Export — Deduction u/s.80HHC — Duty drawback and cash compensatory allowance received in the year other than the year of exports is eligible for deduction u/s.80HHC of the Act in the year of receipt, in a case where assessee is following the cash system of accounting.
B. Desraj v. CIT (2008)
The appellant was a sole proprietor of M/s. D. R. Enterprises engaged in the business of export of textiles/fabrics. Consequent upon exports made by him, inward remittance came into India in foreign exchange during the accounting year ending 31-3-1991 (A.Y. 1990-91). However, the appellant recovered cash compensatory allowance of Rs.7,74,785 and duty drawback of Rs.35,565 in the next accounting year ending on 31-3-1992 (A.Y. 19991-92). The appellant, who was following cash system of accounting, claimed deduction u/s.80HHC on the aforesaid amounts in A.Y. 1991-92, that is, in the year of receipt.
According to the AO, admittedly, the appellant had not made export sales during A.Y. 1991-92 and therefore, the said duty drawback and cash compensatory allowance did not constitute eligible income deductible from the gross total income u/s. 80HHC. On appeal, the Commissioner of Income-tax (Appeals) took the view that the above amounts were admittedly relatable to the sales made during the earlier year and consequently, the Assessing Officer had wrongly rejected the appellant’s claim for deduction u/s.80HHC. The Tribunal upheld the decision of the Commissioner of Income-tax (Appeals).
On an appeal by the Department, the Madras High Court overruled the decision of the Tribunal on the ground that during the A.Y. 1991-92, the assessee had received cash compensatory support and duty drawback for the exports made in the earlier year and that there were no exports made in that year and therefore, the said amounts did not constitute eligible income for deduction u/s.80HHC.
On an appeal by the appellant, the Supreme Court observed that by the Finance Act, 1990 it was clarified that cash compensatory support and duty drawback would be taxable u/s.28(iiib) and in a Circular issued by the CBDT it was clarified that export incentives, namely, cash compensatory support and duty drawback have to be included in the profits of the business for computing the deduction u/s.80HHC. According to the Supreme Court, with the issuance of the said Circular, the point was no more res integra. The Supreme Court after noting the formula for the purpose of computing deduction u/s.80HHC observed that the business profits included export incentives. The Supreme Court, therefore, held that the words ‘business profits’ in the formula u/s. 80HHC(3) would include cash compensatory allowance and duty drawback, and the AO was directed to work out the deduction in accordance with the law as it stood during the relevant A.Y. 1991-92.