2021 (2) TMI 1158 - HC - Income Tax

Deduction u/s 80HHC - Tribunal reversing the order of the first appellate authority and restoring that of the Assessing Officer for excluding receipts arising in the core business and not specified in Explanation (baa) to Section 80 HCC - HELD THAT - Receipts constituting independent income had no nexus with exports were required to be reduced from business profits under Clause (baa). A bare reading of Clause (baa)(1) indicates that receipts by way of brokerage, commission, interest, rent, charges etc. formed part of gross total income being business profits. On a reading of all the variables, it becomes clear that every receipt may not constitute sale proceeds from exports and every receipt is not income under the Income Tax Act and every income may not be attributable to exports. In the case on hand, the insurance claim and miscellaneous income have no nexus with the assessee's business. Since there is no nexus, the Tribunal rightly reversed the order of the appellate authority restoring that of the Assessing Officer for excluding receipts arising in the core business and not specified in Explanation (baa) to Section 80 HCC. The insurance claim and miscellaneous income are not directly attributable to the business, hence, they are liable for 90% deduction. The ratio laid down by the Hon'ble Supreme Court in the judgment 2007 (11) TMI 10 - SUPREME COURT squarely applies to the facts and circumstances of the present case. Though there is no dispute with regard to the ratio laid down in the judgments relied upon by the learned counsel for the appellant, since the facts and circumstances of the present cases are different, the same are not applicable. No substantial question of law.

Issues Involved:
1. Whether the Appellate Tribunal was justified in reversing the order of the first appellate authority and restoring that of the Assessing Officer for excluding receipts arising in the core business and not specified in Explanation (baa) to Section 80 HHC?

Detailed Analysis:

1. Background and Appeals:
T.C.A.No.817 of 2010 and T.C.A.No.818 of 2010 arise from orders passed in I.T.A.No.2418/Mds/2006 and I.T.A.No.2419/Mds/2006 by the Income Tax Appellate Tribunal, Chennai, for the Assessment Years 2002-03 and 2003-04, respectively. The appellant, engaged in the manufacture of cloth, challenged the Tribunal’s orders.

2. Substantial Question of Law:
The appeals were admitted on the substantial question of law: “Whether the Appellate Tribunal was justified in reversing the order of the first appellate authority and restoring that of the Assessing Officer for excluding receipts arising in the core business and not specified in Explanation (baa) to Section 80 HCC?”

3. Appellant’s Claims and Assessing Officer’s Findings:
The appellant claimed deductions under Section 80HHC by computing profits for the export division separately. The Assessing Officer found that the appellant had not maintained separate books of account for domestic and export sales but apportioned expenditures based on combined books. The Assessing Officer concluded that deductions should be based on the proportion of export turnover to total turnover as per Section 80HHC, rejecting the appellant's claim.

4. Commissioner of Income Tax and Tribunal’s Observations:
The Commissioner of Income Tax upheld the Assessing Officer’s view, noting that separate books of accounts are necessary for such deductions. The Tribunal confirmed the inclusion of sales tax, sale of yarn, and sale of condemned materials in the total turnover due to the profit element, while excluding sales tax based on a precedent. The Tribunal also upheld the Assessing Officer’s reduction of 90% of insurance claims and miscellaneous income from business profits, stating these were not derived from business activities.

5. Appellant’s Contentions:
The appellant argued that insurance claims and miscellaneous income (fine amounts from employees for fabric damage) were part of business income and should not be reduced by 90%. The appellant maintained that these receipts were linked to business activities and thus should be fully included in the profits for deduction purposes.

6. Legal Precedents Cited:
The appellant cited several judgments, including:
- Principal Commissioner of Income Tax v. Atul Ltd.: Held that interest on delayed payment of sale consideration should not be excluded from business profits for Section 80HHC deductions.
- Commissioner of Income Tax v. Bangalore Clothing Co: Emphasized that Explanation (baa) should not be invoked in every matter involving receipts like interest, commission, etc., without examining the context of business activity.
- JVS Exports v. Assistant Commissioner of Income Tax: Highlighted that the nature of business activity should be considered to determine if receipts are operational income.

7. Respondent’s Argument and Supreme Court’s Precedent:
The respondent relied on Commissioner of Income Tax v. K. Ravindranathan Nair, where the Supreme Court held that receipts constituting independent income with no nexus to exports should be excluded from business profits under Clause (baa). The Court emphasized that not every receipt is income and not every income includes export turnover.

8. High Court’s Conclusion:
The High Court concluded that the insurance claim and miscellaneous income had no nexus with the appellant’s business. Therefore, the Tribunal correctly excluded these receipts from business profits for Section 80HHC deductions. The Court found no substantial question of law to interfere with the Tribunal’s order, dismissing the appeals.

Final Judgment:
The Tax Case Appeals were dismissed, affirming the Tribunal’s decision to exclude receipts not specified in Explanation (baa) to Section 80 HHC from business profits for deduction purposes. No costs were awarded.

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