2017 (4) TMI 1107 - HC - Income Tax

Explanation (baa) to Section 80HHC application to the Sales Tax Subsidy received by the Appellant - Held that - Applying the ratio in Ravindaranathan Nair s case 2007 (11) TMI 10 - Supreme Court of India to the fact situation prevailing in the present case, the refund of Sales Tax obtained by the Assessee has no direct bearing or attribute of the export component of the business carried on by the Assessee and hence the Assessee cannot seek to retain the same by deriving the benefit spelt out in Section 80HHC.

Summary

Issues Involved:
1. Applicability of Explanation (baa) to Section 80HHC of the Income-tax Act, 1961 to Sales Tax Subsidy.
2. Determination of whether the Sales Tax Subsidy received by the Assessee qualifies for deduction under Section 80HHC.

Detailed Analysis:

1. Applicability of Explanation (baa) to Section 80HHC of the Income-tax Act, 1961 to Sales Tax Subsidy:

The Assessee, engaged in the manufacture and export of leather shoes, received a Sales Tax REP subsidy amounting to ?1,70,29,716/- and included it as 'other income' for the Assessment year 1999-2000. The Assessee argued that Explanation (baa) to Section 80HHC should not apply to such receipts, thus claiming a deduction of ?2,70,89,222/- and returning an income of ?11,72,310/-. The Assessing Officer, Commissioner of Income Tax (Appeals), and the Income Tax Appellate Tribunal (ITAT) all concluded that such receipts should be excluded from the business profits for the purpose of Section 80HHC deduction. The Tribunal's decision was challenged in this appeal.

2. Determination of whether the Sales Tax Subsidy received by the Assessee qualifies for deduction under Section 80HHC:

Section 80HHC allows a deduction of profits derived from the export of goods or merchandise. Explanation (baa) under this section specifies that profits of the business should be reduced by 90% of certain receipts, including brokerage, commission, interest, rent, charges, or any other similar nature receipts. The core issue was whether the Sales Tax Subsidy received by the Assessee had a direct nexus to the export business profits.

The court analyzed the legislative intent behind Section 80HHC, emphasizing that the section aims to provide tax incentives for profits derived from export activities. The court noted that the subsidy received did not have a direct connection to the export turnover or profits derived from export activities. The refund of Sales Tax was considered as 'other income' and did not qualify for the deduction under Section 80HHC as it did not directly relate to the export business profits. The court referenced several judgments, including the Supreme Court's decisions in Commissioner of Income Tax vs. T.V.Sundaram Iyengar & Sons Ltd., Commissioner of Income Tax vs. Lakshmi Machine Works, and Commissioner of Income Tax vs. K.Ravindaranathan Nair, to support its conclusion.

The court held that the refund of Sales Tax obtained by the Assessee did not have a direct bearing or attribute of the export component of the business. Consequently, the Assessee could not claim the benefit of Section 80HHC for the Sales Tax Subsidy received. The appeal was dismissed, and the reference was answered accordingly, affirming the decisions of the lower authorities.