The Commissioner of Income Tax V. M/s Meera AND Ceiko Pumps P. Ltd.

ITTA/298/2003

AI Insights

The case involves the Commissioner of Income Tax as the appellant and Meera & Ceiko Pumps Pvt. Ltd. as the respondent, concerning the interpretation of Section 80HHC of the Income Tax Act, 1960. The primary legal issue was whether the interest earned from deposits made by the respondent, which were not directly linked to its business activities, should be included in the 'profits of business' for the purpose of calculating deductions under Clause (baa) of Explanation to Section 80HHC. The Income Tax Appellate Tribunal had previously ruled in favor of the respondent, allowing the netting of interest income and expense, which the appellant contested in this appeal.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 718701 (HC-HYDERABAD)
• Appeal Type: Others
• Pronouncement Date: 27-11-2014
• Assessment Year: misc
• Other Referred Cases: (2007) 289 ITR 475 (Delhi), (2012) 343 ITR 0089
• Laws Referred To: Income Tax Act, 1960
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: S RAVI
• Assessee Lawyers: S R ASHOK
• Keywords: Export business; Income Tax; Interest deduction; Netting of interest; Profits and Gains; Section 80HHC
• Section: 80HHC; 260-A

Judgement Text

"*THE HON’BLE SRI JUSTICE L.NARASIMHA REDDY AND *THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM + I.T.T.A.Nos. 298 & 311 of 2003 and 13, 19 & 75 of 2004 % Dated 27.11.2014 # The Commissioner of Income Tax. ….Appellant $ Meera & Ceiko Pumps Pvt. Ltd. ….Respondent ! Counsel for the appellant : Sri S.R.Ashok ^ Counsel for respondent : Sri S.Ravi < GIST: > HEAD NOTE: ? CASES REFERRED: 1. (2007) 289 ITR 475 (Delhi) 2. (2012) 343 ITR 0089 THE HON’BLE SRI JUSTICE L.NARASIMHA REDDY AND THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM I.T.T.A.Nos. 298 & 311 of 2003 and 13, 19 & 75 of 2004 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 amount borrowed by it for that very purpose on the other hand. The respondent insisted that it is only the difference between the two, that deserves to be reduced from the profits and gains from profession or business, to the extent of 90%, under the Clause. In other words, it wanted the process of netting to be undertaken in this behalf, and to restrict the deduction to the net interest, and not the gross interest. The appellant on the other hand took the view that unless the respondent has borrowed the amount, on which it has been paying interest for the purpose of business; the corresponding interest cannot be taken into account, for this purpose. Basically, they insisted that netting cannot be undertaken and even if it is to be done, it should be confined only in respect of the amounts, that are borrowed for the purpose of business, and not otherwise. Orders of assessment on those lines were passed. The respondent filed appeals before the Commissioner (Appeals) for the respective years and they were allowed to certain extent. The Revenue filed further appeals before the Hyderabad Bench of the Income Tax Appellate Tribunal. The appeals were dismissed and the Tribunal has taken the view that it is sonly after netting, that the differential amount can qualify for deduction under the Clause. Hence, these appeals. Sri S.R.Ashok, learned senior Standing Counsel for the appellant submits that though Section 80HHC of the Act deals with deduction in respect of profits and gains from export business, determination of (a) profits and gains of business or profession; (b) export turnover; and (c) total turn over become relevant, for arriving at the proportion of profits referable to export or merchandise or manufactured goods vis-a-vis the export turnover and thereby to the total turnover of the business. He contends that by implication, the income from other sources, which do not have any bearing on business or profession stands excluded, and if an assessee has parked his surplus funds in deposits, the interest derived therefrom does not qualify for deduction under the Clause. He places reliance upon the Judgment of the Delhi High Court in Commissioner of Income- Tax vs. Shri Ram Honda Power Equip[1]. He contends that the procedure adopted by the Assessing Officer accords with the one prescribed under the Act and the Rules made thereunder; and that there was no basis 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 Tribunal have taken into account, the real purport of the relevant provisions of law as well as the precedents on the subject; and arrived at just and proper conclusions. The controversy in this case is only about the deduction of interest under the Clause. To appreciate the same from the correct perspective, it becomes necessary to have a glance at the salient features of Section 80HHC of the Act. The provision itself runs into 8 closely printed pages. The main object is reflected under Sub-Section (1), which reads: 80HHC. Deduction in respect of profits retained for export business.- (1) Where an assessee, being an Indian company or a person (other than a company) resident in India, is engaged in the business of export out of India of any goods or merchandise to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction to the extent of profits, referred to in sub-section (1B), derived by the assessee from the export of such goods or merchandise: Provided that if the assessee, being a holder of an Export House Certificate or a Trading House Certificate (hereafter in this section referred to as an Export House or a Trading House, as the case may be), issues a certificate referred to in specified therein, the deduction under this sub-section is to be allowed to a supporting manufacturer, then the amount of deduction in the case of the assessee shall be reduced by such amount which bears to the total profits derived by the assessee from the export of trading goods, the same proportion as the amount of export turnover specified in the said certificate bears to the total export turnover of the assessee in respect of such trading goods. Sub-section (1B) provides for the extent of deduction, which ranges from 80% for the assessment year 2001-02 to 30% for the assessment year 2004-05. Thereafter, the activity of export is brought under the purview of Section 10B of the Act. We are concerned with the exports, to which Section 80HHC of the Act applies. It is quite possible that apart from undertaking an activity of export, an assessee may have other sources of income, including the one from business or profession. Many a time, it would become difficult, atleast for an Assessing Officer to differentiate the income or expenditure for the 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 turn over 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 that the ratio between the turnover in respect of the exported goods on the one hand and the total turnover of the business carried by the assessee on the other hand would reflect the ratio between the profits of export and the rest of the business. This