By TIOL News Service

NEW DELHI, DEC 12, 2015: THE issue is - Whether Sec 80IA(9) mandates that profits allowed as deduction u/s 80IA have to be reduced from profits of undertaking while computing deduction under any another provisions under heading C in Chapter VIA. Matter referred to Larger Bench.

Facts of the case

The assessee, Micro Labs Ltd., is having several industrial units having different activities or different businesses. The Assessee being also in the business of export, had also claimed and was allowed deduction under Section 80HHC. In spite of the fact that the Assessee had claimed deduction in respect of the provisions of Section 80-IB, the Assessee had also claimed deduction under Section 80HHC with respect to the same profits. AO had allowed deductions u/s 80HHC without considering the fact that the Assessee had also claimed and was allowed deduction under the provisions of Section 80-IB. Thus, the CIT, exercising his power u/s 263 observed that AO was not correct in allowing deductions u/s 80-IB as well as u/s 80HHC and therefore, directed the AO to revise the assessment order. The said order passed by CIT had been challenged by the Assessee before the Tribunal and the Tribunal had dismissed the appeal and therefore, the Assessee had filed an appeal before the High Court which has been allowed. The question which had to be considered by the Tribunal as well as by the High Court was whether, while considering the deduction under the provisions of Section 80-IA or/and 80-IB, the assessee is also entitled to the deduction in respect of the profits and gains under the provisions of Section 80HHC or whether the assessee is entitled to deductions under the aforestated all the three Sections in respect of the same profits. Upon perusal of the aforestated Sections and looking at the facts of the case, the Tribunal concluded that the assessee was not entitled to deductions u/s 80HHC and 80-IB but the HC did not agree with the said conclusion arrived at by the Tribunal and decided in favour of the assessee to the effect that though the assessee had claimed and was allowed deductions u/s 80HHC, it was also entitled to deductions under the provisions of Section 80-IB in respect of the same profits. On this subject, different views have been taken by different High Courts and therefore, this appeal had been admitted. The High Court of Bombay has decided cases in favour of the Assessee whereas a different view has been taken by the High Court of Delhi.

The First member of the SC Division Bench held that,

++ the High Court of Karnataka is not right when it decided to allow deductions in respect of same profits under Section 80HHC as well as under Section 80-IA or Section 80-IB. One can very well see from the provisions of Section 80-IA(9) that if an Assessee is engaged in infrastructure development as well as in the export business, he cannot claim deduction of his entire profits and gains under the provisions of Section 80HHC as well as under Section 80-IA or/and Section 80-IB. Section 80-IA(9) is quite unambiguous, which clearly provides that if an assessee claims any deduction under the provisions of Section 80-IA, then the assessee cannot claim deduction to the extent of such profits and gains under heading 'C' of Chapter VIA of the Act, which, in the present case, was claimed and wrongly allowed to the Assessee. Section 80HHC, which pertains to deduction in respect of profits and gains from export business, is included under heading 'C', of Chapter VIA of the Act. If an assessee claims and is allowed any deduction under Section 80HHC, then to the extent to which deduction has been granted to him under Section 80-IA or/and 80-IB, he cannot be allowed further deduction under Section 80HHC. The language is not only very clear, but is also absolutely unambiguous. Admittedly, AO had allowed deductions not only under Section 80HHC but also under Section 80-IB in respect of the entire profits and gains of the business of the Assessee. In the opinion of the Commissioner, it was not proper and therefore, he had taken the matter in revision under Section 263. He, ultimately, directed the Assessing Officer to re-assess the income in the light of the observations made in the order passed under Section 263 of the Act and the said order passed by the Commissioner had also been confirmed by the Tribunal. However, the order of the Tribunal, when challenged before the High Court, was quashed and set aside;

