2009 (1) TMI 543 - AT - Income Tax

Issues Involved:
1. Addition of accrued interest on deep discount bonds.
2. Disallowance of depreciation on commercial vehicles.
3. Computation of deductions under section 80HHC/80-IB.
4. Exclusion of 90% of processing charges in the computation of deduction under section 80HHC.
5. Deduction under section 80-IA in relation to processing charges.
6. Inclusion of excise duty and sales tax in total turnover for deduction under section 80HHC.
7. Treatment of miscellaneous income for deductions under sections 80HHC and 80-IB.

Detailed Analysis:

1. Addition of Accrued Interest on Deep Discount Bonds:
The assessee contested the addition of Rs. 17,19,215 as accrued interest on deep discount bonds issued by ICICI and IDBI. The CIT(A) upheld the Assessing Officer's decision based on CBDT Circular No. 2 dated 15-2-2002, which stated that interest accrued on bonds is taxable in the relevant assessment year. However, the Tribunal found that the circular allowed existing bondholders to opt for the pre-circular law, which taxed gains on redemption/transfer as capital gains. Since the bonds were purchased before the circular's issuance, the Tribunal deleted the addition, allowing the assessee's appeal on this issue.

2. Disallowance of Depreciation on Commercial Vehicles:
The assessee claimed depreciation at 40% on commercial vehicles, which was disallowed by the Assessing Officer and upheld by the CIT(A) due to lack of proper classification. The Tribunal noted that the vehicles were motor lorries eligible for 40% depreciation under section 32(1) and directed the Assessing Officer to allow the claim, setting aside the CIT(A)'s order.

3. Computation of Deductions under Section 80HHC/80-IB:
The CIT(A) held that interest on margin money deposits could not be considered as 'income derived from business' for deductions under sections 80-IB and 80HHC. The Tribunal upheld this view but allowed the assessee's alternative plea for netting interest receipts against interest payments, directing the Assessing Officer to recompute the deductions accordingly.

4. Exclusion of 90% of Processing Charges in the Computation of Deduction under Section 80HHC:
The Tribunal ruled that 90% of processing charges must be excluded from eligible profits for deduction under section 80HHC, following the Supreme Court's decision in CIT v. K. Ravindranathan Nair. However, it directed the Assessing Officer to exclude only 90% of the net processing charges, considering the expenses incurred to earn such income.

5. Deduction under Section 80-IA in Relation to Processing Charges:
The CIT(A) allowed deduction under section 80-IA for processing charges, following the Bombay High Court's decision in Bangalore Clothing Ltd. The Tribunal upheld this decision, rejecting the revenue's appeal on this ground.

6. Inclusion of Excise Duty and Sales Tax in Total Turnover for Deduction under Section 80HHC:
The Tribunal upheld the CIT(A)'s decision to exclude excise duty and sales tax from total turnover for computing deduction under section 80HHC, in line with the Supreme Court's ruling in CIT v. Lakshmi Machine Works.

7. Treatment of Miscellaneous Income for Deductions under Sections 80HHC and 80-IB:
The CIT(A) treated miscellaneous income from the sale of gunny bags, scrap, sales tax written back, and bad debts recovered as derived from business, allowing deductions under sections 80HHC and 80-IB. The Tribunal found no infirmity in this reasoning and upheld the CIT(A)'s order, rejecting the revenue's appeal on this issue.

Conclusion:
The assessee's appeal was partly allowed, with significant relief granted on the issues of accrued interest on deep discount bonds, depreciation on commercial vehicles, and netting of interest receipts. The revenue's appeal was dismissed, with the Tribunal upholding the CIT(A)'s decisions on processing charges, excise duty, sales tax, and miscellaneous income.

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