Circular No. 463

550. Deduction under section 80HHC and equal amount credited to reserve account for export business - Whether distribution of dividends out of such statutory reserve is utilisation for business of the assessee

What this is

Circular No. 463 was issued by the Central Board of Direct Taxes on 11 July 1986. Its subject is 550. Deduction under section 80HHC and equal amount credited to reserve account for export business - Whether distribution of dividends out of such statutory reserve is utilisation for business of the assessee.

What it does

Holds that paying dividends out of the section 80HHC reserve does not break the condition attached to the deduction. Section 80HHC as substituted by the Finance Act, 1985 allows an Indian company or a resident person other than a company a deduction on profits derived from export of the goods or merchandise to which the section applies, and its proviso requires an amount equal to the deduction claimed to be debited to the profit and loss account of that previous year and credited to a reserve account to be utilised for the purposes of the assessee's business. The Board decides that distributing dividends out of that reserve does not infringe the proviso.

Why it was issued

The question whether distribution of dividends out of the statutory reserve amounted to utilisation of the reserve for the purposes of the assessee's business was considered by the Board.

Who it reaches

Exporting companies claiming section 80HHC and creating the statutory reserve
Companies declaring dividends out of accumulated reserves
Assessing Officers testing the utilisation condition in the proviso

The provisions it speaks to

Left, the provision of the Income-tax Act, 1961 as the instrument itself names it. Right, the section of the Income-tax Act, 2025 that the department’s own concordance maps it to — which is where the same ground is now covered.

Under the 1961 Act	Now
s.80HHC	no counterpart recorded

The instrument, as the Board published it

The words below are the department’s own, reproduced from its published text. Where the department’s copy carried a publisher’s notes after the instrument, those are not reproduced.

550. Deduction under section 80HHC and equal amount credited to reserve account for export business - Whether distribution of dividends out of such statutory reserve is utilisation for business of the assessee
1. Section 80HHC, as substituted by the Finance Act, 1985, provides that an assessee, being an Indian company or a person (other than a company) who is resident in India, exports out of India during the previous year any goods or merchandise to which this section applies, will be allowed [deduction of an amount, not exceeding 50 per cent of the profits derived by the assessee from the export of such goods or merchandise]. The proviso to this section lays down that an amount equal to the amount of the deduction claimed should be debited to the profit and loss account 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. The question whether distribution of dividends out of such reserve is utilisation of the reserve for the purposes of the assessee’s business has been considered by the Board. It has been decided that the provisions of the above proviso will not be infringed if dividends are distributed by the assessee out of such reserve.
Circular : No. 463 [F. No. 178/65/86-IT(A-I)], dated 11-7-1986.

What to watch

The circular answers only the dividend question; the reserve must still be created by an actual debit to the profit and loss account of the year of claim.
The amount credited must equal the deduction claimed, and it is the creation of the reserve, not its later use, that is the condition for the deduction.
Section 80HHC was amended many times after 1985 and the reserve requirement did not survive throughout, so read this against the text of the section for the year in issue.

Where you meet it

In an assessment where a section 80HHC deduction is sought to be withdrawn because the reserve was drawn down for a dividend.

On the same provision

Other instruments in this library that name the same provision of the 1961 Act. They are not necessarily still operative, and a later one may have replaced an earlier one without saying so.

Circular No. 1 — 558. Guidelines regarding filing of auditor’s report in old format of Form No. 10CCAC, along with the return, in place o 17 January 2001
Circular No. 729 — 557. Whether profits derived from export of cut and polished dimensional blocks, granite or other rocks is eligible for 1 November 1995
Circular No. 693 — 556. Whether profits derived from export of cut and polished dimensional blocks, granite or other rocks is eligible for 17 November 1994
Circular No. 680 — Sections 115J & 115JA 21 February 1994
Circular No. 624 — 555. Clarification regarding reopening of assessments on account of retrospective amendment made in section 80HHC in res 23 January 1992
Circular No. 600 — 554. Profits retained for export business in the case of tax-payers engaged in the business of growing and manufacturing 23 May 1991

← Circular No. 464 · Circular No. 462 →

A circular binds the department, not you and not a court. The Board issues a circular to its own officers. An assessee may hold the department to a circular that helps him; the department cannot hold an assessee to one that hurts him, and the Tribunal and the courts decide the law for themselves.

Source: the Income Tax Department’s own published text — its page for this instrument.