The Commissioner of Income Tax, V. M/s. K.C.P.Limited

ITTA/433/2011

AI Insights

The case involves multiple appeals concerning the interpretation of Explanation (baa) to Section 80HHC of the Income Tax Act, 1961, which pertains to the deduction of certain receipts from the profits of a business. The primary legal question was whether the 90% deduction on receipts such as brokerage, commission, interest, and rent should be applied to gross or net receipts. The Supreme Court, referencing its earlier decision in ACG Associated Capsules Pvt. Ltd., clarified that the deduction should be on net receipts. This interpretation was supported by various precedents and the Memorandum explaining the clauses of the Finance (No.2) Bill, 1991.

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 719169 (HC-MISC)
• Appeal Type: Others
• Pronouncement Date: 13-03-2012
• Assessment Year: misc
• Other Referred Cases: ACG Associated Capsules Pvt. Ltd. v. The Commissioner of Income Tax, Distributors (Baroda) Pvt. Ltd. v. Union of India & Others, Commissioner of Income Tax v. Shri Ram Honda Power Equipment, Commissioner of Income Tax v. Asian Star Company Ltd.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Keywords: Gross receipts; Income Tax; Net receipts; Section 80HHC; Explanation (baa)
• Section: 28; 80HHC; 30; 44D

Judgement Text

"THE HON’BLE THE CHIEF JUSTICE SHRI MADAN B. LOKUR AND THE HON’BLE SHRI JUSTICE SANJAY KUMAR I.T.T.A. Nos.433 of 2011, 55 and 60 of 2001; 61, 73, 81 of 2002; 127, 174, 220, 224, 226, 233, 262, 265, 329 of 2003; 22, 39, 65, 106, 128 and 155 of 2004; 409 and 587 2006, 328 of 2010 and 555 of 2011 DATED:13-03-2012 I.T.T.A. No.433 of 2011 Between: The Commissioner of Income Tax … Appellant And M/s. K.C.P. Ltd., Chennai and others. … Respondents THE HON’BLE THE CHIEF JUSTICE SHRI MADAN B. LOKUR AND THE HON’BLE SHRI JUSTICE SANJAY KUMAR I.T.T.A. Nos.433 of 2011, 55 and 60 of 2001; 61, 73, 81 of 2002; 127, 174, 220, 224, 226, 233, 262, 265, 329 of 2003; 22, 39, 65, 106, 128 and 155 of 2004; 409 and 587 2006, 328 of 2010 and 555 of 2011 COMMON JUDGMENT: (per the Hon’ble the Chief Justice Shri Madan B. Lokur) 1. The substantial question of law that arises in all these appeals is with regard to the interpretation of Explanation (baa) to Section 80HHC of the Income Tax Act, 1961 (hereinafter referred to as the “Act”). 2. The issue raised in these appeals is no longer res integra in view of a recent decision of the supreme Court in ACG Associated Capsules Pvt. Ltd., (Formerly Associated Capsules Pvt. Ltd.) v. The Commissioner of Income Tax[1] 3. Explanation (baa) to Section 80 HHC of the Act reads as follows:- “ ’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.” 4. The question that arises is whether while calculating the profits of business, the assessee is entitled to deduction of 90% of the receipts by way of brokerage, commission, interest, rent etc., from the gross receipts or from the net receipts. 5. The Supreme Court has now, in the aforesaid decision, held that the reduction will be on the basis of net receipts. 6. The Supreme Court explained that profit of business are required to be computed under the head “profits and gains of business or profession” in accordance with the provisions of Section 28 to 44D of the Act. In the computation of such profits of business, all receipts of income have to be included and all expenses which are allowable under Sections 30 to 44D of the Act, have to be allowed as expenditure. 7. What remains then is the net receipts which are the profits of the business of the assessee computed under the head “profits and gains of business or profession”. It is from this amount, that deductions are required to be made in terms of Explanation (baa) to Section 80HHC of the Act. 8. Therefore, if any receipts by way of brokerage, commission, interest, rent etc., 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”, 90% of such quantum of receipts cannot be reduced in terms of Explanation (baa) to Section 80HHC of the Act from the profits of the business. In other words, only 90% of the net amount of any receipt of the nature of brokerage, commission, interest, rent etc., which is actually included in the profits of the assessee has to be deducted from the profits for determining the profits of the business of the assessee under Explanation (baa) to Section 80HHC of the Act. 9. Therefore, 90% of not the gross interest or gross brokerage as the case may be, but only the net interest or net brokerage included in the profits of business of the assessee as computed under the head “profits and gains of business or profession” is to be deducted under clause (1) of Explanation (baa) to Section 80HHC of the Act for determining the profits of the business. 10. While coming to the above conclusion, the Supreme Court relied upon Distributors (Baroda) Pvt. Ltd., v. Union of India & Others[2]. The Supreme Court also referred to the decision of the Delhi High Court in Commissioner of Income Tax v. Shri Ram Honda Power Equipment[3]. The Supreme Court also considered the opinion of the Bombay High Court in Commissioner of Income Tax v. Asian Star Company Ltd.,[4] which took a contrary view. The Supreme Court also took into consideration the Memorandum explaining the clauses of the Finance (No.2) Bill, 1991 in coming to the conclusion which it did. 11. We may note that learned counsel for the Revenue has very frankly stated that the issue raised in this case is no longer res integra in view of the decision of the Supreme Court referred to above. 12. The appeals are disposed of in view of the above. MADAN B. LOKUR, CJ SANJAY KUMAR, J 13-03-2012 pnb [1] 2012(2) SCALE 374 [2] [1985] 155 ITR 120 [3] [2007] 289 ITR 475 (DELHI) [4] (2010) 326 ITR 56 (Bom.) "