2010 (9) TMI 780 - HC - Income Tax

Not allowing reduction being indirect costs attributable to incomes other than exports for computing indirect costs attributable to export u/s 80HHC. - Held that - In conclusion we may state that u/s 80HHC(3)(b) one has to balance the principle of attribution with the concept of allocation . The concept of allocation is meant to reduce the incentive. However when allocation has to be balanced with the principle of attribution the object is to reduce the incentive and not to eliminate it. - decided in favour of Assessee.

Summary

Issues:
Interpretation of Section 80HHC(3)(b) of the Income-tax Act regarding deduction of indirect costs attributable to incomes other than exports for computing indirect costs attributable to export.

Analysis:
The case involved the interpretation of Section 80HHC(3)(b) of the Income-tax Act regarding the deduction of indirect costs attributable to incomes other than exports for computing indirect costs attributable to export. The appellant, a public limited company, claimed a deduction under Section 80HHC for the Assessment Year 2001-02. The dispute arose when the Assessing Officer disallowed a portion of the claimed deduction, reducing it to Rs. 32,72,749 from the claimed Rs. 50,89,100. This disallowance was based on the AO's calculation of higher indirect costs attributable to exports, resulting in a lower benefit under Section 80HHC.

The key contention revolved around the interpretation of the provisions of Section 80HHC(3)(b) read with the Explanation, specifically Clause (e), to determine whether the indirect costs attributable to incomes other than exports should be deducted from the total indirect expenses for computing indirect costs attributable to exports of trading goods by the assessee. The Tribunal and CIT(A) upheld the AO's decision, leading to the matter being brought before the High Court for final arguments.

The High Court analyzed the relevant provisions of Section 80HHC and the Explanation to determine the scope of deductibility of indirect costs. It emphasized that the word 'attributable' in Section 80HHC(3)(b) indicated the principle of attribution was essential, allowing for the reduction of estimated costs from other income like export incentives and interest income. The Court cited the Supreme Court judgment in Hero Exports v. CIT, which supported the view that costs attributable to other income should be excluded as indirect costs at 10% while computing deductions under Section 80HHC(3)(b).

Moreover, the Court highlighted a previous Tribunal order in the appellant's favor for preceding assessment years, where a similar approach to deducting indirect costs was allowed. The consistency in interpretation across assessment years further supported the appellant's case. Ultimately, the Court ruled in favor of the assessee, setting aside the lower authorities' decision and allowing the appellant to claim the full benefit of Rs. 50 lakhs under Section 80HHC(3)(b) of the Income-tax Act for the relevant assessment year.