2022 (6) TMI 461 - HC - Income Tax

Deduction u/s 80HHC - Exclusion of royalty income received from the subsidiary company - AO rejected the claim of the appellant, after having held that royalty income claimed by them is not arising out of any business activity related to export and it is incidental in nature and hence, 90% of the royalty income was reduced from the profit of the business for computation of deduction under section 80HHC - HELD THAT - Applying the ratio laid down in the aforesaid decision viz.Shiva Distilleries Ltd's case 2007 (2) TMI 103 - HIGH COURT, MADRAS which is squarely applicable to the facts of the present case, wherein, there is no concrete material produced by the appellant / assessee to prove that the royalty income received from the subsidiary company, are related to export business, this court is of the view that the Tribunal has rightly directed the assessing officer to exclude the royalty income from the business profits for the purpose of calculation of deduction under section 80HHC of the Act, which warrants no interference. - Decided against assessee.

Summary

Issues:
1. Interpretation of the deduction under section 80HHC of the Income Tax Act for royalty receipts.
2. Exclusion of royalty income from business profits for computation of deduction under section 80HHC.

Analysis:

Issue 1: Interpretation of the deduction under section 80HHC of the Income Tax Act for royalty receipts

The appellant, engaged in manufacturing and sale of goods, filed an appeal against the order of the Income Tax Appellate Tribunal regarding the exclusion of 90% of royalty receipts from business profits for deduction under section 80HHC. The appellant argued that the royalty receipts were directly related to the goods exported and should not be excluded. However, the respondent contended that previous judicial decisions established that royalty payments should be excluded from business profits for deduction under section 80HHC. The Tribunal directed the assessing officer to exclude royalty receipts, aligning with the precedent. The High Court upheld the Tribunal's decision, emphasizing the need for concrete evidence linking royalty income to export business activities to be eligible for deduction under section 80HHC.

Issue 2: Exclusion of royalty income from business profits for computation of deduction under section 80HHC

The appellant claimed that royalty income should not be excluded from business profits for deduction under section 80HHC as it was related to export activities. The assessing officer, however, excluded 90% of the royalty income, considering it incidental and not directly linked to export business. The Commissioner of Income Tax (Appeals) initially allowed the claim based on a previous order in the appellant's own case. Still, the Tribunal overturned this decision, citing a precedent that established the exclusion of royalty payments from business profits for deduction under section 80HHC. The High Court referred to the precedent and concurred with the Tribunal's decision, emphasizing the need for a clear connection between royalty income and export business to warrant inclusion in the deduction calculation under section 80HHC.

In conclusion, the High Court dismissed the appeal, upholding the Tribunal's decision to exclude royalty income from business profits for the computation of deduction under section 80HHC. The court highlighted the importance of establishing a direct link between royalty receipts and export activities to qualify for the deduction.