Bombay High Court: Deduction u/s 80HHC available at the gross total income and not at profits reduced by section 80-IA(1) but not to exceed 100%.

Associated Capsules Private Limited, Mumbai v. DCIT decided on 10 Jan 2011

Assessment Year: 2003-04

Substantial question of law before the Hon’ble Court: Whether the Tribunal was justified in holding that Section 80IA(9) of the Income Tax Act, 1961 mandates that the amount of profits allowed as deduction under Section 80IA(1) of the Act has to be reduced from the profits of the business of the undertaking while computing deduction under any other provisions under heading ‘C’ in Chapter VIA of the Income Tax Act, 1961?

Relevant facts: The assessee is in the business of manufacture of Empty Hard Gelatin Capsules and PVDC Capsules. For the above business, the assessee has four industrial undertakings at Kandivali, Mumbai and two industrial units at Pune. Out of the above industrial undertakings / units, one undertaking at Kandivali, Mumbai and one unit at Pune are eligible for deduction under Section 80IA and Section 80HHC of the Income Tax Act, 1961. The assessee claimed deduction under Section 80IA at 30 per cent of the profits and gains derived from the business and deduction under Section 80HHC at 50 per cent of the profits derived from the export of goods or merchandise determined on the basis of the formula set out in Section 80HHC of the Act.

Allowing the appeal of the assessee, the Hon’ble Court held that:

(para 39): In the result, we hold that Section 80IA(9) does not affect the computability of deduction under various provisions under heading ‘C’ of Chapter VIA, but it affects the allowability of deductions computed under various provisions under heading ‘C’ of Chapter VIA, so that the aggregate deduction under Section 80IA and other provisions under heading ‘C’ of Chapter VIA do not exceed 100% of the profits of the business of the assessee…Thus, the object of Section 80IA(9) being not to curtail the deductions computable under various provisions under heading ‘C’ of Chapter, it is reasonable to hold that Section 80IA(9) affects allowability of deduction and not computation of deduction. To illustrate, if Rs.100/is the profits of the business of the undertaking, Rs.30/is the profits allowed as deduction under Section 80IA(1) and the deduction computed as per Section 80HHC is Rs.80/, then, in view of Section 80IA(9), the deduction under Section 80HHC would be restricted to Rs.70/, so that the aggregate deduction does not exceed the profits of the business.

The judgment available here.