2007 (11) TMI 13 - SC - Income Tax

Export of trading goods - Claim for adjustment of 10% of export incentive against indirect cost of trading goods while allowing deduction under section 80HHC - export income and income from export incentives - words attributable - concept of allocation - HELD THAT - According to the Department the definition of indirect costs will not cover expenses incurred for earning Other Incomes. However at the same time Department concedes that the assessee had earned export turnover of Rs.6, 50, 000 plus Rs.1, 60, 000 as Other Incomes. It also concedes that Rs.50, 000 is the indirect expense. From the record the words attributable in section 80HHC(3)(b) in the main section itself indicates that apportionment (principle of attribution) is not omitted from the said provision of section 80HHC(3)(b). As stated assessee has earned Other Income of Rs.1, 60, 000 apart from FOB value of exports of Rs.6, 50, 000. Therefore some expense has to be attributed to earning of Rs.1, 60, 000. If so the next question which arises is how to allocate the costs? As stated assessee has two incomes with one Common Pool of expenses and since principle of attribution has been retained in the scheme of section 80HHC both in terms of section 80HHC(3) clause (e) to the Explanation to section 80HHC(3)(a) (b) and (c) and in clause (baa) to the Explanation to section 80HHC instead of going into lengthy exercise of dividing such Common Expenses the assessee has estimated the reduction of export turnover by 10% of the other income of Rs.1, 60, 000 (in the above example). Ultimately clause (baa) to the Explanation is itself based on the assumption that 10% of the income would be an expense. We make it clear that we are not reading Explanation (baa) into section 80HHC(3)(b). What we say is as a Guidance Value/Factor 10% of the total Other Income of Rs.1, 60, 000 would be fair estimate. This guidance value is not flowing from clause (baa) but from the scheme of section 80HHC read with the Memorandum to the Finance Act of 1991. Take a reverse case if allocation of expenses is to be done on Actual Basis it would not only be very difficult but in some cases actual apportionment may not be in the interest even of the Department. In conclusion we may state that under section 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. Thus we set aside the impugned judgments of the High Court and restore the orders of the Income Tax Appellate Tribunal. Accordingly the civil appeals filed by the assessee stand allowed

Summary

Issues Involved:
1. Whether the Assessing Officer and Commissioner of Income-tax (Appeals) were right in disallowing the assessee's claim for adjustment of 10% of export incentive against indirect cost of trading goods while allowing deduction under section 80HHC of the Income-tax Act.

Detailed Analysis:

1. Disallowance of Assessee's Claim for Adjustment of 10% of Export Incentive Against Indirect Cost:

The core issue in this batch of civil appeals pertains to the interpretation of section 80HHC of the Income-tax Act, particularly whether the assessee's claim for adjusting 10% of export incentives against indirect costs should be allowed. The assessee sought to reduce indirect costs attributable to the export of trading goods by attributing a part of these costs to export incentives, thereby increasing the export profits eligible for deduction under section 80HHC. The Department, however, contended that expenses incurred for earning incentives, commission, etc., should not be deducted from indirect costs.

Facts and Example Provided:

The assessee was engaged in the export of trading goods and earned income from export incentives, miscellaneous income, and interest income. An example illustrated the differing computations of export profits by the assessee and the Department. The assessee's method resulted in higher export profits by reducing indirect costs by 10% of the expenses attributable to export incentives, while the Department's method did not allow such a reduction.

Arguments by the Assessee:

The assessee argued that under section 80HHC(3)(b), only indirect costs attributable to exports should be deducted from export turnover. They contended that the Legislature's assumption that 10% of certain receipts (incentives) were incurred as expenses should apply to section 80HHC(3)(b) as well. The assessee emphasized that every receipt has a corresponding expense and that the principle of allocation should be applied.

Arguments by the Department:

The Department argued that the methodology for computing business profits under section 80HHC(3)(a) was different from that for export turnover under section 80HHC(3)(b). They asserted that section 80HHC(3)(b) was a standalone provision and did not incorporate the assumptions of section 80HHC(3)(a). The Department maintained that the entire indirect cost should be deducted from export turnover without any reduction for expenses incurred to earn export incentives.

Court's Analysis and Conclusion:

The Court considered the rival submissions and noted that the Department did not dispute that the assessee incurred expenses to earn export incentives. The Court highlighted that the term "attributable" in section 80HHC(3)(b) indicated the principle of attribution, which necessitated the allocation of costs between export turnover and total turnover. The Court found merit in the assessee's contention that some expenses should be attributed to earning export incentives. The Court concluded that a fair estimate of 10% of the total other income (export incentives) should be considered as expenses, thereby allowing the assessee's claim for reducing indirect costs by this amount.

Judgment:

The Court set aside the High Court's judgments and restored the orders of the Income Tax Appellate Tribunal, thereby allowing the assessee's appeals. The Court emphasized that the principle of attribution should balance the concept of allocation to ensure that the incentive is reduced but not eliminated.

Conclusion:

The civil appeals filed by the assessee were allowed, with no order as to costs, affirming the assessee's right to adjust 10% of export incentives against indirect costs while computing deductions under section 80HHC of the Income-tax Act.