High Court rules in favor of revenue in income tax appeal, excludes Free Trade Zone turnover for Section 80HHC deduction.

The High Court ruled in favor of the revenue and against the assessee in an income tax appeal case. It held that for calculating the deduction under Section 80HHC, the turnover of the industrial undertaking in the Free Trade Zone, whose profits are exempt under Section 10A, should not be considered. The Court emphasized that deductions must be based on income included in the gross total income, as mandated by Section 80AB. The income tax department was instructed to act accordingly.

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Issues Involved:
1. Inclusion of NOIDA unit's export turnover for Section 80HHC deduction.
2. Treatment of NOIDA and Kanpur units as one business under Section 80HHC.
3. Calculation of Section 80HHC deduction by combining turnover and profit of both units.
4. Consideration of NOIDA unit's turnover and profit for Section 80HHC deduction despite Section 10A exclusion.

Issue-wise Detailed Analysis:

1. Inclusion of NOIDA unit's export turnover for Section 80HHC deduction:
The core issue was whether the export turnover of the NOIDA unit, which was excluded from the total income under Section 10A of the Income Tax Act, should be included for calculating the deduction under Section 80HHC. The Assessing Officer did not include the NOIDA unit's export turnover, arguing that only the income/profit included in the total income of the assessee could be considered for Section 80HHC deduction. The Income Tax Appellate Tribunal (ITAT) directed that the turnover of both units should be considered together. However, the High Court agreed with the revenue's argument, emphasizing that Section 80AB mandates that deductions under Chapter VI-A, including Section 80HHC, must be computed based on income included in the gross total income. Since the NOIDA unit's profits were exempt under Section 10A, its turnover should not be included for Section 80HHC deduction.

2. Treatment of NOIDA and Kanpur units as one business under Section 80HHC:
The ITAT had held that the business activities of the NOIDA and Kanpur units should be treated as one for the purpose of Section 80HHC deduction. The High Court, however, found that this approach was flawed because Section 10A specifically exempts the profits of the NOIDA unit from the total income. Consequently, treating the units as one business for Section 80HHC purposes would contradict the statutory provisions that govern the inclusion of income for deduction purposes.

3. Calculation of Section 80HHC deduction by combining turnover and profit of both units:
The ITAT had directed that the deduction under Section 80HHC should be worked out by taking the turnover and profit of both the Kanpur Head Office and NOIDA unit together. The High Court disagreed, holding that since the NOIDA unit's profits were exempt under Section 10A, its turnover should not be included in the calculation of Section 80HHC deductions. The Court emphasized that Section 80AB, which has an overriding effect, requires that deductions be computed based on income included in the gross total income.

4. Consideration of NOIDA unit's turnover and profit for Section 80HHC deduction despite Section 10A exclusion:
The assessee had argued that while the NOIDA unit's profits were excluded under Section 10A, its export turnover should still be considered for Section 80HHC deduction. The High Court rejected this argument, stating that including the NOIDA unit's turnover would be inconsistent with the statutory framework, particularly Section 80AB, which mandates that deductions be computed based on income included in the gross total income. The Court noted that the assessee itself had not included the NOIDA unit's profits for Section 80HHC calculation, which logically extended to excluding its turnover as well.

Conclusion:
The High Court allowed the income tax appeals, deciding all questions of law in favor of the revenue and against the assessee. The Court held that for calculating the deduction under Section 80HHC, the turnover of the industrial undertaking in the Free Trade Zone, whose profits and gains are exempt under Section 10A, should not be taken into consideration. The income tax department was directed to proceed accordingly.

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