Telangana High Court
Krebs Biochemicals And Industries … vs Dy. Commissioner Of Income Tax on 19 June, 2026
Author: P.Sam Koshy
Bench: P.Sam Koshy
1
IN THE HIGH COURT FOR THE STATE OF TELANGANA AT HYDERABAD
THE HON'BLE SRI JUSTICE P.SAM KOSHY
AND
THE HON'BLE SRI JUSTICE SUDDALA CHALAPATHI RAO
ITTA.Nos.30, 31 and 32 of 2009
Dt.19.06.2026
Between:
Krebs Biochemicals & Industries Ltd.
.... Appellant
and
Dy. Commissioner of Income Tax
...Respondent
COMMON JUDGMENT:
(Per the Hon’ble Sri Justice Suddala Chalapathi Rao)
1. Since the instant appeals pertains to the very same assessee, but
for different assessment years of 2002-03, 2003-04 and 2004-05 and as
the dispute is one and the same, giving rise to common questions of law,
all the appeals are heard analogously and decided by this common order.
2. The brief facts of the case are that, the appellant/assessee is a
public limited company engaged in the manufacture and export of bulk
drugs and is assessed to income tax under the jurisdiction of the Deputy
Commissioner of Income Tax, Circle-2(1), Hyderabad. For the
2
assessment years 2002-03, 2003-04 and 2004-05, the appellant filed its
returns of income claiming deductions under Sections 80HHC and 80IB
of the Income Tax Act, 1961 (for short ‘the Act’). Upon scrutiny, the
Assessing Officer completed the assessments under Section 143(3) by
disallowing the claim relating to deferred sales tax liability under Section
43B for the respective assessment years and consequently restricting the
deductions admissible under Sections 80HHC and 80IB of the Act.
3. Aggrieved by the aforesaid disallowance, the appellant/assessee
preferred appeals before the Commissioner of Income Tax (Appeals) (for
short, ‘CIT(A)’). The CIT(A), however, dismissed the appeals and affirmed
the orders passed by the Assessing Officer. The appellant thereafter
carried the matter in further appeal before the learned Income Tax
Appellate Tribunal (hereinafter referred to as ‘ITAT’), which also upheld
the findings of the Assessing Authority. Aggrieved by the orders passed
by the learned ITAT in the respective ITAs, the appellant has preferred
the present appeals before this Court.
4. The learned Assessing Officer, the CIT(A) and the learned ITAT have
concurrently held that the appellant/assessee failed to establish that the
deferred sales tax liability had been converted into a loan. It was further
3
observed that there was neither any agreement with the Commercial Tax
Department regarding repayment of the deferred amount nor any
evidence, such as an adjustment in the sales tax assessment order or
corresponding entries in the Government accounts, demonstrating such
conversion. It was also held that the mere issuance of an Eligibility
Certificate enabling the assessee to avail the sales tax deferment scheme
would not, by itself, amount to conversion of the liability into a loan so as
to attract the benefit under Section 43B of the Act.
5. This Court has admitted the appeals for the following substantial
questions of law:
a) Whether the Hon’ble Tribunal is justified in holding that
the deduction claimed by the assessee being the sales tax
deferment could have been disallowed under Section 43B
of the Income Tax Act, 1961?
b) Whether on the facts and circumstances of the case, the
Hon’ble Tribunal is justified in upholding the order of the
lower authorities that the assessee is not entitled to
deduction under Section 80 IB of the Income Tax Act,
1961, in respect of the export incentives?
c) Whether on the facts and circumstances of the case, the
Hon’ble Tribunal is justified in holding that while
computing deduction under Section 80HHC, the revenue
can reduce the deduction claimed by the
assessee/appellant under Section 80IB of the Income Tax
Act, 1961?
4
6. Heard Sri Karan Talwar, learned counsel representing M/s CKR
Associates for appellant/assessee and Ms J.Sunitha, the learned Senior
Standing Counsel for Income Tax Department for respondent/Revenue.
