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TMI Blog2015 (2) TMI 365X X X X Extracts X X X X X X X X Extracts X X X X ..... 2003 and 13, 19 & 75 of 2004 - - - Dated:- 27-11-2014 - SRI L.NARASIMHA REDDY AND SRI CHALLA KODANDA RAM, JJ. For the Appellant : Sri S.R.Ashok For the Respondent: Sri S.Ravi COMMON JUDGMENT: (Per LNR,J) These appeals under Section 260-A of the Income Tax Act, 1960 (for short the Act) by the Revenue present certain questions of general importance. All the appeals are in relation to the same assessee. Section 80HHC of the Act happens to be the provision, which became the subject matter of serious discussion in several judgments, may be on account of its complicated nature. The respondent is involved in the business of export. In the returns filed by it year after year, it has been claiming deduction under Section 80HHC of the Act. A serious matter of dispute in this behalf, was the deduction of interest in the context of determining the profits of business under Clause (baa) of Explanation to Section 80HHC of the Act (for short the Clause). The business activity of the respondent was such that in every assessment year, it earned interest on the deposits made by it in the course of business on the one hand, and incurred liability to pay interest on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sis either for the Commissioner or for the Tribunal to set aside the same. Sri S.Ravi, learned senior counsel for the respondent, on the other hand submits that once a particular amount has been included in the profits and gains of the business or profession, under the Clause, which obviously takes in its fold, the interest received on the deposits on the one hand and interest paid on the loans on the other hand, the same proportion needs to be maintained in the context of deduction therefrom to the extent of 90% under the Clause. Learned counsel submits that if netting has taken place at the time of determination of profits and gains of business or profession, the same needs to be repeated in the context of deduction to the extent of 90% under the Clause; and if on the other hand, only one component thereof has gone into profits and gains, that part alone needs to be reduced. He contends that the Assessing Officer maintained an otherwise untenable distinction between the deposits made through borrowed funds on the one hand and own funds of the appellant on the other hand, and the same is untenable under the Act. Learned counsel submits that the Commissioner as well as the Tribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respective activities, if one of it happens to be the export. Obviously for this reason, Parliament evolved a formula whereunder, the profits, retained for export business shall bear the same proportion to the export turnover as does the export turnover to the total turnover of the business of the assessee. Sub-section 3(a) of Section 80HHC of the Act gives an indication in this behalf. It reads: (3) For the purposes of sub-section (1),- (a) where the export out of India is of goods or merchandise manufactured [or processed] by the assessee, the profits derived from such export shall be the amount which bears to the profits of the business, the same proportion as the export turnover in respect of such goods, bears to the total turnover of the business carried on by the assessee; Therefore, it becomes essential for an assessee as well as the Department to determine the profits and gains from the business or profession. The necessity in this behalf was explained by this Court in M/s. Aurobindo Pharma Limited, Hyderabad vs. Commissioner of Income Tax (R.C.No.78 of 2000, dated 11.07.2014) as under: From a perusal of both the provisions referred to above, it becomes clear t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the profits of the business as computed under the head Profits and gains of business or profession as reduced by (1) ninety percent 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. The Clause assumes significance in the context of ascertainment of profits and gains of the business or profession. The complexity of the section is such that it provides for deductions of two categories, at various stages. While the deduction provided for under Sub-section (1) is, of profits derived from export business, thereby reducing the taxable income, the exercise referable to the Clause is for the purpose of determining the profits and gains of business or profession, which happens to be a factor in the formula for determining the former. In a way, it is a process of weeding out the elements, which are alien to the activity of export. Interest is one such component, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s derived from exports for the purposes of 80HHC(1) read with 80HHC(3) are, the nexus test has to be applied to exclude that which does not partake of profits that can be said to have been derived from the business of exports. (ii)In the specific context of Clause (baa) of the Explanation to Section 80HHC, while determining the 'profits of the business', the AO has to undertake a two- step exercise in the following sequence. He has to first 'compute' the profits of the business under the head profits and gains of business or profession. In other words, he will have to compute business profits, in terms of the Act, by applying the provisions of Sections 28 to 44 thereof. (iii) ------- (iv) Where surplus funds are parked with the bank and interest is earned thereon it can only be categorised as income from other sources. This receipt merits separate treatment under Section 56 of the Act which is outside the ring of profit and gains from business and profession. It goes entirely out of the reckoning for the purposes of Section 80HHC. (v), (vi) (vii) -------- (viii) The word 'interest' in Clause (baa) of the Explanation connotes 'net inter ..... X X X X Extracts X X X X X X X X Extracts X X X X
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