2006 (1) TMI 115 - HC - Income Tax

Business Profits Recomputed for Section 80HHC Deductions After Retrospective Amendments to Section 28.

The HC concluded that the AO incorrectly excluded certain incomes from the computation of business profits for Section 80HHC deductions. The court ... Deduction u/s 80HHC - receipts from the sale of export licence - commission from sale of STC export counter and commission of shipping, freight and processing charges of job work - Whether the Tribunal has correctly construed the provisions of section 80HHC, in the matter of computing profits and gains of their business, in the context of the said provision for granting deduction? - HELD THAT:- It is also to be considered that export turnover has been defined in clause 43 (b) of the Explanation to mean 'the sale proceeds receivable by the assessee in convertible foreign exchange of any goods or merchandise to which this section applies and which are exported out of India, but does not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act, 1962.' Thus, the profits of business are to be considered as a whole. The object is clear that where the assessee's business consists of multiple activities including the business of export out of India of goods or merchandise, then the clear intent of the Legislature was to permit only proportionate profit of the total business to the extent the business of export out of India of goods or merchandise forms part of its total business, e.g., if the assessee's business of export out of India is only 2 per cent. of its total business activities, then the Legislature intended that only 2 per cent. of the total profit of business as a whole should be eligible for deduction under section 80HHC. If, on the other hand, the business of export outside India of goods and merchandise as in the present case is shown to exist, is a substantial part of its total business, then the total profit and profit eligible for deduction under section 80HHC will be in that ratio. We have already noticed above that with effect from April 1, 1989, special mode was provided for computing income falling under the aforesaid three heads. Only 10 per cent. of the income from such income was to be included in computing profits and gains from business or profession and 90 per cent. of such income was to be directly added to the allowable deduction in the proportionate profit allocated to the business of export out of India of goods and merchandise. In other words by amending the mode of computing allowable deduction u/s 80HHC, 90 per cent. of profit of business falls u/s 28(iiia), (iiib) and (iiic) because part of eligible deduction outright and remaining 10 per cent. too went under consideration for computing proportionate profit from the business of exporting goods and merchandise out of India resulting in enlarging the field of eligible deduction u/s 80HHC. Considering in the aforesaid light, we have no hesitation in coming to the conclusion that the claim of the assessee to deduction u/s 80HHC could not have been denied by deducting from the income attributable to income falling under clauses (iiia), (iiib) and (iiic) or otherwise, falling under the head 'Profits and gains of business or profession', while computing the assessee's total income from 'Profits and gains of business' under Part D of Chapter IV in the assessment year 1989-90. Now, there is no dispute and in our opinion rightly so that for arriving at profit of business for the purpose of finding profit of business of export out of India of goods and merchandise, the computation of income has to be made in accordance with the other provisions of the Income-tax Act and, therefore, deduction u/s 32AB had to be accounted for before arriving at profit of business for the purpose of section 80HHC. It is only proportionate profits attributable to the business of export out of India of goods and merchandise which are eligible for deduction u/s 80HHC. The Legislature in its wisdom has thought it fit to extend benefit of deduction firstly by including such profit in the income as mentioned in clauses (iiia), (iiib) and (iiic) of section 28 with retrospective effect and later on by directly allocating 90 per cent. of such profit to the allowable deduction. Consequently, the Commissioner of Income-tax (Appeals) was right in allowing the appeal of the assessee by directing inclusion of income falling under clause (iiia), (iiib) or (iiic) of section 28 in computing profits and gains of business carried on by the assessee. The Tribunal was also right in affirming the finding of Commissioner of Income-tax (Appeals) in holding that the aforesaid four items are falling under the heads 'Profits and gains of business' and could not have been reduced from the profit of business on the ground that since they are not the income arising out of sale of goods, they are not to be included in the computation of income from business or profession for the purpose of computing deduction u/s 80HHC. Interest receipts from computation of business profit - There is no reason to reduce profit of business as computed under the head of profits and gains of business further by such amount of interest received by the assessee after adjusting deduction allowable u/s 32AB. We, therefore, find that the order of the Tribunal does not call for any interference. It may be noticed that this amount was directly related to credit earned by the assessee in respect of his export business on account of early payment of foreign exchange bills, hence was really part of income from business of export. Had the assessee been engaged in business of exporting goods and merchandise out of India, such amount have become part of income from such business only being incidental to such trade only. Accordingly, the appeal is dismissed and the Assessing Officer is directed to recompute the deduction allowable u/s 80HHC in the light of the aforesaid principles. Issues Involved:1. Interpretation of Section 80HHC of the Income-tax Act, 1961.2. Inclusion of various incomes in the computation of business profits for deduction under Section 80HHC.3. Treatment of interest income in the computation of business profits for deduction under Section 80HHC.4. Applicability of retrospective amendments to Section 28 of the Income-tax Act, 1961.Detailed Analysis:1. Interpretation of Section 80HHC:The core issue was whether the Tribunal correctly construed the provisions of Section 80HHC in computing profits and gains of business for granting deduction. The court noted that Section 80HHC was initially introduced by the Finance Act, 1983, and underwent several amendments to expand the scope and quantum of deductions. By the assessment year 1989-90, Section 80HHC allowed a deduction of the whole income derived from the export of goods or merchandise. The court emphasized that the essential condition for deduction under Section 80HHC was that the assessee must be engaged in the business of export out of India.2. Inclusion of Various Incomes:The court examined whether certain incomes, such as profits from the sale of import licenses, commission from the State Trading Corporation (STC), and processing charges, should be included in the business profits for the purpose of Section 80HHC. The court upheld the Commissioner of Income-tax (Appeals) and the Tribunal's decision that these incomes should be included in the business profits. The court reasoned that Section 28(iiia), (iiib), and (iiic) of the Income-tax Act, which were inserted retrospectively, mandated that these incomes be treated as profits and gains of business or profession.3. Treatment of Interest Income:The Tribunal had allowed the inclusion of interest income as part of business profits, which was contested by the Revenue. The court upheld the Tribunal's decision, noting that the interest income was directly related to the export business, particularly interest earned on early payment of foreign bills of exchange. The court found no reason to exclude this interest income from the computation of business profits for the purpose of Section 80HHC.4. Retrospective Amendments to Section 28:The court addressed the impact of retrospective amendments to Section 28, which included clauses (iiia), (iiib), and (iiic). These amendments, effective from various dates prior to the assessment year 1989-90, required that profits from the sale of import licenses, cash assistance, and customs or excise duty drawbacks be included in business profits. The court emphasized that these amendments must be considered while computing the profits and gains of business for the relevant assessment year.Conclusion:The court concluded that the Assessing Officer had erred in excluding certain incomes from the computation of business profits for the purpose of Section 80HHC. The court directed the Assessing Officer to recompute the deduction allowable under Section 80HHC in light of the principles outlined in the judgment. The appeal was dismissed, and no order as to costs was made.