2012 (4) TMI 435 - HC - Income Tax

Entitlement to assessee to reduce interest paid on bank overdrafts from the interest received on FDRs and exclude profit from the sale of EDP receipts under the duty remission scheme while calculating deductions u/s 80HHC Revenue appeal - Held that - Ninety per cent of not the gross rent or gross interest but only the net interest or net rent which has been included in the profits of business of the assessee as computed under the head Profits and Gains of Business or Profession is to be deducted under clause (1) of Explanation (baa) to Section 80-HHC for determining the profits of the business as per clause (1) of Explanation (baa) to Section 80-HHC in favour of assessee.

Summary

Issues:
1. Interpretation of Section 80HHC of the Income Tax Act, 1961 regarding the treatment of interest paid on bank overdrafts and interest received on FDRs for deduction calculation.
2. Determination of whether profit from the sale of EDP receipts under the duty remission scheme can be excluded from business profits for computing deductions under Section 80HHC.

Analysis:
1. The case involved the respondent-assessee, a company engaged in exports, claiming deductions under Section 80HHC for the assessment year 1996-97. The Assessing Officer did not consider interest earned on FDRs and receipts from group companies for EDP usage as income derived from exports, leading to a reduced deduction amount. This decision was upheld by the Commissioner of Income Tax (Appeals) who deemed the interest income as not export-derived and EDP receipts as 'income from other sources.'
2. On further appeal, the Tribunal ruled that both interest income and EDP receipts should be considered under the head 'income from business' for Section 80HHC calculations. The Tribunal clarified that interest earned on FDRs for export purposes and EDP income from group companies utilizing the assessee's equipment are part of business income, not 'income from other sources.'
3. The court emphasized the interpretation of Explanation (baa) to Section 80HHC, which defines 'profits of the business' and outlines deductions for certain receipts like interest and rent. Referring to the ACG Associated Capsules Pvt. Ltd. case, the court highlighted that profits must be computed as per the Act's provisions, including all income chargeable under business profits and allowable expenses.
4. The Supreme Court's analysis in the ACG case clarified that receipts by way of interest or rent must be included in business profits to be eligible for deduction under Explanation (baa) to Section 80HHC. Only the net amount of such receipts included in business profits can be deducted, not the gross amount. This interpretation ensures that only relevant receipts forming part of business profits are considered for deductions.
5. Consequently, the court answered the raised legal questions affirmatively in favor of the assessee, based on the correct interpretation of Explanation (baa) and the inclusion of interest income and EDP receipts as part of business profits for Section 80HHC calculations. The appeal was disposed of with no costs awarded.