2018 (9) TMI 1632 - HC - Income Tax

Entitled to deduction u/s 80HHC in respect of the interest and rent earned out of business operations - whether Tribunal was right in holding that 90% of the gross receipts should be excluded from the profits of the business under Clause (baa) of Explanation to Section 80HHC? - Held that - Question No.1 is concerned, the same has to be answered in favour of the Revenue and against the assessee in the light of the decision, in the case of Commissioner of Income Tax Vs. K.Ravindranathan Nair 2007 (11) TMI 10 - SUPREME COURT OF INDIA wherein held the processing charges were included in the gross total income from cashew business. In terms of Cl. (baa), 90 per cent of the independent income had to be deducted from gross total income to arrive at business profits to which the fraction had to be applied. Since, the processing charges constituted independent income similar to rent, commission, etc., which formed part of the gross total income, the same had to be reduced by 90 per cent as contemplated in Cl. (baa) to arrive at business profits. Therefore, the said processing charges were includible in the total turnover in the formula under section 80HHC(3) of the IT Act. The nature of every receipt needs to be ascertained in order to find out whether the said receipt forms part of/or that it has an attribute of an export turnover. When an indirect tax is collected by the taxpayer on behalf of the Government the tax recovered is for the Government. It may be an income in the conceptual sense or even under the IT Act but while working out the formula under section 80HHC(3) of the IT Act and while applying the four variables one has to ascertain whether the receipt has an attribute of export turnover. An indirect tax like excise duty does not have that element of export turnover as understood in the above formula. As stated above, it is recovered by the taxpayer on behalf of the Government - Decided in favour of revenue 90% of the gross receipts should be excluded from the profits of the business under Clause (baa) of Explanation to Section 80HHC - Held that - So far as the second question of law is concerned, the issue has been decided by the Hon ble Supreme Court in the case of ACG Associated Capsules (P) Ltd. Vs. Commissioner of Income Tax 2012 (2) TMI 101 - SUPREME COURT OF INDIA as held 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 for statistical purposes.

Summary

Issues:
- Appeal against the order passed by the Income Tax Appellate Tribunal for the assessment year 2003-04.
- Substantial questions of law raised regarding deduction under Section 80HHC, exclusion of gross receipts from business profits, and deduction under Section 40(a)(iia) for wealth tax paid on specific assets.

Analysis:
1. Deduction under Section 80HHC:
The Tribunal held that the appellant was not entitled to deduction under Section 80HHC for interest and rent earned from business operations. The Court referred to a previous judgment where it was established that every receipt may not constitute sale proceeds from exports and that certain receipts, like processing charges, needed to be excluded from gross total income to determine business profits. Consequently, the Court decided against the assessee and in favor of the Revenue on this issue.

2. Exclusion of Gross Receipts from Business Profits:
The Tribunal also decided that 90% of gross receipts should be excluded from business profits under Clause (baa) of the Explanation to Section 80HHC. Citing a Supreme Court decision, the Court concluded that 90% of net interest or net rent, not gross rent, should be deducted to determine business profits. Therefore, the matter was remanded to the Assessing Officer for fresh consideration in line with the legal position outlined in the Supreme Court decision.

3. Deduction under Section 40(a)(iia) for Wealth Tax:
Although the Tribunal's decision on this issue was not pressed during the appeal, the Court considered the importance of addressing it. The Court decided to address this issue along with the other substantial questions raised in the appeal, emphasizing the need for substantial justice. The matter was remanded back to the Assessing Officer for a fresh consideration in accordance with the law and the relevant legal position.

In conclusion, the High Court partially allowed the appeal, deciding against the assessee on the deduction under Section 80HHC and remanding the issue of exclusion of gross receipts from business profits back to the Assessing Officer for reconsideration in line with the Supreme Court decision. The Court also directed a fresh consideration of the issue related to deduction under Section 40(a)(iia) for wealth tax paid on specific assets.