2023 (6) TMI 1363 - AT - Income Tax

Deduction u/s 80HHC - CIT(A) holding that income classified as other income, though held as Business Income was not to be considered for the purpose of working out deduction u/s 80HHC - HELD THAT - If the receipt of the nature Staff quarter rent, Misc Receipts, gains in exchange, liabilities written back are chargeable as profits and gains of business and chargeable to tax u/s 28 of the Act, and if any quantum of these receipts is allowable as an expense in accordance with Sections 30 to 44D and is not to be included in the profits of the business of the assessee as computed under the head Profits and Gains of Business or Profession , ninety per cent of such quantum of the receipt of rent or interest will not be deducted under clause (1) of Explanation (baa) to Section 80HHC. Ninety per cent of not the gross of these receipts but only the net, which has been included in the profits of business of the assessee as computed under the head Profits and Gains of Business or Profession , is to be deducted under clause (1) of Explanation (baa) to Section 80HHC for determining the profits of the business. But no such exercise was taken up by the Ld. AO Therefore the wholesome effect of above is that Ld AO and so did the learned CIT(A) erred in law and in facts of the case in holding that income classified as other income, though held as Business Income was not to be considered for the purpose of working out deduction u/s 80 HHC. Ground decided in favour of the assessee. AO shall recompute the deduction u/s 80HHC, by considering these receipts without deducting 90% of these, while computing adjusted profits. Applicability of Section 80AB for not allowing deduction u/s 80HHC - Computation of deduction on the basis of net income - Directions to recompute the deduction u/s 80HHC, while giving effect to the judgment of Hon ble Supreme court in Commissioner of Income Tax-1 versus Reliance Energy Ltd. 2021 (4) TMI 1237 - SUPREME COURT Treatment to dividend income received - Direction for allowing the credit of taxes paid in Singapore on the dividend income as per the provisions of DTAA in accordance with law.

Summary

Issues Involved:
1. Validity of the CIT(A) order.
2. Classification of interest and dividend income.
3. Consideration of other income for deduction under Section 80HHC.
4. Deduction under Section 80HHC against "Income from Business" vs. "Gross Total Income".
5. Application of Section 80AB.
6. Applicability of the Supreme Court judgment in IPCA Laboratories Ltd. vs DCIT.
7. Netting of interest expense against interest income.
8. Credit for corporate taxes paid by subsidiary.

Summary:

Issue 1: Validity of the CIT(A) Order
- The assessee challenged the order dated 17.03.2006 by CIT(A), arguing it was "bad in law and void ab initio."

Issue 2: Classification of Interest and Dividend Income
- The CIT(A) upheld the AO's classification of interest income of Rs. 37,50,64,281 and dividend income (MTPL) of Rs. 97,70,591 as "income from other sources," denying the deduction under Section 80HHC.

Issue 3: Consideration of Other Income for Deduction under Section 80HHC
- The AO excluded Rs. 18,59,87,838 classified as other income from the deduction calculation under Section 80HHC. The Tribunal found this exclusion erroneous, stating that the AO failed to examine the nature of receipts and their nexus to export activities. The Tribunal directed the AO to recompute the deduction under Section 80HHC, including these receipts without deducting 90%.

Issue 4: Deduction under Section 80HHC against "Income from Business" vs. "Gross Total Income"
- The AO restricted the deduction under Section 80HHC to business income forming part of the gross total income, resulting in a negative adjusted business profit. The Tribunal noted that the AO must recompute the business income and adjusted business profit after considering the interest income issue and the determination of other income.

Issue 5: Application of Section 80AB
- The AO applied Section 80AB to limit the deduction under Section 80HHC, which the Tribunal found incorrect. The Tribunal directed the AO to recompute the deduction under Section 80HHC, considering the Supreme Court judgment in Commissioner of Income Tax-1 vs. Reliance Energy Ltd., which clarifies that Section 80AB pertains to the computation of deduction on the net income.

Issue 6: Applicability of the Supreme Court Judgment in IPCA Laboratories Ltd. vs DCIT
- The Tribunal noted that the AO relied on the IPCA Laboratories Ltd. case to deny the deduction under Section 80HHC. However, the Tribunal directed the AO to recompute the deduction, as the adjusted business profit might not be negative after considering the correct treatment of interest and other income.

Issue 7: Netting of Interest Expense against Interest Income
- The Tribunal restored the matter to the AO to decide afresh on the netting of interest expense against interest income for calculating the deduction under Section 80HHC.

Issue 8: Credit for Corporate Taxes Paid by Subsidiary
- The Tribunal allowed the additional ground raised by the assessee, directing the AO to allow credit for corporate taxes paid by MMTC Transnational Pte. Ltd., Singapore, in accordance with the provisions of the DTAA.

Conclusion:
- The appeal was allowed, and the AO was directed to recompute the deduction under Section 80HHC and allow credit for taxes paid by the subsidiary, following the Tribunal's detailed directions and relevant judicial precedents.