2006 (1) TMI 65 - HC - Income Tax

Special Deduction - Whether Tribunal is right in holding that the assessee is eligible for full deduction under section 80HHC without restricting to the amount received by way of interest were incidental to the export business as fixed deposits is valid in law? held that 90 per cent of the interest that is deductible for the claim under section 80HHC of the Act is from the gross interest received by the assessee and that the amount of interest paid by the assessee should not be deducted therefrom and hence we answer the above question in favour of the Revenue and against the assessee and allow the tax case filed by the Revenue

Summary

Issues:
Interpretation of section 80HHC of the Income-tax Act, 1961 regarding deduction eligibility for interest received in export business.

Analysis:
The judgment delivered by the High Court of Madras involved an appeal by the Revenue against the Income-tax Appellate Tribunal's order. The substantial question of law was whether the assessee is eligible for full deduction under section 80HHC without restricting it to the interest received incidental to the export business. The case revolved around the treatment of interest income by a Hindu undivided family engaged in the export of finished leather for the assessment year 1995-96. The Assessing Officer disallowed the interest payment of Rs. 9,24,967, reducing the deduction under section 80HHC by 90% of the interest income of Rs. 2,65,019. The Appellate Tribunal, however, held that the net interest figure represented only the payment and not receipt, directing not to exclude any amount while computing the deduction.

The court analyzed the provisions of section 80HHC, specifically clause (baa) of the Explanation, which mandates the reduction of certain receipts by 90% from the profits of the business. The court emphasized that the deduction should be made from the profits computed under the head "Profits and gains of business or profession" and not from any other income head. The court referred to previous judgments to support the interpretation that 90% of interest deductible under section 80HHC should be from the gross interest received, without deducting any amount related to interest paid.

Counsel for the Revenue argued that the intention of the Legislature was to exclude 90% of receipts like interest without allowing deductions for related expenditures. The court concurred, stating that the expression "receipts" in the section referred to gross interest received and not income of that nature. Therefore, the court ruled in favor of the Revenue, disallowing the deduction of interest paid by the assessee and upholding the Tribunal's decision. The court highlighted that the legislative intent was to prevent the deduction of any expenditure from such receipts, emphasizing the exclusion of 90% of certain receipts as profits not attributable to exports.

In conclusion, the court answered the substantial question of law in favor of the Revenue, allowing the tax case filed by the Revenue and appreciating the assistance of senior counsel Mr. V. Ramachandran.