2004 (7) TMI 286 - AT - Income Tax

Summary

Issues Involved:
1. Whether the learned CIT(A) erred in directing the AO to allow deduction under section 80HHC of the IT Act, 1961.
2. Treatment of interest income and bill discounting income for the purpose of deduction under section 80HHC.
3. Applicability of the judgment of the Hon'ble Supreme Court in the case of IPCA Laboratories Ltd. vs. Dy. CIT.
4. Consideration of losses before applying the proviso to section 80HHC(3).

Issue-Wise Detailed Analysis:

1. Deduction under Section 80HHC:
The Revenue appealed against the CIT(A)'s order directing the AO to allow a deduction of Rs. 27,79,685 under section 80HHC. The AO had excluded 90% of the interest income and bill discounting income while computing the deduction, resulting in a loss from both export of trading goods and manufactured goods. The CIT(A) directed the AO to allow the deduction, ignoring the losses as per various Tribunal orders.

2. Treatment of Interest Income and Bill Discounting Income:
The AO excluded 90% of the interest income of Rs. 4,83,777 and bill discounting income of Rs. 54,95,161 while computing the deduction under section 80HHC. The assessee contended that these were net interest incomes after deducting proportionate expenses. The Tribunal noted that if the assessee's contention was correct, the amount of Rs. 49,45,645 (90% of Rs. 54,95,161) was wrongly deducted by the AO. However, even if the contention was correct, there would still be a net loss before the proviso to section 80HHC(3).

3. Applicability of IPCA Laboratories Judgment:
The Revenue argued that the issue was covered by the Supreme Court's judgment in IPCA Laboratories Ltd. vs. Dy. CIT, which held that section 80HHC is governed by section 80AB, and no deduction is allowable if there is a net loss. The Tribunal found that the Supreme Court's judgment did not deal with the proviso to section 80HHC(3) and was not applicable for allowing deduction by ignoring losses under clauses (a), (b), or (c) of section 80HHC(3).

4. Consideration of Losses Before Applying Proviso to Section 80HHC(3):
The Tribunal referred to the Special Bench decision in Lalsons Enterprises vs. Dy. CIT, which held that losses under clauses (a), (b), or (c) of section 80HHC(3) should be ignored while computing the deduction under the proviso. The Tribunal also noted a subsequent order in Mangalya Trading & Investment Ltd. vs. Dy. CIT, which held that export incentives alone cannot form the basis for deduction if there is no positive profit before the proviso. The Tribunal concluded that the Special Bench's order in Lalsons Enterprises was still valid for ignoring losses before the proviso.

Conclusion:
The Tribunal set aside the issue to the AO to re-examine the assessee's claim regarding the wrong reduction of Rs. 49,45,645 and to compute the correct amount of loss from manufacturing export. The AO was directed to compute the deduction allowable under section 80HHC read with section 80AB after deducting such losses from the export incentive as per the proviso to section 80HHC(3). The Revenue's appeal was allowed for statistical purposes.