Court clarifies Section 80HHC deductions: turnover limits, indirect costs crucial.

The appeal was partly allowed in favor of the assessee regarding the computation of deduction under Section 80HHC and the calculation of indirect costs for export of trading goods. The court held that "total turnover" should be restricted to the business of goods to which the section applies and that indirect costs must be attributable to the export activity. However, the Revenue succeeded in the exclusion of 90% of amounts written back from profits of the business under Explanation (baa) of Section 80HHC.

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Issues Involved:
1. Computation of deduction under Section 80HHC of the Income Tax Act.
2. Calculation of indirect costs for export of trading goods.
3. Exclusion of 90% of amounts written back from profits of the business under Explanation (baa) of Section 80HHC.

Issue-wise Detailed Analysis:

1. Computation of Deduction under Section 80HHC:
The primary issue was whether the deduction under Section 80HHC should be computed by considering the profits and turnover of only the export divisions or the entire business of the assessee. The ITAT had held that the term "total turnover" referred to the entire business, not just the export divisions. The Madras High Court in CIT v. Madras Motors Ltd. and this Court in Commissioner of Income Tax v. Padmini Technologies held that "total turnover" should be restricted to the business of goods to which the section applies, i.e., export goods. The ITAT's decision did not consider this Court's decision from 2011, leading to the reversal of the ITAT’s decision on this issue in favor of the assessee.

2. Calculation of Indirect Costs:
The second issue was whether indirect costs should include all costs or only those attributable to the export of trading goods. The AO had included all costs debited to the Profit and Loss account, which the ITAT upheld. However, the Supreme Court in Hero Exports v. Commissioner of Income Tax clarified that indirect costs must be attributable to the export of trading goods, implying a necessary nexus. Therefore, the ITAT's decision was reversed, holding that indirect costs must relate to the export activity.

3. Exclusion of 90% of Amounts Written Back:
The third issue involved the interpretation of Explanation (baa) to Section 80HHC, specifically whether amounts written back should be excluded from the "profits of the business." The ITAT held that these amounts fell under "any other receipt of similar nature" and should be excluded. The Supreme Court in Commissioner of Income Tax v. K. Ravindranathan Nair and ACG Associated Capsules (P) Ltd. v Commissioner of Income Tax established that such receipts, which are independent incomes not related to export turnover, should be excluded to avoid distortion in computing export profits. Thus, the ITAT’s decision was upheld, confirming that 90% of the written back liabilities should be excluded from the profits of the business.

Conclusion:
The appeal was partly allowed in favor of the assessee for issues (i) and (ii), while the Revenue succeeded on issue (iii). There was no order as to costs.

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