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TMI Blog2023 (6) TMI 1363X X X X Extracts X X X X X X X X Extracts X X X X ..... ducted under clause (1) of Explanation (baa) to Section 80HHC for determining the profits of the business. But no such exercise was taken up by the Ld. AO Therefore the wholesome effect of above is that Ld AO and so did the learned CIT(A) erred in law and in facts of the case in holding that income classified as other income, though held as Business Income was not to be considered for the purpose of working out deduction u/s 80 HHC. Ground decided in favour of the assessee. AO shall recompute the deduction u/s 80HHC, by considering these receipts without deducting 90% of these, while computing adjusted profits. Applicability of Section 80AB for not allowing deduction u/s 80HHC - Computation of deduction on the basis of net income - Directions to recompute the deduction u/s 80HHC, while giving effect to the judgment of Hon ble Supreme court in Commissioner of Income Tax-1 versus Reliance Energy Ltd. [ 2021 (4) TMI 1237 - SUPREME COURT] Treatment to dividend income received - Direction for allowing the credit of taxes paid in Singapore on the dividend income as per the provisions of DTAA in accordance with law. - SH. G.S.PANNU, HON BLE PRESIDENT AND SH. ANUBHAV ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... missible against Income from Business and not against Gross Total Income as per Income Tax Act. 5. That on the facts and circumstances of the case, the Ld. CIT(A) erred in law in applying the provisions of Section 80 AB to the Head of Income , that is, business income instead of the Nature of Income , that is income derived from exports (covered u/s 80 HHC) and thereby upholding the rejection of claim of deduction u/s 80 HHC admissible to the appellant. 6. That on the facts and circumstances of the case, the Ld. CIT(A) erred in law in applying the judgement of Supreme Court in the case of IPCA Labortries Ltd. vs DCIT (266 ITR 521) to the case of appellant since it had exported only trading goods governed by Sec. 80 HHC (3) (b) of the Act. 7. That on the facts and circumstances of the case, the Ld. CIT(A) erred in law in upholding the action of the Assessing Officer in not netting of the interest expense against interest income, which is intimately linked to each other, while working out indirect expenses for the purpose of calculating deduction admissible u/s 80HHC of the Act. 8. That the Appellant craves leave to alter, amend, add, delete, modify, sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in India. 8. As the additional grounds arise out of questions of facts and law involved in the impugned order but not covered by other grounds. So same are allowed to be raised. 9. Arguments were heard and record has been perused. The ground wise findings are as below. 10. Ground no. 3; Facts are that the assessee had submitted gross income of Rs. 19,13,55,170/-. However, the Ld. AO had made additions on account of accrued interest dividend income and other incomes which assessee had claimed as business income but the Ld. AO allowed the same treating as business income not derived from exports and therefore reduced interest and dividend income to arrive at business income in negative and also in the alternative reduced 90% of the interest income and 90% of other income including dividend income, by invoking provisions of Explanation (baa) of Section 80HHC and arriving in negative adjusted business profit. 11. It was argued by Ld Counsel of assessee that Ld. CIT(A) has erred in not appreciating the scheme of allowance of deduction u/s 80HHC in its correct perspective. It was submitted that assessee during the year under consideration was engaged both in the export of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t derived from export of goods . 11.1 Ld. Counsel relied the following judgments : 1. International Research Park Laboratories vs. ACIT : 212 ITR (AT) 1, 50, ITD 37 2. P.R.Prabhakar vs. CIT : 284 ITR 584 3. Pearl Polymers Limited : 80 ITD 1 (SB) (Del.) 4. Harisons Malayalam Limited V. DCIT : 60 ITD 306 (Coch.) 5. CIT vs. Parry Agro Industries Ltd. : 257 ITR 41 (Ker) 6. Rajeev Enterprises V. AO : 261 ITR (AT) 34 7.Alfa Laval India Ltd. vs. DCIT : 266 ITR 418 (Bom.) 8. CIT vs. Bangalore Clothing Co. : 260 ITR 371 9. CIT vs. kar Mobiles Ltd. : 333 ITR 478 (Ker) 10. CIT vs. Sociedade de Fomento Industrial Ltd. 335 ITR 472 (Bom) 11. DCIT vs. B.A. Aswathaiah Bros. : 72 TTJ 714 (Bang.) 12. Kadra Mills (CBE) Ltd. v. JCIT : 76 TTJ 38 (Chennai) 13. Mitsu Ltd. v. Asstt. CIT : 142 ITD 157 (Ahd.) 14. ACIT vs. GKN Sinter Metal (P.) Ltd. : 153 ITD 311 (Pune) 15. CIT vs. Metalman Auto (P.) Ltd. : 336 ITR 434 12. On the basis of these judgments cited it was also submitted that expenses like interest from customers and sale tax receipt of interest, commissioner labour charges, scrap of sales insurance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sale proceeds (excluding freight and insurance) receivable by the assessee in convertible foreign exchange. In other words, the FOB value of exports. The Finance Act, 1990 has restricted the definition of the term export turnover to mean FOB sale proceeds actually received by the assessee in convertible foreign exchange within six months of the end of the previous year or within such further period as the Chief Commissioner/Commissioner may allow in this regard. 