2016 (5) TMI 318 - AT - Income Tax

Relief u/s.80HHC - denial of claim on rental income received by the assessee from housing provided to its employees as well as the income from leasing activity - Held that - The judgement of Supreme Court in the case of M/s.ACG Capsules Ltd.(2012 (2) TMI 101 - SUPREME COURT OF INDIA ) is directly covered on the issue in dispute before us. Accordingly, we direct the AO to exclude net income of rental income and lease income if it is assessed as business income while applying the clause (i) of Explanation (baa) to Sec.80HHC of the Act. If it is not assessed as business income, then there is no question of considering the same for deduction u/s.80HHC of the Act. Assessing Officer is within the jurisdiction in considering the issue relating to the lease income while computing the deduction u/s.80HHC of the Act. - Decided partly in favour of assessee

Issues Involved:
1. Denial of relief under section 80HHC of the Income Tax Act for rental income received from housing provided to employees and income from leasing activity.
2. Determination of whether rental income should be considered as business income or income from house property.
3. Consideration of whether 90% of gross or net receipts should be excluded while computing deduction under section 80HHC.

Issue-wise Detailed Analysis:

1. Denial of Relief under Section 80HHC:
The primary issue revolves around the denial of relief under section 80HHC of the Income Tax Act for the rental income received from housing provided to employees and income from leasing activities. The assessee argued that the rental income should be treated as business income and thus should not be excluded from the business profit while computing the deduction under section 80HHC. The assessee relied on the Supreme Court judgment in M/s. ACG Capsules Ltd Vs. CIT, which held that only the net income from lease should be considered for computing the deduction under section 80HHC.

2. Classification of Rental Income:
The assessee earned rental income of ?20,24,710 from housing provided to its employees. The assessee contended that this rental income should be assessed as business income since it arises from the business of manufacturing and selling paper, which is an eligible business. The Tribunal had previously allowed the assessee's claim based on the decision of the Bombay High Court in CIT Vs. Bangalore Clothing Co. However, the later judgment of the Bombay High Court in CIT Vs. Dresser Rand India P. Ltd disapproved of this earlier judgment and aligned with the Supreme Court's decision in CIT Vs. Ravindranathan Nair. The Supreme Court held that independent income like rent, commission, and brokerage must be reduced by 90% as per Explanation (baa) to section 80HHC to arrive at business profits.

3. Computation of Deduction under Section 80HHC:
The Tribunal considered the Supreme Court's judgment in CIT Vs. Ravindranathan Nair, which emphasized that the formula in section 80HHC(3) requires the exclusion of 90% of independent incomes like rent and commission from business profits to prevent distortion in computing export profits. The jurisdictional High Court in CIT v. V. Chinnapandi and the Kerala High Court in Vallabhadas & Co. Vs. CIT and M/s. Parry Agro Industries Vs. JCIT also supported this view, stating that 90% of such receipts should be excluded from business profits for deduction purposes. The Tribunal directed the Assessing Officer to exclude 90% of the net income from rental and lease income if assessed as business income while applying Explanation (baa) to section 80HHC. If not assessed as business income, it should not be considered for deduction under section 80HHC.

Jurisdictional Authority of the Assessing Officer:
The assessee argued that the Assessing Officer exceeded his jurisdiction by reconsidering the issue of rental income, as the Tribunal had not directed a re-evaluation. However, the Tribunal clarified that in its previous order, it had remitted the matter to the Assessing Officer for fresh consideration, thereby justifying the Assessing Officer's actions.

Conclusion:
The appeal of the assessee was partly allowed. The Tribunal directed the Assessing Officer to exclude 90% of the net income from rental and lease activities if assessed as business income while computing the deduction under section 80HHC. If these incomes are not assessed as business income, they should not be considered for the deduction. The Tribunal upheld the jurisdiction of the Assessing Officer to reconsider the issue of rental income based on the Tribunal's earlier directions.

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