2015 (2) TMI 365 - HC - Income Tax

Deduction under Section 80HHC - deduction of interest in the context of determining the profits of business under Clause (baa) of Explanation to Section 80HHC - Held that - In deducting such interest, the AO will take into account the net interest i.e. gross interest as reduced by expenditure incurred for earning such interest. The decision of the Special Bench of the ITAT in Lalsons 2004 (2) TMI 294 - ITAT DELHI-E to this effect is affirmed. We differ from the judgments of the Punjab & Haryana High Court in Rani Paliwal 2003 (10) TMI 18 - PUNJAB AND HARYANA High Court and the Madras High Court in Chinnapandi 2006 (1) TMI 65 - MADRAS High Court . We are in agreement with the same. The only sentence, which we propose to added to Clause (i) is that by whatever terminology one may call it, it is the same component of interest that has gone into, while computing profits and gains of business or profession in whatever form, that would qualify for reduction to the extent of 90% under the Clause. - Decided in favour of assessee.

Issues Involved:
1. Deduction of interest in determining profits of business under Clause (baa) of Explanation to Section 80HHC.
2. Netting of interest income and interest expenditure.
3. Classification of interest income from deposits as business income or income from other sources.
4. Applicability of precedents and judicial interpretations.

Detailed Analysis:

Issue 1: Deduction of Interest in Determining Profits of Business under Clause (baa) of Explanation to Section 80HHC
The primary issue revolves around the deduction of interest while determining the profits of business under Clause (baa) of Explanation to Section 80HHC of the Income Tax Act. The respondent, involved in export business, claimed that only the net interest (difference between interest earned on deposits and interest paid on borrowed funds) should be deducted from the profits to the extent of 90%. The Revenue contended that unless the borrowed amount was used for business purposes, the corresponding interest could not be considered for deduction, arguing against netting and insisting on deducting gross interest.

Issue 2: Netting of Interest Income and Interest Expenditure
The respondent argued for netting, asserting that if netting occurred while determining profits and gains of business or profession, the same approach should be applied for the 90% deduction under the Clause. The Tribunal supported this view, stating that the differential amount post-netting qualifies for deduction. The Revenue's stance was that netting should only be considered if the borrowed funds were used for business purposes.

Issue 3: Classification of Interest Income from Deposits as Business Income or Income from Other Sources
The Revenue argued that interest earned from surplus funds parked in deposits should be classified as income from other sources and not qualify for deduction under the Clause. They cited the Delhi High Court's judgment in Commissioner of Income-Tax vs. Shri Ram Honda Power Equip, which emphasized that interest from surplus funds parked in banks should be treated as income from other sources under Section 56 of the Act, and not as profits and gains from business or profession.

Issue 4: Applicability of Precedents and Judicial Interpretations
The judgment extensively discussed judicial precedents, particularly the Delhi High Court's ruling in Shri Ram Honda Power Equip, which outlined the two-step process for determining profits of business under Clause (baa): first, computing profits under the head "profits and gains of business or profession" by applying Sections 28 to 44; second, deducting 90% of the specified receipts, including interest. The judgment affirmed that the term 'interest' in Clause (baa) connotes 'net interest' (gross interest minus expenditure incurred to earn such interest), supporting the netting approach.

Conclusion:
The High Court upheld the Tribunal's decision, agreeing that net interest should be considered for the 90% deduction under Clause (baa). It emphasized that if the interest income and expenditure were part of the profits and gains computation, the same process should be applied for deduction. The Court clarified that interest from deposits unrelated to business activities should be treated as income from other sources and excluded from business profits. The appeals were dismissed with this clarification, aligning with the Supreme Court's approval in ACG Associated Capsules Pvt. Ltd. vs. Commissioner of Income Tax. The judgment ensured that the same component of interest considered in computing profits and gains of business or profession should be used for the 90% deduction under the Clause, maintaining consistency in the process.

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