Supporting Manufacturer Entitled to Deduction Under Section 80HHC (of Income Tax Act, 1961) Despite Export House's Loss

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Case Name:

Commissioner of Income Tax and Another vs. Shamanur Kallappa and Sons (High Court of Karnataka)

Income Tax Appeal No.10/2009

Date: 12th January 2015

Key Takeaways

- The supporting manufacturer is entitled to a deduction under Section 80HHC (of Income Tax Act, 1961) if they fulfill the conditions of selling goods to an export house and obtaining a certificate from the export house.

- The export house's profit or realization of foreign exchange is immaterial for the supporting manufacturer's deduction.

- The court upheld the Tribunal's decision, which allowed the deduction based on the supporting manufacturer's compliance with Section 80HHC(1A) (of Income Tax Act, 1961).

Issue

Can a supporting manufacturer claim a deduction under Section 80HHC (of Income Tax Act, 1961), even if the export house does not earn a profit or realize foreign exchange?

Facts

- The assessee, Shamanur Kallappa and Sons, is a partnership firm engaged in trading sugar, pulses, and exporting rice.

- For the assessment year 2003-04, the assessee claimed a deduction under Section 80HHC (of Income Tax Act, 1961).

- The assessee exported rice to Cambodia through the State Trading Corporation of India Ltd. (STC) and obtained a certificate from STC stating that no export benefit was claimed by STC.

- The Assessing Officer disallowed the deduction, citing STC's loss and the lack of foreign exchange realization.

- The Tribunal ruled in favor of the assessee, leading to an appeal by the revenue.

Arguments

- Revenue:

Argued that the deduction should not be allowed as the export house did not earn a profit and no foreign exchange was realized.

- Assessee:

Contended that they fulfilled all conditions under Section 80HHC(1A) (of Income Tax Act, 1961) and were entitled to the deduction.

Key Legal Precedents

- Section 80HHC(1A) (of Income Tax Act, 1961):

Allows a supporting manufacturer to claim a deduction if they sell goods to an export house and obtain a certificate from the export house.

- INCOME TAX OFFICER vs. MANDIRA D. VAKHARIA:

Established that a certificate produced during proceedings, even if not filed with the return, should be considered for granting benefits.

Judgement

The court ruled in favor of the assessee, Shamanur Kallappa and Sons, stating that the supporting manufacturer is entitled to the deduction under Section 80HHC(1A) (of Income Tax Act, 1961) as long as the conditions are met, regardless of the export house's profit or foreign exchange realization. The appeal by the revenue was dismissed.

FAQs

Q1: What is Section 80HHC (of Income Tax Act, 1961)?

A1: Section 80HHC (of Income Tax Act, 1961) provides deductions for profits derived from export business.

Q2: What conditions must be met for a supporting manufacturer to claim a deduction under Section 80HHC (of Income Tax Act, 1961)?

A2: The supporting manufacturer must sell goods to an export house and obtain a certificate from the export house.

Q3: Does the export house need to earn a profit for the supporting manufacturer to claim the deduction?

A3: No, the export house's profit or realization of foreign exchange is immaterial.

Q4: What was the court's decision in this case?

A4: The court ruled in favor of the supporting manufacturer, allowing the deduction under Section 80HHC (of Income Tax Act, 1961).

Q5: What precedent did the court rely on for this decision?

A5: The court relied on the precedent set in INCOME TAX OFFICER vs. MANDIRA D. VAKHARIA, which allowed consideration of certificates produced during proceedings.

1. The assessee is a partnership firm carrying on the business of trading in Sugar, Pulses and export of Rice. For the assessment year 2003-04, the assessee filed return of income declaring total income of Rs.2,20,55,450/- after claiming deduction of Rs.80,95,064/- under Section 80HHC (of Income Tax Act, 1961) (for short hereinafter referred to as ‘the Act’).

2. It is not in dispute that the assessee exported

rice to Pnomphenh, Cambodia through State Trading

Corporation of India Ltd., (for short hereinafter referred

to the ‘STC’), Jalandhar as a supporting manufacturer

and therefore, they claimed deduction under Section 80 (of Income Tax Act, 1961)

HHC of the Act. The assessee produced a letter dated

28.11.2003 from the STC to the effect that STC had not

claimed any export benefit on the said exports and that

the said exports are under protocol exports i.e.

Government of India to Government Aid Programme and

that the export consideration was received in Indian

rupees from the Ministry of External Affairs. A

certificate of disclaimer from STC in the prescribed

Form 10CCAB and the bill of lading was also filed before

the Assessing Officer.

3. The Assessing Officer disallowed the said claim

on the ground that the STC had declared loss. In other

words, they had not earned any profit out of such

exports. Secondly on the ground that deduction under

Section 80HHC (of Income Tax Act, 1961) is permissible only when the

realization is in foreign exchange. Aggrieved by the said

order, the assessee preferred an appeal to the

Commissioner of Income Tax (Appeals), who confirmed

the order of the Assessing Authority against which the

assessee preferred an appeal to the Tribunal.

