2.4       Query

Determination of profit for the purpose of section 80 HHC of the Income-tax Act, 1961.

1. The querists have drawn the attention of the Expert Advisory Committee to sub-section 3(b) of section 80 HHC of the Income-tax Act, 1961, which provides that the profits from exports would be, “in case 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 & Gains of Business and Profession”) the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee.”

2. The querists have mentioned that there may be cases where an assessee carries on business of more than one commodity, say commodities A and B, and he exports only a part of the commodity A and the balance of commodity A as well as the whole of the commodity B are sold domestically. If the assessee is maintaining consolidated accounts for both the commodities, the following alternatives are open to him, in the view of the querists, to calculate the profits derived from exports of commodity A:

(a) He may calculate export profits by dividing the export turnover of commodity A with the total of turnover of A and B.

 

(b) He may calculate the gross profits of A and B and deduct therefrom the proportionate overheads calculated in ;proportion to the total turnover of A and B to arrive at the total net profit allocable to A and to calculate the profit from export of A, he may apportion the total net profits from A as calculated above by the export turnover and domestic turnover of A. From a careful reading of the section, one finds that the words used are “the amount which bears to the profits of the business the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee”. The word ‘business’ used in this section appears to imply, according to the querist, only the business of goods or merchandise to which this section applies and which are not exclusively but partly exported out of India. So, it should not cover the goods or merchandise which are not at all exported out of India by the assessee though he maintains consolidated accounts for such goods with the goods which are partly exported out of India. Thus, it appears to imply, ccording to the querist, that second alternative given above, being beneficial to the assessee, is the right approach. If this alternative is not found to be according to Law, there is another alternative which may be adopted by the assessee under ;which the profits may be calculated by deducting the total overheads of the business from the gross profits de rived from the commodities which are partly exported out of India and to calculate export profits he may apportion this net profit in the ratio of domestic and export turnover of such goods. This is a very conservative method, in the view of the querist, which will give the profits derived from the export of goods less than profits derived under any other method.

 3. The querists have sought the opinion of the Expert Advisory Committee as to which of the alternatives described in para 2 above are proper.

                                                                Opinion                                 September 18, 1988

The Committee is of the opinion that since section 80 HHC (3)(b) specifically lays down the manner of computation in a case where the business carried on by the assessee does not consist exclusively of the goods or merchandise to which this section applies, no other approach is permissible. Thus, only the alternative mentioned by querists in para 2 (a) above is permissible, i.e., the amount of qualifying export profits shall be computed as under;

            Export turnover

            (commodity A)                        Profits of the business (as computed

            ---------------------------X     under the head “Profits and Gains of

            Total turnover of                    Business or profession”)1

            the business carried

            on by the assessee

            (i.e. whole of commodity

            A + whole of commodity B)

Para 5.5 of Chapter 5 of Guidance Note on Audit under Section 80 HHB and 80HHC of the Income-tax Act, issued by the Institute of Chartered Accountants of India.

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1 Para 5.5 of Chapter 5 of Guidance Note on Audit under Section 80 HHB and 80HHC of the

Income-tax Act, issued by the Institute of Chartered Accountants of India.