1982 (12) TMI 52 - AT - Income Tax

Issues Involved:
1. Determination of relief under section 80HH of the Income-tax Act, 1961.
2. Inclusion of disallowed interest under section 40(b) in the computation of profits for section 80HH.
3. Legality of rectification under section 154 of the Act.

Detailed Analysis:

1. Determination of Relief under Section 80HH:
The primary issue revolves around whether the relief under section 80HH should be determined based on the gross amount of profits and gains of the business, including disallowed interest to partners under section 40(b), or on the net amount of profits excluding such disallowed interest. The Income Tax Officer (ITO) initially restricted the relief to 20% of the divisible income before adjusting the disallowed interest to partners.

The Commissioner (Appeals) supported the ITO's view, stating that profits and gains of business should be understood in the normal commercial sense, which means the net amount of profit as determined before disallowance under section 40(b). The Commissioner (Appeals) relied on the provisions of section 80E to support this interpretation.

The appellant contended that the relief under section 80HH should be determined with reference to the gross amount of profits, including the disallowed interest under section 40(b), arguing that the restricted interpretation by the Commissioner (Appeals) was incorrect.

2. Inclusion of Disallowed Interest under Section 40(b):
The Tribunal examined the provisions of section 80HH and the relevant judicial precedents, including the Supreme Court's decision in Cambay Electric Supply Industrial Co. Ltd. v. CIT, which discussed the expressions "attributable" and "derived from." The Tribunal noted that the expression "derived from" used in section 80HH is of narrower amplitude, requiring a restricted construction in determining the profits and gains of the industrial undertaking.

The Tribunal emphasized that the character of interest paid to partners is akin to profits, referencing the Supreme Court's observations in CIT v. R.M. Chidambaram Pillai, which stated that salaries and other remunerations paid to partners are essentially profits known by different names. Therefore, the interest disallowed under section 40(b) should be included in the computation of profits for the purpose of section 80HH.

3. Legality of Rectification under Section 154:
In some appeals, the ITO initially allowed relief under section 80HH but later rectified the assessments under section 154, restricting the relief based on the net amount of profits excluding disallowed interest under section 40(b). The Tribunal held that the question of relief under section 80HH is a complex issue and does not constitute a patent error that could be rectified under section 154. Therefore, the rectification orders were erroneous and not maintainable.

Conclusion:
The Tribunal concluded that the relief under section 80HH should be determined based on the gross amount of profits, including the disallowed interest under section 40(b). The Tribunal directed the ITO to allow relief on this basis for all the assessment years in question. Additionally, the Tribunal quashed the rectification orders under section 154, reinforcing that such complex issues are not suitable for rectification proceedings.

Result:
All the appeals were allowed, directing the ITO to compute the relief under section 80HH based on the gross amount of profits, including disallowed interest under section 40(b).

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