Deductions Under Section 80HHC Are Not Reduced by Section

Deductions Under Section 80HHC Are Not Reduced by Section 80IA, and Capital-Linked Sales-Tax Remissions Are Capital Receipts

Issue

Whether business profits must be reduced by deductions allowed under Section 80IA while computing the deduction under Section 80HHC of the Income-tax Act, 1961.
Whether a sales-tax remission granted under the West Bengal Incentive Scheme, 1993—explicitly linked to capital investment for expansion and modernization in backward areas—should be classified as a capital receipt or a revenue receipt.

Facts

The assessee claimed a deduction under Section 80HHC, which the taxing authorities sought to reduce by the amount of deduction already allowed under Section 80IA.
The assessee received a sales-tax remission under the West Bengal Incentive Scheme, 1993.
This specific incentive scheme was designed to encourage the expansion and modernization of industrial units in backward areas and was directly linked to fixed capital investment.
The Income Tax Appellate Tribunal (Tribunal) originally categorized this sales-tax remission/subsidy as a revenue receipt, making it liable to tax.
The assessee challenged this classification, arguing that the subsidy was capital in nature.

Decision

Regarding Section 80HHC: Decided in favor of the assessee. While computing the deduction under Section 80HHC, the profits of the business are not required to be reduced by the deduction allowed under Section 80IA.
Regarding the Subsidy Classification: Decided in favor of the assessee. The character of a subsidy must be determined by applying the well-settled “purpose test.”
The West Bengal Incentive Scheme, 1993, clearly intended to induce fresh capital investment and expand industrial capacity, rather than assisting the assessee in running daily trade more profitably.
The Tribunal erred in treating the subsidy as revenue; it is a capital receipt and therefore not taxable as regular business income.

Key Takeaways

No Double Reduction: Deductions under Section 80HHC and Section 80IA operate under independent frameworks; the computing of export turnover benefits under Section 80HHC cannot be artificially deflated by Section 80IA relief.
The “Purpose Test” Governs Subsidies: The taxability of a government subsidy depends entirely on its objective. If the purpose is to aid set-up, expansion, or capital growth, it is a non-taxable capital receipt. If it merely supplements day-to-day operational revenues, it is a taxable revenue receipt.

HIGH COURT OF CALCUTTA

Graphite India Ltd.

Commissioner of Income-tax

Rajarshi Bharadwaj and CHAITALI CHATTERJEE (DAS), JJ.

IT Appeal Nos. 72 OF 2018 AND 16 OF 2021

MAY 18, 2026

Somak Basu and Swagato Kabiraj, Advs. for the Appellant. Prithu Dudhoria, Madhu Jana and Wahed Reja, Advs. for the Respondent.

ORDER

1. The Court: Learned counsel appearing for the appellant refers to the substantial questions of law that were admitted on 7^th June, 2018 in respect of ITA/72/2018 as well as on 8^th May, 2018 in respect of ITA/16/2021 by the orders passed by their Lordships Hon’ble Justice Aniruddha Bose and Hon’ble Justice Amitabha Chatterjee. The substantial questions of law are as follows:

“(a) Whether on the facts and in the circumstances of the case and in law, the Tribunal was right in holding that deduction allowed under Section 80IA of the Act needs to be reduced while computing profits of the business eligible for deduction under section 80HHC of the Act ?”

2. Learned counsel submits that the issue is already covered by the judgment of the Hon’ble Supreme Court of India in Shital Fibers Ltd. v. CIT (SC)/[2025] 476 ITR 309 (SC).

3. Learned counsel appearing for the respondent/department on instruction agrees with the submission made by the appellant.

4. As such, in view of the judgment of the Supreme Court in Shital Fibers Ltd. (supra), this Court holds that the substantial question of law to be in negative and in favour of the assessee.

5. The next substantial question of law is-

“(b) Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that incentive/subsidy received by the appellant in the form of remission of sales tax is not capital but revenue in nature ?”

6. The assessee received sales-tax remission under the West Bengal Incentive Scheme, 1993, which was granted to encourage expansion and modernization of industrial units located in backward areas and was directly linked to investment fixed capital.

7. The nature of such subsidy must be determined by applying the well-settled “purpose test”. In CIT v. Ponni Sugars & Chemicals Ltd. (SC)/[2008] 306 ITR 392 (SC), the Supreme Court held that where the object of the subsidy is to enable setting up or expansion of an industrial unit, the receipt is capital nature irrespective of the mechanism through which it is granted. The principle was reiterated in Shree Balaji Alloys v. CIT (Jammu & Kashmir) (Jammu & Kashmir)/[2011] 333 ITR 335 (Jammu & Kashmir), where incentive aimed at promoting industrialization in backward regions were held to be capital receipts. This Court in Pr. CIT v. Ankit Metal & Power Ltd. (Calcutta)/[2019] 416 ITR 591 (Calcutta) applied the aforesaid test and held that subsidies linked to capital investment for industrial development cannot be treated as revenue receipts.

8. A perusal of the West Bengal Incentive Scheme, 1993 clearly demonstrates that the remission was intended to induce fresh capital investment and expansion of industrial capacity. It was not a subsidy to assist the assessee in carrying on its trade more profitably.

9. The Tribunal, therefore, erred in treating the said subsidy as revenue in nature. We accordingly answer substantial question of law (b) in the negative, i.e., in favour of the assessee and against the revenue.

10. The appeal, being ITA/72/2018 and the appeal, being ITA/16/2021 along with connected application [IA No.GA/1/2017 (Old No.GA/43/2017)] are disposed of.