Circular No. 600

554. Profits retained for export business in the case of tax-payers engaged in the business of growing and manufacturing tea - Calculation of claim of deduction

What this is

Circular No. 600 was issued by the Central Board of Direct Taxes on 23 May 1991. Its subject is 554. Profits retained for export business in the case of tax-payers engaged in the business of growing and manufacturing tea - Calculation of claim of deduction.

What it does

Settles the order of working for a tea grower-manufacturer claiming the export deduction under section 80HHC. Rule 8 first computes the composite income as business income and treats 40 per cent of it as chargeable to tax, the balance being agricultural income. The question was whether the section 80HHC deduction is taken off the whole composite profit or only off the 40 per cent. The Board holds that the deduction is allowed after the income chargeable under the head 'Profits and gains of business or profession' has been computed under rule 8, that is, from the 40 per cent figure, and illustrates the working with two examples.

Why it was issued

Tea exporters had made representations about the difficulty in computing the section 80HHC claim where rule 8 splits the profit.

Who it reaches

Companies and firms growing and manufacturing tea in India and exporting it
Assessing Officers computing a rule 8 case with an export deduction
Tea exporters whose sales are partly domestic and partly export

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.8OHH	no counterpart recorded
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.

554. Profits retained for export business in the case of tax-payers engaged in the business of growing and manufacturing tea - Calculation of claim of deduction
1. The Board has received representations regarding problems faced by tea exporters in calculating the claim of deduction under section 80HHC of the Income-tax Act.
2. In the case of tax-payers engaged in the business of growing and manufacturing tea, the income chargeable to tax from the sale of tea grown and manufactured in India, is computed under rule 8 of the Income-tax Rules. Under this rule, the composite income is first determined as if it were income derived from business and 40 per cent of such income is deemed to be income liable to tax.
3. The question raised in the said representations is whether the amount to be deducted under section 80HHC is to be computed with reference to the total income from the composite activity or whether it would be computed with reference to 40 per cent of the composite profits, being the part which is to be taken as income chargeable to tax. In other words, clarification has been sought whether the deduction under section 80HHC is to be made before allocation of composite profits under rule 8 or whether the allocation under rule 8 is to be made first and then deduction under section 80HHC allowed from 40 per cent of the composite profits.
4. These representations have been considered. The Board is of the opinion that deduction under section 80HHC is to be allowed after the income chargeable to tax under the head "Profits and gains of business and profession" has been computed under rule 8. This is illustrated by the following two examples :—
EXAMPLE I
Abbreviated Profit & Loss A/c

Rs.

Rs.

Expenses

1,200

Domestic sales

1,000

Profit

300

Exports (FOB)

500

1,500

1,500

Profits from tea business

Rs. 300

Allocation under rule 8 :

Income chargeable

under I.T. Act, 40 per cent

Rs. 120

Agricultural income

Rs. 180

Income chargeable to income-tax

Less : deduction under section 8OHHC

Rs. 120

Rs. 120 × 500

Rs. 40

Rs. 1,500

Rs. 80

EXAMPLE II
Abbreviated Profit & Loss A/c

Rs.

Rs.

Expenses

1,200

Export Sales

1,500

Profits

300

(FOB)

1,500

1,500

Profits from the business

Rs. 300

Allocation under rule 8 :

Income chargeable under I.T. Act 40 per cent

Rs. 120

Agricultural income

Rs. 180

Income chargeable to income-tax

Rs. 120

Less : Deduction under section 80HHC

Rs. 120

Taxable income

Rs. Nil

Circular : No. 600, dated 23-5-1991.

What to watch

Taking the deduction before the rule 8 split would give a far larger claim; the Board's order of working keeps it to the taxable 40 per cent.
The export turnover to total turnover proportion is applied to the rule 8 figure, as the worked examples show.
Where the whole turnover is export, the deduction can wipe out the taxable 40 per cent altogether, as the second example shows.
The illustration follows the section 80HHC formula as it then stood, and the circular speaks only to tea income computed under rule 8.
Some section numbers in the text before you are garbled in transcription; the working is on section 80HHC.

Where you meet it

In the assessment of a tea company where the Assessing Officer recomputes the section 80HHC deduction on the post-rule 8 figure, and in the appeal on quantum that follows.

An example

Ours, not the Board’s: a worked case built from the rule the instrument sets, to show how it falls out.

A tea company shows profits of Rs. 300 from a turnover of Rs. 1,500, of which exports on FOB basis are Rs. 500. Under rule 8, Rs. 120 is chargeable to income-tax and Rs. 180 is agricultural income. The section 80HHC deduction is Rs. 120 multiplied by Rs. 500 over Rs. 1,500, that is Rs. 40, leaving Rs. 80 chargeable.

What it names

Rules it names. Rule 8 of the Income-tax Rules, 1962. The 1962 Rules were replaced by the Income-tax Rules, 2026, which renumbered nearly everything: a rule number quoted here almost never means the same rule today.

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. 575 — 545. Whether ‘convertible foreign exchange’ does not include remittances from Nepal and Bhutan 31 August 1990

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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.