2012 (4) TMI 344 - HC - Income Tax

Whether on the facts and circumstances of the case, depreciation has to be allowed to the assessee while working out deduction under Section 80 HHC and also while working out income under the head Business even if not claimed by the assessee in the return of income - assessee, while computing the total income, did not claim depreciation in respect of the assets used for the purpose of the assessee s business. The depreciation was also not claimed while claiming deduction under Section 80 HHC of the Act. Further the assessee had while computing profits under Section 80 HHC (3)(c) from export of goods, which included both, own processed ore and trading goods, added losses incurred in export of trading goods to the profit of the business to arrive at adjusted profit of the business - The assessing officer by his order dtd. 17th March 1997 disallowed the depreciation in computing the gross total income of the assessee, but allowed the depreciation while computing deduction under Section 80HHC Held that depreciation has to be allowed to the assessee while working out deductions under Section 80HHC and also while working out income under the head business even if not claimed by the assessee in the return of the income Where the profits of trading goods determined under Section 80HHC(3)(c)(ii) after deducting direct and indirect cost of trading goods from the export turnover of trading goods is a loss, then, whether such loss has to be ignored while computing deduction under Section 80HHC(1) of the Act - In the present case, the export turnover of trading goods is Rs.41,50,59,635/and direct/indirect costs are Rs. 35,81,34,588/and Rs.11,14,89,257/respectively. If the export turnover of trading goods amounting to Rs.41,50,59,635/is reduced by the direct and indirect costs amounting to Rs. 46,96,23,845/( Rs.35,81,34,588/ Rs. 11,14,89,257/), the result would be loss of Rs. 5,45,64,210/. As per Section 80HHC(3)(c)(ii), the amount so determined i.e. Rs. 5,45,64,210/is liable to be treated as profits derived from export of trading goods - Held that in calculating the profits under Section 80HHC(3)(c)(i), one has to necessarily reduce the profits determined under Section 80HHC(3)(c)(ii) and if there is loss, then, those losses in export of trading goods have to be adjusted cannot be faulted - The same analogy would apply where the assessee has issued a certificate to a supporting manufacturer Decided in favor of the assessee

Issues Involved:
1. Depreciation allowance under Section 80HHC and its applicability even if not claimed by the assessee.
2. Entitlement to add losses on the export of trading goods of the supporting manufacturer in computing the deduction under Section 80HHC(1).
3. Consideration of losses on export of trading goods in arriving at the adjusted profit of the business for computing deduction under Section 80HHC.

Detailed Analysis:

Issue 1: Depreciation Allowance Under Section 80HHC
The primary contention was whether depreciation should be allowed to the assessee while calculating deductions under Section 80HHC and while computing income under the head "Business" even if it was not claimed by the assessee in the return of income. The Tribunal had ruled that depreciation should not be deducted if not claimed by the assessee, citing the Supreme Court's decision in C.I.T. vs. Mahendra Mills Limited, which stated that depreciation cannot be thrust upon the assessee if not claimed.

However, the revenue argued, citing the Full Bench decision in Plastiblends India Limited vs. Additional Commissioner of IncomeTax and others, that for the purposes of deductions under Chapter VIA, the gross total income must include allowable depreciation even if not claimed. The court agreed, stating that the decision in Plastiblends India Limited was binding and applicable, thus holding that depreciation must be considered while computing deductions under Section 80HHC. Therefore, the court concluded that depreciation has to be allowed to the assessee while working out deductions under Section 80HHC and also while working out income under the head "Business" even if not claimed by the assessee in the return of income.

Issue 2: Losses on Export of Trading Goods and Disclaimer Certificate
The second issue was whether the assessee is entitled to add the losses on the export of trading goods of the supporting manufacturer in computing the deduction under Section 80HHC(1) in view of the disclaimer certificate issued. The Tribunal had ruled that losses on trading goods should be added to the profits of the business for the purpose of adjusted profits of the business. The revenue contested this, arguing that losses should be ignored.

The court examined the statutory mechanism provided under Section 80HHC(3)(c) for computing the profits attributable to the export of trading goods and manufactured goods. It concluded that the losses in trading goods should be factored into the computation of adjusted profits of the business, as required by the statutory formula. The court found no merit in the revenue's argument and upheld the Tribunal's decision that losses on trading goods should be added to the profits of the business for the purpose of adjusted profits.

Issue 3: Consideration of Losses on Export of Trading Goods
The third issue was whether losses on export of trading goods should be added to the profits of the business to arrive at the adjusted profit of the business as given in the Explanation (b) to subsection (3) of section 80HHC for computing deduction under Section 80HHC or such loss should be ignored. The court referred to the statutory language of Section 80HHC(3)(c) and the mechanism for computing adjusted profits of the business.

The court ruled that the loss from the export of trading goods should be considered in determining the adjusted profits of the business, as the statutory language requires the deduction of profits derived from trading activities from the composite profits. If the trading activity results in a loss, it must be added to the composite profits to determine the profits from the export of manufactured goods. The court found that the Tribunal's decision to include the losses in the computation was correct and in accordance with the statutory provisions.

Conclusion:
The court concluded that depreciation must be allowed while computing deductions under Section 80HHC and while computing income under the head "Business" even if not claimed by the assessee. It also held that losses on the export of trading goods should be added to the profits of the business for the purpose of adjusted profits. The appeals were partly allowed, with the court ruling in favor of the revenue on the first issue and in favor of the assessee on the second and third issues.

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