Section 80HHC deduction follows the statutory proportional formula; separate export profits were not required under the pre-amendment regime.

Deduction under Section 80HHC for the relevant assessment year had to be computed under the then-applicable proportional formula, by applying the ratio of export turnover to total turnover to business profits. Separate and independently earned export profits were not a prerequisite where the statute itself prescribed the method of computation for a composite business. The later amended regime relied on by the High Court was materially different and did not control the assessment year in question, so denial of the deduction on the ground of absence of separate export profits was unsustainable.

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Issues: Whether, for the assessment year 1990-91, deduction under Section 80HHC of the Income-tax Act, 1961 could be denied merely because the assessee did not earn separate export profits, despite having export turnover and business profits.

Analysis: Section 80HHC falls within Chapter VI-A and operates subject to Section 80A. The provision grants deduction in respect of profits retained for export business, while sub-section (1) governs eligibility and sub-section (3) governs computation of quantum. For the relevant assessment year, the statutory formula applied the principle of proportionality, under which export profits were to be derived from business profits by reference to the ratio of export turnover to total turnover. In a case of composite business, the formula does not require that export business must itself generate independent profits; rather, the deduction is computed on the basis of the prescribed proportion of overall business profits. The Court also noted that the later decision relied upon by the High Court concerned a materially different amended statutory regime and was not controlling for the assessment year in question.

Conclusion: The assessee was entitled to deduction under Section 80HHC on the proportional formula applicable for the relevant year, and the denial of deduction by the High Court was unsustainable.

Ratio Decidendi: For the pre-amendment regime applicable to the relevant assessment year, deduction under Section 80HHC was to be computed on a proportionate basis from business profits by applying the ratio of export turnover to total turnover, and separate export profits were not a prerequisite where the statutory formula itself governed quantum.

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