2007 (9) TMI 360 - HC - Income Tax

Deduction-Export- The assessee filed a return of income claiming deduction under section 80HHC of the Income- tax Act, 1961. The Assessing Officer finalised the assessment after, inter alia, deducting 90 per cent. interest received for the purpose of section 80HHC deduction. Aggrieved by the assessment order, the assessee filed an appeal before the Commissioner of Income-tax (Appeals) on the ground that the interest earned from the sister concern is part of the appellant s business profits and therefore the same cannot be reduced. As an alternative plea, it was contended that the interest paid to the sister concern for the loans obtained from them should be deducted from the interest received from them and only the net amount should be taken. The Commissioner of Income-tax (Appeals) dismissed the appeal on that issue. The assessee filed a further appeal before the Income-tax Appellate Tribunal. The Tribunal held that since there was bound to be an expenditure directly relatable in earning such income, only the net amount of interest should be taken. Aggrieved by the order of the Tribunal, the present appeal is filed. Held that- held that- while computing such profits and under the head Profit and gain of business or profession if any receipt by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature is included in such profits, it has to be reduced by 90% from the profits computed. The deduction to be made are from the amount of profit so computed and not from the amount computed under any other head of income of that assessee. Once the receipt of interest is known, 90%of the same is to be reduced from the profits without deducting any amount.

Summary

Issues:
1. Interpretation of section 80HHC for computing business profits.
2. Whether netting of interest is permissible for deduction under section 80HHC.

Issue 1: Interpretation of section 80HHC for computing business profits

The case involved a dispute regarding the interpretation of section 80HHC of the Income-tax Act, 1961, for computing business profits. The appellant claimed a deduction under section 80HHC, which the Assessing Officer reduced by 90% of the interest received. The appellant contended that the interest earned from a sister concern should not be reduced, or alternatively, the interest paid to the sister concern should be deducted from the interest received. The Commissioner of Income-tax (Appeals) dismissed the appeal, leading to further appeal before the Income-tax Appellate Tribunal. The Tribunal held that only the net amount of interest should be considered, based on the expenditure directly related to earning such income. The Revenue argued that the Tribunal erred in introducing the concept of "net interest," which is not specified in the statute. The court analyzed the provision in clause (baa) of the Explanation to section 80HHC, emphasizing that it refers to interest included in the profits and gains of the business or profession. The court referred to previous decisions and held that deductions should be made from the profits computed under the head "Profits and gains of business or profession." The court concluded that the Tribunal's incorporation of net interest was erroneous, setting aside the Tribunal's order.

Issue 2: Permissibility of netting interest for deduction under section 80HHC

The court examined whether netting of interest is permissible for deduction under section 80HHC. The appellant argued that in the absence of clear terminology specifying gross or net interest, netting of interest should be allowed. The appellant relied on a Delhi High Court decision supporting the netting principle. However, the court referred to its previous judgments and held that the clause in the Explanation to section 80HHC does not mention net interest. The court emphasized that the profits of the business should be computed under the head "Profits and gains of business or profession," without deducting amounts computed under other heads of income. The court distinguished the facts of the present case from the Delhi High Court judgment, as the interest income was not considered as business income by the appellate authority. Relying on binding decisions, the court answered the first question of law in the negative and set aside the Tribunal's order, as the second question did not arise for consideration.

This detailed analysis of the judgment clarifies the issues surrounding the interpretation of section 80HHC and the permissibility of netting interest for deduction, providing a comprehensive overview of the court's decision and reasoning.