In a recent case, Supreme Court has held that in case of a loss in export business, the assessee would not be entitled to deduction under section 80HHC(3) of Income Tax Act, 1961.

Case Details:
Civil Appeal No. 8912/2003
Jeyar Consultant & investment Pvt. Ltd. .......Appellant(s)
Commissioner of Income Tax, Madras ........Respondent(s)
Date of Order- 01-04-2015
Coram- J. A. K. Sikri; Rohinton Fali Nariman

Case Law Referred:
IPCA Laboratory Ltd. v. Deputy Commissioner of Income Tax, Mumbai (2004) 12 SCC 742
A.M. Moosa v. Commissioner of Income Tax, Trivandrum (2007) 9 SCR 831

Facts of the Case:
The appellant company was engaged in the business of export of Marine products and also financial consultancy and trading in equity shares and thus its total business did not consist purely of exports and was covered by Section 80HHC(3)(b) of Income tax Act, 1961.

The Assessing Officer, for Assessment Year 1989-90, noticed that appellant had suffered loss from the export business and as per Section 80AB, the deduction under Section 80HHC could not exceed the amount of income included in the total income. The appellant contended that the formula applied by the Assessing Officer was different from formula prescribed under Section 80HHC and it was also in direct violation of CBDT Circular dated 05-07-1990. However both ITAT and Madras High Court dismissed the appeal holding against the assessee appellant.

The appellant argued that the term “profit of business” would not confine to profit from export business but income both from export business as well as from domestic business, had to be taken into Consideration for computing deduction under 80HHC(1) to which he is entitled.

Question of Law:
Thus the question before the supreme Court was to determine the correct method of computation of deductions under Section 80HHC(3) of the Income Tax Act, 1961, in the given facts and circumstances.

Excerpts from the Judgment:

It stands settled, on the co-joint reading of IPCA and A.M. Moosa, that where there are losses in the export of one type of goods (for example self-manufactured goods) and profits from the export of other type of goods (for example trading goods) then both are to be clubbed together to arrive at net-profits or losses for the purpose of applying the provisions of Section 80HHC of the Act. If the net result was loss from the export business, then the deduction under the aforesaid Act is not permissible. As a fortiori, if there is net profit from the export business, after adjusting the losses from one type of export business from other type of export business, the benefit of the said provision would be granted.

It is also to be borne in mind that in both the aforesaid cases namely IPCA and A.M. Moosa, the Court was concerned with two business activities, both of which related to export, one from export of self manufactured goods and other in respect of trading goods i.e. those which are manufactured by others. In other words, the Court was concerned only with the income from exports. In the present case, however, the fact situation is somewhat different.

Therefore, in the first instance, it has to be satisfied that there are profits from the export business. That is the pre-requisite as held in IPCA and A.M. Moosa as well.

Subsection (3) comes into picture only for the purpose of computation of deduction. For such an eventuality, while computing the “total turnover”, one may apply the formula stated in clause (b) of subsection (3) of Section 80HHC. However, that would not mean that even if there are losses in the export business but the profits in respect of business carried out within India are more than the export losses, benefit under Section 80HHC would still be available. In the present case, since there are losses in the export business, question of providing deduction under Section 80HHC does not arise and as a consequence, there is no question of computation of any such deduction in the manner provided under sub-section (3).

Download Full Judgment Click Here >>