Section 80HHC of income tax Act -when not applies - when the assessment admittedly had not earned any profits from the export of the Marine products. and On the other hand, when it had suffered a loss. - The deduction permissible under Section 80HHC is only a deduction of the profits of the assessee from the export of the goods or merchandise. - By the very terms of Section 80HHC, it is clear that the assessee was not entitled to any benefit thereunder in the absence of any profits. - 2015 SC msklawreports



What is the correct method  of  computation  of  deductions
under Section 80HHC(3) of the Income Tax Act, 1961, in the given  facts  and
circumstances,
 Finance Act of 1983 introduced Section 80HHC of the  Income
Tax Act, providing  incentives  to  exporters  and  deductions  for  persons
involved in the export business.
Section 80HHC(3)(b) provided  the  formula
for the computation of deduction  for  persons  who  do  not  have  business
exclusively of export out of India, that is  to  say,  in  cases  where  the
assessee is having turnover and income from  business in India  as  well  as
from the export business.
 On 05.07.1990,  the  Central  Board  of  Direct  Taxes  (CBDT)  issued
Circular No.564 dated 05.07.1990 giving detailed guidelines as  to  how  the
deductions  under  Section  80HHC  are  to  be  calculated.  
 The   formula prescribed by CBDT circular is as follows:
|Profit of the       |X   |Export Turnover     |
|Business            |    |                    |
|                    |    |Total Turnover      |


the Assessing Officer passed fresh order  dated  28.05.1992
giving effect to the orders of the  ITAT.  
While  giving  the  effect,  the
Assessing Officer found that the appellant had not earned any  profits  from
the export of Marine products and in fact, from the  said  export  business,
it had suffered a loss.
Therefore, according to the Assessing  Officer,  as
per Section 80AB, the deduction under Section 80HHC  could  not  exceed  the
amount of income included in the total income.
He found that as the  income
from export of Marine product business was in the negative i.e. there was  a
loss, the deduction  under  Section  80HHC  would  be  nil,  even  when  the
assessee is entitled to deduction  under  the  said  provision.

 "Whether on the facts and  in  the  circumstances  of  the  case,  the
Tribunal was right in law in holding that the deduction  admissible  to  the
assessee under Section 80HHC is nil?"


  The High Court has now pronounced on the aforesaid  question  referred
to it by the impugned judgment  dated  20.08.2002  answering  this  question
against the assessee holding as under:
      "5.  In this case,  the  assessment  admittedly  had  not  earned  any
profits from the export of the Marine products.  On the other hand,  it  had
suffered a loss.  The deduction permissible under Section 80HHC  is  only  a
deduction of the profits of the assessee from the export  of  the  goods  or
merchandise.  By the very terms of Section  80HHC,  it  is  clear  that  the
assessee was not entitled to any benefit thereunder in the  absence  of  any
profits.

            The question referred to us therefore is  answered  against  the
assessee and in favour of the revenue."
Apex court held that

Therefore, we are of the opinion that  the  view  taken  by  the  High
Court is correct on the facts of this case. With  this,  there  may  not  be
need to  answer  the  second  facet  of  the  problem  as  the  question  of
computation of deduction does not arise. However, we find  that  even  here,
the approach of the ITAT is correct.
   In the present case, the domestic income in respect of  which  benefit
is sought is from dividend  income,  interest  income,  profit  or  sale  of
shares and fees received from arranging finance for the assessee's  clients.
 The Tribunal has recorded this aspect as under:
      13.  It is, however, seen from the assessee's Profit  &  Loss  Account
for the year of account ending on  31.03.1989  that  the  aggregate  sum  of
Rs.26,04,477 (which the assessee has labeled as  total  turnover)  comprised
not only export turnover of Rs.16,67,084 but also the following items  which
cannot properly be regarded as turnover:

|(1)  |Brokerage received for arranging  |:|Rs.8,50,321|
|     |Finance for the assessee's claims | |           |
|(2)  |Dividend                          |:|Rs.        |
|     |                                  | |5,247      |
|(3)  |Interest                          |:|Rs.        |
|     |                                  | |7,212      |
|(4)  |Profit on sale of shares          |:|Rs.        |
|     |                                  | |74,913     |
|     |                                  | |Rs.9,37,693|

The  Tribunal  observed  that  aforesaid  four   items   are   income
simplicitor and cannot  be  covered  by  the  expression  "total  turnover".
Following discussion of the Tribunal in this behalf needs to be quoted:

       "17.   Now  the  mode  and  mechanics  of  computing  the   deduction
admissible  to  an  assessee  falling  under  Section  80HHC(3)(b)   clearly
proceeds on the basis that in trading transactions profit, or, as  the  case
may be, loss is embedded  in  the  gross  turnover.   The  most  significant
conclusion that flows from the said provision is that when Section  80HHC(3)
talks of turnover, it talks of trading receipts and not  of  receipts  which
are of the nature of income to start with.   It  should,  therefore,  follow
that the  aggregate  sum  of  Rs.9,37,693/-  referred  to  supra  cannot  be
regarded as turnover, and that by the same token, it should be left  out  of
reckoning for purposes of computing deduction  admissible  to  the  assessee
under Section 80HHC.  If this exercise is done, we are back  to  Proposition
No.1.  This would mean that the deduction admissible to the  assessee  under
Section 80HHC would be nil, especially in view of the fact that  the  export
business of the assessee has resulted in a loss.

                          xx          xx         xx

 But a manufacturer may not invariably  be  able  to  export,  in  their
entirety, the goods or merchandise manufactured.  He may export  a  part  of
them and sell the rest in India.  Given the paramount need  to  give  fillip
to exports, Parliament clearly intended that the benefit  of  Section  80HHC
should not be denied in such cases.  But the difficulty  in  such  cases  is
that  the  profits  attributable  to  exports  cannot  be   ascertain   with
precision.  This is because not only the manufacturing activities  but  also
the selling activities (including the  activities  connected  with  exports)
from a continuous, integrated whole.  Even so, the intention of  Parliament,
was to extend the benefit of Section 80HHC to  the  extent  of  the  profits
generated by exports.  With this end  in  view,  Parliament  incorporated  a
rule of thumb in Section 80HHC(3)(b).  As long as the assessee  has  cleared
profits in a particular year of account,  export  profits  are  computed  by
applying to total profits the ratio which export  turnover  bears  to  total
turnover."
We  are  in  agreement  with  the  aforesaid  view  of  the  Tribunal.
Therefore, even otherwise, the formula  as  sought  to  be  applied  by  the
appellant does not become applicable on the facts of this case.
Thus, from every angle the matter is to be  looked  into,  the  appeal
lacks merit.  Same is, accordingly, dismissed with costs. - 2015 SC msklawreports

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