2) of 1998, is prospective and effective from 1-4-1999. It is not declaratory and does not apply to assessment years prior to 1-4-1999. This conclusion was supported by the decision of the Rajasthan High Court in CIT v. Rochiram & Sons.

Issue 5: Mutual Exclusivity of Deductions under Sections 80HHC and 80-IA
The tribunal clarified that deductions under sections 80HHC and 80-IA are not mutually exclusive and can be claimed simultaneously. The computation of deductions under these sections should be done independently. However, the total deductions should not exceed the profits and gains of the industrial undertaking, as per section 80A.

Issue 6: Applicability of Section 80A on Combined Deductions
The tribunal emphasized that the aggregate amount of deductions under Chapter VI-A should not exceed the gross total income of the assessee, as per section 80A(2). This ensures that the total deductions do not exceed the total profits and gains of the industrial undertaking.

Issue 7: Levy of Interest under Section 234B
The tribunal directed the Assessing Officer to recompute the interest chargeable under section 234B based on the income finally assessed. This ground was consequential to the other issues discussed.

Conclusion:
The tribunal allowed the appeal of the assessee, granting the entitlement to deductions under sections 80HHC and 80-IA, subject to the limitation under section 80A. The issues related to the deduction of freight and insurance and the levy of interest under section 234B were set aside for verification and recomputation by the Assessing Officer. The appeal for the assessment year 1998-99 was partly allowed, reversing the CIT(A)'s order on the grounds related to section 80HHC and freight and insurance deductions.