2016 (8) TMI 159 - 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:
1. Interpretation of Section 80HHC of the Income-tax Act, 1961 regarding the computation of deduction for profits of business.
2. Whether 90% of profit of sale of license computed in the proportion of export turnover to the total turnover should be added to the profit of business for computation of deduction under Section 80HHC.

Analysis:
1. The High Court of Gujarat was presented with an appeal challenging an order passed by the Income Tax Appellate Tribunal regarding the interpretation of Section 80HHC of the Income-tax Act, 1961. The main question revolved around whether 90% of the profit of the sale of a license, calculated based on the export turnover to total turnover ratio, should be included in the business profit for deduction computation under Section 80HHC. The appellant argued that the Tribunal had erred in dismissing the appeal, while the respondent cited a decision of the Supreme Court in ACG Associated Capsules Pvt. Ltd. v. Commissioner of Income-Tax to support their stance.

2. The Supreme Court's decision in ACG Associated Capsules Pvt. Ltd. v. Commissioner of Income-Tax clarified the interpretation of Explanation (baa) to Section 80HHC. It emphasized that only the net amount of receipts like brokerage, commission, interest, rent, charges, or similar receipts, which are included in the profits of the business under "Profits and Gains of Business or Profession," should be deducted for determining the profits of the business under Section 80HHC. The judgment highlighted that expenses allowed under Sections 30 to 44D and not included in the business profits should not have 90% deducted under Explanation (baa). The Court referenced previous decisions to support this interpretation, emphasizing the need to consider the language of the law itself rather than explanatory memoranda.

3. In a related case, the issue of deducting 90% of gross interest versus net interest under Explanation (baa) to Section 80HHC was also addressed. The High Court upheld the Tribunal's decision that only 90% of the net interest included in the business profits should be deducted for determining the profits of the business. This decision was in line with the Supreme Court's interpretation in ACG Associated Capsules Pvt. Ltd. v. Commissioner of Income-Tax, emphasizing consistency in the application of the law.

In conclusion, the High Court dismissed the appeals, upholding the interpretation that only the net amounts of specified receipts included in the business profits should have 90% deducted under Section 80HHC. The Court emphasized the need to follow the clear language of the law and previous judicial interpretations for consistent application.