2007 (5) TMI 216 - HC - Income Tax

Relief u/s 80HHA should be computed after adjusting the loss of the head office against the profit of the branch duty drawback couldn t be termed as profits derived hence not required to be included in income for computing deduction u/s 80HHA & 80I - cash compensatory support & profits on sale of import entitlements didn t form part of the eligible profits for purpose of computing deductions u/s 80HHA & 80-I liability to pay compensation are not fixed but contingent so not deductible u/s 37

Summary

Issues:
1. Deduction claim for compensation payable to M/s. M. W. Hardy and Co., New York
2. Computation of relief under section 80HHA after adjusting head office set loss against branch profit
3. Inclusion of cash compensatory support and profits on sale of import entitlements in eligible profits for deductions under sections 80HHA and 80-I
4. Treatment of duty drawback as profits derived from industrial undertaking for computing deductions under sections 80HHA and 80-I

Issue 1:
The judgment deliberated on the deduction claim for compensation payable to M/s. M. W. Hardy and Co., New York. The court analyzed the concept of "expenditure laid out or expended" under section 37 of the Income-tax Act, emphasizing that the expenditure must be actually incurred or spent. It was noted that the liability incurred should not be contingent upon future events. In the case at hand, the liability to pay compensation was contingent upon shipping per ounce, indicating a contingent liability rather than a fixed one. Consequently, the deductions sought by the assessee were deemed impermissible under section 37, leading to the rejection of the deduction claim.

Issue 2:
Regarding the computation of relief under section 80HHA after adjusting head office set loss against branch profit, the court referred to the decision in CIT v. Canara Workshops P. Ltd. [1986] 161 ITR 320. The court upheld the income-tax authorities' finding that the loss of one office (branch) had to be adjusted against the profit of the other office (head office). As a result, the second question referred at the instance of the assessee was answered against the assessee and in favor of the Department.

Issue 3:
The judgment addressed the inclusion of cash compensatory support and profits on the sale of import entitlements in eligible profits for deductions under sections 80HHA and 80-I. Citing the decision in CIT v. Sterling Foods [1999] 237 ITR 579 (SC), the court ruled in favor of the Revenue, holding that such components form part of the eligible profits for computation of deductions. The first question referred at the instance of the Revenue was decided in favor of the Department and against the assessee.

Issue 4:
Lastly, the treatment of duty drawback as profits derived from an industrial undertaking for computing deductions under sections 80HHA and 80-I was discussed. Following the precedent set in CIT v. Sterling Foods [1999] 237 ITR 579 (SC), the court ruled in favor of the Department and against the assessee. The second question referred at the instance of the Department was also answered against the assessee and in favor of the Department. Ultimately, the reference was disposed of based on the detailed analysis and conclusions drawn on the various issues presented in the case.