600 : Circular No. 600, dated 23-05-1991

554. Profits retained for export business in the case of tax-payers engaged in the business of growing and manufacturing tea - Calculation of claim of deduction

1. The Board has received representations regarding problems faced by tea exporters in calculating the claim of deduction under section 80HHC of the Income-tax Act.

2. In the case of tax-payers engaged in the business of growing and manufacturing tea, the income chargeable to tax from the sale of tea grown and manufactured in India, is computed under rule 8 of the Income-tax Rules. Under this rule, the composite income is first determined as if it were income derived from business and 40 per cent of such income is deemed to be income liable to tax.

3. The question raised in the said representations is whether the amount to be deducted under section 80HHC is to be computed with reference to the total income from the composite activity or whether it would be computed with reference to 40 per cent of the composite profits, being the part which is to be taken as income chargeable to tax. In other words, clarification has been sought whether the deduction under section 80HHC is to be made before allocation of composite profits under rule 8 or whether the allocation under rule 8 is to be made first and then deduction under section 80HHC allowed from 40 per cent of the composite profits.

4. These representations have been considered. The Board is of the opinion that deduction under section 80HHC is to be allowed after the income chargeable to tax under the head "Profits and gains of business and profession" has been computed under rule 8. This is illustrated by the following two examples :—

EXAMPLE I

Abbreviated Profit & Loss A/c

				Rs.				Rs.
Expenses				1,200		Domestic sales		1,000
Profit				300		Exports (FOB)		500
				1,500				1,500
Profits from tea business								Rs. 300
Allocation under rule 8 :
Income chargeable
under I.T. Act, 40 per cent								Rs. 120
Agricultural income								Rs. 180
Income chargeable to income-tax
Less : deduction under section 8OHHC								Rs. 120
		Rs. 120 × 500						Rs. 40

Rs. 1,500

Rs. 80

EXAMPLE II

Abbreviated Profit & Loss A/c

	Rs.				Rs.
Expenses	1,200	Export Sales			1,500
Profits	300	(FOB)
	1,500				1,500
Profits from the business			Rs. 300
Allocation under rule 8 :
Income chargeable under I.T. Act 40 per cent			Rs. 120
Agricultural income			Rs. 180
Income chargeable to income-tax					Rs. 120
Less : Deduction under section 80HHC					Rs. 120
Taxable income					Rs. Nil

Circular : No. 600, dated 23-5-1991.

JUDICIAL ANALYSIS

u Circular No. 600, dated 23-5-1991 is not valid in law - Warren Tea Ltd. v. Union of India [1999] 102 Taxman 501 (Cal.).