COMMISSIONER OF INCOME TAX Vs. PAREKH BROTHERS

JUDGEMENT

(1.) FOR the assessment year 1987-88, the assessee claimed a deduction of Rs. 11,20,750 under Section 80HHC of the Income-tax Act, 1961. He also created a reserve of a sum equivalent to Rs. 11,20,750 in the profit and loss account of the previous year. The Assessing Officer found that there was an error in calculation and found that the deduction allowable under Section 80HHC of the Act was only an amount of Rs. 10,89,472. The Assessing Officer allowed that deduction in view of the fact that the assessee had created a reserve in his profit and loss account for the previous year, of a sum of Rs. 11,20,750. The Assessing Officer made an addition to the business income under Section 41(1) of the Income-tax Act of a sum of Rs. 5,60,851. The assessee appealed. Before the Commissioner of Income-tax (Appeals) the assessee contended that the addition of the amount of Rs. 5,60,851 as business income was not justified. Alternatively, the assessee contended that even if it was taken as business profit, the same also should be reckoned for deduction under Section 80HHC of the Act. The Commissioner of Income-tax (Appeals) did not accept the contention of the assessee that the same could not be added as business income under Section 41(1) of the Act. But the Commissioner of Income-tax (Appeals) agreed with the assessee that the sum of Rs. 5,60,851 could also be taken into consideration while considering the claim of the assessee for deduction under Section 80HHC of the Act. But the Commissioner of Income-tax (Appeals) took the view that since the assessee had created only a reserve of a sum of Rs. 11,20,750 in the profit and loss account for the previous year, in terms of the proviso to Section 80HHC of the Act, the assessee was entitled to deduction under Section 80HHC of the Act only to the tune of Rs. 11,20,750.

(2.) FEELING aggrieved, the assessee appealed to the Tribunal. Before the Income-tax Appellate Tribunal, the only contention raised by the assessee was that the entire sum of Rs. 16,14,792 determined as business income under Section 41(1) of the Act, was eligible for deduction under Section 80HHC of the Act notwithstanding the fact that the assessee had only created a reserve of Rs. 11,20,750 in the profit and loss account of the previous year. According to the assessee, he had created a reserve in the account, the amount claimed as deduction under Section 80HHC of the Act and the amount eligible for deduction under Section 80HHC of the Act got enhanced only because of the order of assessment made by the Assessing Officer and in such a situation, the excess added or the addition to business income made by the Assessing Officer, was eligible for computation as deduction under Section 80HHC of the Act, even though the said amount had not been provided for as a reserve in the profit and loss account for the previous year. The Income-tax Appellate Tribunal accepted this contention of the assessee and setting aside the order of the Assessing Officer and that of the Commissioner of Income-tax (Appeals), remitted the question to the Assessing Officer directing him to consider the amount of Rs. 5,60,851 also for the purpose of deduction under Section 80HHC of the Act. The Revenue having felt aggrieved by the view adopted by the Income-tax Appellate Tribunal on the scope of deduction under Section 80HHC of the Act, sought a reference of the following questions to this court under Section 256(1) of the Act :

(3.) IN terms of Sub-section (1) of Section 80HHC of the Act, a deduction equal to the aggregate of the amounts referred to in that sub-section, can be allowed in computing the total income of the assessee provided the conditions mentioned in the said sub-section are satisfied. The proviso that occurs first, imposes the condition that the deduction under the section shall not exceed the profits derived by the assessee from the export of goods or merchandise. The further proviso says that an amount equal to the amount of the deduction claimed under this sub-section should have been debited to the profit and loss account of the previous year in respect of which the deduction was to be allowed and credited to a reserve account to be utilised for the purposes of the business of the assessee. On a plain reading of Section 80HHC(1) of the Act, it appears to us that the eligibility for deduction under Section 80HHC(1) of the Act depends upon the conditions in the provisos being satisfied. We are concerned here with the further proviso which insists that the deduction can be granted, for an amount being equal to the amount debited to the profit and loss account of the previous year and credited to a reserve account to be utilised for the purposes of the business of the assessee.