1

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 5475        OF 2008 (Arising out of SLP(C) No. 7323 of 2007)

M/s. Mysodet (P) Ltd. .... Appellant

Versus

Commissioner of Income Tax, Bangalore .... Respondent

O R D E R

1. Leave granted.

2. This Civil  Appeal is  directed against  the  judgment  and order dated 18th

April,  2006 delivered by Karnataka High Court in I.T.R.C. No. 901 of 1998.

3. The  assessee  is  a  limited  company.   It  purchased  105  computers  for

Rs.90,91,063/-.  It exported them and realized export sales of Rs.90,91,063/-.  There were

no  profits  during  that  relevant  Assessment  Year  on  the  export  sales.   The  relevant

Assessment Year is AY 1990-91.  The I.T.O. allowed the claim of deduction under Section

80HHC at Rs.15,81,389/-.  It may be noted that according to the calculations made by the

I.T.O. the business income stood at Rs.55,31,941/- to which the I.T.O. applied the ratio in

terms of Section 80HHC(3)(b).   Applying that  ratio the  export profits  worked out to

Rs.15,81,389/-.  The formula adopted was as follows :-

Export Profits= 90,91,063    x 55,31,941        3,18,01,941

4. Aggrieved by the  decision of  the  I.T.O. the  Department  went  in revision.

The Revisional Authority  and the Tribunal accepted the contention advanced on behalf

2

of the Department.  The revision was under Section 263 of the Income Tax Act.  It was

held that Section 80HHC (1) refers to profits derived from the export business and it is

with reference to such profits that deduction under Section 80HHC is to be computed.

According  to  the  Commissioner  Section  80HHC  confers  the  benefit  only  on  those

assessees who have not only carried the export business but who have also derived profits

from  such  business.   According  to  the  Commissioner  Section  80HHC  (3)(b)  is  a

machinery provision which  enables  the  AO to  compute  profits  from export  business

particularly when the income of the assessee accrues from composite business of domestic

and export sales.  For the above reasons the order of the I.T.O. in favour of the assessee

was set aside by the Commissioner against which the assessee carried the matter in appeal

to the Tribunal.  The Tribunal took the view that in view of the decision of I.T.A.T., Delhi

Branch (Special Bench) in the case of International Research Park Laboratories Ltd. Vs.

ACIT (212 ITR, Page 1) profits need not be earned in the export business alone to claim

special deduction under Section 80HHC.  Accordingly, in this case I.T.A.T. allowed the

assessee's appeal and restored the order of the I.T.O.  giving deduction to the assessee.

Aggrieved by the decision of the I.T.A.T. the matter was carried by way of Reference

under Section 256 (2) of 1961 Act to the Karnataka High Court which took the view that

in  view of  the  decision  of  the  Supreme  Court  in  IPCA Laboratory Ltd. Vs.  Deputy

Commissioner of Income-Tax reported in 266 ITR , Page 521 since the assessee had not

earned profits from export sales during the year in question, the assessee was not entitled

to deduction under Section 80HHC.  Accordingly, the Department's appeal came to be

allowed.  Hence, this Civil Appeal by the assessee.  

5. At the outset it may be stated that Section 80HHC falls under Chapter VI-A

which refers to deductions to be made in computing total income.  Under Section 80A it is

3

inter alia provided that in computing total income of an assessee, there shall be allowed

from his gross total income deductions specified in Section 80C to 80U.  It is  further

provided that the aggregate amount of deductions under Chapter VI-A shall not exceed

the  gross  total  income  of  the  assessee.   In our opinion,  Section  80A  governs Section

80HHC which deals with deductions in respect of profits retained for export business.  At

this stage we may also note that the head note to Section 80HHC refers to deduction in

respect  of  profits  retained  for export business.   It is  not  profits  retained from export

business.  Moreover, prior to 1.4.86 Section 80HHC referred to deduction in respect of

export turnover.  That phraseology has been changed later on.  We are concerned with the

Assessment  Year 1990-91.   Keeping  in  view the  above analysis  we have to  interpret

Section  80HHC(3).   At  this  stage  it  may  be  noted  that  eligibility  for  deduction  is

contemplated by Section 80HHC(1) whereas quantum of deduction is determined under

Section  80HHC(3).   In  the  matter  of  determining  the  quantum  of  deduction,  the

"principle  of proportionality" applies.  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 applies as

under :-

S. 80HHC concession = export profits =  

profits of business x  Export T.O.      Total T.O.

In the  first  situation  where  the  business  of  the  assessee  is  only  in  terms  of  exports

exclusively, the profits of business has to be multiplied by 1/1.  However, when it comes to

composite business the profits of business in the above formula has to multiplied by two

different figures in the denominator and nominator.  This calculation has been correctly

done by the I.T.O. as indicated hereinabove.  The I.T.O. took into account the business

4

income  at  Rs.55,31,941/-  to  which  he  correctly  applies  the  ratio  of

Rs.90,91,063/Rs.3,81,01,941.   In the  case  of  composite  business,  as  stated  above,  the

figure of export turnover is quite different from total turnover.  The entire object  for

applying the principle of proportionality is to derive export profits from total business

profits.  As stated above, this formula applies both under Section 80HHC(3)(a) as well as

80HHC(3)(b).

