2020 (1) TMI 732 - HC - Income Tax

Deduction u/s 80HHC - excluding from the total business income the labour charges and Labour Commission for the purpose of calculating deductions - Retrospective operation of the 1991 amendment to Section 80HHC - HELD THAT - In view of this dicta of the Supreme Court in the case of P.R. Prabhakar 2006 (7) TMI 121 - SUPREME COURT and K.K. Doshi 2000 (8) TMI 74 - BOMBAY HIGH COURT the foundation of the decision of the Tribunal does not survive and the question of law as framed will have to be answered against the Revenue.

Summary

Issues:
1. Exclusion of labor charges and commission for calculating deductions under Section 80 HHC.
2. Interpretation of Section 80HHC of the Income Tax Act, 1961.
3. Application of precedents in determining the eligibility of deductions.
4. Retroactive effect of the 1991 amendment to Section 80HHC.

Issue 1: Exclusion of labor charges and commission for calculating deductions under Section 80 HHC:
The Appellant, engaged in diamond exports, received labor charges and commission which were excluded by the Assessing Officer for calculating deductions under Section 80 HHC. The Commissioner of Income Tax (Appeals) initially allowed the Appellant's claim, but the Income Tax Appellate Tribunal reversed this decision based on precedents. The Tribunal held that the labor charges lacked a direct nexus with export activities, making the Appellant ineligible for the claimed deduction.

Issue 2: Interpretation of Section 80HHC of the Income Tax Act, 1961:
The Tribunal's decision was based on the interpretation of Section 80HHC, which requires a direct nexus between profits and export activities for deductions. The Division Bench referred to the pre-amendment formula for computing export profits and highlighted the legislative intent behind excluding certain receipts like service charges from business profits under Section 80HHC.

Issue 3: Application of precedents in determining the eligibility of deductions:
The Tribunal relied on precedents such as K.K. Doshi and S.G. Jhaveri Consultancy to support its decision. These cases emphasized the need for a direct nexus between profits and export activities to qualify for deductions under Section 80HHC. The Tribunal's decision aligned with the principles established in these judgments, leading to the reversal of the Commissioner's initial allowance of the Appellant's claim.

Issue 4: Retroactive effect of the 1991 amendment to Section 80HHC:
The Supreme Court clarified the retroactive effect of the 1991 amendment to Section 80HHC in the case of P.R. Prabhakar v. Commissioner of Income-Tax. The Court held that the amendment was prospective, not retrospective, which impacted the interpretation and application of Section 80HHC. This clarification influenced the decision-making process and outcome in the present case, ultimately leading to the Appeal being disposed of against the Revenue based on the Supreme Court's dicta.