4. The Tribunal on consideration of various

provisions of law as well as Circulars held that under

the scheme, the supporting manufacturer gets an

independent right to claim deduction once he gets a

declaration certificate in his favour from the Export

House. What is to be seen is whether the benefit is

claimed by both the Export House and the supporting

manufacturer. If the export house is not claiming the

benefit and the issue of certificate of disclaimer is in

respect of export turn over, then the supporting

manufacturer is entitled to the benefit. After referring to

the circulars issued by the Central Board of Taxes

dealing with the protocol exports, it was held that the

supporting manufacturer has realized the consideration

in Indian currency. Whether the Government of India

has realized some foreign currency is not the criteria.

In view of the specific provision as contained in Section

80 HHC(1A) of the Act, the supporting manufacturer is

entitled to the said benefit. Aggrieved by the said order,

the revenue is in appeal.

5. The learned Counsel appearing for the revenue

assailing the impugned order contended that when the

export house has not earned any profit, the question of

passing on the said benefit to the supporting

manufacturer does not arise. Secondly, the

Government of India gifted the rice to Cambodia and it

is not a sale and no foreign exchange is realized and

therefore, he submits Section 80HHC (of Income Tax Act, 1961) has no

application to the facts of this case.

6. Per contra, learned Counsel for the assessee

submitted that the present case falls under Section

80HHC(1A) of the Act and all the conditions prescribed

therein are fulfilled as held by the Tribunal and

therefore, no case for interference is made out in the

impugned order.

7. The appeal was admitted to consider the

following substantial question of law:

“Whether the Tribunal was right in holding

that the respondent-assessee was entitled

to the benefit of the provisions of Section

80HHC(1A) of the Income Tax Act, 1961

even without actually exporting any food

grains to a foreign country?”

8. Section 80HHC (of Income Tax Act, 1961) provides for

deduction in respect of profits return from export

business. In the instant case, the role of the assessee is

that of the supporting manufacturer and therefore, it is

Section 80HHC(1A) (of Income Tax Act, 1961) that is attracted which

reads as under:

“Section 80HHC(1A) (of Income Tax Act, 1961): Where the

assessee, being a supporting

manufacturer, has during the previous

year, sold goods or merchandise to any

Export House or Trading House in respect

of which the Export House or Trading

House has issued a certificate under the

proviso to sub- section (1), there shall, in

accordance with and subject to the

provisions of this section, be allowed in

computing the total income of the

assessee, a deduction to the extent of

profits, referred to in sub-section (1B)

derived by the assessee from the sale of

goods or merchandise to the Export

House or Trading House in respect of

which the certificate has been issued by

the Export House or Trading House.”

9. To attract the said provision, the supporting

manufacturer who sells the goods or merchandise to the

export house or trading house, the export house and

trading house has to issue a certificate under the

proviso to Sub-section (1) of Section 80HHC (of Income Tax Act, 1961).

If these two conditions are fulfilled, then the supporting

manufacturer is entitled to the deduction as

contemplated under Section 80HHC (of Income Tax Act, 1961) to an

extent as mentioned in Section 80HHH(1B) (of Income Tax Act, 1961).

It is immaterial whether in the process, export house or

trading house sells the goods to any foreign country or

earns profit or realizes any foreign exchange. In order

to attract Section 80HHC(1A) (of Income Tax Act, 1961), after purchase

of goods or merchandise from the supporting

manufacturer, the said goods has to be exported out of

India. Once such export is established, a certificate

under the proviso to Sub-section (1) is issued by the

export house or trading house and when they are not

claiming benefit under Section 80HHC (of Income Tax Act, 1961), the assessee

would be entitled to the benefit of deduction as

prescribed under Section 80HHC(1A) (of Income Tax Act, 1961). Even

the circulars relied on do support the case of the

assessee.

10. In that view of the matter, we do not see any

merit in this appeal. The substantial question of law is

answered in favour of the assessee and against the

revenue.

11. Yet another substantial question of law which

arises for consideration in this appeal is as under:

“Whether on the facts and in the

circumstances of the case, the Tribunal

was right in law and on facts in coming to

the conclusion that the assessee has

apparently complied with the statutory

requirements provided in Section

80HHC(1A) for claiming the deduction,

even though the requisite certificate duly

signed by an accountant as defined in the

Explanation below sub-section (2) of

Section 288 (of Income Tax Act, 1961),

has not been filed along with the R/I?”

12. This Court had an occasion to consider this

question in the case of INCOME TAX OFFICER –vs-

MANDIRA D. VAKHARIA [2001 (250) ITR 432

(Karnataka)] where it has been held that even though

the requisite certificate duly signed by an accountant as

defined in Sub-section (2) of Section 88 (of Income Tax Act, 1961) is not

produced along with return. If it is produced even in the

course of proceedings, it has to be taken note of and

given the benefit. Therefore, the Tribunal was justified

in granting the relief to the assessee relying upon the

certificate produced in the course of the proceedings.

Therefore, we do not see any merit in this contention

also and the substantial question of law is answered in

favour of the assessee and against the revenue.

No merit. The appeal is dismissed.

Sd/-

Judge

Sd/-

Judge