CONTENTIONS OF THE COUNSEL FOR APPELLANT:
7. Though the instant appeals were admitted on substantial questions
of law (a), (b) and (c), the learned counsel for the appellant/assessee has
not pressed Question No.(b) and has confined his submissions to
Questions (a) and (c). In essence, the issues that arise for consideration
are: (a) whether the sales tax deferment is liable to be disallowed under
Section 43B of the Act; and (c) whether, while computing deduction
under Section 80HHC, the deduction already allowed under Section 80IB
is required to be reduced.
8. Insofar as Substantial Question No.(a), the learned counsel for the
appellant/assessee contends that the learned ITAT and the lower
authorities erred in holding that the deferred sales tax liability had not
been converted into a loan solely on the ground that the assessee failed
to produce the agreement to that effect. He further submits that the
appellant had admittedly produced the Eligibility Certificate and as such,
the conversion of the sales tax liability into a loan need not necessarily
5
be evidenced by a formal agreement, and when once the competent
authority passed adjustment orders giving effect to the deferment scheme
by treating the sales tax dues as a loan liability, such adjustment itself
constituted valid conversion. He further contends that the lower
authorities, including the learned ITAT, failed to appreciate this aspect in
its proper perspective. In this context, the learned counsel has drawn the
attention of this Court to paragraph 9 of the order of the learned ITAT,
which reads as follows:
“Apart from eligibility certificate, the assessee has to show that
the liability was in fact converted into loan by way of an
agreement or by way of entry in the Government Account or by
way of set-off or adjustment in the sales tax assessment
order.”
9. The learned counsel, referring to the above findings, submits that
pursuant to audit proceedings under the VAT Act, the jurisdictional
Commercial Tax Officer issued adjustment orders dt.27.06.2016 in
respect of the assessment years 2002-03 and 2003-04, whereby excess
tax available for subsequent years was adjusted towards the deferred
sales tax dues relating to the earlier assessment years, and these
adjustment orders specifically contain year-wise particulars of the
deferred tax liability and clearly demonstrate that the deferred sales tax
6
liability stood recognized under the Government deferment scheme. It is
further submitted that similar adjustment orders were subsequently
passed in the years 2016, 2017 and 2022 and since the said orders were
passed after the proceedings before the learned ITAT and even after the
present appeals were filed, as such the appellant could not file them
along with the appeals, but however, they were produced them before
this Court by way of additional evidence, and that since the said
adjustment orders are statutory orders passed by the Commercial Tax
Officer, this Court can take judicial notice of the same and direct the
authorities to consider them, even de hors the application filed under
Order XLI Rule 27 of the Code of Civil Procedure.
10. The learned counsel further submits that the only basis on which
the learned ITAT and the lower authorities rejected the appellant’s claim
was the absence of material evidencing conversion of the deferred sales
tax liability into a loan. It is contended that since the subsequent
adjustment orders issued by the Commercial Tax Officer conclusively
establish that the deferred sales tax liability was treated by the
Commercial Tax Department as a liability under the Government
deferment scheme, repayable with interest, it thereby satisfies the very
requirement observed by the learned ITAT. It is, therefore, contended
7
that the orders of the Assessing Officer, the Appellate Authority and the
learned ITAT deserve to be set aside and the matter be remitted to the
Assessing Officer for fresh consideration in the light of the adjustment
orders passed by the Commercial Tax Officer for the years 2016, 2017
and 2022.
11. The learned counsel also placed reliance on Section 16C of the
Andhra Pradesh General Sales Tax Act, 1957, as well as the subsequent
amendment introduced by Act 25 of 2002, whereby the expression
“Government Loan extended to the dealer due to treating deferred tax as
deemed to have been paid” was incorporated, to contend that the
amendment recognizes the statutory position that, upon conversion
under the Government scheme, the deferred sales tax liability assumes
the character of a Government loan. Reliance is also placed on CBDT
Circular No.496, dt.25.09.1987, which clarifies that where sales tax
liability is converted into a loan in accordance with a Government
Scheme, such conversion is to be treated as payment for the purposes of
Section 43B of the Act.
12. Learned counsel for the appellant therefore, submitted that the
findings recorded by the learned ITAT and the lower authorities cannot
8
be sustained in view of the adjustment orders issued by the Commercial
Tax Officer, which now satisfies the very deficiency noted by them,
namely, the absence of material establishing conversion of the deferred
sales tax liability into a loan, thereby entitling the appellant to the benefit
under Section 43B of the Act.