++ in the instant case, I also find that the intention of the legislature is very clear to the effect that if an assessee claims any deduction under the provisions of Sections 80-IA or/and 80-IB, he cannot claim deduction to the extent to such profits and gains which had been claimed and allowed under the provisions of Section 80HHC of the Act, because Section 80HHC is included in heading 'C' of Chapter VIA. In my opinion, the High Court was in error while permitting the Assessee to get benefit in respect of Section 80HHC as it did not take into account the fact that the profits in respect of which deduction was allowed under Section 80HHC had also been previously allowed under Section 80-IB. In my opinion, this is not permissible under Section 80-IB(13) read with Section 80-IA(9) because by virtue of Section 80-IB(13) provisions of Section 80-IA(9) are also applicable to Section 80-IB. For the aforestated reasons, I am not in agreement with the view expressed by the High Court and therefore, I decide the appeals in favour of the Revenue by holding that the Assessee who had claimed and had been allowed deductions in respect of profits under Section 80-IB, could not have been allowed deductions in respect of the same profits under Section 80HHC. Other issues, though referred to in the memo of appeals, had not been pressed seriously and therefore, I am not deciding the same by keeping the said issues open. The appeals, thus, stand disposed of as allowed in favour of the Revenue with no order as to costs.

Revenue's appeal allowed

The Second member of the SC Division Bench held that,

++ in this case, the assessee has made profits which are eligible and on which deduction is to be allowed under Sections 80HHC and 80IA. Two other aspects need to be noticed. In Jeyar Consultant and Investment Private Limited, the Court was dealing with the Assessment Year 1989-90 and sub-section (3) to Section 80HHC as it then existed and was applicable. The said sub-section had underwent substitution by Finance (No.1) Act, 1990 with effect from 1st April, 1991 and then again by Finance (No.2) Act, 1991 with effect from 1st April 1992. The first substitution may not be of material relevance for it was specified that the profits derived from exports were to be worked out in the same proportion with the sale proceeds received in, or brought into India in convertible foreign exchange bear to the total sale proceeds of such goods or merchandise. However, the amendments made by Finance (No.2) Act, 1991 with effect from Assessment Year 1992-93 are substantial as the new provisions provides a detailed mechanism for computing profits from exports from trading goods and in case of mixed activity of manufacturing and trading. Sub-section(3) to Section 80HHC as enacted by the Finance (No.2) Act, 1991 and further amendments has been quoted in paragraph 15 above. It may be noted that the second, third and fourth provisos to Section 80HHC(3) were inserted by Taxation Laws (Amendment) Act, 2005 with retrospective effect from 1st April, 1998. The fifth proviso was inserted by Taxation Laws (Amendment) Act, 2005 with retrospective effect from 1st April, 1992. Explanation to sub-section (3) would indicate that it defines different terms including "direct" and "indirect cost", "trading goods", "adjusted export turnover" and "adjusted profits of the business";

++ the expression "profits of the business" as defined in clause (baa) of the Explanation to Section 80HHC was interpreted by the Court in ACG Associated Capsules Private Limited v. Commissioner of Income Tax, Central-IV, Mumbai 2012-TIOL-13-SC-IT-LB. Referring to CIT v. K. Ravindranathan Nair 2007-TIOL-202-SC-IT, it was observed that processing charges received by the assessee were held to be business turnover and included in profits and gains of business. As per Explanation (baa) it was observed that 90% of this income would have to be deducted. However, in Ravindranathan Nair the Court was not deciding whether 90% of the deduction was to be made from gross or net income. Earlier decision in Topman Exports v CIT 2012-TIOL-11-SC-IT-LB holds that not the entire amount on sale of DEPB, but the sale value less the face value will represent profit under Section 28(iii-d) and accordingly deduction under Section 80HHC should be computed. The second aspect to be noticed is that in Jeyar Consultant and Investment Private Limited reference was made to IPCA Laboratories Limited and A.M. Moosa and it was noticed that in the said cases, the Court was concerned with two business activities both of which related to exports, one from export of self manufactured/processed goods and other from trading in goods. In other words, the Court was concerned only with income from exports and there was no domestic or in India turnover. In view of the aforesaid analysis, I am of the considered opinion that the interpretation placed by the High Court of Bombay is correct and, accordingly, I dismiss the appeals preferred by the revenue and allow the appeals preferred by the assessees. There shall be no order as to costs.

(See 2015-TIOL-296-SC-IT)