1998 (6) TMI 570 - AT - Income Tax

Summary

Issues Involved:
1. Adjustment of losses from one business unit against profits from another for computing deduction under Section 80HHC.
2. Allowance of deduction under Section 80HHC on export incentives received through an export house.
3. Computation of the claim under Section 80HHC.

Issue-wise Detailed Analysis:

1. Adjustment of Losses from One Business Unit Against Profits from Another:

The assessee-company operated two distinct business units: an engineering division and a leather garment division, maintaining separate books of account for each. The primary issue was whether the loss incurred by the engineering division (Rs. 17,92,200) should be adjusted against the profits of the leather garment division when computing the deduction under Section 80HHC of the IT Act.

The CIT(A) upheld the AO's decision to adjust the loss, reasoning that Section 80HHC(1) necessitates computing the total income of the assessee, which includes all profits/losses from the entire business activity. However, the assessee contended that such an adjustment was unjustified, citing precedents such as CIT vs. Canara Workshop (P) Ltd. and CIT vs. Sidh Ganga Oil Extraction (P) Ltd., which held that losses from one unit should not be set off against the profits of another unit for the purpose of specific deductions.

The Tribunal agreed with the assessee, stating that since the engineering and leather divisions were separate units with independently audited accounts, the loss from the engineering division should not be adjusted against the profit of the leather division for Section 80HHC. Thus, the AO was directed to compute the deduction under Section 80HHC without reducing the profit of the leather division by the loss incurred in the engineering division.

2. Allowance of Deduction on Export Incentives Received Through an Export House:

The second issue revolved around the non-allowance of deduction under Section 80HHC on export incentives received by the assessee-company through an export house, Fortune International Ltd. The assessee claimed that the incentives received (duty drawback, cash assistance, and sale of replenishment licenses) should be considered for deduction under Section 80HHC, even though they were received through an export house.

The CIT(A) and AO denied this claim, arguing that the specific proviso allowing for such deductions under Section 80HHC(3) for direct exporters did not apply to supporting manufacturers under Section 80HHC(3A). However, the Tribunal found that the assessee-company directly exported goods as per orders from the export house and received the incentives directly from the government. This situation was akin to direct exports, making the assessee eligible for deductions on these incentives.

The Tribunal emphasized that the legislative intent, as reflected in the Finance Minister's Budget Speech and the Notes on Clauses, was to extend benefits under Section 80HHC to supporting manufacturers as well. Thus, the AO was directed to allow the deduction under Section 80HHC on the export incentives received by the assessee-company.

3. Computation of the Claim Under Section 80HHC:

The final issue was the computation of the deduction under Section 80HHC. The Tribunal noted that the computation would materially change based on its findings on the first two issues. The Tribunal directed the AO to recompute the claim under Section 80HHC, considering the Tribunal's findings and relevant provisions of the IT Act, ensuring due opportunity for the assessee to be heard.

Conclusion:

The Tribunal allowed the appeal, directing the AO to:
1. Compute the deduction under Section 80HHC without adjusting the engineering division's loss against the leather division's profit.
2. Allow deductions on export incentives received by the assessee-company through the export house.
3. Recompute the claim under Section 80HHC in line with the Tribunal's findings and relevant legal provisions.