1999 (6) TMI 60 - AT - Income Tax

Summary

Issues involved:
The judgment concerns the entitlement of the assessee to deduction u/s 80HHC of the Income Tax Act in relation to the premium on export licence, export subsidy, and duty draw back for the assessment year 1986-87.

Deduction under section 80HHC:
The assessee claimed a deduction under section 80HHC based on 50% of the export profits, which included amounts from premium on export licence, export subsidy, and duty draw back. However, the Assessing Officer excluded these amounts from the profit calculation, leading to a negative figure. The CIT(A) upheld this decision, stating that the profits eligible for deduction under section 80HHC must be the sale proceeds of the goods exported, received in convertible foreign exchange. As the conditions were not met by the assessee, the deduction was denied.

Supreme Court's decision:
The assessee's counsel cited the Supreme Court's decision in the case of Sterling Foods, arguing that it supported the assessee's position. The Supreme Court held that the source of import entitlements is the Export Promotion Scheme of the Central Government, not the industrial undertaking of the assessee. This decision was in line with the Karnataka High Court's ruling in the same case, emphasizing that profits from sale proceeds of import entitlements are not derived from the assessee's industrial undertaking.

Judicial interpretations:
The judgment also referred to the Kerala High Court's decision in Cochin Company v. CIT, which highlighted the necessity of a direct nexus between an activity and the earning of profit for it to be considered derived from that activity. The court concluded that duty draw back, export subsidy, and premium on export licence received under the Central Government's scheme were not profits derived from the export business, thus not eligible for deduction u/s 80HHC.

Proviso to section 80HHC:
The proviso to section 80HHC specifies that the deduction shall not exceed the profit derived from the export of goods. Since excluding the premium on export licence, export subsidy, and duty draw back resulted in a negative profit figure for the assessee, the deduction under section 80HHC was rightfully denied.

Precedent and final decision:
Citing the case of CIT v. V.T. Joseph, the judgment highlighted that deduction under section 80HHC is only allowed to the extent of income from export business included in the gross total income. As the assessee had no income from export business in the gross total income, the appeal was dismissed, affirming the denial of deduction under section 80HHC.