Tax Case (Appeal) No. 47 of 2003

Decided on January 18, 2006

The Judgment of the Court was delivered by

P.P.S Janarthana Raja, J.:— This appeal has been preferred by the Revenue under section 260A of the Income-tax Act, 1961, against the order of the Income-tax Appellate Tribunal, “C” Bench, Chennai, in I.T.A No. 1594.Mds./1998 dated July 24, 2002 and the appeal was admitted in terms of the following substantial question of law:

“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in holding that the assessee is eligible for full deduction under section 80HHC without restricting to the amount received by way of interest were incidental to the export business as fixed deposits is valid in law?”

2. The facts leading to the above question of law are as under: The assessee is a specified Hindu undivided family. The assessment year is 1995-96 and the corresponding accounting year ended on March 31, 1995. The assessee filed its return of income on November 29, 1995, admitting a gross total income of Rs. 9,66,389 and claiming deduction of an amount of Rs. 9,37,057 under section 80HHC. The case was proceeded under section 143(1)(a) and notice under section 143(2) was issued. The assessee is engaged in the business of export of finished leather. During the year, the assessee had received interest of Rs. 2,65,019 but he had not shown the interest receipt in the credit side of the profit and loss account. Instead he had debited the interest (net) at Rs. 6,59,946 and the details of interest he had shown is as under:

(Rs.) Interest paid 9,24,967 Less: Interest received 2,65,019 Interest (net) 6,59,946

3. The contention before the Assessing Officer was that, interest receipts are incidental to export business as fixed deposits were made as required by the bank for availing of various credit facilities for carrying on the business and so, interest receipt had to be considered as business income, and hence the same was not deductible for the purpose of section 80HHC. The Assessing Officer was of the view that the relevant provisions referred to the exclusion of 90 per cent. of “receipts” in the nature of, inter alia, interest and not income of that nature. Hence he had not taken into account the interest payment of Rs. 9,24,969, but reduced the deduction under section 80HHC by 90 per cent. of the income of Rs. 2,65,019. Aggrieved by the order of assessment, the assessee filed an appeal to the first appellate authority who confirmed the order of the Assessing Officer. Against that order, the assessee preferred an appeal before the Income-tax Appellate Tribunal. The Income-tax Appellate Tribunal held that, in this case on hand, the net figure of interest is only the payment in a sum of Rs. 6,59,946 and not receipt and hence there is no question of removing any amount out of such net interest payments while computing the deduction under section 80HHC. Hence, the Appellate Tribunal set aside the order of the Revenue authorities and directed not to remove any amount towards interest by applying the Explanation (baa) to sub-section (4B) of section 80HHC as the net interest resulted only in payment in a sum of Rs. 6,59,946 and not any income.

4. Learned counsel for the Revenue submitted that the relevant provisions referred to the exclusion of 90 per cent. of “receipt” in the nature of, inter alia, interest and not “income” of that nature and further submitted that the intention of the Legislature is that, there should be no attempt to deduct any expenditure from the receipts, howsoever related the said expenditure may be to the receipts. The expression “receipts” has been used in the section and, hence, the Assessing Officer was right in not taking into account the interest payment of Rs. 9,24,967 and he is also right in reducing the deduction under section 80HHC by 90 per cent. of the interest income of Rs. 2,65,019.

5. There is no representation on behalf of the respondent-assessee even though notice was served duly on the assessee. The matter involved in the appeal is a very important one and, hence, we requested Mr. V. Ramachandran, senior counsel, to assist the court as amicus curiae. The senior counsel submitted that the interest receipt was considered as a business income and, hence, the assessee had not deducted for the purpose of section 80HHC, and further stressed the fact that in the present case the net figure of interest, is only the payment in a sum of Rs. 6,59,946 and not receipt and hence there is no question of excluding any amount out of such net interest payments while computing the deduction under section 80HHC of the Act.

6. We heard the contention advanced by both the parties. The entire controversy centres around the meaning to be assigned to the language employed in clause (baa) of the Explanation to section 80HHC of the Act. The said clause reads as follows:

“(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 per cent. of any sum referred to in clauses (iiia), (iiib) and (iiic) 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.”

