2008 (5) TMI 285 - SC - Income Tax

Whether in the facts and circumstances of the case the Tribunal was right in holding that the deduction under s. 80HHC in respect of duty drawback and cash compensatory support is allowable even though no export was done by the assessee during the asst. yr. 1991-92? Held that - The formula as indicated in s. 80HHC(3) itself shows that business profits include export incentives. This formula is also indicated in the circular issued by CBDT indicates that the Parliament as well as CBDT have taken into account the insertion of cl. (iiib) in s. 28 by the Finance Act 1990. Further it is also relevant to note that by the same Finance Act 1990 cl. (iiib) was inserted into s. 28 and changes were also made in s. 80HHC(3). Therefore s. 80HHC as it stood at the relevant time was required to be read with s. 28(iiib) because both the sections have been amended by the same Finance Act of 1990. This vital aspect has not at all been considered by the High Court. Thus the words business profits in the above formula under s 80HHC(3) would include cash compensatory allowance and duty drawback and accordingly we direct the AO to work out the deduction in accordance with the law as it stood during the relevant asst. yr. 1991-92. Appeal allowed of assessee.

Summary

Issues:
Determining the eligibility of deduction under s. 80HHC for duty drawback and cash compensatory support without actual exports during the relevant assessment year.

Analysis:
The case involved a dispute regarding the eligibility of income for deduction under s. 80HHC of the IT Act, 1961, in relation to duty drawback and cash compensatory support received by the appellant during the accounting year ending March 31, 1991, despite no exports made during the assessment year 1991-92. The appellant, engaged in the export business, received inward remittances and export incentives in the previous year. The Assessing Officer (AO) contended that since no export sales were made during the relevant assessment year, the duty drawback and cash compensatory allowance did not qualify for deduction under s. 80HHC.

The CIT(A) and the Tribunal upheld the appellant's claim for deduction based on the formula mentioned in s. 80HHC(3) and CBDT Circulars, which stated that export incentives should be included in business profits for computing the deduction under s. 80HHC. The High Court, however, overturned the Tribunal's decision, stating that since there were no exports during the assessment year, the amounts received did not constitute eligible income for deduction under s. 80HHC.

The Supreme Court analyzed the relevant provisions of the Finance Act, 1990, which clarified that cash compensatory support and duty drawback are taxable under s. 28 of the IT Act. The Court noted that the circular issued by CBDT explicitly stated that export incentives, including cash compensatory support and duty drawback, should be considered in computing the deduction under s. 80HHC. The Court emphasized that the formula in s. 80HHC(3) clearly indicated that business profits include export incentives.

Consequently, the Court held that the duty drawback and cash compensatory support should be considered as part of business profits for the purpose of deduction under s. 80HHC, directing the AO to calculate the deduction in accordance with the law applicable during the relevant assessment year. The Court ruled in favor of the appellant, allowing the Civil Appeal with no order as to costs.