High Court Holds Deduction Under Section 80HHC Cannot Be

High Court Holds Deduction Under Section 80HHC Cannot Be Reduced By Profits Allowed Under Section 80IA

Issue

Whether Section 80IA(9) mandates that profits allowed as a deduction under Section 80IA(1) must be reduced from business profits while computing deductions under Section 80HHC under Chapter VI-A.

Facts

Assessment Year: The matter pertains to Assessment Year 2002-03 involving the computation of tax deductions claimed by the assessee.
Deduction Claims: The assessee claimed deductions under both Section 80IA (for industrial undertakings) and Section 80HHC (for export profits) under Chapter VI-A.
ITAT Order: The Income Tax Appellate Tribunal (ITAT) held that under Section 80IA(9), the deduction amount allowed under Section 80IA(1) had to be reduced from the business profits before calculating the eligible deduction under Section 80HHC.
Appeal: The assessee challenged the ITAT’s interpretation, questioning whether Section 80IA(9) restricts the computation of export deductions under Section 80HHC.

Decision

ITAT Order Reversed: In favor of Assessee. The ITAT was not justified in holding that deduction allowed under Section 80IA(1) must be reduced from the business profits for computing Section 80HHC deductions.
Independent Computation Allowed: In favor of Assessee. Deductions under Section 80HHC and Section 80IA operate independently without requiring a prior reduction of Section 80IA profits from business profits under Section 80IA(9).

Key Takeaways

Independent Operation of Chapter VI-A Deductions: Deductions allowable under Section 80HHC are computed on the profits of the export business without reducing the relief already granted under Section 80IA.
Scope of Section 80IA(9): Section 80IA(9) prevents total deductions under Chapter VI-A from exceeding 100% of the eligible business profits, but it does not alter or scale down the basic formula used for computing Section 80HHC export benefits.
Protection of Export Incentives: The decision ensures that taxpayers claiming infrastructure or industrial production incentives under Section 80IA do not lose out on full export incentives available under Section 80HHC.

HIGH COURT OF ALLAHABAD

Rati Enterprises

Commissioner of Income-tax

Saumitra Dayal Singh and Swarupama Chaturvedi, JJ.

IT APPEAL No. 307 of 2010^†

JULY 30, 2026

Suyash Agarwal for the Appellant. Gaurav Mahajan for the Respondent.

ORDER

1. Heard Sri Suyash Agarwal, learned counsel for the assessee/appellant and Sri Ankur Agarwal, learned Senior Standing Counsel for the revenue.

2. Present income tax appeal has been filed under Section 260-A of the Income Tax Act, 1961 arising from the order of the Income Tax Appellate Tribunal, Delhi Bench : ‘F’ New Delhi in Pr. CIT v. Rati Enterprises [I.T.A. No. 3921(Del) of 2009, dated 18-06-2010] for the A.Y. 2002-03. Thereby, the Tribunal has dismissed the assessee appeal.

3. Present appeal was admitted on the following questions of law:-

“2. Whether the deduction claim under Section 80IB of Rs. 7,46,006/- is to be reduced from the profit from business of Rs. 29,84,874/ as from qualified amounts of deduction under Section 8 HIC of Rs. 19,07,138/-.

6. Whether the ITAT was justified in holding that Section 801A(9) of Act mandates that the amount of profits allowed as deduction u/s 80IA(1) of Act has to be reduced from the profit of business of industrial undertaking while computing the deduction from any other provision under heading C in Chapter VI-A of the Act following the decision ACIT, Moradabad v. Hindustan Mint and Agro Products (2009) 315 ITR (AT) 401 (Delhi) (SB), contrary to the decision of Associated Capsules P Ltd v. DCIT (2011) 332 ITR 42 (Bom)?”

4. At the outset, Sri Suyash Agarwal, learned counsel for the assessee/appellant states that presently, the appellant confines the present appeal to question no. 6. In that regard, it has been further stated that the said question is conclusively decided by the larger bench of the Supreme Court in Shital Fibers Ltd. v. CIT 476 ITR 309 (SC). Therein, it has been observed as below:-

“23. Hence, we find that the view taken by the Bombay High Court is correct. Dipak Misra, J (as he then was), in paragraphs 47 and 48 of the decision in the case of Assistant Commissioner of Income Tax, Bangalore v. Micro Labs Limited approved the view taken by Bombay High Court in the aforesaid case. Paragraphs 47 and 48 read thus:

