2006 (6) TMI 261 - AT - Income Tax

Deductions - computation of business profit for the purpose of section 80HHC - whether deeming profit brought down by the assessee under section 41(1) cannot form part of the business profits for the purpose of section 80HHC? - HELD THAT - The profits of the business means the profit and gains computed under the provisions of sections 28 to 43C of the Income-tax Act 1961. Section 41(1) comes therefore among the provisions relating to the computation of business profits/gains. Section 41(1) provides for treating the assessment ( sic cessation) of liability as income provided those liabilities were claimed as deductions in computing the taxable income for earlier assessment years. It shows that section 41(1) is not creating any income as such independently without any basis. The profits and gains of the assessee were reduced to that extent in the earlier assessment years. When those liabilities ceased to exist it is very necessary to write back the liabilities as a result of which the amount needs to be offered as income in the accounts under section 41(1). Therefore there is no force in the argument of the revenue that the income deemed under section 41(1) stands alone differently and distinctly from the computation of business income of an assessee provided under the provisions of law contained in sections 28 to 43C. More particularly speaking with reference to section 80HHC the law does not differentiate the profits and gains of business on the basis of the colour of segments which contributed such business profits and gains. The exclusion provided in the Act with reference to section 80HHC is provided under Explanation ( baa ) where the law directs to exclude 90% of certain receipts - The write back provided under section 41(1) for the purpose of nullifying the effect of earlier deductions claimed towards central excise liability is not a receipt similar to brokerage commission interest or rent charges. Therefore Explanation ( baa ) has no application either. Thus any amount of profit construed under section 41(1) is nothing but business profits in its texture colour and character. Therefore the Assessing Officer is not justified in excluding the amount of Rs. 1, 71, 35, 268 in computing the business profits for the purpose of section 80HC - the Assessing Officer is directed to accept the computation of deduction under section 80HHC rendered by the assessee by including the income of Rs. 1, 71, 35, 268. This appeal filed by the assessee is allowed.

Summary

Issues:
Validity of reopening assessment under section 147
Computation of business profit for section 80HHC

Analysis:
The appeal involved a dispute regarding the reopening of assessment under section 147 and the computation of business profit for section 80HHC. The assessee, engaged in the business of manufacturing and exporting aluminum products, faced a challenge with the Central Excise department regarding excise duty payments. After a Supreme Court decision in favor of the assessee, a sum of Rs. 1,71,35,268 was offered for income-tax assessment under section 41(1) for the assessment year 1996-97. The Assessing Officer, however, excluded this amount from business profits for section 80HHC computation, leading to an income escaping assessment. The CIT(A) upheld this decision, prompting the appeal.

The first issue raised was the validity of the assessment reopening under section 147. The assessee, however, did not press this ground during the appeal. The second issue concerned the computation of business profit for section 80HHC. The assessee argued that the sum of Rs. 1,71,35,268, brought in by section 41(1), should be considered part of business profit as it was related to the earlier disputed liabilities. The revenue contended that such amounts should be excluded as they were not generated from regular business activities.

Upon detailed consideration, the tribunal found that section 41(1) did not create income independently but required writing back of previously claimed deductions. The tribunal emphasized that such deemed income under section 41(1) was integral to the overall business profit computation under sections 28 to 43C. The tribunal also noted that the exclusion provision in section 80HHC did not apply to the sum brought in by section 41(1) as it was not similar to specified receipts. Therefore, the tribunal concluded that the amount of Rs. 1,71,35,268 should be included in the computation of business profit for section 80HHC. Consequently, the appeal was allowed in favor of the assessee.