2008 (5) TMI 352 - AT - Income Tax

Summary

Issues:
- Legal issue: Whether unrealized portion of export incentive is eligible for deduction under section 80HHC.

Analysis:
1. Identification of Appeals and Parties: The judgment pertains to two appeals filed by the revenue against different assessees for the assessment year 2001-02. The assessees involved are Shri Narsi Shah Sadh and Smt. Sheela Sadh from Farrukhabad. The appeals concern identical issues, and the orders appealed against are dated 9-3-2005.

2. Legal Issue: The primary legal issue in these appeals is the eligibility of the unrealized portion of the export incentive issued by the Ministry of Commerce for deduction under section 80HHC. In the case of Shri Narsi Shah Sadh, an amount of Rs. 4,34,477, and in the case of Smt. Sheela Sadh, an amount of Rs. 10,94,255 remained unrealized. The Assessing Officer held these amounts to be not eligible, while the CIT(A) held them to be eligible for deduction under section 80HHC.

3. Precedent and Legal Interpretation: Both parties agreed that the issue in question is covered in favor of the assessee by a decision of the Hon'ble Supreme Court in the case of B. Desraj v. CIT. The Supreme Court clarified that export incentives, including cash compensatory support and duty drawback, are to be included in the profits of the business for computing the deduction under section 80HHC. The Court emphasized that the words 'business profits' in the formula under section 80HHC(3) include such incentives. Therefore, the unrealized portion of the export incentive should be considered for deduction under section 80HHC.

4. Accounting System and Eligibility for Deduction: The assessee in this case followed the mercantile system of accounting and included the entire incentive amount as income in the Profit & Loss account. The Assessing Officer excluded the unrealized portion for the purpose of section 80HHC deduction. However, considering the provisions of section 80HHC(3) and sections 28(iiia), (iiib), and (iiic), amounts receivable under these provisions are entitled to deduction. Since the right to receive the incentive had accrued to the assessee during the export business operations, the CIT(A) was justified in including the unrealized portion for deduction under section 80HHC.

5. Judgment: Based on the settled legal position and the provisions of the Act, the appeals of the Revenue were dismissed. The Tribunal upheld the decision of the CIT(A) to allow the deduction for the unrealized portion of the export incentive under section 80HHC. Therefore, both appeals were dismissed in favor of the assessee.