In K.H. Shoes Ltd v. ACIT, the division bench of the Madras High Court held that the Refund of Sales Tax received by the assessee is not deductible under section 80HHC of the Income Tax Act when such income has no direct nexus with his Export Business.
Assessee has been charged Sales Tax earlier by the State of Tamil Nadu in respect of transfer of certain REP Licenses. Subsequently, the Govt withdrawn the levy on representation of the Leather Goods Exportersand the amount so collected was refunded to the tax payers including the assessee. On receipt of Sales Tax REP subsidy in a sum of Rs.1,70,29,716/-, the assessee reflected the same, as ‘other income’ for the Assessment year 1999-2000. While filing return, Assessee claimed deduction in respect of the income so received. However, the AO denied the claim by holding that Explanation (baa) for Sub-section 4(c) of Section 80HHC of the Income Tax Act would not apply to such receipts.
On first and second appeals, the appellate authorities held that computation of profits of the business for the purpose of Section 80HHC does not include receipts which do not have any element of turnover like rent, commission, interest etc. and hence such receipts are to be excluded from the business profits for allowing deduction under Section 80HHC. Against the above orders, the assessee approached the High Court.
Analyzing the relevant provisions of Income Tax Act, the bench observed that whenever any allowance or deduction has been made or claimed in any previous assessment year(s) towards loss, expenditure or trading liability and subsequently the Assessee obtains in cash or in any other form any remission or cessation or benefit in respect of such loss or expenditure the value of such benefit accruing is liable to be treated as profit or gain chargeable to Income Tax.
The division bench comprising of Justice Nooty Ramamohana Rao and Justice P. Devadass also observed that as per the Explanation in clause (baa), the profits and gains of business or profession be reduced by 90% of any sum referred to in clause (iiia), (iiib), (iiic), (iiid) and (iiie) of Section 28 or of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits. “Thus, when we bear this Explanation in mind for the purpose of reducing the profit derived by the Assessee from the export of goods or merchandise, it becomes imperative that the other income must have a bearing or nexus to such a profit derived from the export business. The main theme incorporated behind Section 80HHC is to enable every Assessee who derives profit from out of the business of export of goods or merchandise carried on by it, to retain it as it is and not subject the same to the assessment of income tax, by reducing it from the total income derived from the whole of the business or profession of such an Assessee. Thus, what was insulated against incidence of Tax by Section 80HHC was that part of the profit derived from export of goods.”
The bench also said that, in the instant case, the Assessee is carrying on business of both export and domestic sales, to the extent of profit derived by it from the export of goods and merchandise alone, having been permitted to be retained by Section 80HHC, hence, it is required by the Department to ascertain and then segregate the extent of profit made out of export business from out of the total amount of profit earned from the composite business. “All such components which constitute or form part of such profit made from export of goods have to be ascertained first and to the extent allowable, they be kept away from incidence of taxation, by applying deduction. Therefore, the refund of Sales Tax, obtained by the Assessee during the previous financial year to the assessment year, if were to insulated by securing the benefit contemplated by Section 80HHC, the same shall bear direct nexus to his export business.”
According to the bench, the refunded amount was rightly claimed as other income by the Assessee, but however, the bench rejected the contention of the assessee that the benefit of Section 80HHC should be applied to such income.
Applying the ratio of the Apex Court decision in Ravindaranathan Nair’s case, to the present case, the bench observed that the refund of Sales Tax obtained by the Assessee has no direct bearing or attribute of the export component of the business carried on by the Assessee and hence the Assessee cannot seek to retain the same by deriving the benefit spelt out in Section 80HHC of the Income Tax Act.
Read the full text of the Judgment below.
