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TMI Blog2010 (7) TMI 631X X X X Extracts X X X X X X X X Extracts X X X X ..... eme of section 80HHC, both in terms of section 80HHC(3) - Decided in the favour of the assessee Regarding bad debt - Supreme Court in the case of T. R. F. Ltd. v. CIT (2010 -TMI - 76626 - SUPREME COURT) has held that after April 1, 1989 it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable; it is enough if the bad debt is written off as irrecoverable in the accounts of the assessee - Decided in the favour of the assessee - 141 and 137 of 2005 - - - Dated:- 7-7-2010 - KUMAR N., NAGARATHNA B. V. MRS., JJ. JUDGMENT N. Kumar J.- As these two appeals arise out of a common order passed against a common assessee for the assessment years 1996-97 and 1998-99, they are taken up for consideration together and disposed of by this common order. 2. The facts leading to these appeals are as under : 3. The assessee is carrying on business in the manufacture and sale of communication products. In respect of the assessment year 1998-99 the assessee filed a return of income claiming the following : (a) Excise duty and sales tax should be deducted when computing the total turnover under section 80HHC of the Act. (b) 90 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... request. In appeal, the appellate authority upheld the said claim and allowed the said claim which order was confirmed by the Tribunal by its order dated August 17, 2004. It is against the said order, the said appeal is filed which was admitted to consider the following substantial question of law : "Whether the Tribunal was correct in holding that the claim of bad debt written off to the extent of Rs. 2,66,297 is an allowable deduction as it has been incurred in the normal trade transactions and the pro-visions for written off has been satisfied without actually examining the item and the corresponding evidence to support such a conclusion." 6. In so far as the first substantial question of law is concerned, the legal position is now well-settled by the judgment of the apex court in the case of CIT v. Lakshmi Machine Works [2007] 290 ITR 667 (SC) where it has been held as under : "Section 80HHC(3) was a beneficial section. It was intended to provide incentives to promote exports. The incentive was to exempt profits relatable to exports . . . Just as commission received by an assessee is relatable to exports and yet it cannot form part of `turnover', excise duty an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r cent. deduction from such incomes to account for these expenses." 9. Therefore, he contends while calculating the profits of business, 90 per cent. of the gross amount received by way of commission is to be deducted and not the net amount of commission. 10. In order to appreciate this contention it is necessary to look into the relevant provisions and the pronouncement of the various courts on the point. 11. Section 80HHC(4C)(baa) defines what profits of business means. It reads as under : "For the purposes of this section- (baa) `profits of the business' means the profits of the business as computed under the head `Profits and gains of business or profession' as reduced by- (1) ninety per cent. of any sum referred to in clauses (iiia), (iiib), (iiic), (iiid) and (iiie) of section 28 or of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits ; and (2) the profits of any branch, office, warehouse or any other establishment of the assessee situate outside India." 12. In order to find out "profits of business", under the aforesaid provision, first, profits of the busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of section 80HHC concession when the entire deduction claimed could not be regarded as relatable to exports. Therefore, while interpreting the words `total turnover' in the formula in section 80HHC one has to give a schematic interpretation to that expression. There is one more reason for giving schematic interpretation. The various amendments to section 80HHC show that receipts by way of brokerage, commission, interest, rent etc., do not form part of business profits as they have no nexus with the activity of exports. If interest or rent was not regarded by the Legislature as business profits, the question of treating the same as part of the total turnover in the formula did not arise. In fact, section 80HHC had to be amended several times since the formula on several occasions gave a distorted figure of export profits when receipts like interest, rent, commission etc., which did not have the element of turnover got included in the profit and loss account and consequently became entitled to deduction. This was clarified by the amendment to section 80HHC commencing from 1st April, 1992 . . .tax under the Act is upon income, profits and gains. It is not a tax on gross receipts. Und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... value/factor, 10 per cent. of the total other income of Rs.1,60,000 would be fair estimate. This guidance value is not flowing from clause (baa) but from the scheme of section 80HHC read with the Memorandum to the Finance (No. 2) Act of 1991. Take a reverse case, if allocation of expenses is to be done on actual basis, it would not only be very difficult but in some cases actual apportionment may not be in the interest even of the Department." 17. The Supreme Court in the case of CIT v. K. Ravindranath Nair [2007] 295 ITR 228 (SC) held as under (page 239) : "By the Finance (No. 2) Act, 1991 with effect from April 1, 1992, for the first time, the expression `profits of the business' stood defined to mean the `profits of the business' as computed under the head `Profits and gains of business' under sections 28 to 44D of the Income-tax Act. Therefore, before giving deduction under section 80HHC(3)(a), (b) or (c) of the Income-tax Act, the gross total income of the assessee being profits from business had to be arrived at in terms of clause (baa) of the said Explanation. However, one point, needs to be noted, namely, while calculating `business profits' the same had to be done ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arate treatment under section 56 of the Act which is outside the ring of profits and gains from business and profession. It goes entirely out of the reckoning for the purposes of section 80HHC. (v) Interest earned on fixed deposits for the purposes of availing of credit facilities from the bank, does not have an immediate nexus with the export business and therefore has to necessarily be treated as income from other sources and not business income. (vi) Once business income has been determined by applying accounting standards as well as the provisions contained in the Act, the assessee would be permitted, in terms of section 37 of the Act, to claim as deduction, expenditure laid out for the purposes of earning such business income. (vii) In the second stage, the Assessing Officer will deduct from the profits of the business computed under the head `Profits and gains of business or profession' the following sums in order to arrive at the `profits of the business' for the purposes of section 80HHC(3): (a) 90 per cent. of any sum referred to in clauses (iiia), (iiib) and (iiic) of section 28, i.e., export incentives ; (b) 90 per cent. of any receipts by way of brokerage, commission, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of section 80HHC, both in terms of section 80HHC(3). Clause (e) to the Explanation to section 80HHC(3)(a), (b) and (c) and in clause (baa) to the Explanation to section 80HHC, instead of going into lengthy exercise of dividing such common expenses, the Legislature has estimated the reduction of export turnover by 10 per cent. Ultimately, clause (baa) to the Explanation is itself based on the assumption that 10 per cent of the income would be an expense. This guidance value is not flowing from clause (baa) but from the scheme of section 80HHC read with the Memorandum to the Finance (No.2) Act of 1991. By the Finance (No. 2) Act, 1991 with effect from April 1, 1992, for the first time, the expression "profits of the business" stood defined to mean the "profits of the business" as computed under the head "Profits and gains of business" under sections 28 to 44D. Therefore, before giving deduction under section 80HHC, the gross total income of the assessee being profits from business had to be arrived at in terms of clause (baa) to the Explanation. While calculating "business profits" the same had to be done in terms of section 28 to section 44D alone. The idea of section 80HHC is to en ..... X X X X Extracts X X X X X X X X Extracts X X X X
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