method appears to have been evolved with a view to cushion the uncertainity in one sector, with the profits earned in the other sector and vice versa. For instance, if the total turnover of the business of an assessee is Rs.10,00,000/-, the turnover in respect of exported goods is Rs.4,00,000/- and the company has earned total profit of Rs.3,00,000/-, the profit earned through export shall be deemed to be 40% thereof, amounting to Rs.1,20,000/-. This is irrespective of the actual profit that has been earned through export. The actual difficulty is experienced in arriving at the “profits of the business”. Indiscriminate posting of profits may result in loss to the revenue, since the proportion of the investment for export goods would have a bearing upon the profits also. With a view to avoid the indiscriminate addition to the profits and gains of business or profession, the Clause mandates that the items mentioned therein must be deducted to the extent of 90%. The effort is only to ensure that the benefit of deduction provided in respect of profits, retained for export business is not claimed vis-à-vis the unrelated items. To the extent, the items are mentioned in the provision, there does not exist any difficulty for deduction from the total profits in the ordinary parlance. To arrive at the “profits of business” which is an expression coined specifically for the purpose of the Section, not only the items mentioned therein i.e., brokerage, commission, interest and rent, but also “charges or any other receipt of similar nature” are to be deducted. The whole controversy is as to whether the “conversion charges” earned by the applicant can be deducted from the “profits and gains of the business”, to arrive at the “profits of the business” mentioned under the Clause.” At the end of Section 80HHC of the Act, an explanation which is added which is totally devoted for definitions of certain important expressions, that are used through out the Section is added. One such expression is “profits of business” and the same is defined and explained in the Clause as under: (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 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 he 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, by which the profits and gains of business or profession are to be reduced by 90%. It hardly needs any emphasis that the profits and gains of a business are to be determined by following the procedure prescribed under Sections 28 to 42 of the Act. The resultant figure must be reduced to the extent of 90% of the components mentioned in Sub-clause (1). Even for the activity of business or profession, that qualifies for deduction under Section 80HH, it may become necessary for an assessee to pay interest on the funds borrowed, and some times to make deposits and earn corresponding interest thereon in a given assessment year. If the income in the form of interest on the deposits so made and the expenditure incurred in the form of interest paid on loans borrowed by the assesssee have become part of the exercise of determining the profits and gains, the same exercise needs to be repeated at the stage of reduction under the Clause also. If on the other hand, only one part of it has gone into it, obviously the same deserves to be repeated at the subsequent stage. As explained by the Delhi High Court in Shri Ram Honda Power Equip,’s case (1 supra), the process in this behalf involves two stages. The first is ascertainment of the profits and gains in the ordinary course of things in accordance with the Section. The second is deduction of the figures so arrived by the components that figure in Sub-clause (1) of the Clause. The word “interest “ that occurs in sub-clause (1) of the Clause has positive as well as negative character. It becomes positive when it is in the form of an income to the assessee on the deposits made by it; and negative, when it is in the form of interest paid on the loans borrowed by the assessee. If what has gone into the profits and gains is the difference of the two, that very component, to the extent of 90% deserves to be deducted from the profits and gains from the business or profession. Whether one calls it as netting or differentiation, the correct procedure would be to ensure that the same process is repeated at both the stages viz., while determining the profits and gains from business or profession as well as deduction of that figure by 90%, under the Clause. Summing up its extensive discussion, with reference to relevant provisions of law and decided case, the Delhi High Court observed as under: (i) In computing what the profits 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 interest' and not 'gross interest'. Therefore, in deducting such interest, the AO will take into account the net interest i.e. gross interest as reduced by expenditure incurred for earning such interest. The decision of the Special Bench of the ITAT in Lalsons [(2004) 8 ITR 25 (Delhi)] to this effect is affirmed. In holding as above, we differ from the judgments of the Punjab & Haryana High Court in Rani Paliwal [(2004) 268 ITR 220]and the Madras High Court in Chinnapandi [(2006) 282 ITR 389]and affirm the ruling of the Special Bench of the ITAT in Lalsons [(2004) 8 ITR 25 (Delhi)]. We are in agreement with the same. The only sentence, which we propose to added to Clause (i) is that by whatever terminology one may call it, it is the same component of interest that has gone into, while computing profits and gains of business or profession in whatever form, that would qualify for reduction to the extent of 90% under the Clause. The endeavour of the Assessing Officer in the instant case was to ensure that if the assessee has parked his excess funds in a deposit, which is totally unrelated to his business activity, the interest derived therefrom may not qualify for deduction under the Clause. In a way, his apprehension is misplaced. The reason is that if the deposits are outside the business activity, the interest therefrom happens to be the income from a source, other than the one from business or profession; and thereby it does not gain its entry into the profits and gains, under that head. This aspect has been clarified by the Tribunal in a detailed manner and we approve of the same. We therefore dismiss the appeals, subject however with the clarification given in the preceding paragraphs, which in turn was approved by the Supreme Court in ACG Associated Capsules Pvt. Ltd. vs. Commissioner of Income Tax[2]. The miscellaneous petitions filed in these appeals shall also stand disposed of. There shall be no order as to costs. ____________________ L.NARASIMHA REDDY, J ______________________ CHALLA KODANDA RAM, J Date: 27.11.2014 Note: L.R.Copy to be marked. JSU THE HON’BLE SRI JUSTICE L.NARASIMHA REDDY AND THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM I.T.T.A.Nos. 298 & 311 of 2003 and 13, 19 & 75 of 2004 Date: 27.11.2014 JSU [1] (2007) 289 ITR 475 (Delhi) [2] (2012) 343 ITR 0089 "