2012 (9) TMI 17 - HC - Income Tax

Disallowance of claim of Section 80HHC(3)(b) - inclusion of rent and interest in the computation of the profits - Held that - As decided in P. R. Prabhakar Vs. Commissioner of Income Tax (2006 (7) TMI 121 - SUPREME COURT) that the amendment made to clause (baa) of the Explanation to Section 80HHC which defines profits of the business in such a manner as to exclude receipts like interest, commission etc. which did not have an element of turnover, was introduced prospectively by the Finance (No.2) Act, 1991 w.e.f. the assessment year 1992-93 and did not operate retrospectively - as assessment year in question was 1991-92 it was therefore held that it would not be permissible to exclude interest receipts even if the business from which interest arose did not have an element of turnover. As it is not permissible to exclude the domestic profits from the profits of the business in order to arrive at the export profits and that even if the domestic business (the money lending activity in the present case) was not capable of having any turnover , the deduction under Section 80HHC cannot be denied and it had to be computed proportionately from the formula prescribed by the sub-section (3) of Section 80HHC, which was Export Profits Profits of Business x (Export Turnover Total Turnover) - in favour of assessee.

Issues:
1. Interpretation of Section 80-HHC in relation to different types of goods in local business.
2. Relevance of Section 80 AB for computing deduction under Section 80-HHC.
3. Characterization of interest earned by the assessee as business income.
4. Requirement of nexus between domestic business and export business for deduction under Section 80-HHC.
5. Necessity of turnover in domestic business for deduction under Section 80-HHC.

Issue 1 - Interpretation of Section 80-HHC:
The case involved a reference made by the Commissioner of Income Tax regarding the applicability of Section 80-HHC in a situation where the assessee's local business dealt with goods different from those exported. The Assessing Officer proposed to exclude rent and interest receipts from the deduction calculation, arguing that only profits from the export business should be considered. The assessee contended that the formula prescribed in Section 80-HHC(3) was mandatory and included all profits of the business, even from money lending activities. The ITAT upheld the assessee's position, emphasizing the mandatory nature of the formula.

Issue 2 - Relevance of Section 80 AB:
The Tribunal held that Section 80 AB was not relevant for computing export profits under Section 80-HHC, considering the latter as a self-contained provision. It was established that the assessee's money lending activities constituted a business, and interest earned from such activities was deemed as business income. The Tribunal relied on a previous judgment to support its decision that excluding domestic profits from the business was impermissible under the statutory formula of Section 80-HHC.

Issue 3 - Characterization of Interest Income:
The primary concern was whether interest income, even if arising from a money lending business, should be considered domestic profits or export profits for Section 80-HHC purposes. The Tribunal concluded that the interest income was assessable as profits of the business and should not be excluded from the export profits calculation. The Tribunal highlighted the importance of adhering to the statutory formula without excluding any profits from the business.

Issue 4 - Nexus Between Domestic and Export Business:
The critical question revolved around whether a nexus between domestic and export business was necessary for claiming a deduction under Section 80-HHC. The Tribunal ruled that even if the domestic business (money lending) did not have a turnover, the deduction could not be denied. It emphasized that the deduction had to be computed proportionately from the formula specified in the sub-section, regardless of the nature of the domestic business.

Issue 5 - Turnover Requirement in Domestic Business:
Regarding the necessity of turnover in the domestic business for claiming a deduction under Section 80-HHC, the Tribunal clarified that the absence of turnover in the domestic business did not preclude the assessee from claiming the deduction. The Tribunal's decision was supported by a Supreme Court judgment, which confirmed that interest receipts, even without a turnover element, could not be excluded for assessment years before 1992-93.

In conclusion, the High Court answered the reframed question in favor of the assessee, citing the Supreme Court's judgment and clarifying that the amendment to exclude certain receipts did not apply retrospectively. The decision favored the assessee, and no costs were awarded.

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