Case: M/S Mysodet (P) Ltd Vs. Commr.Of Income Tax,Bangalore

3. The assessee is a limited company. It purchased 105 computers for Rs.It exported them and realized export sales of Rs.There were no profits during that relevant Assessment Year on the export sales. The relevant Assessment Year is AYThe I.T.O. allowed the claim of deduction under Section 80HHC at Rs.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.The formula adopted was asProfits = 90,91,063 xAggrieved 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 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 assessees 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 ofreported 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 Departments appeal came to be allowed. Hence, this Civil Appeal by the assessee.

Court's reasoning:
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 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(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.