9. Thus, in the case of an assessee who is doing export business exclusively, export turnover and total turnover would be identical, if the entire sale proceeds are brought into India in convertible foreign exchange within the prescribed time limit. In that case, the entire profit under the head Profits and gains of business or profession (which will include the three export (incentives) will be deductible under Section 80HHC. However, in order to arrive at the amount deductible under Section 80HHC in the case of an assessee doing export business as well as some other domestic business, the fraction of export turnover to total turnover , will be applied to his profits computed under the head Profits and gai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etc., which do not have an element of turnover are included by the assessee in the profit and loss account. Therefore, Explanation (baa) came to be introduced. Under that Explanation profits of the business, for the purposes of Section 80HHC, does not include receipts which do not have an element of turnover like rent, commission, interest, etc. However, as some expenditure might be incurred in earning such incomes an ad hoc 10 per cent. deduction from such incomes is provided to account for those expenses. However, learned counsel for the Department cannot invoke Explanation (baa) in every matter involving receipts by way of brokerage, commission, interest, rent, labour charges, etc. These items of income have got to be seen in the context of the business activity of the assessee. To give an example, in the case of a manufacturing company which undertakes exports, receipt of interest or commission may not be operational income because they do not have the element of turnover and consequently Explanation (baa) will apply. However, that will not be the case if the assessee is carrying on the business of financing because in the case of financing, the interest income which accrues t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts. The Tribunal has further found, on the facts, that the activity of labour job involved use of machinery, labour and material which were also forming part of the activity of manufacturing garments for its own sales. The Tribunal further found that there was no difference between manufacturing of garments for the assessee's own sales and manufacturing of garments for others on labour job basis. These are findings of fact. They have not been challenged in the memo of appeal. The memo of appeal proceeds only on the basis that because the receipt is by way of labour charges, Explanation (baa) stood attracted. As stated above, each case will have to be examined by the Assessing Officer. As stated above, in each case of receipt of labour charges, rent, interest commission, etc., the Assessing Officer will have to ascertain whether the element of turnover existed. In the present case, the Tribunal has found, on the facts, that there was an element of job work turnover and, therefore, the Tribunal concluded on the facts of this case that the receipt of labour charges was not in the nature of brokerage, commission, rent, interest or charges as mentioned in Explanation (baa) to Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... distinction sought to be made in respect of the definition of profits of the business under sub-section (baa) of the Explanation, to mean the profits of the business as computed under the head Profits and gains of business or profession , which incorporates the entire procedure for computing the business income under Section 28 to 44 of the Act. Dehors Section 80HHC of the Act, the consistent approach is that where the statutory provision talks of income derived from the business activity in question, the nexus theory should be applied in order to determine whether a particular item of income is business income or not. 17.2 The Hon ble High court the answered the question as follows; 44. On the question No. 3, we hold that the earning of the income convertible from foreign exchange by way of interest, is not necessary so long as the interest is derived from business of export, and has direct and proximate nexus, with the income earned out of the profits retained for the export business. The earning of the income convertible from foreign exchange, is not a test for determining, as to whether deduction is allowable in respect of the income derived from the profits r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... context, the judgment relied by Ld. Counsel of Assessee of Hon ble Bombay High Court in Alfa Laval India Ltd. vs Deputy Commissioner Of Income Tax 2004 266 ITR 418 Bom, { as confirmed by Hon ble Supreme Court in [2008]170 Taxman 615 (SC)}, is relevant where too the AO had assessed the interest income from customers, sales-tax set off, etc. under the head income under the head 'Profits and gains of business or profession', but excluded the same from the business profits while computing the deduction under Section 80HHC of the Act. Hon ble Bombay High Court held; 17. In our opinion, the submissions made on behalf of the assessee deserve to be accepted. In the present case, the AO has computed the income by way of interest from the customers, salestax set off, claims, refunds; etc. under the head 'Profits and gains of business or profession'. To put it differently, the AO has not assessed the interest income from customers, sales-tax set off, etc. under the head 'Income from other sources' or under any other head. Having assessed these income under the head 'Profits and gains of business or profession', it was not open to the AO to treat these in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 02 was considering a case where while framing the assessment under Section 143(3) of the Act, 1961, for the asst. yrs. 1996-97 and 1997-98, the AO excluded 90 per cent of other receipts, viz. yarn conversion charges, miscellaneous income like gunny bag sales, insurance claim and premium on hank yarn obligation while arriving at the adjusted business profit for the purpose of computation of relief