“It is in the context of Section 80-HHC that sub-section (9) of Section 80-I has come up for interpretation. There is no dispute that sub-section (9) of Section 80-I would be applicable as the assessee would be entitled to deduction under Section 80-IA as well as under Section 80-HHC. The contention of the Revenue is that the said sub-section mandates that deduction under Section 80-HHC has to be computed not only on the profits of business as reduced by the amounts specified in clause (baa) and sub-section (4-B) of Section 80-HHC but by also reducing the amount of profit and gains allowed as a deduction under Section 80-IA(1) of the Act. In other words, the gross total income eligible for deduction under Section 80-HHC would be less or reduced by the deduction already allowed under Section 80-IA . Thus, the gross total income eligible for deduction would not be the gross total income as defined in sub- section (5) of Section 80-B read with Section 80-B, but would be the gross total income computed under sub-section (5) of Section 80-B read with Section 80-AB less the deduction under Section 80-IA. An example will make the position clear. Supposing an assessee has gross total income of Rs 1000 and is entitled to deduction under Section 80-IA and 80-HHC and the deduction under Section 80-IA is Rs 300, then the gross total income of which deduction under Section 80-HHCis to be computed would be Rs 700, and not Rs 1000.

On the other hand, the case of the assessee is that the gross total income would not undergo a change or reduction for the purpose of Section 80-HHC. The two deductions will be computed separately, without the deduction allowed under Section 80-IA being reduced from the gross total income for computing the deduction under Section 80-HHC. The reason being that sub-section (9) of Section 80-IA does not affect computation of deduction under Section 80-HHC, but postulates that the deduction computed under Section 80-HHC so aggregated with the deduction under Section 80-IA does not exceed the profits of the business.”

In paragraphs 53 and 54 of the same decision, it is held thus:-

“The first part of sub-section (9) of Section 80-IA refers to the computation of profits and gains of an undertaking or enterprise allowed under Section 80-IA in any assessment year and the amount so calculated shall not be allowed as a deduction under any other provisions of this Chapter. It is in this context that the Bombay High Court has rightly pointed out that there is a difference between allowing a deduction and computation of deduction. The two have separate and distinct meanings. Computation of deduction is a stage prior and helps in quantifying the amount, which is eligible for deduction. Sub- section (9) of Section 80-IA does not bar or prohibit the deduction allowed under Section 80-IA from being included in the gross total income, when deduction under Section 80-HHC(3) of the Act is computed. In this context it has been held that the expression “shall not be allowed” cannot be equated with the words “shall not qualify” or “shall not be allowed in computing deduction”. The effect thereof would be that while computing deduction under Section 80-HHC, the gross total income would mean the gross total income before allowing any deduction under Section 80-IA or other sections of Part C of Chapter VI-A of the Act. But once the deduction under Section 80-HHC has been calculated, it will be allowed, ensuring that the deduction under Section 80-HHC and 80-IA when aggregated do not exceed profits and gains of such eligible business of undertaking and enterprise.

As I find, the legislature has used the expression “shall not qualify” in Section 80-HHB(5) and 80-HHD(7), but the said expression has not been used in sub-section (9) of Section 80-IA. The formula prescribed in sub-section (3) of Section 80-HHC is a complete code for the purpose of the said computation of eligible profits and gains of business from exports of mercantiles and goods. It has reference to total turnover, turnover from exports in proportion to profits and gains from business in clause (a) and so forth under clauses (b) and (c) of Section 80-HHC(3) of the Act. In case the gross total income is reduced or modified taking into account the deduction allowed under Section 80-IA, it would lead to absurd and unintended consequences. It would render the formula under sub-section (3) of Section 80-HHC ineffective and unworkable as highlighted in para 30 of the decision in Associated Capsules (P) Ltd. [Associated Capsules (P) Ltd. v. CIT, 2011 SCC OnLine Bom 27 : (2011) 332 ITR 42 (Bom)] with reference to clause (b) of Section 80-HHC(3). Even when I apply clause (a) and calculate eligible deduction under Section 80-HHC, it would give an odd and anomalous figure. To illustrate, I would like to expound on the earlier example after recording that the gross total income of Rs 1000 was on assumed total turnover of Rs 10,000 which includes export turnover of Rs 5000 and the deduction allowable under Section 80-IA was 30% and the deduction allowable under Section 80-HHC was 80% of the eligible profits as computed under Section 80-HHC(3). The stand of the Revenue is that without alteration or modification of the figures of total turnover and the export turnover, the gross total income would undergo a reduction from Rs 1000 to Rs 700 as Rs 300 has been allowed as a deduction under Section 80-IA. This would result in anomaly for the said figure would not be the actual and true figure or the true gross total income or profit earned on the total turnover including export turnover and, therefore, would give a somewhat unusual and unacceptable result. There is no logic or rationale for making the calculation in the said impracticable and unintelligible manner.”

5. In view of the issue having been decided authoritatively by the larger bench of the Supreme Court in Shital Fibers Ltd. (supra), the issue has no longer res integra. Accordingly, question no. 6 is answered in negative i.e. in favour of the assessee in terms of Shital Fibers Ltd. (supra).

6. Accordingly, the present appeal is disposed of.