2016 (9) TMI 901 - HC - Income Tax

Deduction under Section 80HHC - whether the ITAT was right in holding that interest from others and also from IDBI constitute profit from the business for the purpose of computing deduction? - Held that - Firstly, the assessment order must reflect the correct position. Secondly, it is not always that a computation under the wrong head would have no tax effect. For instance, a loss under one head may not be permitted to be carried forward and adjusted against the loss under another head. Further, an error in including the income under the wrong head would result in multiple errors as the case before us itself demonstrates. On account of the income being computed under the wrong head of income in the computation of income, the error is carried forward while computing the deductions under sections 32AB and 80HHC. Moreover it is possible that the assessment could have an impact in the event of there being any amendment to the law. It is desirable, therefore, that the assessment order should reflect the correct position. This view is not contrary to or in conflict with the judgment of the Division Bench in CIT vs. Avery Cycles Industries Limited ( 2006 (9) TMI 96 - PUNJAB AND HARYANA HIGH COURT ). At the cost of repetition, the Department in that case did not make an application similar to the one made by Mr. Klar before us. Nor did the Department in that case agree that a fresh assessment order would be passed in accordance with the correct position in all respects relating to the assessment. There is no warrant for knowingly including amounts under a wrong head. To insist upon an error being continued invites the authorities and the court to endorse the error. There is nothing in law or in principle that requires or even permits this. There is nothing in law or in principle that prohibits the authorities under the Act or the Court from returning a finding regarding the correct head under which the income ought to be assessed and then directing the Assessing Officer to pass a fresh assessment order in accordance with the finding for all purposes. This course commends itself to us. Mr. Mittal submitted that under sub-section (3) of Section 80HHC the profits derived from export of goods or merchandise out of India shall be the amounts which bear to the profit of the business as computed under the head Profits and gains of business or profession . He submitted that the Assessing Officer has computed the interest under the head Profits or gains of business . He was bound by the terms of sub-section (3) itself to consider the same as business income. The argument begs the question it must first be determined as to whether the income is business income or not and thereafter consider the same for the purpose of section 80HHC. What sub-section (3) requires is a consideration of the profits of the business as rightly computed under the head Profits and gains of business . It cannot possibly require a consideration of the amounts wrongly computed under the head Profits and gains of business . Question answered in favour of the appellant/Revenue. Computing deduction u/s 32AB - whether all the receipts including non-business receipts viz the interest from others, the interest from IDBI, the rent receipt and the dividend income form part of the Profit of eligible business ? - Held that - The assessee s case admittedly falls under clause (b) of sub-section (3) and not clause (a). Clause (b) does not provide for the profits to be computed in accordance with the requirement of Parts-II and III of the Sixth Schedule to the Companies Act. These words are missing in clause (b). We see no reason then to read these words into clause (b). That would amount to re-writing clause (b) which is not permissible. The legislature having, in the same sub-section, provided for a particular manner of computation of profits in one clause but not in the other must be deemed to have intended the profits to be calculated differently in these sub-clauses. Mr. Mittal s submission is, therefore, rejected.It is true, as Mr. Mittal pointed out, that unlike as in Section 80HHC the words in clause (b) are not profits of the business as computed under the head Profits and gains of business . That, however, would make no difference. It was not necessary for the legislature to use the entire expression in clause (b) for sub-section (1) itself refers to income as including income chargeable to tax under the head Profits and gains of business or profession . The second question is, therefore, also answered in favour of the appellant/Revenue.

Summary

Issues Involved:
1. Whether interest from others and from IDBI constitutes profit from the business for the purpose of computing deduction under Section 80HHC.
2. Whether non-business receipts such as interest, rent, and dividend form part of the "Profit of eligible business" for the purpose of computing deduction under Section 32AB.

Issue-wise Detailed Analysis:

1. Interest from Others and IDBI as Business Profit for Section 80HHC:

The primary question was whether interest income from others and IDBI qualifies as business profit for computing deductions under Section 80HHC. The Tribunal had previously held that such interest should be included as business profits. However, the High Court disagreed, emphasizing that the assessee was not engaged in money lending, and the interest income should be classified under "Income from other sources" rather than "Profits and gains of business."

The Court noted that the assessee did not possess a money lending license and that the interest was earned from loans given to related parties, not as part of a business activity. The Tribunal's reliance on the decision in CIT Vs. Isher Dass Mahajan and Sons was found to be misplaced, as the facts differed significantly. The Court concluded that the interest income should be assessed under "Income from other sources," thus not qualifying for deductions under Section 80HHC.

2. Non-Business Receipts as Part of "Profit of Eligible Business" for Section 32AB:

The second issue pertained to whether non-business receipts like interest, rent, and dividend should be included in the "Profit of eligible business" for deductions under Section 32AB. The Court examined the relevant legal provisions and the assessment order, which excluded these incomes from business profits for deduction purposes.

The Court noted that the assessee's Memorandum of Association allowed for money lending, but there was no evidence that the assessee engaged in such activities. The interest income, therefore, did not qualify as business income. The Court also addressed the argument that the Assessing Officer had assessed the interest under "Profits and gains of business," stating that an error in the assessment should not perpetuate incorrect deductions.

The Court distinguished this case from CIT Vs. M/s Avery Cycles Industries Limited, where the interest was treated as business income. Here, the Department actively sought correction, arguing that the interest should be correctly classified under "Income from other sources." The Court agreed, directing a fresh assessment to reflect the correct classification.

Conclusion:

Both questions of law were answered in favor of the appellant/Revenue. The Court held that the interest income should be assessed under "Income from other sources" and not as business income for the purpose of Sections 32AB and 80HHC. The Tribunal's order was set aside, and the Assessing Officer was directed to pass a fresh assessment order in accordance with this judgment.