7. On a plain reading of the provision, it is clear that what the provision stipulates is that “profits of the business” for the purpose of section 80HHC of the Act mean the profits of the business as computed under the head “Profits and gains of business or profession”. While computing such profits under the head “Profits and gains of business or profession”, if any receipt by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature is included in such profits, the same has to be reduced by 90 per cent. from the profits computed as aforesaid. The deductions to be made are from the amount of profits so computed and not from the amount computed under any other head of income of that assessee. No reference of net interest is mentioned in the said clause. What we have to see is only the nature of receipt as contemplated under the clause. No deduction is permissible. Once the receipt of the interest is known, 90 per cent. of the same is to be reduced from the profits without deducting any amount. This court in the case of K.S Subbiah Pillai and Co. (India) P. Ltd. v. CIT, [2003] 260 ITR 304, held as follows (page 305):

“The clause does not refer to net interest. It refers, inter alia, to the interest included in the profits and gains of the business or profession….

Clause (baa) under the Explanation to section 80HHC defines profits of the business as computed under the head ‘Profits and gains of business or profession’. The deductions to be made are from the amount of profit so computed and not from the amount computed under any other head of income of that assessee. The reference to ‘such profits’ in sub-clause (1) of clause (baa) can only be to the profits of the business computed under the head ‘Profits and gains of business or profession’. Addition of prefix ‘the’ to ‘profits’ in clause (baa), while referring to the profits and gains of business or profession makes it clear that it is only the amounts already included in that computation which are now to be reduced to the extent of 90 per cent., if those items are included in subclause (1) of that definition.”

8. The Punjab and Haryana High Court judgment reported in [2004] 268 ITR 220, at pages Nos. 222 and 223, Rani Paliwal v. Commissioner Of Income-Tax, held as follows:

“This issue relates to the inclusion of interest as part of the asses-see's ‘business income’ for working out the deduction claimed under section 80HHC of the Act. The total interest received by the assessee during the relevant assessment year was Rs. 6,33,454 and the total interest paid by the assessee was Rs. 4,12,982. The Assessing Officer was of the view that 90 per cent. of the gross amount of interest of Rs. 6,33,454 was liable to be deducted from the profits of the business for the purpose of deduction. He, therefore, reduced the quantum of deduction under section 80HHC of the Act accordingly. The Commissioner of Income-tax (Appeals), however, took a different view in appeal and allowed 90 per cent. of the amount of interest to be deducted after deducting a sum of Rs. 4,12,982 which had been paid by the assessee as interest during the assessment year. The Tribunal again affirmed the view of the Assessing Officer holding that 90 per cent. of the interest that was deductible for the claim under section 80HHC of the Act was from the gross interest received by the assessee and that the amount of interest paid by the assessee could not be deducted therefrom. A plain reading of clause (baa) of Explanation to section 80HHC of the Act makes this aspect quite clear and we are of the view that the Tribunal was right in disallowing the claim of the assessee in this regard.”

9. The above two judgments support the case of the Revenue. The appellant in the present case had received interest of Rs. 2,65,019 and hence the receipt of interest is alone relevant and the same is to be taken into consideration for the purpose of deduction for the claim under section 80HHC of the Act. No expenditure or any other deduction is permissible from the receipt of interest income. Section 80HHC stipulates a deduction in respect of export profits. Instead of enjoining the Assessing Officer to compute such export profits from out of the consolidated amount of the assessee, which may involve income by way of interest, rent, commission etc., the Legislature has provided a simple procedure under which 90 per cent. of the receipts such as interest, rent, commission, brokerage, etc., shall be excluded as profits not attributable to exports. The intention is, therefore, clear that there should be no attempt to deduct any expenditure from the receipts, however, related, such expenditure may be to the receipts. It is in this view of the matter that the expression “receipt by way of” has been used in the section and not “income” of that nature. In view of the above, we are of the view that 90 per cent. of the interest that is deductible for the claim under section 80HHC of the Act is from the gross interest received by the assessee and that the amount of interest paid by the assessee should not be deducted therefrom and, hence, we answer the above question in favour of the Revenue and against the assessee and allow the tax case filed by the Revenue. No costs.

10. We appreciate learned senior counsel Mr. V. Ramachandran for the valuable assistance.