2015 (2) TMI 120 - HC - Income Tax

Computation of deduction u/S.80HHC - ITAT directing not to exclude 90% of interest on overdue payment of sale consideration in computing the deduction - Held that - Interest income on overdue payment is part of profit derived from it, however, this interest on overdue payment is received by the assessee on account of late payment of sale consideration by the overseas customers to whom the export have been made by the assessee. Thus considering case of Nirma Industries Ltd. (2006 (2) TMI 92 - GUJARAT High Court), such interest has a direct nexus with the sale price of an item which is exported. Hence, answer to question (A) shall be in affirmative in favour of assessee. Adjustment to the expenses having nexus with the earning of interest before excluding 90% of such interest under Explanation (baa) below section 80HHC despite the word used in the Explanation being receipts and not income and the adjustment of 10% having already been provided for expenses by a legal fiction - Held that - As relying on ACG Associated Capsules Pvt. Ltd. vs. CIT 2012 (2) TMI 101 - SUPREME COURT OF INDIA while calculating the amount of interest, the net interest income is to be considered and not the gross interest income. Under the circumstances, we find that the answer to question (B) shall be in affirmative in favour of the assessee. Exclusion of 90% of compensation in computing the deduction u/S.80HHC - Held that - The compensation received may be on account of improper functioning or less than the expected capacity of the windmill by the assessee would have a different category of the income received and it cannot be made corelatable to the profits and gains from business. In our view, so far as amount of compensation received is concerned, it has no element of export turnover of the assessee and therefore, a separate treatment would be required to be given.Rational for excluding 90% of the receipt by way of brokerage, commission, interest, rent or charges is that these are independent income and their inclusion in the profit of business would result into distortion.the income by way of compensation received by the assessee cannot be made directly relatable to the regular course of business as sought to be canvassed. Hence, we find that question (C) needs to be answered in negative by holding in favour of the revenue and against the assessee.

Summary

Issues Involved:
1. Exclusion of 90% of interest on overdue payment in computing deduction under Section 80HHC.
2. Adjustment of expenses related to earning interest before excluding 90% of such interest under Explanation (baa) below Section 80HHC.
3. Exclusion of 90% of compensation in computing deduction under Section 80HHC.

Detailed Analysis:

Issue (A): Exclusion of 90% of Interest on Overdue Payment
The primary question was whether the interest on overdue payment should be excluded by 90% while computing the deduction under Section 80HHC. The Tribunal had relied on the Gujarat High Court's decision in Nirma Industries Ltd. vs. DCIT, which held that interest on overdue payments is part of the profit derived from the business. The Tribunal directed the Assessing Officer to verify and allow the claim as per this precedent. The High Court confirmed this view, emphasizing that the interest has a direct nexus with the sale price of the exported item, thus affirming the Tribunal's decision in favor of the assessee.

Issue (B): Adjustment of Expenses Related to Earning Interest
The second issue was whether the expenses related to earning interest should be adjusted before excluding 90% of such interest under Explanation (baa). The Tribunal had directed the Assessing Officer to allow the expenditure with a nexus to earning the interest while working out the deduction under Section 80HHC. The High Court referred to the Supreme Court's decision in ACG Associated Capsules Pvt. Ltd. vs. CIT, which clarified that only net interest (gross interest minus expenses) should be considered for exclusion. Thus, the High Court affirmed the Tribunal's decision, holding in favor of the assessee.

Issue (C): Exclusion of 90% of Compensation
The third issue was whether 90% of the compensation received should be excluded in computing the deduction under Section 80HHC. The Tribunal had treated the compensation received for low generation of electricity as business income, thus including it in the computation of deduction under Section 80HHC. The High Court, however, disagreed, citing the Supreme Court's decision in CIT vs. Ravindranathan Nair, which emphasized that independent incomes like processing charges should be excluded to avoid distortion of export profits. The High Court concluded that the compensation received did not have an element of export turnover and required separate treatment, thus ruling in favor of the revenue.

Conclusion:
The High Court partly allowed the appeals, affirming the Tribunal's decisions on issues (A) and (B) in favor of the assessee, but ruled in favor of the revenue on issue (C). No order as to costs was made.