6. In the present case, it appears that the High Court has decided the matter

against  the assessee overruling the decision of the Tribunal by placing reliance on the

judgment of this Court in  IPCA Laboratory Ltd. (supra).  In our view the High Court

could not have relied upon the judgment of this Court in IPCA Laboratory Ltd. (supra)

for two reasons. Firstly, Section 80HHC(3) has undergone amendments 11 times.  We are

concerned with the initial period when the above formula was simplistically stated.  Later

on that formula has undergone a change by several amendments.  IPCA Laboratory Ltd.

was  concerned  with  the  Assessment  Year  1996-97.   By  that  time  the  formula  had

undergone a change.   By that  time the concept  of adjusted export turnover, adjusted

profits of business and adjusted total turnover had come into play.  Therefore, the High

Court had erred in relying upon the judgment of this Court in  IPCA Laboratory Ltd.

(supra).  Secondly, in the present case we are concerned with the Assessment Year 1990-

91.  At that time the above formula existed.  On 5.7.1990 CBDT had issued a circular No.

564.  We quote herein below paras 4, 6 and 9.   

"4.   Sub-section(3)  of  section  80HHC  statutorily  fixes  the

quantum of deduction on the basis of a proportion of the profits of

business  under  the  head  "Profits  and  gains  of  business  or

profession"  irrespective  of  what  could  strictly  be  described  as

"profits derived from the export of goods or merchandise out of

India".  The deduction is computed in the following manner :-

5

  Profit of the business x Export turnover  Total turnover

6. The  term  "export  turnover"  under  the  existing

provisions,  means  the  sale  proceeds  (excluding  freight  and

insurance)  receivable  by  the  assessee  in  convertible  foreign

exchange.  In other words, the FOB value of exports.  The Finance

Act,  1990  has  restricted  the  definition  of  the  term  "export

turnover" to mean FOB  sale proceeds  actually  received by the

assessee in convertible foreign exchange within six months of the

end of the previous year or within such further period as the Chief

Commissioner/Commissioner may allow in this regard.   

9. Thus, in the case of an assessee who is doing export

business exclusively, "export turnover and total turnover" would

be identical, if the entire sale proceeds are brought into India in

convertible foreign exchange within the prescribed time limit.  In

that case, the entire profit under the head "Profits and gains of

business  or  profession"  (which  will  include  the  three  export

(incentives) will be deductible under Section 80HHC.  However,

in order to arrive at the amount deductible under Section 80HHC

in the case of an assessee doing export business as well as some

other  domestic  business,  the  fraction  of  "export  turnover"  to

"total turnover", will be applied to his profits computed under the

head "Profits and gains of business or profession", (which again

will include the three export incentives).  The operation of section

80HHC  read with section 28,  as amended by the  Finance  Act,

1990, can be illustrated by way of the following examples :

Code I Exclusively

export business

Code II 2/3 export

1/3 domestic sale

Code III 1/2 export

1/2 domestic sale

Code IV 1/3 export

2/3 domestic sale

6

                    (Figures in lakhs of rupees) (i) Turnover

(a)  FOB exports

100 100 100 100

(b)  Domestic rate

... 50 100 200

(c)  Total turnover

100 150 200 300

(ii) Business profits  before incentives (assumed figures)

10 15 20 30

(iii) CCS, DDK,I/L 10 10 10 10 Total  Profits of  the business 20 25 30 40

(iv) Deduction  u/s 80HHC  if entire  export proceeds,  i.e. Rs.100  lakhs is  brought into  India within  the stipulated period  = 20.00

25x 100     150

= 16.67

30 x 100      200

= 15.00

40 x 100      300

= 13.33 (v) Deduction  u/s

80HHC if  only 50%  of  the export proceeds  i.e., Rs.50 lakhs  is brought  into India

20 x 50     100

= 10.00

25x 50     150

= 8.33

30 x 50      200

= 7.50

40 x 29      300

= 6.62"

The  above  Circular  indicates  vide  Para  4  of  the  Circular  that  Section  80HHC(3)

statutorily fixes the quantum of deduction on the basis of a proportion of business profits

7

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.  Even in clause 9

the  illustration given  indicates  that  the  ratio mentioned  in  sub-Section (3)  has to  be

applied to business profits computed under the provisions of Sections 28 to 43D of the

Income Tax Act.  This Circular supports the  reasoning  given by us in our judgment

hereinabove.

7. For  the  above  reasons,  we  allow  this  civil  appeal  by  setting  aside  the

impugned judgment of the High Court with no order as to costs.  We make it clear that

our reasoning is strictly applicable to the law as it stood during the relevant Assessment

Year.   

...........................J.        (S.H. KAPADIA)

...........................J.        (B. SUDERSHAN REDDY)

New Delhi September 03, 2008