2012 (6) TMI 437 - HC - Income Tax

Reassessment u/s 147 / 148 - deduction claimed u/s 80HHC - Explanation (baa) - Whether the appellate authorities were correct in holding that wages, appraisal charges, repairs and renewals charges, received by the assessee cannot be reduced by 90 per cent. from the profits and gains of business as contemplated under Explanation (baa) read with section 80HHC(3)(c) of the Act for the purpose of granting deduction under section 80HHC(1) of the Act where the assessee had exported goods manufactured/processed/traded by it in India? - Whether the appellate authorities were correct in taking into consideration irrelevant circumstances like direct nexus between pay- ments and receipts positive and negative income instead of adopting the mandatory method of computation prescribed under section 80HHC of the Act for claiming deductions on exports manufactured/ processed/traded in India? The appellate authorities were justified in allowing the deduction under the head by setting aside the order of the assessing authority and were of the view that the assessee has to first prove that it was a trade debt and, secondly, it was irrecoverable and, thirdly, it was actually written off. Therefore, the said substantial questions of law are answered against the Revenue and in favour of the assessee. - Decision in f CIT v. Shri Ram Honda Power Equip 2007 (1) TMI 86 (HC) followed.

Issues Involved:
1. Whether wages, appraisal charges, repairs, and renewals charges received by the assessee should be reduced by 90% from the profits and gains of business as per Explanation (baa) read with section 80HHC(3)(c) of the Act for the purpose of granting deduction under section 80HHC(1).
2. Whether the appellate authorities erred in considering irrelevant circumstances like direct nexus between payments and receipts instead of adopting the mandatory method of computation prescribed under section 80HHC of the Act for claiming deductions on exports.

Detailed Analysis:

Issue 1: Reduction of Wages, Appraisal Charges, Repairs, and Renewals Charges by 90% from Profits
The Revenue contended that the receipts such as wages, appraisal charges, fixed deposits, and other amounts should be reduced from the profits of business for the purpose of section 80HHC deduction. The legislative intent, as per the Revenue, was to consider gross income from commission and not net commission for deduction purposes. The legislative amendment clarified that "profits of the business" for section 80HHC would exclude receipts by way of brokerage, commission, interest, rent, charges, or any similar nature, with an ad hoc 10% deduction for expenses incurred in earning these incomes.

Conversely, the respondent-assessee argued, supported by the decision in CIT v. Gokuldas Exports, that the net commission should be considered. The court examined the relevant provisions and judicial pronouncements, including the Supreme Court's interpretation in CIT v. Lakshmi Machine Works and Hero Exports v. CIT. It was established that the term "profits of the business" should exclude 90% of the net receipts (gross receipts minus related expenses) from the profits and gains of business.

The court concluded that 90% of the net commission should be deducted, aligning with the interpretation that the deduction applies to net receipts included in the profits of the business.

Issue 2: Consideration of Irrelevant Circumstances
The Revenue argued that the appellate authorities incorrectly considered irrelevant factors such as the direct nexus between payments and receipts, which deviated from the mandatory computation method prescribed under section 80HHC. The appellate authorities, however, relied on the principle that the computation of business profits under section 80HHC should first consider the profits computed under the head "Profits and gains of business or profession" as per sections 28 to 44D.

The court referred to the Delhi High Court's decision in CIT v. Shri Ram Honda Power Equip, which emphasized the two-step process: first, computing the business profits under sections 28 to 44D, and second, deducting 90% of specified receipts from the computed profits. This approach ensures that only net interest (gross interest minus expenses incurred to earn such interest) is considered for deduction, thereby preventing the distortion of export profits.

The court affirmed that the appellate authorities correctly applied the legal principles and did not consider irrelevant circumstances. The deduction method adopted was consistent with the statutory framework and judicial precedents, ensuring accurate computation of export profits for section 80HHC deductions.

Conclusion:
The court upheld the appellate authorities' decisions, confirming that the deductions under section 80HHC should be based on net receipts included in business profits. The substantial questions of law were answered in favor of the assessee, and the appeals were dismissed.

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