2024 (2) TMI 785 - AT - Income Tax

Allowability of 80HHC from Gross Total Income - HELD THAT - As decided in own case 2023 (6) TMI 1363 - ITAT DELHI held by merely relying the decision of Hon ble Supreme Court in IPCA Laboratories Ltd. Case 2004 (3) TMI 9 - SUPREME COURT 80HHC deduction can not be declined as adjusted business profit has to be recomputed and may not be in minus. Revenue recognition - Accrued interest income and pursuant to arbitration award, as income of the assessee - HELD THAT - Legal battle shows the uncertainty of recovering the interest amount and also the principal. The Hon'ble Supreme Court in the case of Shoorji Vallabhji 1962 (3) TMI 6 - SUPREME COURT and in the case of Godara Electricity 1997 (4) TMI 4 - SUPREME COURT has laid down the ratio that the substance of the matter is the income which has to be recognized as per the system of accounting followed by the assessee in view of section 145 of the Act if the income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a hypothetical income, which does not materialize. Similarly, in the case of Surya Agroil 2006 (4) TMI 554 - SC ORDER certain dispute arose and the dispute was referred to the Arbitration Tribunal and the Tribunal passed order in favour of the assessee, and the award was challenged in the Hon'ble Delhi High Court, which was dismissed wherein as mentioned elsewhere, the fact of uncertainty has to be considered while recognizing the revenue and in our considered opinion, considering the peculiar facts of the case of uncertainty and keeping in mind the decision of the Hon'ble Supreme Court supra , we do not find any merit in recognizing the revenue for the year under consideration since in the case of KJI, the assessee has subsequently recognized the revenue as and when it received as mentioned in the chart elsewhere. No addition is called for during the year under consideration and in so far as Surya Agroil is concerned, there is not even an iota of chance to recover the arbitral award. No addition is called for. Ground Nos. 3 and 4 taken together are allowed.

Summary

Issues Involved:
1. Allowability of deduction under Section 80HHC from Gross Total Income.
2. Treatment of accrued interest income pursuant to arbitration awards as business income.
3. Classification of interest income as business income for the purpose of calculating deduction under Section 80HHC.

Summary:

Issue 1: Allowability of Deduction under Section 80HHC from Gross Total Income
The assessee contended that the deduction under Section 80HHC should be allowed from the gross total income. The Tribunal referred to its earlier decision in ITA No. 1722/DEL/2006, where it was held that deductions under Chapter VI-A, including Section 80HHC, should be computed based on the gross total income. The Tribunal emphasized that the deduction should not be restricted to business income alone, citing the Supreme Court judgment in CIT vs. Reliance Energy Ltd. The Tribunal directed the Assessing Officer to recompute the deduction under Section 80HHC accordingly.

Issue 2: Treatment of Accrued Interest Income Pursuant to Arbitration Awards as Business Income
The assessee argued that the accrued interest income from arbitration awards should be treated as business income. The Tribunal examined the cases of M/s K.J. International and M/s Surya Agroil, where disputes led to arbitration awards that included interest amounts. The Tribunal highlighted the uncertainty in recovering these amounts and referred to Accounting Standard AS-9 on Revenue Recognition, which states that revenue should be recognized only when ultimate collection is reasonably certain. Citing Supreme Court judgments in Shoorji Vallabhji and Godara Electricity, the Tribunal concluded that the accrued interest income should not be recognized as income for the year under consideration due to the uncertainty of recovery. Consequently, no addition was called for during the year.

Issue 3: Classification of Interest Income as Business Income for Calculating Deduction under Section 80HHC
The Revenue contended that interest income of Rs. 16,62,45,832/- should be treated as income from other sources and not business income, thereby excluding it from the calculation of deduction under Section 80HHC. The Tribunal, referring to its detailed discussion on the assessee's appeal, dismissed the Revenue's appeal, upholding that the interest income should be treated as business income for the purpose of calculating the deduction under Section 80HHC.

Conclusion:
The appeal of the assessee was partly allowed for statistical purposes, directing the Assessing Officer to recompute the deduction under Section 80HHC. The appeal of the Revenue was dismissed, affirming that the interest income should be treated as business income for the purpose of deduction under Section 80HHC. The order was pronounced in the open court on 30.01.2024.