2017 (5) TMI 1587 - HC - Income Tax

Interest receipt not constitute business income for the purpose of computation of exemption u/s 10B - 90% exclusion of net interest/rent or gross interest/rent Held that - In view of the decision of Supreme Court in case of ACG Associated Capsules (P) Ltd. vs. Commissioner of Income Tax Central-IV Mumbai 2012 (2) TMI 101 - SUPREME COURT OF INDIA Ninety per cent of not the gross interest/rent but only the net interest/rent which has been included in the profits of the business of the assessee as computed under the heads PGBP is to be deducted under clause (1) of Explanation (baa) to Section 80HHC for determining the profits of the business. Matter remanded back to A.O. to work out the deductions Decided in favor of assessee

Summary

Issues:
1. Interpretation of interest receipt as "business income" for exemption u/s 10B of the Act.
2. Disallowance of interest expenditure despite specific provisions u/s 57(iii) of the Act.

Issue 1: Interpretation of Interest Receipt as "Business Income" for Exemption u/s 10B of the Act

The appeals involved a common question of law regarding the treatment of interest receipts totaling specific amounts for the purpose of computing exemption under section 10B of the Act. The Court framed substantial questions of law related to whether the interest receipts should be considered as "business income" and whether the interest income, if considered under "income from other sources," could lead to the disallowance of corresponding interest expenditure. The Court referred to the Supreme Court decision in ACG Associated Capsules (P) Ltd. vs. Commissioner of Income Tax, Central-IV, Mumbai, emphasizing the computation of business profits under the head "Profits and Gains of Business or Profession." The Court highlighted the interpretation of Explanation (baa) to Section 80HHC, which specified deductions related to receipts by way of brokerage, commission, interest, rent, charges, or similar receipts. The Court concluded that the issue should be answered in favor of the assessee against the department, leading to the allowance of the appeals.

Issue 2: Disallowance of Interest Expenditure Despite Specific Provisions u/s 57(iii) of the Act

The judgment did not delve extensively into the second issue mentioned in the initial framing of substantial questions of law. However, the Court's reference to specific provisions under section 57(iii) of the Act indicated a concern regarding the potential disallowance of interest expenditure despite the existence of statutory provisions. While the judgment did not provide detailed analysis or discussion on this specific issue, it can be inferred that the Court's decision to answer the primary issue in favor of the assessee might indirectly impact the treatment of interest expenditure in the context of the overall decision. The Court's emphasis on the interpretation of relevant provisions and the application of legal principles to determine the tax treatment of interest receipts could indirectly influence the treatment of corresponding interest expenditure, ensuring a holistic approach to resolving tax disputes related to business income and exemptions under the Act.

In conclusion, the judgment by the Rajasthan High Court, delivered by Hon'ble Mr. Justice K.S. Jhaveri and Hon'ble Dr. Justice Virendra Kumar Mathur, addressed significant issues concerning the interpretation of interest receipts as business income for exemption under section 10B of the Act. The detailed analysis of legal provisions and the application of precedents highlighted the importance of accurately computing business profits and adhering to statutory deductions. The decision in favor of the assessee underscored the court's commitment to upholding the principles of tax law while ensuring a fair and just resolution to tax disputes.