2015 (1) TMI 246 - HC - Income Tax

Interpretation of provisions of section 80HHC purport of the expression indirect costs - Held that - It is defined under clause (e) of Explanation - the definition is exclusionary, in nature - the expression direct costs is defined in clause (d) and it takes in its fold, the costs attributable to export of trading, including purchase price - when it comes to the question of indirect costs, it is couched in residuary terms, namely, not being direct costs - the definition further makes an indication that the allocation of direct costs shall be in the ratio between export turnover and total turnover - once the costs incurred by an assessee for export of trading is determined, the figure indirect costs, as defined under clause (e) of Explanation, can be derived, just by relating the direct costs to the total costs - the ratio between export turnover over and the total turnover is an important phenomenon that, cuts across the gamut of Section 80HHC of the Act. U/s 80HHC of the Act, the export profits are always determined by taking into account, the profits of the business, not only of the export activity, but also the profits of other activities of the assessee, multiplied by the resultant figure of division by the export turnover by the total turnover - the export profit is derived from the formula of profit of the business export turnover - when the section dissolves the difference between the export activity and non-export activity to such absolute levels, there is no reason why the indirect costs referred to in sub-section 3 (b) of Section 80HHC of the Act must be taken in a restrictive manner - the expression indirect costs occur only in sub-section 3(b) the view taken by the Tribunal is upheld Decided against assessee.

Summary

Issues: Interpretation of Sections 80HHC and 115JA of the Income Tax Act.

Analysis:
The judgment involved the interpretation of Sections 80HHC and 115JA of the Income Tax Act, 1961. The appellant, an assessee undertaking manufacturing and trading activities, claimed a deduction under Section 80HHC for exports yielding foreign exchange. Section 115JA mandated that if the total income of a company is less than 30% of the book profits, the total income shall be deemed equal to 30% of the book profit. The dispute arose regarding the calculation of indirect costs for deduction under Section 80HHC.

The appellant sought a deduction of &8377; 1,84,471/- as indirect costs, but the Assessing Officer calculated it at &8377; 14,57,292/-. The appellant's argument was that only costs directly related to export activities should be considered as indirect costs, not including manufacturing costs. The respondent contended that the calculation should include costs related to all activities, not just exports.

The judgment analyzed the definitions and provisions of Sections 80HHC and 115JA. It highlighted the importance of determining book profits accurately to avoid higher tax liabilities. The court explained the calculation methods for book profits and the impact of deductions under Section 80HHC on taxable income.

The court emphasized that the determination of profits under Section 80HHC was crucial, especially for exporters engaged in trading. It discussed the definitions of adjusted export turnover, adjusted profits of the business, and indirect costs, emphasizing the allocation of costs based on turnover ratios.

The judgment clarified that indirect costs should not be restricted to export activities alone but should consider all business profits. It rejected the appellant's argument for a restrictive interpretation of indirect costs, stating that export profits are derived from the overall business profits. The court upheld the Tribunal's decision, dismissing the appeal and emphasizing the holistic approach to calculating profits under Section 80HHC.

In conclusion, the court dismissed the appeal with no costs awarded and disposed of miscellaneous petitions related to the case. The judgment provided a detailed analysis of the interpretation of Sections 80HHC and 115JA, emphasizing the importance of accurate profit calculation for tax purposes.