[Modyset P. Ltd. vs. CIT (2008) 305 ITR 276 (SC)].
The asessee, a limited company, purchased 105 computers for
Rs.90,91,063. It exported them and realised export sales of Rs.90,91,063.
There was no export profit during the relevant assessment year 1990-91. The
Income-tax Officer allowed the claim of deduction under Section 80HHC at
Rs.15,81,389 as the total business income of the assessee stood at
Rs.55,31,941 by applying the ratio in terms of Section 80HH(3)(b) as follows :
Export Profits = 90,91,063 x 55,31,941
3,18,01,941
The Commissioner of Income-tax revised the aforesaid
assessment order in exercise of his powers under Section 263 denying the
deduction under Section 80 HHC, holding that Section 80 HHC confers the
benefit only on those assessees who have not only carried on the export
business, but who have also derived profits on such business. On an appeal,
the Tribunal allowed the assessee’s appeal following the decision of its Delhi
Special Bench in International Research Park Laboratories Ltd. vs. Asst.
CIT [(1995) 212 ITR (AT) 1], in which it was held that profits need not be
earned in the export business alone to claim special deduction under Section
80 HHC. On a reference by the Revenue, the Karnataka High Court following the
decision of the Supreme Court in Ipca Laboratory Ltd. vs. Dy CIT
[(2004) 266 ITR 521] held that since the assessee had not earned profits from
export sales during the year in question, the assessee was not entitled for
deduction under Section 80 HHC. On an appeal to the Supreme Court by the
assessee, it was held that the eligibility for deduction is contemplated by
Section 80 HHC(1), whereas the quantum of deduction is determined under
Section 80 HHC(3). In the matter of determining the quantum of deduction, the
‘principle of proportionality’ applied. There are two situations which are
covered by Section 80HHC (3), namely, turnover only from export sales and
secondly turnover from composite sales (domestic and export business). In both
cases the formula applied as under :
Section 80 HHC concession = export profit =
Profits of business x Export turnover
Total turnover
The Supreme Court on facts held that the calculation had
been correctly done by the Income-tax Officer. The Supreme Court further held
that the High Court had erred in relying upon the judgment in case of Ipaca
Laboratories Ltd., inasmuch as the provisions as applicable in that case were
for the assessment year 1996-97 which were different from the provisions for
the assessment year 1990-91 with which it was concerned and that for the
relevant assessment year the CBDT Circular No. 564 indicated that Section
80HHC (3) statutorily fixes the quantum of deduction on the basis of a
proportion of business profits under the head ‘Profits and gains of business
or profession’, irrespective of what could strictly be described as profits
derived from export of goods out of India. According to the Supreme Court, the
Circular supported its above reasoning. The Supreme Court however, clarified
that the above reasoning was strictly applicable to the law as it stood during
the relevant assessment year.
