s.80HHC covers trading and manufactured exports; commission for procuring export contracts qualifies when exporter earns profit

SC allowed the appeal and set aside the High Court judgment, holding that s.80HHC was enacted to incentivize export houses and must be liberally construed once applicability is established. The phrase "income arising out of business of export" includes export of trading goods as well as manufactured or processed goods, and Parliament intended the incentive where a positive profit is earned by an exporter. Consequently the deduction in dispute (commission/brokerage for procuring export contracts) falls within s.80HHC.

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Issues Involved:
1. Whether the assessee is entitled to deduction under section 80HHC of the Income-tax Act despite incurring a loss in the export business.
2. Whether commission and brokerage for procuring export contracts for other exporters qualify as export profits under section 80HHC of the Act.

Detailed Analysis:

Issue 1: Entitlement to Deduction under Section 80HHC Despite Export Business Loss

The appellant, engaged in the export business and earning commission from procuring export contracts for others, claimed a deduction under section 80HHC of the Income-tax Act for the assessment year 1990-91. The Assessing Officer disallowed the exemption, citing a loss in the export business. The Commissioner of Income-tax (Appeals) upheld this decision. However, the Income-tax Appellate Tribunal (ITAT) ruled in favor of the appellant, stating that the commission received should be considered for deduction purposes. The High Court later reversed this decision, stating that the income from commission/brokerage is not eligible for exemption under section 80HHC.

The Supreme Court examined the relevant provisions of section 80HHC, emphasizing that the term "business of export" includes both the export of goods and trading of goods. The court highlighted the Central Board of Direct Taxes (CBDT) circular No. 621, which clarified that the amendment to section 80HHC, effective from April 1, 1992, was prospective and not retrospective. The court concluded that the High Court erred in applying the amendment retrospectively and that the appellant was entitled to the deduction under section 80HHC despite the export business loss.

Issue 2: Commission and Brokerage as Export Profits under Section 80HHC

The appellant argued that the commission earned from procuring export contracts should be considered part of the export business and thus eligible for deduction under section 80HHC. The respondent contended that such income did not qualify for exemption as it only received statutory recognition with the 1992 amendment.

The Supreme Court analyzed sub-sections (1) and (3) of section 80HHC, noting that the provision applies to assessees engaged in the export business, including trading of goods. The court referred to the CBDT circular, which stated that profits of the business for section 80HHC would not include receipts like commission or brokerage. However, it provided for a 10% deduction from such incomes to account for expenses.

The court concluded that the amendment was intended to curtail the area of exemption rather than widen it. Therefore, income derived from commission/brokerage should be considered for computing profit or loss for deduction purposes under section 80HHC. The court cited previous judgments, including ITO v. Induflex Products P. Ltd. and a Special Bench decision of the ITAT in International Research Park Laboratories Ltd. v. Asst. CIT, which supported the inclusion of commission income in export profits.

The Supreme Court held that the High Court's judgment could not be sustained and set it aside, allowing the appeal and ruling that the appellant was entitled to the deduction under section 80HHC for the commission earned from procuring export contracts. The parties were directed to bear their own costs.

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