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The Supreme Court, in a landmark judgement that will have a bearing on most export houses, has held that tax benefit for exports will be available only for those who profit from exports and not for those incurring losses. The court, hearing an appeal by Ipca Laboratories last week, also held that tax benefits cannot be claimed on the basis of profit from one part of export business alone.

Profit should be set off against the losses, if any, to determine the net profit from export business. If the exports result in a net loss, the company is not entitled to tax benefits, the court said. Only the net profit from exports is entitled for tax benefits under 80 HHC of the Income Tax Act.

The SC verdict goes against the practice of some corporates who separate the losses made in export of traded goods, (not manufactured by the exporter) from the profit made from exporting self-manufactured goods.
This method helped them claim tax benefits for the income received from the export of manufactured goods, though there may be losses from the business of traded goods. But the income-tax department did not agree with this. They started disallowing claim based on separating the profit from export of manufactured goods from the losses from export of traded goods.

Ipca Laboratories had moved the apex court against a high court order, which upheld the assessing officer's decision to disallow the claim of export income as the officer found that the company had separated the profit from the losses made from traded goods. According to the assessing officer, there was a net loss from the export business. In this case, Ipca laboratories had export earnings of Rs 3.8 crore, largely profit from the export of manufactured goods.

On the other hand, the company had made a loss of over Rs 6 crore on export of traded goods. The company, disregarded loss on the traded goods and claimed tax benefits on profits generated from export of manufactured goods. The assessing officer disallowed the claim for Rs 3.9 crore. The apex court, in its order, upheld the decision of the high court.

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