2005 (4) TMI 31 - HC - Income Tax

Deduction u/s 80HHC - Commissioner of Income-tax (Appeals) has recorded the finding that the assessee has created a valid reserve which was also verified by the Assessing Officer from the books of account, even if the reserve is not created at the time of submission of the return, but it could be created during the course of the assessment proceedings and such creation of reserve subsequently is held to be a proper compliance with the proviso to section 80HHC - We do not find any infirmity in the order of the Commissioner of Income-tax (Appeals), which has been confirmed by the Tribunal - Tribunal was correct in law in confirming the order of the CIT (Appeals) directing the Assessing Officer to allow deduction under section 80HHC, subject to various conditions being duly complied with

Summary

Issues:
Interpretation of section 80HHC of the Income-tax Act, 1961 for deduction eligibility and compliance with reserve creation requirements.

Analysis:
The High Court of Allahabad was presented with questions of law regarding the correctness of confirming the order directing the Assessing Officer to allow deduction under section 80HHC of the Income-tax Act, subject to compliance with conditions. The assessment year in question was 1986-87. The case involved an assessee, a registered partnership firm, claiming deduction under section 80HHC, which was initially rejected by the assessing authority due to the absence of the required reserve in the balance-sheet filed with the return of income. The Commissioner of Income-tax (Appeals) later allowed the claim, stating that a valid reserve had indeed been created by the assessee, even if not reflected in the initial balance-sheet. This decision was supported by referencing the case law precedent set by the court in CIT v. Modi Spinning and Weaving Mills Co. Ltd. The Tribunal upheld the Commissioner's decision, leading to the current reference before the High Court.

The court considered the provisions of section 80HHC of the Act, which allowed for deductions based on specific criteria related to export business profits. The court referred to the decision in CIT v. Modi Spinning and Weaving Mills Co. Ltd., where it was established that the entries required for compliance with such provisions could be made before the income tax return filing. Additionally, the court cited the apex court's ruling in Karimjee P. Ltd. v. Deputy CIT, which emphasized the importance of complying with the second proviso to section 80HHC. In that case, the apex court allowed the compliance to be fulfilled even during the proceedings, leading to the assessee being granted the deduction.

The Commissioner's finding that the assessee had validly created the required reserve, verified by the Assessing Officer, was deemed sufficient compliance with the proviso to section 80HHC. The court found no fault in the decisions of the Commissioner and the Tribunal, aligning with the previous court judgments and the apex court's ruling. Consequently, the court answered the referred question in favor of the assessee and against the Revenue, affirming the allowance of the deduction under section 80HHC for the relevant accounting year.

In conclusion, the judgment clarified the interpretation and application of section 80HHC of the Income-tax Act, emphasizing the importance of compliance with reserve creation requirements and allowing for such compliance to be met during the assessment proceedings. The court's decision was based on established legal principles and precedents, ensuring fair treatment and adherence to statutory provisions in tax matters.