Profits arising from exports are tax-free under the provisions of Section 80-HHC, and in the case of units set up in a free-trade zone or in the case of export-oriented units, such profits are tax-free under Sections 10-A and 10-B of the Income-tax Act, 1961 respectively. Section 80-HHC states that where a person is engaged in the export of merchandise, a deduction would be allowed in respect of the profits earned from the exports which would be computed in accordance with and subject to the provisions of this section.

An interesting question arises where an exporter has carried forward losses and unabsorbed depreciation, which are to be brought forward and set-off under the provisions of Sections 72(2) and 32(2) respectively against income of the current year. Hence, the controversial issue is whetherthe exemption of the profit under Section 80-HHC is to be granted in respect of the profits of the current year or whether the past losses and unabsorbed depreciation are first to be set-off against the current year's profits and, thereafter, only the net amount becomes eligible for exemption.

While some benches of the tribunal have taken the view that the exemption under Section 80-HHC should be allowed in respect of the export profit after deducting the unabsorbed losses and depreciation, in a recent decision of the Andhra Pradesh high court, a more liberal view has been taken, allowing the exemption under Section 80-HHC without setting-off the past unabsorbed losses and depreciation.

In CIT vs Gogineni Tobacco Limited (238 ITR 970), the assessee derived income from tobacco trade. For the assessment year 1992-93, it had filed the return of income on December 30, 1992, admitting a loss of Rs 8,55,137 after deducting the carried forward loss of Rs 42,59,952 from the income of Rs 34,27,372.

While filingthe return, the assessee had not quantified the deductions under Section 80-HHC of the Income-tax Act, because of the loss admitted by the company. Subsequently, it filed a revised return claiming deduction of Rs 34,14,814 under Section 80-HHC of the Income-tax Act from the current year's income and requested that the unabsorbed business loss of Rs 20,45.751 and the unabsorbed depreciation of Rs 21,16,890 be carried forward to the subsequent years. While processing the return of income, no deduction under Section 80-HHC was allowed as, after the setting off of the unabsorbed business loss of Rs 20,45.751 and the unabsorbed depreciation of Rs 18,81,011 from the total income of Rs 34,27,372, the gross total income was nil.

Aggrieved by the disallowance, the assessee filed an appeal before the commissioner of income-tax (appeals). The commissioner of income-tax (appeals) vide his order dated December 23, 1994, held that there were conflicting decisions in regard to the income against which the deduction underSection 80-HHC was to be allowed and, as such, the issue was debatable in nature. The commissioner further held that as the issue was debatable in nature, it did not fall under prima facie adjustments.

On a reference, the high court pointed out that the Gujarat high court in Paushak Ltd vs CIT (210 ITR 535) and the Orissa high court in CIT vs Tarun Udyog (191 ITR 588) were dealing with the deductions concerned with the deductions permissible under Section 80-HHC of the Act. Therefore, the view expressed by the commissioner of income-tax (appeals) that in view of the difference of opinion between the Gujarat high court and the Orissa high court, the issue was debatable and, therefore, there could not be any prima facie adjustments under Section 143(1) (a) with regard to Section 80-HHC, was not correct.

Similarly, the tribunal was also not correct in holding that there was a debatable issue with regard to the deductions under Section 80-HHC, as the tribunal was also referring to judgments of the Orissa highcourt in Tarun Udyog's case and the Andhra Pradesh high court in CIT vs Venkateswara Transmission Ltd (216 ITR 510), which dealt with the deductions under Section 80-HH of the act. The reason was that the language used in Section 80-HH and Section 80-HHC was different.

The deductions permissible under Section 80-HH are from the gross total income which are to be arrived at by computing the total income in accordance with the provisions of the act. In other words, income has to be computed in accordance with the other provisions of the Act to arrive at the gross total income and from that gross total income, the deductions permissible under Section 80-HH are to be allowed.

Section 80-HHC enacts that in computing the total income of the assessee, deductions of the profits derived by the assessee are to be allowed in accordance with the subject to the provisions of this section. The expression used is "this section" which means Section 80-HHC. It does not say that the deduction is to be allowed from thegross total income. Therefore, the interpretation applicable to Section 80-HH is not relevant to Section 80-HHC.

In the light of the above, both the commissioner of income-tax (appeals) and the tribunal were not correct in holding that the deduction to be allowed under Section 80-HHC was debatable.

The next question was as to how to compute the total income under Section 80-HHC of the act. The section states that the deduction of profits derived by the assessee from the export of goods or merchandise would be in accordance with the subject to the provisions of Section 80-GHHC, in computing the total income of the assessee. In other words, in computing the total income of the assessee, the deduction of profits would be in accordance with and subject to the provisions of Section 80-HHC, thereby meaning that from out of the income declared, the deductions under Section 80-HHC were to be allowed first.

From a reading of this section, it is clear that the total income is to be computed in accordance with theprovisions of the act first. Thereafter, the deduction under Section 80-E is to be allowed. Whereas, under Section 80-HHC, the deduction under that section is to be allowed before working out the income under the other provisions of the act. Section 80-HHC does not use the words "as computed in accordance with the other provisions of this act." The section itself states that there shall, in accordance with an subject to the provisions of this section, be allowed a deduction of the profits derived by the assessee in computing the total income of the assessee.

Since the language used in Section 80-HHC is different from the language used in Section 80-E, the principle laid down by the Supreme Court in Combay Electric Supply Industrial Co Ltd vs CIT (113 ITR 84) , is not applicable to the interpretation of the Section 80-HHC of the act.

Thus, the Andhra Pradesh high court concluded that the full benefit of exemption under Section 80-HHC should be given to an exporter without reducing the unabsorbeddepreciation or past losses from the export profits. The high court has, in its judgment, not considered the provisions of Section 80-AB which stipulate that for computing the deduction under Chapter VI-A, the amount of income in respect of which deduction is claimed must be computed under the provisions of the act and such amount would be deemed to be income which is derived or received.

While unabsorbed depreciation under Section 32(2) would be taken into account for determining the amount taxable under Section 28, deduction under Section 72(2) for business losses is an independent provision for set-off. It is for this reason that, in some decisions of the tribunal, the unabsorbed depreciation is required to be set-off before exemption under Section 80-HHC is allowed. (SEE Asvini Cold Storage (P) Ltd vs CIT ((1999) 105 Taxman 341 (Mad Bench of ITAT.))

In view of the above, there is no doubt that litigation on this point will continue until the Supreme Court gives its final verdict on thesubject.

The author is a Supreme Court advocate