13. The learned counsel also relies upon the decision of the Hon’ble
Punjab and Haryana High Court in CIT v. Gopal Cotton Industries 1, to
contend that additional evidence, if found relevant, ought to be taken on
record and the matter remitted to the Assessing Officer for verification of
its authenticity and relevance, after affording an opportunity of hearing
to the appellant/assessee. It is, therefore, urged that Substantial
Question No.(a) deserves to be answered by remanding the matter to the
Assessing Officer for fresh consideration for proper verification and
consequential orders.
14. Insofar as Substantial Question No.(c), the learned counsel for the
appellant submits that the view adopted by the learned ITAT in reducing
the deduction allowable under Section 80HHC by the amount of
deduction granted under Section 80IB is contrary to law. Learned
1
2017 392 ITR 276 (P&H)
9
counsel further submits that though Section 80IA(9), made applicable to
Section 80IB by virtue of Section 80IB(13), which was inserted to prevent
double deduction of the same profits, the provision does not mandate
reduction of the eligible profits while computing deduction under Section
80HHC. It is contended that the Tribunal erred in relying upon the
decision in ACIT v. Rogini Garments 2 to uphold the stand of the
Department and consequently concluded that the deduction under
Section 80IB has to be reduced while computing the deduction under
Section 80HHC, and that the said interpretation is legally unsustainable.
15. In support of the above submission, the learned counsel places
strong reliance upon the judgment of the Hon’ble Supreme Court in CIT
v. Shital Fibers Ltd. 3 particularly paragraphs 22 and 24, wherein it has
been categorically held that the deduction allowable under Section 80IB
cannot be excluded while computing the deduction under Section
80HHC. It is, therefore, submitted that the controversy now stands
concluded by the law declared by the Hon’ble Supreme Court and,
accordingly, Substantial Question No.(c) deserves to be answered in
favour of the appellant/assessee.
2
(2007) 108 ITR 49 (Chennai) (SB)
3
2025 SCC Online SC 1178
10
CONTENTIONS OF THE COUNSEL FOR RESPONDENT:
16. Ms J.Sunitha, the learned Senior Standing Counsel for Income Tax
Department appearing for respondent/Revenue while supporting the
orders passed by the Assessing Officer, the Appellate Authority and the
learned ITAT, submits that the appellant failed to produce any material
before the authorities to establish that the deferred sales tax liability had
been converted into a Government loan during the relevant assessment
years, and that mere production of the Eligibility Certificate was not
sufficient to claim the benefit under Section 43B of the Act, and that the
Tribunal rightly held that the assessee was required to establish such
conversion by cogent evidence, which it failed to do.
17. The learned Senior Standing Counsel further submits that the
adjustment orders now relied upon by the appellant were not produced
before any of the authorities below and cannot be relied upon at this
stage to overcome the deficiencies in the appellant’s case. She further
contends that the concurrent findings recorded by the authorities are
based on the material available before them and do not call for
interference. Further, neither Section 16C of the Andhra Pradesh General
Sales Tax Act nor CBDT Circular No.496 assists the appellant in the
absence of proof of actual conversion of the deferred tax liability into a
11
Government loan, and therefore the learned Senior Standing Counsel
vehemently opposes the request for remand for giving the benefit under
Section 43B of the Act.
18. With regard to the deduction under Sections 80HHC and 80IB, the
learned Senior Standing Counsel submits that the learned ITAT rightly
upheld the computation made by the Assessing Officer by applying
Section 80IA(9), read with Section 80IB(13), so as to avoid double
deduction in respect of the same profits, and prays that the appeals be
dismissed.
CONSIDERATION BY THE COURT:
SUBSTANTIAL QUESTION ‘a’:
19. Admittedly, the Assessing Officer, the CIT(A) and the learned ITAT
rejected the claim of the appellant/assessee solely on the ground that no
material had been placed on record to establish that the deferred sales
tax liability had, in fact, been converted into a loan under the
Government scheme. According to the authorities, there was neither any
agreement with the Commercial Tax Department evidencing such
conversion nor any statutory adjustment order or other
contemporaneous record issued by the competent authority to
12
substantiate the appellant’s claim. It was on this limited premise that the
benefit claimed under Section 43B of the Act came to be denied.
