2014 (2) TMI 188 - HC - Income Tax

Deduction u/s 80HHC of the Act - Whether the order of the assessing officer diminishing the export turnover by reducing the foreign commission and thereby reducing the claim under section 80HHC of the Income Tax Act in accordance with law Held that - As long as the export turnover indicated in the return of income is as per the definition of 'export turnover' under the explanation, there was no reason for the assessing officer to place reliance on the terms of contract between the assessee and the agent in order to deduct the commission amount from the export turnover thus Commissioner of Income Tax (Appeals) and the Tribunal were justified in rejecting the method of calculation adopted by the assessing officer and allowing the exporter assessee to include commission paid to the agent in the export turnover Decided against Revenue.

Summary

Issues:
1. Whether the assessing officer's reduction of export turnover by deducting foreign commission under Section 80HHC of the Income Tax Act is lawful.
2. Whether the Tribunal was correct in interfering with the reduction of foreign commission and its impact on the Section 80HHC benefit.

Issue 1: Reduction of Export Turnover by Deducting Foreign Commission
The respondent, running a coir factory, had a foreign agent whose commission was deducted from the export turnover for the assessment year 2003-2004. The assessing officer argued that the commission was a charge attached to the export order and thus should not be included in the export turnover for Section 80HHC deduction. The first appellate authority disagreed, stating that the commission paid to the foreign agent should be part of the export turnover. The Appellate Tribunal, relying on a previous case, upheld the appellate authority's decision. The High Court concurred, emphasizing that the assessing officer's method of deduction was not justified as the commission paid to the agent did not impact the export turnover as defined in the Income Tax Act.

Issue 2: Tribunal's Interference with Foreign Commission Reduction
The assessing officer disallowed the foreign agent's commission under Section 40(a) of the Act, citing a previous judgment. The formula for deductions under Section 80HHC is directly affected by the export turnover. The assessing officer's deduction of the commission would reduce the benefits to the assessee. However, the High Court clarified that the commission paid to the foreign agent, while a valid expenditure, should not be excluded from the export turnover. The definition of 'export turnover' under the Income Tax Act's Explanation (b) clearly outlines what constitutes export turnover, and the assessing officer's reliance on the contract terms between the assessee and the agent was deemed unjustified. The Commissioner of Income Tax (Appeals) and the Tribunal were correct in rejecting the assessing officer's calculation method and allowing the inclusion of the commission in the export turnover. The High Court upheld the decisions of the appellate authorities, ruling against the revenue's claim that the assessing officer's actions were justified.

In conclusion, the High Court ruled in favor of the respondent, holding that the assessing officer's reduction of the export turnover by deducting the foreign commission was not in accordance with the law. The Tribunal's decision to interfere with the reduction and uphold the inclusion of the commission in the export turnover for Section 80HHC benefits was deemed correct. The judgment clarified the definition of export turnover and emphasized that the commission paid to the foreign agent should not impact the export turnover calculation for tax deductions.