COMMISSIONER OF INCOME TAX KARNAL vs. K.T.M. INDIA

Facts

The Revenue (Principal Commissioner of Income Tax, Karnal) appealed against an order dated 04.12.2015 passed by the Income Tax Appellate Tribunal (ITAT), Delhi Bench 'D'. The ITAT had allowed the appeal of the respondent-assessee, M/s K.T.M. India, against an order dated 16.11.2007 by the Commissioner of Income Tax (Appeals), Karnal. For assessment year 2004-2005, the CIT(A) had directed the Assessing Authority to allow deduction under Section 80HHC to the assessee, a supporting manufacturer, in the same manner as a direct exporter. The assessee, a partnership firm manufacturing home furnishing items, had claimed deductions under Sections 80HHC and 80IB. The Assessing Officer completed the assessment on 26.12.2006, making several additions, including disallowing deduction under Section 80HHC and holding that the assessee did not qualify for it. The CIT(A) allowed relief on certain issues, including Section 80HHC deduction on DEPB receipts and difference in closing stock, but disallowed Section 80IB deduction on DEPB receipts and foreign travelling expenses. The ITAT initially dismissed the Revenue's appeal but later allowed the assessee's appeal regarding Section 80IB deduction.

Held

The High Court allowed the appeal filed by the Revenue and set aside the impugned order dated 04.12.2015 passed by the ITAT. The Court noted that the respondent-assessee did not dispute being a supporting manufacturer. In light of the Supreme Court's decision in CIT, Karnal vs. M/s Carpet India, Panipat (2019 AIR (Supreme Court) 5032), which clarified that a larger bench had held that supporting manufacturers cannot be treated at par with direct exporters for the purpose of deduction of export incentives under Section 80HHC, the Tribunal's order allowing the assessee's appeal was deemed incorrect. The ratio decidendi is that the principle laid down in Baby Marine Exports is distinguishable and the Carpet India judgment governs the issue for supporting manufacturers concerning export incentives under Section 80HHC.

Key Issues

1. Whether the respondent-assessee, a supporting manufacturer, can be treated at par with a direct exporter for the purpose of claiming deduction under Section 80HHC of the Income Tax Act, 1961, on export incentives. Assessee's contention: The assessee relied on the Supreme Court decision in CIT vs. Baby Marine Exports, (2007) 290 ITR 323 (SC), arguing that supporting manufacturers can claim deduction under Section 80HHC(1A) at par with direct exporters. Revenue's contention: The Revenue contended that the Supreme Court in CIT vs. Sterling Foods, (1999), 237 ITR 579, held that import entitlements cannot constitute profit derived from an industrial undertaking. Furthermore, the Revenue highlighted the Supreme Court's later decision in CIT, Karnal vs. M/s Carpet India, Panipat (2019 AIR (Supreme Court) 5032), which clarified that the Baby Marine Exports judgment was based on different facts and that supporting manufacturers cannot be treated at par with direct exporters for Section 80HHC deductions on export incentives.