20. For proper appreciation of the controversy, it is apposite to extract
the relevant portion of Section 43B of the Income Tax Act, 1961:
“43B. Certain deductions to be only on actual payment.–
Notwithstanding anything contained in any other provision of
this Act, a deduction otherwise allowable under this Act in respect
of–
(a) any sum payable by the assessee by way of tax, duty, cess or
fee, by whatever name called, under any law for the time being
in force;
…
shall be allowed (irrespective of the previous year in which the
liability to pay such sum was incurred according to the method of
accounting regularly employed by the assessee) only in computing
the income referred to in Section 28 of that previous year in which
such sum is actually paid by him.”
……
Explanation 4 (inserted to give effect to Government deferment
schemes) clarifies that where a deduction in respect of any sum
payable by way of tax, duty, cess or fee is deemed to have been
actually paid under any scheme framed by the Central Government
or a State Government, such amount shall be treated as having been
actually paid for the purposes of this section.
Note: The last paragraph (Explanation 4) is only accurate if your case
concerns the deeming fiction introduced in relation to Government
deferment schemes and the applicable assessment years. If this is
13
intended to be part of a High Court judgment, it would be preferable
to quote the exact statutory text applicable to AYs 2002-03 to 2004-
05 from the Bare Act rather than paraphrase it.
….”
21. It is not in dispute that the assessment order was passed on
09.03.2006 and that the appellant/assessee had already been granted
the benefit of sales tax deferment for the assessment years 2002-03 to
2004-05. It is equally undisputed that the Commercial Tax Officer
subsequently issued Form VAT 205 adjustment orders in the years 2016,
2017 and 2022, for the respective assessment years, which were
admittedly not available when the Assessing Officer completed the
assessments. They were also not in existence when the appeals were
heard by the learned ITAT or even when the present appeals were
instituted before this Court.
22. Be that as it may, the adjustment orders have now been passed by
the competent statutory authority, namely, the Commercial Tax Officer,
in exercise of the powers vested in him under the relevant enactment.
Though the appellant has filed applications under Order XLI Rule 27 of
the Code of Civil Procedure seeking to bring the said documents on
record, this Court is of the considered view that the adjustment orders,
being statutory proceedings issued by the competent authority, cannot
14
be ignored, particularly when it is an admitted position that the
appellant/assessee was extended the benefit of sales tax deferment for
the assessment years in question.
23. The principal reason which weighed with the Assessing Officer as
well as the learned ITAT in rejecting the appellant’s claim was the
absence of any material evidencing conversion of the deferred sales tax
liability into a Government loan. The subsequent adjustment orders
passed by the jurisdictional Commercial Tax Officer directly address this
deficiency. Since these statutory orders were not available at the time
when the assessment proceedings or the appellate proceedings were
concluded, the appellant cannot be denied such benefit for their non-
production. In these circumstances, in the interests of justice the
Assessing Authority is required to afford an opportunity to the assessee
to examine the effect of the said adjustment orders. Thus, in our
considered view, the Assessing Authority is bound to consider the claim
of the appellant/assessee afresh, keeping in view the adjustment orders
passed by the Commercial Tax Officer, and extend the benefit under
Section 43B of the Act by passing appropriate consequential orders.
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24. Accordingly, insofar as Substantial Question of Law No.(a) is
concerned, we hold that the matter deserves to be remitted to the
Assessing Authority for the limited purpose of examining Form VAT 205
adjustment orders issued by the jurisdictional Commercial Tax Officer in
the years 2016, 2017 and 2022. Upon such examination, the Assessing
Authority shall determine the appellant’s entitlement to the benefit
claimed under Section 43B of the Act and pass appropriate
consequential orders in accordance with law.
SUBSTANTIAL QUESTION ‘c’:
25. This issue no longer remains res integra, in view of the law laid
down by the Hon’ble Supreme Court, in Shital Fibers Ltd.‘s case(supra),
wherein the Hon’ble Supreme Court while considering an identical
question, has held that the deduction admissible under Section 80IB
cannot be excluded while computing the deduction under Section
80HHC. The principle laid down therein squarely governs the controversy
involved in the present appeals.
