M/S. HERO EXPORTS, G.T. ROAD, LUDHIANA versus COMMISSIONER OF INCOME TAX, (CENTRAL), LUDHIANA

Citation: [2007] 12 S.C.R. 337 · Decided: 20-11-2007 · Supreme Court of India · Bench: S.H. KAPADIA · Disposal: Appeal(s) allowed

Judgment (excerpt)

~ 
MIS. HERO EXPORTS, G.T. ROAD, LUDHIANA 
A 
v. 
COMMISSIONER OF INCOME TAX, (CENTRAL), LUDHIANA 
NOVEMBER 20, 2007 
B 
'""· 
[S.H. KAPADIA AND B. SUDERSHAN REDDY, JJ.] 
Income Tax Act, 1961-s.80HHC(3)(b) r/w clauses (d) and (e) of 
Explanation to s.80HHC(3)-Assessment Years 1994-95to1997-98-
Asses see engaged in export of trading goods-Deriving income from c 
such export and also other income on account of export incentives 
etc. -Common pool of expenses with regard to both incomes-Claim 
for adjustment of 10% of other income from export incentives etc. 
> 
against indirect cost of trading goods-Entitlement for-Held: 
D 
Entitled-Guidance value of 10% of other income from export 
incentives etc. is fair estimate-This guidance value flowing from the 
scheme of s. 80HHC rlw Memorandum to Finance Act of 1991-
Principle of attribution. 
Words and Phrases--"attributable", "direct costs" and "indirect E 
costs "-Meaning of-In context to s. 80HHC(3) (b) rlw clauses ( d) and 
(e) of the Explanation to s.80HHC(3) of the Income Tax Act, 1961. 
--~ 
The instant appeals filed by assessee related to the Assessment 
Years 1994-95, 1995-96, 1996-97and1997-98. 
F 
Assessee was engaged in the business of export of trading goods. 
In addition to the income derived from export of trading goods, assessee 
also earned other income from export incentives etc .. Assessee had one 
common pool of expenses with regard to both incomes. It claimed for G 
adjustment of10% of other income from export incentives etc. against 
indirect cost of trading goods while seeking deduction under s.80HHC 
oflncome Tax Act, 1961. 
Department attempted to prevent the aforesaid claim of the 
337 
H 
338 
SUPREME COURT REPORTS 
[2007] 12 S.C.R. 
A assessee by taking the stand that expenses incurred for earning export 
incentives etc. were not liable to be reduced/deducted from indirect costs 
under s.80HHC(3)(b) r/w clause (e) of the Explanation to Section 
80HHC(3). 
B 
The Assessing Officer and Commissioner (Appeals) disallowed the 
claim of assessee. Tribunal allowed the claim which was again reversed 
by the High Court. Hence the present appeal. 
Allowing the appeals, the Court 
C 
HELD: 1. Under s.80HHC(3)(b) which is the main section, the 
Legislature has provided that in cases falling under s. 80HHC(3)(b) 
direct and indirect costs attributable to such exports have to be deducted 
from the export turnover to arrive at Export Profits. Similar provision 
is made in clause (d) of the Explanation to Section 80HHC(3) which 
D defines the words "direct costs" to mean costs attributable to exports 
of trading goods. Moreover, clause (e) of the said Explanation defines 
"indirect costs" as costs which is not direct costs as defined in clause 
(d). The word "attributable" is wider than the word 'derived' 
E 
(Para 11] (349-B-D] 
2. There is no merit in contention of department that the question 
of allocation does not arise in cases falling under s.80HHC(3)(b ). Firstly 
clause ( e) to the Explanation which refers to allocation of costs applies 
toss. 80HHC(3)(a), 80HHC(3)(b) and 80HHC(3)(c). Secondly, 
F s.80HHC(3)(b) equates export profits to export turnover less direct and 
indirect costs attributable to the exports of trading goods. Therefore, 
the principle of attribution is retained. Thirdly, keeping in mind the 
provisions of s.80HHC(3)(b) read with clauses (d) and (e) of the 
Explanation it is clear that Legislature intended allocation of costs 
G between export turnover and total turnover. It is true that in most cases 
the apportionment may not apply to cases under s.80HHC(3)(b ). But 
in certain cases falling under s.80HHC(3)(b ), ratio still applies. 
(Para 12] (349-G-H; 350-A] 
3. The word "attributable" in s.80HHC(3)(b) in the main section 
H itself indicates that apportionment (principle of attribution) is not omitted 
HERO EXPORTS, G.T. ROAD, LUDHIANA v. COMMNR. 339 
OF INCOME TAX, (CENTRAL) 
from the said provision of s.80HH C(3)(b ). Assessee has two incomes A 
with one Common Pool of expenses and since "principle of attribution" 
has been retained in the scheme of section 80HHC, both in terms of 
s: 80HH C(3), clause ( e) to the Explanation to s.80HHC(3)( a), (b) and 
(c) and in clause (baa) to the Explanation to s. 80HHC, instead of going 
into lengthy exercise of dividing such Common Expenses, the assessee B 
has estimated the reduction of export turnover by 10% of the other 
income. Ultimately, clause (baa) to the Explanation is itself base

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