Supreme Court’s 3-Judges Bench clarifies computation of deduction on export profits to not exclude amounts claimed as deductions under other provisions of ITA

In the case of Shital Fibres Ltd. ^[1] (Taxpayer), the issue before the Supreme Court (SC) pertained to computation of the deduction available for export profits under the Income Tax Act, 1961 (ITA) when the same activity was also eligible for other income-linked tax incentives.

In the facts of the case, the Taxpayer was eligible to and claimed deductions under two separate income-linked incentive provisions of the ITA for the same eligible business activity, namely Section (S.) 80HHC (pertaining to export profits) and S. 80-IB (pertaining to profits from eligible industrial undertaking). The Taxpayer calculated the deduction under both the provisions independently. To illustrate, if profits of the eligible industrial undertaking which exported goods were INR 1000 and deduction under s. 80IB was INR 300, while computing exports linked deduction under s. 80HHC, the taxpayer computed pro-rated export profits with reference to profits of INR 1,000 rather than INR 700 (i.e., net of S. 80-IB deduction of INR 300). If the Taxpayer had exports of 50% from the eligible industrial undertaking, it claimed s.80HHC deduction of INR 500 i.e. 50% of INR 1,000 while the Tax Authority contended that the deduction had to be restricted to 50% of INR 700. While the eligibility and other parameters were undisputed, the Tax authority challenged the quantum by relying on the relevant provision of the ITA ^[2] which stated that when a deduction is claimed for certain income-linked tax incentives, the same amount shall not be again permitted as a deduction under any other similar incentive provision, and the cumulative deduction under both provisions shall not exceed the actual taxable profits from the eligible business activity. Consequently, the Tax Authority curtailed the deduction which position was upheld by the First Appellate Authority (FAA), Tribunal and the Punjab and Haryana High Court (HC).

There were divergent views, with a division bench of the Supreme Court ^[3] divided on the matter. One of judges supported the tax treatment by the tax authority (also backed by an earlier Delhi HC ruling in Great Eastern Exports^[4] ), while another ruled in favor of the Taxpayer’s computation (upheld by the Bombay HC in Associated Capsules (P) Ltd) ^[5] . The issue was referred to a 3-Judges Bench of the SC to resolve the judicial conflict.

The 3-Judges Bench of the SC accepted the basis of quantification of the Taxpayer and ruled that the deduction under S. 80HHC of the ITA Act should be computed without reducing the profits by the amount claimed under S. 80-IB. The deduction should be calculated based on the total profits from eligible business (i.e. INR 1000 in the above illustration). The SC upheld the Bombay HC ruling in Associated Capsules (P) Ltd (supra) as supported by one of the judges in the 2-Judges Bench ruling in Micro Labs Ltd. (supra). 

The 3-Judges Bench of the SC emphasized that the process of determining deductions occurs in two phases: first, at the calculation stage where the possible deduction amount is determined, and secondly, where the deduction is allowed against actual taxable profits from the eligible business activity. The SC held that provision denying duplicated deduction of same profits applies at the second stage, ensuring that total deductions do not exceed the actual taxable profits from the eligible business activity; however, such does not prohibit the inclusion of same profits in the computation of deduction under S. 80HHC.

^[1] Refer [TS-612-SC-2025] with lead case Civil Appeal No. 14318 OF 2015; 3-Judges Bench of Supreme Court (SC) with ruling dated 20 May 2025
^[2] S. 80-IB(13) r.w. S. 80-IA(9)
^[3] Micro Labs Ltd. [2016] 380 ITR 1 (SC)
^[4] [2011] 332 ITR 14 (Delhi)
^[5] [2011] 332 ITR 42 (Bombay)