Court excludes labour commission from business profits for deduction under 80HHC, rules for Department. Export reserves transferred to partners not taxable income. No breach in reserve transfer as no statutory reserve mandate. Appeal partly allowed.

The court held that labour commission/indenting commission was not includible in business profits for claiming deduction u/s 80HHC, ruling in favor of the Department. Regarding taxation of export reserves transferred to partners' capital account, the court agreed with the Tribunal that the transferred reserves were not taxable as income for the relevant assessment year. Emphasizing the absence of specific provisions mandating a permanent statutory reserve, the court found no breach in transferring reserves, distinguishing between sections 80HHC and 80HHD. The appeal was partly allowed with no order as to costs.

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Issues involved:
1. Entitlement to claim deduction u/s 80HHC on receipt of labour commission.
2. Taxation of export reserves withdrawn from business and transferred to partners' capital account.

Entitlement to claim deduction u/s 80HHC on receipt of labour commission:
The court held that labour commission/indenting commission was not includible in business profits for the purpose of claiming deduction u/s 80HHC. Citing a previous judgment, it was established that the issue was answered in favor of the Department and against the assessee.

Taxation of export reserves withdrawn from business and transferred to partners' capital account:
The assessee had created export reserves in previous assessment years, which were later transferred to the partners' capital account. The Assessing Officer taxed this amount as income for the relevant assessment year. The first appellate authority allowed the appeal, stating that there was no violation of the proviso to section 80HHC as the reserves were utilized for business purposes. However, the Tribunal dismissed the appeal, noting that the section had undergone changes and there was no provision for taxing the withdrawn reserves. The court agreed with the Tribunal, emphasizing that the section did not mandate a statutory reserve to be maintained permanently. The absence of specific provisions led to the conclusion that the transfer to the partners' capital account did not constitute a breach. The court highlighted the difference in treatment between section 80HHC and section 80HHD, where consequences of non-utilization of reserves were clearly defined. Ultimately, the court found no merit in the Department's argument and partly allowed the appeal, with no order as to costs.

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