I made a profit on exporting my own manufactured goods and a bigger loss on exporting trading goods. Can I claim the deduction on the profit and ignore the loss?
No. The Supreme Court dismissed the appeal and held that where an assessee exports both self manufactured goods and trading goods, section 80HHC(3)(c) requires the profits of both to be counted, and a loss in one must be set against the profit in the other. Profit throughout section 80HHC means positive profit arrived at after taking losses into account. Section 80AB overrides the sections in Chapter VI-A, including section 80HHC, and requires income to be computed in accordance with the Act, which brings in losses as well as profits. Against a profit of Rs 3.78 crore and a loss of Rs 6.86 crore there was a net loss, so no deduction survived.
Decided by the Supreme Court (Supreme Court of India - S.N. Variava and H.K. Sema, JJ; judgment by S.N. Variava, J) on 2004-03-11, reported as (2004) 266 ITR 521; (2004) 12 SCC 742; AIR 2004 SC 3046; (2004) 135 Taxman 594. It bears on section 80HHC, section 80AB, section 80B(5) of the Income Tax Act 1961, in Deductions & Disallowances and How Tax Law Is Read matters.
This is the leading authority on positive profit in incentive deductions and it did two things at once. It settled that section 80AB has an overriding effect over every section in Chapter VI-A that has no contrary provision of its own, and it expressly held that the contrary decisions of the Bombay High Court in Shirke Construction Equipments and of the Kerala High Court in T.C. Usha, which treated section 80HHC as a self contained code outside section 80AB, are not correct law. The interpretive principle it states is used far beyond section 80HHC: an incentive provision is construed liberally, but liberality cannot confer a benefit the words do not give, and a construction leading to an absurd result is not adopted. It also disposes of the disclaimer argument - a disclaimer in favour of a supporting manufacturer passes on a deduction, it does not reduce the export house's turnover, and an export house with no deduction has nothing to pass on.
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The appellant was an export house holding a certificate issued by the Chief Controller of Imports and Exports. For assessment year 1996-97 it filed a return declaring nil income. Its taxable income before Chapter VI-A deductions was Rs 4.39 crore, against which it claimed various deductions including Rs 3.78 crore under section 80HHC. In assessment it emerged that the company exported both goods it manufactured itself and trading goods bought from supporting manufacturers. The Rs 3.78 crore claimed was the profit on exports of self manufactured goods, while exports of trading goods had produced a loss of Rs 6.86 crore. The appellant had issued disclaimer certificates in favour of the supporting manufacturers covering the entire export of trading goods. The Assessing Officer held that there was a net loss from export of goods and disallowed the deduction. The Commissioner (Appeals) dismissed the appeal on 11 October 1999, the Tribunal on 29 December 2000, and the Bombay High Court dismissed the appeal under section 260A on 2 July 2001.
The appeal was dismissed with no order as to costs. On a plain reading of section 80HHC, in arriving at the profits earned from export of both self manufactured goods and trading goods the profits and losses in both trades must be taken into account; if after that adjustment there is a positive profit the assessee gets the deduction, and if there is a loss he gets none. The word profit in section 80HHC means, in sub-section (1) and in sub-section (3) alike, a positive profit worked out after taking losses into consideration. Section 80AB overrides section 80HHC, and the decisions of the Bombay High Court and the Kerala High Court to the contrary cannot be said to be correct law. The argument that a disclaimer reduces the export house's turnover so that the trading loss drops out of the computation was rejected. The argument that a loss is a negative profit which, fed into the Board's formula, produces a deduction was also rejected, the Board's circular nowhere providing for negative profits.
The Court read the sub-sections structurally. Sub-section (3)(a) deals with export of self manufactured goods alone and (3)(b) with trading goods alone, so where Parliament wanted the two kept apart it said so. Sub-section (3)(c) deals with the case of both, and its opening words profits derived from such export, together with the word and between clauses (i) and (ii), show that both are to be counted. In any event clause (3)(c)(i) works on the adjusted profit of the business, which is profit reduced by the profit derived from export of trading goods, so a loss on trading goods necessarily enters the computation and cannot be ignored. Section 80AB, which opens with where any deduction is required to be made or allowed under any section of this Chapter and adds notwithstanding anything contained in that section, has overriding effect over the Chapter; section 80HHC contains no provision giving itself priority, so it is governed by section 80AB, which requires income to be computed in accordance with the Act, and that means losses as well as profits. On the meaning of profit, the Court held that the word takes its colour from context but that here it bears the same meaning throughout, namely positive profit after losses. Harprasad & Co, cited for the proposition that loss is negative profit, was held to tell against the assessee, since it says both positive and negative profits must enter the computation. On disclaimer, the proviso to sub-section (1) exists only to let an export house pass on a deduction to a supporting manufacturer; it does not reduce turnover, and the appellant's own figure of Rs 4.39 crore had been arrived at after taking the Rs 6.86 crore loss into account. The Court accepted that section 80HHC is an incentive provision to be construed liberally, citing Bajaj Tempo, but held that benefits not available on the words cannot be conferred and that an absurd result is not to be adopted.
