JAY KUMAR MITTAL, J. - (1.) IN this reference at the instance of the Revenue, the Income -tax Appellate Tribunal, Chandigarh Bench, Chandigarh (for 201/Chandi/1992 has referred the following question of law under s. 256(1) of the IT Act, 1961 (for short "the Act"), for the asst. yr. 1988 -89 : "Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the case of the assessee was covered under s. 80HHC(3)(a) and not under s. 80HHC(3)(b) of the IT Act, 1961, and that the CIT was not justified in withdrawing the deduction of Rs. 8,84,660 - under s. 80HHC of the Act was allowed at Rs. 17,12,765 as per the audit report. The Commissioner of Income -tax ("the CIT"), invoking the powers under s. 263 of the Act, came to the conclusion that since the business carried on by the assessee did not consist exclusively of exports outside India of the goods or merchandise to which s. 80HHC applied, the deduction had to be allowed to the assessee as per s. 80HHC(3)(b) of the Act on a pro rata basis. The CIT allowed deduction to the assessee under s. 80HHC at Rs. 8,28,105 as against the deduction of Rs. 17,12,765 allowed by the AO and held that deduction had been allowed in excess to the extent of Rs. 8,84,660. Accordingly, he recomputed the assessable income at Rs. 16,32,360 by adding the aforesaid amount of Rs. 8,84,660. The assessee took the matter in justified in resorting to the provisions of s. 263 and withdrawing the deduction of Rs. 8,84,660.
(2.) THE point that requires adjudication in this reference is whether an assessee who is engaged in the export business but his business actively does not consist exclusively of exports outside India of the goods or merchandise would be entitled to have deduction as per s. 80HHC(3)(b) on a pro rata basis or under s. 80HHC(3)(a) of the Act.
(3.) IT is apposite to refer to s. 80HHC of the Act as stood at the relevant time which reads thus : "80HHC. - -(1) Where an assessee, being an Indian company or a person (other than a company) resident in India, is engaged in the business of export out of India of any goods or merchandise to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction equal to the aggregate of, (a) four per cent, of the net foreign exchange realisation; and (b) fifty per cent of so much of the profits derived by the assessee from the export of such goods or merchandise as exceeds the amount referred to in cl. (a): Provided that the deduction under this sub -section shall not exceed the profits derived by the assessee from the export of such goods or merchandise : Provided further that an amount equal to the amount of the deduction claimed under this sub -section is debited to the P&L a/c of the previous year in respect of which the deduction is to be allowed and credited to a reserve account to be utilised for the purposes of the business of the assessee. (2)(a) This section applies to all goods or merchandise, other than those specified in cl. (b), if the sale proceeds of such goods or merchandise exported out of India are receivable by the assessee in convertible foreign exchange. (b) This section does not apply to the following goods or merchandise, namely : (i) mineral oil; and (ii) minerals and ores. (3) For the purposes of sub -s. (1), profits derived from the export of goods or merchandise out of India shall be, (a) in a case where the business carried on by the assessee consists exclusively of the export out of India of the goods or merchandise to which this section applies, the profits of the business as computed under the head 'Profits and gains of business or profession'; (b) in a case where the business carried on by the assessee does not consist exclusively of the export out of India of the goods or merchandise to which this section applies, the amount which bears to the profits of the business (as computed under the head 'Profits and gains of business or profession') the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee." A plain reading of cl. (a) of sub -s. (3) of s. 80HHC of the Act shows that for the purposes of sub -s. (1), profits derived from the export of the eligible goods or merchandise out of India in a case where business carried on by the eligible assessee consists exclusively of the export out of India of the goods or merchandise shall be the profits of the business as computed under the head "Profits and gains of business or profession". However, in a case where the business carried on by the eligible assessee did not consist exclusively of export out of India of the goods or merchandise but includes domestic sales as well as, then cl. (b) of sub -s. (3) it shall be the amount which bears to the profits of the business as computed under the head "Profits and gains of business or profession" the same proportion as the export turnover bears to the total turnover of the business carried on by the eligible assessee.;