26. For better understanding, the relevant observations contained in
paragraphs 20 to 24 of the judgment in Shital Fibers Ltd.‘s case(supra),
are extracted hereunder:
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“20. Therefore, on plain reading of Sub-section (9) of Section 80-IA, if a
deduction of profits and gains under Section 80-IA is claimed and
allowed, the deduction to the extent of such profits and gains in any other
provision under the heading ‘C’ is not allowed. The deduction to the
extent allowed under Section 80-IA cannot be allowed under any other
provision under heading ‘C’. Therefore, if deduction to the extent of ‘X’ is
claimed and allowed out of gross total income of ‘Y’ under Section 80-
IA and the assessee wants to claim deduction under any other provision
under the heading ‘C’, though he may be entitled to deduction ‘Y’ under
the said provision, he will get deduction under the other provisions to the
extent of (Y-X) and in no case total deductions under heading ‘C’ can
exceed the profits and gains of such eligible business of undertaking or
enterprise.
21. Sub-section (9) of Section 80-IA, on its plain reading, does not provide
that when a deduction is allowed under Section 80-IA, while considering
the claim for deduction under any of the provision under heading ‘C’, the
deduction allowed under Section 80-IA should be deducted from the
gross total income. The restriction under sub-section (9) of Section 80-
IA is not on computing the total gross income. It restricts deduction
under any other provision under heading ‘C’ to the extent of the
deduction claimed under Section 80- IA.
22. Bombay High Court, in the case of Associated Capsules (P) Ltd. v. Deputy
Commissioner of Income Tax and Anr4 in paragraphs 38 and 39 held
thus:
“39. Strong reliance was also placed by the counsel for the Revenue on
the Special Bench decisions of the Tribunal in the case of Rogini
Garments (2007) 294 ITR (AT) 15 (Chennai) and Hindustan Mint and
Agro Products P. Ltd.(2009) 315 ITR (AT) 401 (Delhi), which are affirmed
by the Delhi High Court in the case of Great Eastern Exports (2011) 332
ITR 14.
Reliance is also placed on decision of the Kerala High Court in the case of
Olam Exports (India) Ltd. (2011) 332 ITR 40, which supports the case of the
Revenue.
40. We find it difficult to subscribe to the views expressed by the Delhi
High Court in interpreting the provisions of section 80-IA(9). In that case,
in fact, the counsel for the Revenue had argued (see paragraph 38 of the
judgment) that section 80-IA(9) applies at the stage of allowing deduction
and not at the stage of computing deduction under other provisions
under heading C of Chapter VI-A. It was argued that in the matter of
grant of deduction, the first stage is computation of deduction and the
second stage is the allowance of the deduction. Computation of
deduction has to be made as provided in the respective sections and it is
only at the stage of allowing deduction under section 80-IA(1) and also
17under other provisions under heading C of Chapter VI-A, the provisions
of section 80-IA(9) come into operation. While accepting the arguments
advanced by the counsel for the Revenue, it appears that the Delhi High
Court failed to consider the important argument of the Revenue noted in
paragraph 38 of its judgment. Moreover, without rejecting the argument
of the Revenue that section 80-IA(9) applies at the stage of allowing the
deduction and not at the stage of computing the deduction, the Delhi
High Court could not have held that section 80- IA(9) seeks to disturb
the method of computing the deduction provided under other provisions
under heading C of Chapter VI-A of the Act. In these circumstances, we
find it difficult to concur with the views expressed by the Delhi High
Court in the case of Great Eastern Exports [2011] 332ITR 14. For the
same reason, we find it difficult to subscribe to the views expressed by
the Kerala High Court in the case of Olam Exports [2011] 332ITR 40.
41. In the result, we hold that section 80-IA(9) does not affect the
computability of deduction under various provisions under heading C of
Chapter VI-A, but it affects the allowability of deductions computed
under various provisions under heading C of Chapter VI-A, so that the
aggregate deduction under section 80-IA and other provisions under
heading C of Chapter VI-A do not exceed 100 per cent. of the profits of
the business of the assessee. Our above view is also supported by
the dated December 23, 1998 ((1999) 235 TR (St.)35), wherein it is stated
that section 80-IA(9) has been introduced with a view to prevent the
taxpayers from claiming repeated deductions in respect of the same
amount of eligible income and that too in excess of the eligible profits.
