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TMI Blog2012 (6) TMI 437X X X X Extracts X X X X X X X X Extracts X X X X ..... rove that it was a trade debt and, secondly, it was irrecoverable and, thirdly, it was actually written off. Therefore, the said substantial questions of law are answered against the Revenue and in favour of the assessee. - Decision in f CIT v. Shri Ram Honda Power Equip [2007 (1) TMI 86 (HC)] followed. - 2568 and 2569 of 2005 - - - Dated:- 21-7-2010 - KUMAR N., NAGARATHNA MRS. B. V., JJ. JUDGMENT N. Kumar J.- 1. These appeals are filed by the Revenue by challenging the common order dated December 13, 2004, passed in I. T. A. No. 1068/ Bang./2002 (In I. T. A. No. 2569 of 2005) and I. T. A. Nos. 1066 and 1067/ Bang./2002 (In I. T. A. No. 2568 of 2005), by the Income-tax Appellate Tribunal, Bangalore. 2. The facts of the case leading to the filing of these appeals are that the respondent-assessee which is engaged in the business of jewellery, readymade garment and granite, has manufactured, processed or traded in India and, thereafter, exported the aforesaid products. 3. For the assessment year 1993-94, the assessee filed a return of income on October 29, 1993, declaring a total income of Rs. 5,75,810 and for the assessment year 1994-95, the assessee filed a return ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferred an appeal I. T. A. No. 2569 of 2005 before this court. 6. These appeals were admitted on March 9, 2010, to consider the follow- ing substantial questions of law : "(1) Whether the appellate authorities were correct in holding that wages, appraisal charges, repairs and renewals charges, received by the assessee cannot be reduced by 90 per cent. from the profits and gains of business as contemplated under Explanation (baa) read with section 80HHC(3)(c) of the Act for the purpose of granting deduction under section 80HHC(1) of the Act where the assessee had exported goods manufactured/processed/traded by it in India ? (2) Whether the appellate authorities were correct in taking into consideration irrelevant circumstances like direct nexus between pay- ments and receipts positive and negative income instead of adopting the mandatory method of computation prescribed under section 80HHC of the Act for claiming deductions on exports manufactured/ processed/traded in India ?" 7. We have heard the learned counsel appearing for the appellant-Revenue and the learned counsel appearing for the respondent-assessee. 8. It was contended on behalf of the Revenue that the receipts, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee situate outside India." 12. In order to find out "profits of business", under the aforesaid provision, first, profits of the business as computed under the head "Profits and gains of profession" is to be arrived at. Section 28 deals with profits and gains of business or profession. In arriving at the profits and gains section 28 stipulates that the income referred to in section 28 shall be computed in accordance with the provisions in sections 30 to 43(d) which in substance provides for the deductions to be made out of total income. Section 37 deals with expenses to be deducted which are not provided for in sections 30 to 36. It provides that, any expenditure not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". In this background of this provision, in the instant case, the assessee has income from exports, income from manufacturing activities within the country and also income from com- mission. In so far as the income from commission is co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 992 . . . tax under the Act is upon income, profits and gains. It is not a tax on gross receipts. Under section 2(24), the word 'income' includes profits and gains. The charge is not on gross receipts but on profits and gains. The charge is not on gross receipts but on profits and gains properly so-called. Gross receipts or sale proceeds, however, include profits . . . Therefore, schematic interpretation for making the formula in section 80HHC workable cannot be ruled out. Similarly, purposeful interpretation of section 80HHC which has undergone so many changes cannot be ruled out, particularly, when those legislative changes indicate that the Legislature intended to exclude items like commission and interest from deduction on the ground that they did not possess any elements of 'turnover' even though commission and interest emanated from exports . . . This is because the very basis for computing section 80HHC deduction was 'business profits' as com- puted under section 28, a portion of which had to be apportioned in terms of the above ratio of export turnover to total turnover. Section 80HHC(3) was a beneficial section. It was intended to provide incentives to promote exports. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting 'business profits' the same had to be done in terms of section 28 to section 44D alone." 15. The Delhi High Court had an occasion to consider a similar provision in the case of CIT v. Shri Ram Honda Power Equip [2007] 289 ITR 475 (Delhi) where it was held as under (pages 503 and 507) : "The idea of section 80HHC is to ensure that the exporter gets the benefit of the profits derived from export and not to depress the profit further. Therefore, it can only be the net interest which can be included in the profits. If netting were not to be permitted the result would be that the profits of the exporter would be depressed by an item that is expenditure incurred on earning interest, which does not form part of the profit at all. This could not have been the intention of the Legislature . . . Explanation (baa) is relatable only to clause (a) of section 80HHC(3) and not to clause (b) thereof. These operate in distinct areas and no inter-mixing is contemplated. Hence, the word 'interest' in clause (baa) to the Explanation in section 80HHC is indicative of 'net interest', i.e., gross interest less the expenditure incurred by the assessee in earning such interest . . . To summari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... b) 90 per cent. of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits ; and (c)profits of any branch, office, warehouse or any other establishment of the assessee situate outside India. (viii) The word 'interest' in clause (baa) of the Explanation connotes 'net interest' and not 'gross interest'. Therefore, in deduct- ing such interest, the Assessing Officer will take into account the net interest, i.e., gross interest as reduced by expenditure incurred for earning such interest. (ix) Where, as a result of the computation of profits and gains of business and profession, the Assessing Officer treats the interest receipt as business income, then deduction should be permissible, in terms of Explanation (baa) of the net interest, i.e., the gross interest less the expenditure incurred for the purposes of earning such interest. The nexus between obtaining the loan and paying interest thereon (laying out the expenditure by way of interest) for the purpose of earning the interest on the fixed deposit, to draw an analogy from section 37, will require to be shown by the assessee for application of the ne ..... X X X X Extracts X X X X X X X X Extracts X X X X
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