2016 (8) TMI 158 - HC - Income Tax

Deduction under section 80HHC - Whether the Income Tax Appellate Tribunal is right in law and on facts in holding that 90% of profit of sale of licence computed in the proportion of export turnover to the total turnover should be added to the profit of business for computation of deduction u/s 80HHC? - Held that - We have also gone through the judgment cited by learned advocate for the respondent. In the case of ACG Associated Capsules Pvt. Ltd. v. Commissioner of Income-Tax reported in 2012 (2) TMI 101 - SUPREME COURT OF INDIA it is observed that ninety percent of not the gross rent or gross interest but only the net interest or rent which had been included in the profits of business of the assessee as computed under the head Profits and gains of business or profession was to be deducted under clause (1) of Explanation (baa) to Section 80HHC for determining the profits of the business.- Decided in favour of the assessee

Summary

Issues involved:
- Challenge to orders passed by the Income Tax Appellate Tribunal
- Interpretation of Section 80HHC for deductions related to interest, freight, commission, and insurance
- Application of Explanation (baa) to Section 80HHC
- Dispute over whether to deduct 90% of gross or net amounts for determining profits of the business

Analysis:

1. Challenge to Tribunal Orders:
The appellant challenged orders passed by the Income Tax Appellate Tribunal related to deductions under Section 80HHC. The questions of law framed revolved around the correctness of the Tribunal's decisions in holding that certain amounts should be reduced for calculating deductions under Section 80HHC.

2. Interpretation of Section 80HHC:
The High Court analyzed the interpretation of Section 80HHC in light of the ACG Associated Capsules Pvt. Ltd. case. The Court emphasized that deductions under Explanation (baa) to Section 80HHC should be based on the net amounts of interest, rent, commission, etc., included in the profits of the business. The judgment clarified that only amounts chargeable as profits and gains of business, and not allowed as expenses, should be considered for the 90% deduction.

3. Application of Explanation (baa):
The Court examined the application of Explanation (baa) to Section 80HHC, emphasizing that only receipts like brokerage, commission, interest, rent, etc., included in the profits of the business should be subject to the 90% deduction. The judgment highlighted the importance of distinguishing between gross and net amounts for accurate determination of business profits.

4. Deduction Calculation Dispute:
A crucial aspect of the judgment was the dispute over whether 90% deduction should apply to gross or net amounts of interest and other receipts. The Court's interpretation, influenced by previous decisions and legislative intent, favored deducting 90% of the net amounts that contribute to the profits of the business, ensuring a fair calculation of business profits under Section 80HHC.

5. Consistency in Interpretation:
The Court's decision in a related case reaffirmed the principle that only net amounts contributing to business profits should be considered for deductions under Section 80HHC. The judgment maintained consistency in interpretation, aligning with previous rulings and providing clarity on the correct application of Explanation (baa) to ensure fair and accurate deductions for business profits.

In conclusion, the High Court's detailed analysis and interpretation of Section 80HHC, particularly regarding the application of Explanation (baa) and the distinction between gross and net amounts, provided clarity on the calculation of deductions for interest, freight, commission, and insurance. The judgment emphasized the importance of accurately determining business profits and ensuring consistency in applying the relevant legal provisions.