2004 (7) TMI 275 - AT - Income Tax

Summary

Issues Involved:

1. Deduction under section 80HHC on benefits on licences.
2. Deduction under section 80HHC on interest and miscellaneous receipts.
3. Deduction under section 80HHC on interest.

Issue-wise Detailed Analysis:

1. Deduction under section 80HHC on benefits on licences:

The assessee, a 100% Export Trading Company, claimed a deduction under section 80HHC for benefits on import licences amounting to Rs. 6,26,674. The Assessing Officer (AO) rejected this claim, stating that the assessee did not actually incur any such expenditure and that the rebate of 10% of income as claimed resulted in a negative figure for indirect expenses. The AO's decision was based on the interpretation that the definition of "profits of the business" as per Explanation (baa) to section 80HHC was not relevant for a 100% trading exporter. The CIT(A) reversed the AO's decision, allowing the deduction by considering 10% of the amounts as ad hoc expenses, thus entitling the assessee to a 100% deduction on profit from trading exports after reducing these expenses.

2. Deduction under section 80HHC on interest and miscellaneous receipts:

The assessee claimed 10% expenses at Rs. 56,701 on interest receipts of Rs. 5,57,113 and miscellaneous receipts of Rs. 9,904. The AO disallowed this claim, stating that the assessee had not incurred any such expenditure and that the rebate of 10% of income as claimed resulted in a negative figure for indirect expenses. The CIT(A) allowed the deduction, considering 10% of the amounts as ad hoc expenses, thus entitling the assessee to a 100% deduction on profit from trading exports after reducing these expenses.

3. Deduction under section 80HHC on interest:

The AO found that the interest income of Rs. 5,57,113 was net income after deducting interest expenditure of Rs. 1,70,802. Only Rs. 49,827 was related to earning interest income, and the balance was debited against profit from export business. The AO concluded that Rs. 1,20,975 represented interest earned by advancing surplus business funds and should be taxed under "income from other sources." The CIT(A) disagreed, stating that the entire interest of Rs. 1,70,802 paid should be reduced out of interest received, resulting in a net interest income of Rs. 5,57,113, and directed the AO not to treat Rs. 1,20,975 as interest income, allowing deduction under section 80HHC.

Tribunal's Decision:

The Tribunal analyzed the provisions of section 80HHC, including the definitions of "export turnover," "direct costs," and "indirect costs." It noted that the assessee's reliance on Explanation (baa) was misplaced as it was not relevant for computing "profits derived from export" under section 80HHC(3)(b). The Tribunal referred to various judicial decisions and concluded that the assessee's claim for notional expenditure of 10% on import entitlement and interest was not justified, especially when the actual expenditure incurred was minimal. The Tribunal held that a fair and reasonable allocation of indirect expenses should be made based on the proportionate basis of total receipts to export turnover.

Final Computation:

The Tribunal computed the deduction under section 80HHC by allocating indirect expenses proportionately. The total indirect expenditure was Rs. 2,36,699, and the allocable expenditure to export activity was Rs. 1,84,420. The balance Rs. 52,279 was related to other income. The income entitled to section 80HHC deduction, including export profit, was worked out to be Rs. 59,35,236. The Tribunal directed that this figure should be substituted for the deduction under section 80HHC, as against the claim of Rs. 65,51,332 by the assessee and Rs. 58,38,630 determined by the AO.

Conclusion:

The Tribunal partly allowed the appeal, providing a detailed computation and rationale for the deductions under section 80HHC, ensuring a fair allocation of indirect expenses and adherence to the statutory provisions.