In arriving at the figure of positive profit, both the profits and the losses will have to be considered. If the net figure is a positive profit then the assessee will be entitled to a deduction.
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Handle my notice → Ask a CA on WhatsAppNo. The Supreme Court dismissed the appeal and held that where an assessee exports both self manufactured goods and trading goods, section 80HHC(3)(c) requires the profits of both to be counted, and a loss in one must be set against the profit in the other. Profit throughout section 80HHC means positive profit arrived at after taking losses into account. Section 80AB overrides the sections in Chapter VI-A, including section 80HHC, and requires income to be computed in accordance with the Act, which brings in losses as well as profits. Against a profit of Rs 3.78 crore and a loss of Rs 6.86 crore there was a net loss, so no deduction survived. This was decided by the Supreme Court (Supreme Court of India - S.N. Variava and H.K. Sema, JJ; judgment by S.N. Variava, J) and bears on section 80HHC, section 80AB, section 80B(5) of the Income Tax Act 1961. It is reported as (2004) 266 ITR 521; (2004) 12 SCC 742; AIR 2004 SC 3046; (2004) 135 Taxman 594. This is the leading authority on positive profit in incentive deductions and it did two things at once. It settled that section 80AB has an overriding effect over every section in Chapter VI-A that has no contrary provision of its own, and it expressly held that the contrary decisions of the Bombay High Court in Shirke Construction Equipments and of the Kerala High Court in T.C. Usha, which treated section 80HHC as a self contained code outside section 80AB, are not correct law. The interpretive principle it states is used far beyond section 80HHC: an incentive provision is construed liberally, but liberality cannot confer a benefit the words do not give, and a construction leading to an absurd result is not adopted. It also disposes of the disclaimer argument - a disclaimer in favour of a supporting manufacturer passes on a deduction, it does not reduce the export house's turnover, and an export house with no deduction has nothing to pass on. If it applies to you, the first step is this: Work out the net figure across all the limbs the formula requires before claiming any Chapter VI-A deduction geared to profits; a loss in one limb kills the claim on another.
The appellant was an export house holding a certificate issued by the Chief Controller of Imports and Exports. For assessment year 1996-97 it filed a return declaring nil income. Its taxable income before Chapter VI-A deductions was Rs 4.39 crore, against which it claimed various deductions including Rs 3.78 crore under section 80HHC. In assessment it emerged that the company exported both goods it manufactured itself and trading goods bought from supporting manufacturers. The Rs 3.78 crore claimed was the profit on exports of self manufactured goods, while exports of trading goods had produced a loss of Rs 6.86 crore. The appellant had issued disclaimer certificates in favour of the supporting manufacturers covering the entire export of trading goods. The Assessing Officer held that there was a net loss from export of goods and disallowed the deduction. The Commissioner (Appeals) dismissed the appeal on 11 October 1999, the Tribunal on 29 December 2000, and the Bombay High Court dismissed the appeal under section 260A on 2 July 2001. The matter was decided on 2004-03-11 by the Supreme Court (Supreme Court of India - S.N. Variava and H.K. Sema, JJ; judgment by S.N. Variava, J). On those facts the Supreme Court held as follows. The appeal was dismissed with no order as to costs. On a plain reading of section 80HHC, in arriving at the profits earned from export of both self manufactured goods and trading goods the profits and losses in both trades must be taken into account; if after that adjustment there is a positive profit the assessee gets the deduction, and if there is a loss he gets none. The word profit in section 80HHC means, in sub-section (1) and in sub-section (3) alike, a positive profit worked out after taking losses into consideration. Section 80AB overrides section 80HHC, and the decisions of the Bombay High Court and the Kerala High Court to the contrary cannot be said to be correct law. The argument that a disclaimer reduces the export house's turnover so that the trading loss drops out of the computation was rejected. The argument that a loss is a negative profit which, fed into the Board's formula, produces a deduction was also rejected, the Board's circular nowhere providing for negative profits.
The Court read the sub-sections structurally. Sub-section (3)(a) deals with export of self manufactured goods alone and (3)(b) with trading goods alone, so where Parliament wanted the two kept apart it said so. Sub-section (3)(c) deals with the case of both, and its opening words profits derived from such export, together with the word and between clauses (i) and (ii), show that both are to be counted. In any event clause (3)(c)(i) works on the adjusted profit of the business, which is profit reduced by the profit derived from export of trading goods, so a loss on trading goods necessarily enters the computation and cannot be ignored. Section 80AB, which opens with where any deduction is required to be made or allowed under any section of this Chapter and adds notwithstanding anything contained in that section, has overriding effect over the Chapter; section 80HHC contains no provision giving itself priority, so it is governed by section 80AB, which requires income to be computed in accordance with the Act, and that means losses as well as profits. On the meaning of profit, the Court held that the word takes its colour from context but that here it bears the same meaning throughout, namely positive profit after losses. Harprasad & Co, cited for the proposition that loss is negative profit, was held to tell against the assessee, since it says both positive and negative profits must enter the computation. On disclaimer, the proviso to sub-section (1) exists only to let an export house pass on a deduction to a supporting manufacturer; it does not reduce turnover, and the appellant's own figure of Rs 4.39 crore had been arrived at after taking the Rs 6.86 crore loss into account. The Court accepted that section 80HHC is an incentive provision to be construed liberally, citing Bajaj Tempo, but held that benefits not available on the words cannot be conferred and that an absurd result is not to be adopted. In the words reproduced by the source cited on this page: "In arriving at the figure of positive profit, both the profits and the losses will have to be considered. If the net figure is a positive profit then the assessee will be entitled to a deduction."
