2020 (1) TMI 870 - HC - Income Tax

Deduction u/s 80 HHC - excluding from the total business income the Re-assortment charges and Labour Commission for the purpose of calculating deduction u/s 80 HHC - scope of amendment - Retrospectivity - Tribunal held that such charges are not includeble in business profits for the purpose of computation of special deduction under Section 80HHC accordingly the Appeal was allowed - HELD THAT - The Assessment Year in question is of importance. The Assessment Year is 1991-92. The Section 80 HHC of the Act was amended with effect from 1 April 1992 and explanation was brought in the same. In the case of K.K. Doshi and Co. v. Commissioner of Income-Tax 2000 (8) TMI 74 - BOMBAY HIGH COURT an issue arose before this Court whether the service charges constitute business income for the purposes of computing export profits under Section 80HHC. Prior to the amendment export profits included interest, commission, etc., which did not have element of turnover came to be included in the profit and loss account. By way of amended provisions in the Explanation (ba) to Section 80HHC of the Income Tax Act, 1961 it was no longer permissible to do so. The Court opined that there was no nexus between the profits on the one hand and the export activity on the other hand, which was necessary. The question of retrospective operation of the 1991 amendment to Section 80HHC arose for consideration of the Supreme Court in the case of P.R. Prabhakar v. Commissioner of Income-Tax 2006 (7) TMI 121 - SUPREME COURT and disposed of the Appeal setting aside the order passed in K.K. Doshi (supra) holding that the amendment of 1 April 1992 is prospective in nature. In view of this dicta of the Supreme Court in the case of P.R. Prabhakar (supra) and K.K. Doshi (supra), the foundation of the decision of the Tribunal does not survive and the question of law as framed will have to be answered against the Revenue.

Summary

Issues:
1. Exclusion of reassortment charges and labor commission charges for calculating deduction under Section 80 HHC of the Income Tax Act.

Analysis:
The appellant, engaged in the export of cut and polished diamonds, received reassortment charges and labor commission charges during the assessment year 1991-92. The Assessing Officer excluded these amounts from the deduction under Section 80 HHC, resulting in a reduced deduction. The Commissioner of Income Tax (Appeals) allowed the appeal in favor of the appellant, but the Income Tax Appellate Tribunal overturned this decision. The main question of law was whether the exclusion of reassortment charges and labor commission charges for calculating the deduction under Section 80 HHC was justified.

The Tribunal determined that reassortment charges were commissions received from diamond traders, and labor commission charges were received for cutting and polishing diamonds for other dealers. Citing a previous court decision, the Tribunal concluded that such charges should not be included in business profits for the purpose of computing deductions under Section 80 HHC. The Tribunal's decision was based on the amendment to Section 80 HHC, which clarified that certain receipts, like commissions, should not be included in business profits for deduction calculation purposes.

The High Court referred to the case of K.K. Doshi and Co. v. Commissioner of Income-Tax, which addressed the computation of export profits under Section 80 HHC. The court highlighted that the amendment to Section 80 HHC aimed to prevent the inclusion of receipts like commissions that do not have a nexus with export activities in the profit and loss account. The court emphasized the need for a direct nexus between profits and export activities to claim deductions under Section 80 HHC.

The Supreme Court's decision in P.R. Prabhakar v. Commissioner of Income-Tax clarified that the amendment to Section 80 HHC from April 1, 1992, was prospective, not retrospective. This decision influenced the outcome of the present case, leading to the dismissal of the Revenue's challenge to the High Court's decision. The Supreme Court's ruling established that the amendment's prospective nature meant that the exclusion of certain charges from business profits for deduction calculation purposes was valid.

In light of the Supreme Court's rulings and the clarification on the prospective nature of the amendment to Section 80 HHC, the High Court disposed of the appeal in favor of the appellant. The foundation of the Tribunal's decision was deemed invalid, and the question of law was answered against the Revenue, upholding the appellant's position regarding the exclusion of reassortment and labor commission charges for deduction calculation under Section 80 HHC.