2015 (4) TMI 195 - SC - Income Tax

Correct method of computation of deductions under Section 80HHC(3) - in the present case, the domestic income in respect of which benefit is sought is from dividend income, interest income, profit or sale of shares and fees received from arranging finance for the assessee s clients, thus no income from indigenous business which, in no case, be described as turnover and be part of total turnover as held by revenue Held that - The mode and mechanics of computing the deduction admissible to an assessee falling under Section 80HHC(3)(b) clearly proceeds on the basis that in trading transactions profit, or, as the case may be, loss is embedded in the gross turnover. The most significant conclusion that flows from the said provision is that when Section 80HHC(3) talks of turnover, it talks of trading receipts and not of receipts which are of the nature of income to start with. It should, therefore, follow that the aggregate sum of dividend income, interest income, profit or sale of shares and fees received from arranging finance for the assessee s clients cannot be regarded as turnover, and that by the same token, it should be left out of reckoning for purposes of computing deduction admissible to the assessee under Section 80HHC. In the first instance, it has to be satisfied that there are profits from the export business. That is the pre-requisite as held in IPCA 2004 (3) TMI 9 - SUPREME Court and A.M. Moosa 2007 (9) TMI 24 - SUPREME COURT OF INDIA as well. Sub-section (3) comes into picture only for the purpose of computation of deduction. For such an eventuality, while computing the total turnover , one may apply the formula stated in clause (b) of sub-section (3) of Section 80HHC. However, that would not mean that even if there are losses in the export business but the profits in respect of business carried out within India are more than the export losses, benefit under Section 80HHC would still be available. In the present case, since there are losses in the export business, question of providing deduction under Section 80HHC does not arise and as a consequence, there is no question of computation of any such deduction in the manner provided under sub-section (3). This would mean that the deduction admissible to the assessee under Section 80HHC would be nil, especially in view of the fact that the export business of the assessee has resulted in a loss. But a manufacturer may not invariably be able to export, in their entirety, the goods or merchandise manufactured. He may export a part of them and sell the rest in India. Given the paramount need to give fillip to exports, Parliament clearly intended that the benefit of Section 80HHC should not be denied in such cases. But the difficulty in such cases is that the profits attributable to exports cannot be ascertain with precision. This is because not only the manufacturing activities but also the selling activities (including the activities connected with exports) from a continuous, integrated whole. Even so, the intention of Parliament, was to extend the benefit of Section 80HHC to the extent of the profits generated by exports. With this end in view, Parliament incorporated a rule of thumb in Section 80HHC(3)(b). As long as the assessee has cleared profits in a particular year of account, export profits are computed by applying to total profits the ratio which export turnover bears to total turnover . We are in agreement with the this view of the Tribunal. Therefore, even otherwise, the formula as sought to be applied by the appellant does not become applicable on the facts of this case. - Decided against assessee.

Issues Involved:
1. Correct method of computation of deductions under Section 80HHC(3) of the Income Tax Act, 1961.
2. Interpretation of "profits of the business" for the purpose of Section 80HHC.
3. Applicability of formula for computation of deduction under Section 80HHC.
4. Validity of the Assessing Officer's order and subsequent appeals.

Detailed Analysis:

1. Correct Method of Computation of Deductions under Section 80HHC(3):
The primary issue was the correct method for computing deductions under Section 80HHC(3) of the Income Tax Act, 1961. The appellant argued that even if there were losses in the export business, the overall profits, including domestic business, should be considered for the deduction. However, the court held that deduction under Section 80HHC is permissible only if there are profits from the export business itself. The computation of deduction under sub-section (3) comes into play only after establishing that there are profits from the export business.

2. Interpretation of "Profits of the Business":
The court examined whether the term "profits of the business" under Section 80HHC includes only export profits or the combined profits from both export and domestic business. The court referred to the judgments in IPCA Laboratory Ltd. v. Deputy Commissioner of Income Tax and A.M. Moosa v. Commissioner of Income Tax, which established that the term "profits" means positive profits from the export business alone. Losses in the export business cannot be set off against profits from domestic business for the purpose of Section 80HHC.

3. Applicability of Formula for Computation of Deduction:
The appellant contended that the formula prescribed by the Central Board of Direct Taxes (CBDT) should be applied, which considers the total turnover, including domestic business. However, the court clarified that the formula applies only when there is a positive profit from the export business. Since the appellant had losses in the export business, the formula was not applicable.

4. Validity of the Assessing Officer's Order and Subsequent Appeals:
The Assessing Officer had initially denied the deduction on the grounds that the appellant had suffered losses in the export business. This order was upheld by the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal (ITAT). The High Court also supported this view, stating that the deduction under Section 80HHC is not permissible in the absence of export profits. The Supreme Court affirmed this position, dismissing the appellant's appeal and agreeing with the lower authorities' interpretation and application of the law.

Conclusion:
The court concluded that the deduction under Section 80HHC is only available if there are positive profits from the export business. Losses in the export business cannot be offset by profits from domestic business to claim the deduction. The formula for computation of deduction is only applicable when there are export profits. The appeal was dismissed, and the court upheld the orders of the lower authorities, including the High Court, ITAT, and the Assessing Officer.

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