2014 (10) TMI 388 - HC - Income Tax

Benefit of netting - Nexus with income Interest income Whether, whenever certain income is to be excluded for the purpose of deduction under section 80-I, 80-IA and 80HH, etc. gross income is to be excluded or only the net thereof or not Held that - Following the decision in M/s ACG Associated Capsules Pvt. Ltd. (Formerly M/s Associated Capsules Pvt. Ltd.) & Others Versus The Commissioner of Income Tax, Central-IV, Mumbai & Others 2012 (2) TMI 101 - SUPREME COURT OF INDIA - for the purpose section 80HHC of the Act, it is not the entire amount received by the assessee on sale of DEPB credit, but the sale value of less the face value of the DEPB that will represent profit on transfer of DEPB credit by the assessee relying upon Topman Exports v. CIT 2012 (2) TMI 100 - SUPREME COURT OF INDIA - even other amounts, such as, interest or rent when are to be excluded for the purpose of explanation (baa) to section 80HHC of the Act - Ninety per cent of not the gross rent or gross interest, but the net thereof shall have be excluded - the amounts are to be excluded for the purpose of deduction u/s 80HHC of the Act - when the profit is being excluded from the claim of deduction, not the gross profit but the net thereof, that is the gross profit minus the expenditure incurred for earning such profit should be excluded the benefit of deduction u/s 80I of the Act on various incomes, such as, job work receipt, sale of empty soda ash bardan, sale of empty barrels and plastic waste is to be granted Decided against revenue. Soda ash project interest expenses and lab project interest disallowed Held that - Tribunal rightly came to the conclusion that there was interconnection, inter-lacing and inter-dependence of the management, financial and administrative control of various units of Nirma Limited - the business is continuation of the existing business and not a new business - the assessee through its existing administrative mechanism started a new facility for production of soda ash and had also set up facility for production of a material called lab for its captive consumption for the purpose of its existing manufacturing business - the assessee is engaged in the business of manufacture of soap and the soda ash and lab so produced is used by way of captive consumption the order of the Tribunal is upheld - Decided against revenue.

Issues Involved:

1. Netting of income for deductions under Sections 80I, 80IA, and 80HH.
2. Deduction eligibility of income from sales of by-products and miscellaneous items.
3. Deduction eligibility of interest from debtors.
4. Verification of expenses for netting purposes.
5. Deduction eligibility of project interest expenses.
6. Deduction eligibility under Section 35AB.

Analysis of Judgment:

1. Netting of Income for Deductions under Sections 80I, 80IA, and 80HH:
The Tribunal's decision to restore the issue back to the Assessing Officer (AO) for verifying the nexus between income and expenses and allowing netting was upheld. The Court referred to the Supreme Court decision in ACG Associated Capsules Pvt. Ltd. v. CIT, which established that only the net income (gross income minus expenses) should be excluded for deductions. This principle was extended to Sections 80I, 80IA, and 80HH, rejecting the Revenue's argument that the logic of netting should not apply to these sections.

2. Deduction Eligibility of Income from Sales of By-products and Miscellaneous Items:
The Tribunal's decision to allow deductions for income from sales of by-products such as poster papers, iron scrap, gunny bags, etc., was upheld. The Court relied on its previous decision in Dy.C.I.T. v. Harjivandas Juthabhai Zaveri, which granted similar deductions under Section 80I.

3. Deduction Eligibility of Interest from Debtors:
The Tribunal's decision to allow deductions for interest received on late payments was upheld. The Court referenced its decision in Nirma Industries Ltd. v. Deputy CIT, which recognized such interest as derived from eligible business activities and thus deductible under Section 80I.

4. Verification of Expenses for Netting Purposes:
The Tribunal's directive to the AO to verify the nexus between expenses and income for netting purposes was upheld. The Court emphasized that the net income (after deducting expenses incurred to earn the income) should be considered for exclusions and deductions.

5. Deduction Eligibility of Project Interest Expenses:
The Tribunal upheld the CIT (Appeals) decision allowing the deduction of soda ash project interest expenses and lab project interest expenses. The Court noted that the CIT (Appeals) and the Tribunal found a commonality of business and concluded that the expenses were for the expansion of the existing business, not a new one. The Court referenced CIT v. Alembic Glass Industries Ltd., which provided tests for determining whether an expense is part of an existing business or a new one. The Court agreed with the Tribunal's finding that the business was a continuation of the existing business, making the interest expenses deductible.

6. Deduction Eligibility under Section 35AB:
The Tribunal remanded the issue of the assessee's claim for deduction under Section 35AB back to the AO for full verification. The Court clarified that the issues remain open and should be examined afresh by the AO.

Conclusion:
The High Court dismissed the Revenue's appeal, upholding the Tribunal's decisions on various issues related to the netting of income, deductibility of interest and miscellaneous income, and project interest expenses. The Court emphasized the application of the net income principle for exclusions and deductions and affirmed the Tribunal's findings on the interconnectedness of business activities for deduction purposes.

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