2007 (9) TMI 251 - HC - Income Tax

Tribunal hold that the case of the assessee was covered u/s 80HHC(3)(a) and not u/s 80HHC(3) (b) and hence special deduction is allowable to assessee held that assessee business actively of assessee does not consist exclusively of exports outside India of the goods or merchandise and had mixture of export as well as domestic activities and therefore he would be entitled to have deduction as per section 80HHC(3)(b) on a pro rata basis not u/s 80HHC(3)(a)

Summary

Issues:
Interpretation of section 80HHC(3)(a) and 80HHC(3)(b) for deduction eligibility.

Analysis:
1. The judgment pertains to a reference by the Revenue regarding the deduction under section 80HHC of the Income-tax Act, 1961 for the assessment year 1988-89. The Commissioner of Income-tax had withdrawn a deduction of Rs. 8,84,660 allowed by the Assessing Officer, contending that the business did not exclusively consist of exports outside India, thus necessitating a pro rata deduction under section 80HHC(3)(b). The Tribunal, in its order, disagreed with the Commissioner's decision, leading to the present reference.

2. The crux of the matter lies in determining whether an assessee, engaged in export business but not exclusively in exports outside India, should be eligible for deduction under section 80HHC(3)(a) or section 80HHC(3)(b) of the Act. The relevant provisions of section 80HHC were extensively discussed to ascertain the correct interpretation for the deduction eligibility based on the nature of the business activities conducted by the assessee.

3. Section 80HHC(3)(a) stipulates that if the business consists solely of export activities, the profits derived from such exports shall be computed as per the business's overall profits. Conversely, section 80HHC(3)(b) applies when the business includes both export and domestic sales, requiring the deduction to be calculated proportionately based on the export turnover in relation to the total turnover of the business.

4. The Kerala High Court's decision in Indian Spices Co. v. CIT was cited, emphasizing that clause (b) of sub-section (3) of section 80HHC is applicable when an assessee conducts both export and local sales of the same goods. In this case, since the assessee's business encompassed a mix of export and domestic activities, deduction under clause (b) was deemed appropriate.

5. Reference was made to the Madras High Court's judgment in CIT v. Rathore Brothers, where the assessee, maintaining separate accounts for domestic and export trade, was granted 100% deduction for the export business. However, the court in the present case aligned with the Kerala High Court's interpretation of section 80HHC(3)(b), emphasizing the significance of the clause "does not consist exclusively of the export" in determining the deduction eligibility.

6. Ultimately, the court ruled in favor of the Revenue, upholding the Commissioner's decision to withdraw the excess deduction allowed to the assessee under section 80HHC. The judgment clarified the application of section 80HHC(3)(b) in cases where the business activities include a combination of export and domestic sales, ensuring a proportional deduction based on the turnover composition of the business.