Sequential Deduction of S.80IB & 80HHC Contrary to Supreme Court Ruling: Madras HC Sets Aside ITAT Order against Tata International Ltd. [Read Order]

In a ruling in favour of Tata International Limited, the Madras High Court set aside the order passed by the Income Tax Appellate Tribunal (ITAT) regarding the computation of deductions under Sections 80IB and 80HHC of the Income Tax Act, 1961. The Court held that the ITAT’s method of sequentially deducting these concessions was contrary to the guidelines laid down by the Supreme Court in the case of M/s. Shital Fibers Ltd vs. Commissioner of Income Tax.

The High Court ruled in favour of the Appellant, finding that the tax demand was not based on a proper computation of income and remanded the matter for fresh assessment.

Tata International Limited, formerly known as M/s Bachi Shoes India Pvt Ltd, is engaged in the manufacturing and export of leather goods. For the Assessment Year 2003-2004, the company claimed deductions of Rs. 72.77 lakhs under Section 80HHC (profits from exports) and Rs. 58.27 lakhs under Section 80IB (profits from industrial undertakings).

Relief to Leg Fractured Assessee: Calcutta HC Directs GST Authority to Consider Extension for Appearance in Summons Case [Read Order]

The Assessing Officer (AO) determined the total income by first deducting the Section 80IB amount from the business profits and then computing the Section 80HHC deduction on the remaining balance, thereby reducing the export profit deduction significantly. The CIT(A) and ITAT upheld this "sequential" deduction method, relying on precedents like Leben Laboratories Limited and ACIT vs. Rogini Garments.

The Revenue argued that the deduction under Section 80IB must be given effect to, prior to Section 80HHC, and that both deductions could not be computed simultaneously from the gross income. The Department supported the ITAT's view that the tax concessions must be applied one after the other rather than on the gross profits.

The Appellant contended that this sequential computation method was contrary to the law. Relying on the Supreme Court’s decision in M/s. Shital Fibers Ltd [(2025), the Appellant submitted that the Apex Court had laid down specific guidelines for computing deductions under Chapter VI-A, particularly Sections 80IA, 80IB, and 80HHC. They argued that the ITAT’s approach deviated from these guidelines, necessitating a remand for fresh computation.

The Coram of Dr. Justice G. Jayachandran and Justice Shamim Ahmed observed that the Supreme Court had comprehensively addressed the mode of computing these deductions in M/s. Shital Fibers Ltd. The High Court noted that the ITAT's affirmation of the Assessing Officer’s order, which deducted Section 80IB first and then limited Section 80HHC to the balance, was apparently in deviation from the method approved by the Supreme Court.

The Court observed:

“In our view the impugned tax demand is not based on proper computation of income. Hence, it has to be set aside.”

The Court accepted the Appellant's submission that the matter required reconsideration in light of the Supreme Court's dictum. The Revenue agreed to the remand, provided the scope was restricted to the computation of deductions under Sections 80IB and 80HHC.

In view of this, the Madras High Court set aside the ITAT's order dated 11.04.2008 and remanded the matter to the Assessing Officer for fresh computation of taxable income, giving due effect to the deductions under Sections 80IB and 80HHC in accordance with the Shital Fibers Ltd judgment.

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates