2015 (4) TMI 1108 - HC - Income Tax

Court rules in favor of taxpayer, allows full deduction based on gross total income.

The court held that the Assessing Officer was not justified in restricting the deduction under Section 80HHC to Rs. 17,40,33,719/- and ruled that the ... Deduction allowable under Section 80HHC - determination of profit - Held that:- Part C of Chapter VI-A of the said Act provides for deductions in respect of the certain income and one of such Sections which fall within the said part is Section 80HHC which provides for deductions in respect of the profits determinable by the assessee from the export of goods or merchandise. Sub Section (1) of Section 80HHC as it stood then provides that the profit that an assesse Indian company engaged in the business of export of any goods or merchandise to which this section applies, there shall, in accordance with and subject to provisions of Section, a deduction of the profits derived by the assessee from such export of goods or merchandise be allowed in computing the total income of the assessee. Sub- section (3) sets out the manner in which the profits derived from export business of the goods or merchandise is to be determined. In the present case, the respondent by applying the methodology as provided in Section 80HHC(3) has determined the profits derived from the export of goods or merchandise as far as the appellant is concerned to be a sum of ₹ 19,92,39,981/-. Once the respondents themselves have arrived at the said figure after applying the methodology as provided in Section 80HHC(3) of the said Act, such amount of deduction has to be allowed. But however, taking note of the provisions of Section 80A(2) referred to herein above, such deduction has to be restricted to the gross total income which in the present case is a sum of ₹ 19,78,94,900/-. But however, the respondents have restricted the said deduction only to ₹ 17,40,33,719/- by relying upon the provisions of Section 80AB. However, we find that once the income has been determined by applying the methodology as provided in Section 80HHC(3) of the said Act, the question of restricting the deduction in terms of Section 80AB of the said Act would not arise. This is so in terms of Section 80AB of the Act, as the appellant is claiming deductions on its export profits alone, which is included in computing its gross total income. Section 80HHC (3) was introduced when the provisions of Section 80AB were already on the statute. Even upon reading the provisions of Section 80AB of the said Act, the determination of the amount as provided therein would have to be effected for the purpose of computing the deductions under each of the respective sections specified in Part C of the said Act. As such, while computing the deduction under Sections 80HHB, 80HHC, 80HHD, 80I, 80IB, 80IA, 80IB etc., one would have to apply Section 80AB of the said Act. On perusal of Annexure A, we find that the deduction under Section 80HHC to which the appellant was entitled has been arrived at a sum of ₹ 19,92,49,981/- by the respondents themselves. In terms of Section 80AB(2), the restriction of the deduction is to the gross total income and in such circumstances, the restriction to the total profit of business in a sum of ₹ 17,40,33,719/- is not at all justified. The restriction is on the gross total income of ₹ 19,78,94,900/- and as such we find that the restriction effected by the Assessing Officer on the deduction is not at all justified. Issues Involved1. Whether the Assessing Officer was justified in restricting the deduction under Section 80HHC of the Income Tax Act.2. Whether the deduction allowable under Section 80HHC should be restricted to the extent of business profits or gross total income.Detailed AnalysisIssue 1: Restriction of Deduction by the Assessing OfficerThe primary issue was whether the Assessing Officer was justified in restricting the deduction under Section 80HHC to Rs. 17,40,33,719/- instead of the computed amount of Rs. 19,92,39,981/-. The appellant argued that the deduction should be allowed as computed, pointing out that the appellant is engaged in the export of processed iron ore. The Assessing Officer had determined the income chargeable under different heads, including 'Profits and gains of business or profession' and 'Income from other sources.' The gross total income was computed as Rs. 19,78,94,900/-. The appellant was entitled to deductions under Section 80I and Section 80HHC, but the Assessing Officer restricted the deduction under Section 80HHC to Rs. 17,40,33,719/-.The appellant contested this restriction, arguing that the deduction should be based on the gross total income, not just the business profits. The Commissioner of Income Tax (Appeals) and the Tribunal upheld the Assessing Officer's decision, relying on the judgment of the Supreme Court in Ipca Laboratory Ltd. v. Deputy CIT and the Andhra Pradesh High Court in CIT v. Visakha Industries Ltd.Issue 2: Extent of Deduction Allowable Under Section 80HHCThe appellant argued that the deduction under Section 80HHC should be allowed to the extent of the gross total income, not just the business profits. The appellant's counsel pointed out that the methodology provided in Section 80HHC(3) determined the profits derived from the export of goods at Rs. 19,92,49,981/-. However, the deduction was restricted to Rs. 17,40,33,719/- by applying Section 80AB, which the appellant contended was erroneous.The respondent's counsel supported the restriction, arguing that the deductions should be restricted to the profits and gains of the business, as specified in the provisions of the Act. The Tribunal held that the deduction should be restricted to the profits and gains of the export business, not the gross total income.Court's AnalysisThe court examined the relevant provisions of the Income Tax Act, including Section 80A, Section 80AB, and Section 80B(5). Section 80A(2) provides that the aggregate amount of deductions under Chapter VI-A shall not exceed the gross total income. Section 80AB specifies that the amount of income for computing the deduction should be as computed in accordance with the provisions of the Act before making any deduction under this Chapter.The court noted that once the income is determined by applying the methodology in Section 80HHC(3), the question of restricting the deduction under Section 80AB does not arise. The court emphasized that the deduction should be based on the gross total income, as defined in Section 80B(5), and not restricted to business profits.Precedents CitedThe court referred to several judgments, including:- CIT v. Tridoss Laboratories Ltd., where it was held that the cap for deduction is the gross total income.- CIT v. Eskay Knit India Ltd., which reiterated that the deduction should be based on the gross total income.- CIT v. J. B. Boda and Co. Pvt. Ltd., which supported the view that the gross total income includes all income computed in accordance with the provisions of the Act.ConclusionThe court concluded that the Assessing Officer was not justified in restricting the deduction to Rs. 17,40,33,719/-. The deduction should be based on the gross total income of Rs. 19,78,94,900/-. Both substantial questions of law were answered in favor of the appellant, and the impugned orders were modified accordingly. The appeal was disposed of with no order as to costs.