2009 (8) TMI 827 - AT - Income Tax

Deduction u/s 80HHC - Whether the whole profit on sale of DEPB entitlement is to be treated as business profit - Whether for the profit referred to therein requires any artificial cost to be interpolated - Held that - The face value of DEPB is chargeable to tax under section 28(iiib) at the time of accrual of income, that is, when the application for DEPB is filed with the competent authority pursuant to exports and profit on sale of DEPB representing the excess of sale proceeds of DEPB over its face value is liable to be considered under section 28(iiid) at the time of its sale. Whatever is said about DEPB, shall also hold good for DFRC, on both its components, viz., the face value of DFRC and profit on its transfer, except for the fact that the profit on sale of DFRC shall be charged to tax under section 28(iiie). There is no dispute about the duty drawback, which shall be chargeable to tax at the time of accrual of income under section 28(iiic) when application is filed with the competent authority after making exports. - Since the necessary facts for the determination of the quantum of deduction under section 80HHC, are not available on record - AO is directed to compute the amount of relief. Disallowance of expences - Held that - Disallowance so made on account of telephone expenses is reasonable and does not warrant any further interference. Insofar as the disallowance of motor car expenses and interest on car loan is concerned AO has made disallowance at 20 per cent of such expenses which are on higher side. Thus order to restrict it to 10 per cent of these expenses Regarding Interest income and deduction under section 80HHC - Business income Vs. Interest income - Held that - It as an undisputed fact that the said interest was earned from the temporary deployment of business funds , as contended by the assessee before the authorities below - If the funds of the business are parked for safe keeping or with a view to earn interest income de hors the main business activity, the interest resulting therefrom cannot assume the character of business income and hence will resultantly fall under the residual head of income, viz. Income from other sources - Held that the interest income has been rightly held to be taxable under the last head of income and there is no amount deductible against this income - Appeals are partly allowed for statistical purpose

Issues Involved:
1. Whether the entire amount received on sale of DEPB entitlements represents profit chargeable under section 28(iiid) of the Income-tax Act or if the profit requires any artificial cost to be interpolated.
2. Computation of deduction under section 80HHC.
3. Classification and treatment of interest income.
4. Disallowance of telephone expenses, motor car expenses, and interest on car loan.

Detailed Analysis:

1. DEPB Entitlements and Section 28(iiid):
The primary question was whether the entire amount received on the sale of DEPB entitlements represents profit chargeable under section 28(iiid) or if the profit requires any artificial cost to be interpolated. The Tribunal held that the face value of DEPB is chargeable to tax under section 28(iiib) at the time of accrual of income, i.e., when the application for DEPB is filed with the competent authority pursuant to exports. The profit on the sale of DEPB, representing the excess of sale proceeds over the face value, is liable to be considered under section 28(iiid) at the time of its sale. The Tribunal concluded that the face value of DEPB cannot be reduced from the cost of purchases but is a separate income under section 28(iiib).

2. Computation of Deduction under Section 80HHC:
The Tribunal examined the computation of profits derived from exports under section 80HHC, which is a complete code in itself. They noted that the face value of DEPB should not be reduced from the cost of purchases. Instead, it should be treated as a separate income under section 28(iiib). The Tribunal clarified that the profit on the sale of DEPB (i.e., the amount in excess of the face value) falls under section 28(iiid). They also discussed the rationale behind the inclusion of DEPB and DFRC profits in the computation of deduction under section 80HHC, particularly noting the statutory discrimination between exporters with turnover exceeding Rs. 10 crores and those with lesser turnover.

3. Classification and Treatment of Interest Income:
The Tribunal addressed the issue of interest income, which was earned from the temporary deployment of business funds. They upheld the classification of such interest income under the head "Income from other sources" and not under "Profits and gains of business or profession." They emphasized that the interest income must have a direct nexus with the business activity to be classified under business income. They rejected the contention that the interest income should be considered as business income merely because business funds were deployed.

4. Disallowance of Telephone Expenses, Motor Car Expenses, and Interest on Car Loan:
The Tribunal upheld the disallowance of 10% of telephone expenses as reasonable. However, they found the disallowance of 20% of motor car expenses and interest on car loan to be on the higher side and restricted it to 10%.

Conclusion:
The Tribunal answered the main question in the negative, stating that the entire amount received on the sale of DEPB entitlements does not represent profit chargeable under section 28(iiid). They affirmed that the face value of DEPB should be deducted from the sale proceeds to determine the profit on the transfer. The Tribunal directed the Assessing Officer to compute the amount of relief in accordance with their view, ensuring that the face value of DEPB is treated as income under section 28(iiib) and the profit on its sale under section 28(iiid). They upheld the classification of interest income under "Income from other sources" and partially allowed the disallowance of expenses.

← Previous Next →