Thus, the object of section 80- IA(9) being not to curtail the
deductions computable under various provisions under heading C of
Chapter VI-A, it is reasonable to hold that section 80-IA(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 80-IA(1) and the deduction
computed as per section 80HHC is Rs. 80, then, in view of section 80-
IA(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.”
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 Limited1 approved the view taken by Bombay High Court in the
aforesaid case. Paragraphs 47 and 48 read thus:
“47. 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
18under 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 Sections 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-HHC is to be
computed would be Rs 700, and not Rs 1000.
48. 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:-
“53. 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
19allowed” 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 Sections 80-HHC and 80-
IA when aggregated do not exceed profits and gains of such eligible
business of undertaking and enterprise.
54. As I find, the legislature has used the expression “shall not
qualify” in Sections 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.
20
24. In view of what we have held above, we find that the interpretation made
by the Bombay High Court in the case of Associated Capsules (P) Ltd.
v. Deputy Commissioner of Income Tax and Anr(Civil Appeal No.1914
OF 2012, dt.08.02.2012) appears to be logical and correct.”
27. In view of the law laid down by the Hon’ble Supreme Court in
Shital Fibres Ltd.‘s case (supra), this substantial question of law stands
settled in favour of the appellant/assessee.
28. The Hon’ble Supreme Court has clearly held that the deduction
allowed under Section 80-IA/80-IB cannot be reduced while computing
the deduction available under Section 80HHC. The provisions of Section
80-IA(9) only place a restriction on the total amount of deduction that
can ultimately be allowed under various provisions of Chapter VI-A and
do not provide for reducing the deduction already allowed under Section
80-IA/80-IB while calculating the deduction under another provision.
29. The Hon’ble Supreme Court has also upheld the view that the
deductions under different sections of Chapter VI-A have to be computed
separately in accordance with the respective provisions. After computing
the deductions, it has to be ensured that the total deduction allowed
does not exceed the eligible profits of the business. Therefore, the
deduction granted under Section 80IB cannot be deducted from the
profits while working out the deduction under Section 80HHC.
21
30. In the present case, the Assessing Officer, as well as the Appellate
Authority and the learned ITAT, proceeded on the basis that the
deduction allowed under Section 80IB has to be reduced while
computing the deduction under Section 80HHC. Such a view is contrary
to the law laid down by the Hon’ble Supreme Court. Once the legal
position has been settled by the Hon’ble Supreme Court, the contrary
view taken by the authorities below cannot be sustained.
31. Accordingly, the findings of the Assessing Officer, as confirmed by
the Appellate Authority and the learned ITAT, are liable to be set aside.
The substantial question of law is, therefore, answered in favour of the
appellant/assessee and against the Revenue.
CONCLUSION:
32. In view of the above findings, all the appeals are PARTLY
ALLOWED. The assessment orders passed by the Assessing Officer, as
confirmed by the Commissioner of Income Tax (Appeals) and the learned
ITAT, are all set aside to the extent indicated above. The matter is
remitted back to the Assessing Officer to consider the Form VAT-205
adjustment orders issued by the jurisdictional Commercial Tax Officer
during the years 2016, 2017 and 2022 and examine the effect of the said
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statutory orders while reconsidering the claim of the appellant/assessee
under Section 43B of the Income Tax Act. The Assessing Officer shall
also re-compute the deduction under Section 80HHC by applying the law
laid down by the Hon’ble Supreme Court in Shital Fibers Limited’s
case(supra) and extend the consequential benefit to the
appellant/assessee. After undertaking the above exercise, the Assessing
Officer shall pass appropriate consequential orders in accordance with
law after affording a reasonable opportunity of hearing to the
appellant/assessee. The aforesaid exercise shall be completed as
expeditiously as possible, preferably within a period of three(03) months
from the date of receipt of a copy of this judgment. There shall be no
order as to costs.
As a sequel, pending miscellaneous applications, if any, shall stand
closed.
_________________________________
P.SAM KOSHY, J
________________________________
SUDDALA CHALAPATHI RAO, J
19th June, 2026
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