2008 (8) TMI 455 - AT - Income Tax

Issues Involved:

1. Deduction under Section 80HHC of the IT Act.
2. Eligibility of protocol exports for deduction under Section 80HHC.
3. Applicability of the Supreme Court decision in IPCA Laboratory Ltd. vs. Dy. CIT to the case.
4. Compliance with statutory provisions under Section 80HHC(1A), (3A), and (4A).
5. Interpretation of Circular No. 562, dated 23rd May 1990.

Detailed Analysis:

1. Deduction under Section 80HHC of the IT Act:

The assessee, a firm engaged in trading sugar, pulses, and exporting rice, claimed a deduction of Rs. 80,95,064 under Section 80HHC for the assessment year 2003-04. The AO disallowed the claim on two grounds: (a) The STC, through which the assessee exported rice, declared a loss and thus couldn't pass on the deduction benefit to the assessee, as per the Supreme Court decision in IPCA Laboratory Ltd. vs. Dy. CIT. (b) The export consideration was received in Indian rupees, not foreign exchange, disqualifying the claim under Section 80HHC.

2. Eligibility of protocol exports for deduction under Section 80HHC:

The assessee argued that the exports were protocol exports under a Government-to-Government aid program, with considerations received from the Ministry of External Affairs in Indian rupees. The AO rejected this, stating the exports were gifts with no commercial value or foreign exchange involvement. The CIT(A) upheld the AO's decision. However, the ITAT found that the transaction between the assessee and STC, and between STC and the Government of India, involved consideration and could be characterized as protocol exports, making the assessee eligible for deduction under Circular No. 562.

3. Applicability of the Supreme Court decision in IPCA Laboratory Ltd. vs. Dy. CIT to the case:

The ITAT determined that the Supreme Court decision in IPCA Laboratory Ltd. was not applicable to the assessee's case. The IPCA case dealt with the interpretation of profits under Section 80HHC(1) and (3)(c), relevant to export houses, not supporting manufacturers. The assessee, being a supporting manufacturer, claimed deduction under Section 80HHC(1A), which was not addressed in the IPCA case. The ITAT relied on the Supreme Court decision in CIT vs. Baby Marine Exports, which clarified that the supporting manufacturer's claim is under Section 80HHC(1A), not Section 80HHC(1).

4. Compliance with statutory provisions under Section 80HHC(1A), (3A), and (4A):

The ITAT noted that the assessee complied with the statutory provisions under Section 80HHC(1A), (3A), and (4A). The assessee provided the necessary certificates, including the disclaimer certificate from STC, and met the conditions for claiming the deduction. The ITAT emphasized that the legislative intent was to provide tax benefits to supporting manufacturers exporting through export houses, as reflected in the relevant circulars and statutory provisions.

5. Interpretation of Circular No. 562, dated 23rd May 1990:

The ITAT interpreted Circular No. 562 liberally, noting that protocol exports involve Government-to-Government agreements, where realization may be in Indian currency. The circular aimed to provide tax benefits to exporters engaged in protocol exports, regardless of the realization in foreign currency. The ITAT concluded that the assessee's exports to Cambodia through STC qualified as protocol exports, making the assessee eligible for the deduction under Section 80HHC.

Conclusion:

The ITAT allowed the assessee's appeal, granting the deduction under Section 80HHC, and recognized the exports as protocol exports eligible for benefits under Circular No. 562. The decision emphasized the legislative intent to support exporters and the need for a liberal interpretation of beneficial provisions.

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