2011 (9) TMI 210 - HC - Income Tax

Deduction u/s 80HHC -Calculation of turnover for the purpose of section 80HHC - The issue involved in the present case is where an assessee runs and manages two separate units, one of which, is engaged fully or partially in earning income through exports then, in the calculation of proportionate deductible profits, would the expression total turnover of the business would include only the turnover of the export business or also that of the domestic business. - Decided in favor of assessee.

Issues Involved:

1. Calculation of deduction under section 80 HHC of the Income Tax Act, 1961.
2. Inclusion of domestic turnover in the calculation of export profits.
3. Applicability of the Supreme Court judgments in IPCA Laboratory Ltd. and Simco Industries Ltd.
4. Tribunal's decision on expenditure incurred for purchase of music titles.
5. Tribunal's conclusion on the purchase of an asset of enduring benefit.
6. Applicability of section 35A of the Income Tax Act, 1961.
7. Deduction of head office depreciation from the profit of the Sahibabad unit for section 80 IA deduction.

Detailed Analysis:

1. Calculation of Deduction under Section 80 HHC:

The primary issue pertains to the claim of deduction by the assessee under section 80 HHC of the Income Tax Act, 1961. The assessee manages two units: one involved in multimedia exports and the other in manufacturing PET jars for the domestic market. The assessee claimed a deduction under section 80 HHC amounting to Rs.1966.33 Lacs. The Assessing Officer (AO) concluded that the turnover of the entire business, including both units, should be considered for calculating the deduction, thus rejecting the assessee's contention of separate businesses.

The Commissioner of Income Tax (Appeals) [CIT(A)] accepted the assessee's revised computation, which included only the multimedia business's turnover and profits. The Income Tax Appellate Tribunal (Tribunal) upheld the CIT(A)'s decision, referencing its previous decisions and the Madras High Court judgment in CIT Vs. Madras Motors Ltd.

2. Inclusion of Domestic Turnover:

The core question is whether the turnover of the domestic unit should be included in calculating the deduction under section 80 HHC. The Madras High Court in Madras Motors Ltd. held that the total turnover should only include the turnover of goods to which section 80 HHC applies, i.e., export goods. The court emphasized that including domestic turnover would inflate the total turnover, thereby reducing the deduction, which contradicts the section's objective to encourage exports.

3. Applicability of Supreme Court Judgments:

The revenue argued that the Supreme Court judgments in IPCA Laboratory Ltd. and Simco Industries Ltd. should govern the issue. However, the court found this contention mis-conceived. In IPCA Laboratory Ltd., the Supreme Court dealt with the calculation of profits from exports of self-manufactured goods and trading goods, concluding that both should be considered for deductions under section 80 HHC. Similarly, in Simco Industries Ltd., the Supreme Court addressed the set-off of losses from previous years before allowing deductions under Chapter VI-A. These cases were factually different from the present case.

4. Tribunal's Decision on Expenditure for Music Titles:

The Tribunal allowed the entire expenditure incurred by the assessee for the purchase of music titles amounting to Rs.1,12,64,618/-.

5. Tribunal's Conclusion on Asset of Enduring Benefit:

The Tribunal concluded that the assessee had not purchased an asset of enduring benefit, which was contested by the revenue.

6. Applicability of Section 35A:

The applicability of section 35A of the Income Tax Act, 1961, was questioned in the context of the expenditure on music titles.

7. Deduction of Head Office Depreciation:

The Tribunal held that the depreciation of the head office should not be deducted from the profit of the Sahibabad unit for calculating the deduction under section 80 IA of the Income Tax Act.

Conclusion:

The court upheld the Tribunal's view, agreeing with the rationale of the Madras High Court in Madras Motors Ltd. The court found no merit in the revenue's arguments based on the Supreme Court judgments cited. The court did not frame a question of law on the issue of including domestic turnover in the calculation of export profits. However, it framed questions of law regarding the Tribunal's decisions on the expenditure for music titles, the purchase of an asset of enduring benefit, the applicability of section 35A, and the deduction of head office depreciation.

Next Steps:

The court ordered the filing of paper books within eight weeks and listed the case on the regular board as per its age and seniority.

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