under Section 80HHC of the Act. It was held by the Tribunal ; 25. We have heard rival submissions and considered the facts and materials available on record including that of the decisions relied upon by both the parties. After a careful consideration of the same, we are of the opinion that the Expln. (baa) of Sub-section (4B) of Section 80HHC speaks of only Profits of business as computed under the head Profits and gains of business or profession and not profits derived from export. Further, the items of receipts such as miscellaneous incomes like gunny bag sales, scrap sales, insurance claim, premium on hank yarn obligation, etc. do not have even a semblance of the items mentioned in Expln. (baa) viz., brokerage, commission, interest, rent, charges or any other receipts of simi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erage, commission, interest, rent, charges or any other receipt of a similar nature included in any such profits are to be deducted from the profits of the business as computed under the head Profits and Gains of Business or Profession . The expression included any such profits in clause (1) of the Explanation (baa) would mean only such receipts by way of brokerage, commission, interest, rent, charges or any other receipt which are included in the profits of the business as computed under the head Profits and Gains of Business or Profession . Therefore, if any quantum of the receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature is allowed as expenses under Sections 30 to 44D of the Act and is not included in the profits of business as computed under the head Profits and Gains of Business or Profession , ninety per cent of such quantum of receipts cannot be reduced under Clause (1) of Explanation (baa) from the profits of the business. In other words, only ninety per cent of the net amount of any receipt of the nature mentioned in clause (1) which is actually included in the profits of the assessee is to be deducted from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... HC of the Act an exporter is entitled to deduction in respect of profits derived from export and in case of an exporter like present assessee who is engaged in both export of trading goods i.e. goods other than, one manufactured by the assessee and also goods manufactured by the assessee, then the profits derived from export which formed the basis for deduction under the said section is computed in accordance with formula prescribed in sub-section (3) of sub section 80HHC of the Act. It was submitted that Chapter VI-A of the Act deals with deduction to be made in computing total income. According to section 80A of the Act, in computing the total income of assessee deductions specified in section 80C to 80U are allowed from gross total income. It was submitted that the only limitation contained in sub section 2 of section 80A is that the aggregate deduction under Chapter VI-A of the Act cannot exceed the gross total income which is defined in section 80B(5). It was submitted that the aforesaid interpretation establishes that first the gross total income has to be computed and thereafter deductions if any under Chapter VI-A of the Act have to be made. It was submitted that in the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee had reported profit of the business at R 2,47,088,375/- while profits from export of trading goods at 33,78,35,239/-. The Gross Total Income (Revised) was submitted at Rs. 19,13,55,170 and the ld AO arrived at Business income of (-) 913479702/- after reducing the interest income and dividend and in alternative the adjusted business profit is calculated at (-)Rs. 313591737/ after reducing the interest income and 90% of other income including dividend income. 29. Now, in regard to manner of treating interest income of assessee the issue has been restored to the files of Ld AO. Therefore, the effect giving order has to passed by the ld AO and the Business income has to be re-calculated. Similarly on determination of ground no 3 as above and also the interest income issue as determined by previous orders, the Adjusted business profit has to be recalculated. Therefore, by merely relying the decision of Hon ble Supreme Court in IPCA Laboratories Ltd. Case, the 80HHC deduction can not be declined as adjusted business profit has to be recomputed and may not be in minus. 29.1 At the same time in regard to the applicability of Section 80AB for not allowing deduction u/s 80HHC, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gross total income . Sub-section (2) of Section 80A of the Act provides that the aggregate amount of the deductions under Chapter VI-A shall not exceed the gross total income of the Assessee. We are in agreement with the Appellate Authority that Section 80AB of the Act which deals with determination of deductions under Part C of Chapter VI-A is with respect only to computation of deduction on the basis of net income . 30. Therefore, these grounds no 4 to 6 are allowed for statistical purpose while directing the Ld. AO to recompute the deduction u/s 80HHC, while giving effect to the judgment of Hon ble Supreme court in Commissioner of Income Tax-1 versus Reliance Energy Ltd.( Supra). 31. Additional ground of appeal; In regard to the additional ground as raised it can be observed that there is no dispute to the fact that MMTC Transnational Pte. Ltd. (MTPL) is a company incorporated under the laws of Singapore, is a 100% subsidiary of the assessee from which the assessee received dividend income of Rs. 95,95,039/- in the relevant previous year. The Ld. AO had followed the previous year s assessment while holding that dividend income received from MTPL, cannot be treated ..... 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