It was decided by the Supreme Court on 2004-03-11 and is reported as (2004) 266 ITR 521; (2004) 12 SCC 742; AIR 2004 SC 3046; (2004) 135 Taxman 594. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 80HHC, section 80AB, section 80B(5), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The appeal was dismissed with no order as to costs. On a plain reading of section 80HHC, in arriving at the profits earned from export of both self manufactured goods and trading goods the profits and losses in both trades must be taken into account; if after that adjustment there is a positive profit the assessee gets the deduction, and if there is a loss he gets none. The word profit in section 80HHC means, in sub-section (1) and in sub-section (3) alike, a positive profit worked out after taking losses into consideration. Section 80AB overrides section 80HHC, and the decisions of the Bombay High Court and the Kerala High Court to the contrary cannot be said to be correct law. The argument that a disclaimer reduces the export house's turnover so that the trading loss drops out of the computation was rejected. The argument that a loss is a negative profit which, fed into the Board's formula, produces a deduction was also rejected, the Board's circular nowhere providing for negative profits. It arises in Deductions & Disallowances and How Tax Law Is Read matters, on section 80HHC, section 80AB, section 80B(5) of the Income Tax Act 1961, and was decided by Supreme Court of India - S.N. Variava and H.K. Sema, JJ; judgment by S.N. Variava, J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Do not argue that a provision is a complete code outside section 80AB unless it says so; section 80AB overrides every section in the Chapter that does not provide otherwise. Remember that a disclaimer certificate does not shrink your turnover, and that you cannot pass on to a supporting manufacturer a deduction you do not have. Use the liberal construction argument only where the words are capable of it; here the Court accepted the incentive purpose and still applied the language.
Still good law. The later history that was not checked before has now been searched: 327 decisions cite this judgment. The Madras High Court in CIT v P.R. Prabhakar (18 May 2004) records that the Supreme Court, while disapproving certain observations of the Bombay High Court, affirmed the decision in IPCA Laboratories; the Bombay High Court applied its reading of 'profits derived from such exports' in Rohan Dyes and Intermediates Ltd v CIT (4 August 2004); and the Karnataka High Court applied it in CIT v Global Corporation Ltd (8 December 2006). The Kolkata Tribunal in ACIT v Champdany Industries Ltd (28 January 2005) applied its holding that losses may not be ignored. Nothing overruling or doubting it was found; the Delhi High Court in CIT v Arya Exports and Industries (18 August 2017) held only that it did not consider the position of a supporting manufacturer. Section 80HHC now gives no deduction, so the decision is used for its holdings on the overriding effect of section 80AB and on 'profit' meaning a positive figure. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The batch line lists sections 80A(2) and 80-IA. Section 80-IA is nowhere in the judgment and section 80A(2) is not discussed; sections 80AB and 80B(5), which the Court does construe, are given instead. The harvested text includes a long extract from an earlier version of section 80HHC quoted in the course of discussing an earlier decision of the Court, and that decision is not named in the portion harvested. The figure of Rs 3,07,84,867 appears only in the appellant's alternative calculation and the judgment does not explain how it relates to the Rs 3.78 crore claimed or the Rs 6.86 crore loss. Circular No. 421 of 12 June 1985 and the later Board circular containing the disclaimer formula are referred to without the second being numbered. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal was dismissed with no order as to costs. On a plain reading of section 80HHC, in arriving at the profits earned from export of both self manufactured goods and trading goods the profits and losses in both trades must be taken into account; if after that adjustment there is a positive profit the assessee gets the deduction, and if there is a loss he gets none. The word profit in section 80HHC means, in sub-section (1) and in sub-section (3) alike, a positive profit worked out after taking losses into consideration. Section 80AB overrides section 80HHC, and the decisions of the Bombay High Court and the Kerala High Court to the contrary cannot be said to be correct law. The argument that a disclaimer reduces the export house's turnover so that the trading loss drops out of the computation was rejected. The argument that a loss is a negative profit which, fed into the Board's formula, produces a deduction was also rejected, the Board's circular nowhere providing for negative profits.
TaxSphere, “IPCA Laboratory Ltd v Deputy CIT”, https://taxnotice.vittsphere.com/caselaw/case/ipca-laboratories-ltd-v-dy-cit/ (validity last checked 2026-08-29)
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