M/S ACG Associated
Capsules Pvt. Ltd. (Formerly M/S Associated Capsules Pvt. Ltd.) Vs. The
Commissioner of Income Tax, Central-IV, Mumbai
[Civil Appeal No.
1914 of 2012 arising out of SLP (C) No. 32450 of 2010]
The Commissioner of Income
Tax, New Delhi Vs. Bharat Rasayan Limited
[Civil Appeal No.
4534 of 2008]
[Civil Appeal No. of 2012
arising out of SLP (C) No. 32450 of 2010]
J U D G M E N T
A. K. PATNAIK, J.
1.
Leave
granted.
2.
This
is an appeal against the judgment and order dated 06.08.2010 of the Bombay High
Court in ITA(L) No. 1276 of 2010 deciding two issues against the assessee. On
the first issue, the High Court has held, relying on its judgment in Commissioner
of the Income Tax vs. Kalpataru Colours and Chemicals (ITA(L) 2887 of 2009), that
the entire amount received by an assessee on sale of the Duty Entitlement Pass Book
(for short `the DEPB') represents profit on transfer of DEPB under Section 28(iiid)
of the Income Tax Act, 1961 (for short `the Act'). We have already decided this
issue in favour of the assessee in a separate judgment in M/s Topman Exports vs.
Commissioner of Income Tax, Bombay, and other connected matters and we have held
that not the entire amount received by the assessee on sale of DEPB, but the sale
value less the face value of the DEPB will represent profit on transfer of DEPB
by the assessee. The first issue is, therefore, decided accordingly.
3.
For
appreciating the second issue, we may refer very briefly to the facts of the case.
For the assessment year 2003-04, the assessee filed a return of income claiming
a deduction of Rs.34,44,24,827/- under Section 80HHC of the Act. The Assessing Officer
passed the assessment order deducting ninety per cent of the gross interest and
gross rent received from the profits of business while computing the deduction under
Section 80HHC and accordingly restricted the deduction under Section 80HHC to Rs.2,36,25,053/-.
The assessee filed an
appeal against the assessment order before the Commissioner of Income-Tax (Appeals),
who confirmed the order of the Assessing Officer excluding ninety per cent of the
gross interest and gross rent received by the assessee while computing the
profits of the business for the purposes of Section 80HHC. Aggrieved, the assessee
filed an appeal before the Income Tax Appellate Tribunal (for short `the
Tribunal'). The Tribunal held, relying on the decision of the Delhi High Court in
Commissioner of Income-Tax v. Shri Ram Honda Power Equip [(2007) 289 ITR 475 (Delhi)],
that netting of the interest could be allowed if the assessee is able to prove the
nexus between the interest expenditure and interest income and remanded the matter
to the file of the Assessing 4Officer.
The Tribunal also remanded
the issue of netting of the rent to the Assessing Officer with the direction to
find out whether the assessee has paid the rent on the same flats against which
rent has been received from the staff and if such rent was paid then such rent
is to be reduced from the rental income for the purpose of exclusion of business
income for computing the deduction under Section 80HHC.
Against the order of the
Tribunal, the Revenue filed an appeal before the High Court and the High Court
has directed that on remand the Assessing Officer will decide the issue in accordance
with the judgment of the High Court in Commissioner of Income-Tax v. Asian Star
Co. Ltd. [(2010) 326 ITR 56 (Bom)] in which it has been held that while determining
the profits of the business as defined in Explanation (baa) to Section 80HHC, ninety
per cent of the gross receipts towards interest and not ninety per cent of the net
receipts towards interest on fixed deposits in banks received by the assessee would
be excluded for the purpose of working out the deduction under Section 80HHC of
the 5 Act.
4.
Learned
counsel for the appellant submitted that it will be clear from the Explanation (baa)
that ninety per cent of any receipts by way of brokerage, commission, interest,
rent, charges or any other receipt of a similar nature included in such profits
will be excluded for determining the profits and gains of business or profession.
He argued that as the net receipts and not the gross receipts towards interest and
rent are included in profits and gains of business or profession, ninety per cent
of such net interest and net rent and not ninety per cent of gross interest and
gross rent are to be excluded for determining the profits of the business under
Explanation (baa) to Section 80HHC of the Act.
5.
In
support of this argument, learned counsel for the appellant relied on the decision
of this Court in Distributors (Baroda) P. Ltd. v. Union of India and Others [(1985)
155 ITR 120] in which a Constitution Bench of this Court has held that only the
dividends computed in accordance with the provisions of the Act, which is included
in the gross total income of the domestic company, shall be taken into account for
working out the relief under Section 80M of the Act.
He cited the judgment
in Commissioner of Income-Tax v. Shri Ram Honda Power Equip (supra) in which the
Delhi High Court has taken a view that the word `interest' in Explanation (baa)
to Section 80HHC connotes `net interest' and not `gross interest' and, therefore,
in deducting such interest, the Assessing Officer will have to take into
account the net interest, i.e. gross interest as reduced by expenditure
incurred for earning such interest. He submitted that the Karnataka High Court in
Commissioner of Income-Tax v. Gokuldas Exports, etc. [(2011) 333 ITR 214 (Karn)]
has taken a similar view relying on the decision of the High Court in
Commissioner of Income-Tax v. Shri Ram Honda Power Equip (supra).
6.
Learned
counsel for the appellant referred to the Memorandum to Finance (No.2) Bill, 1991
explaining the rationale of Explanation (baa) in which inter alia it is stated that
as some expenditure might be incurred in earning such incomes, which in the generality
of cases is part of common expenses, and thus ad-hoc per cent deduction from such
incomes have been provided for to account for these expenses. He submitted that
the High Court has not correctly appreciated the Memorandum and has held,
relying on the Memorandum, that gross interest and gross rent have to be deducted
under Explanation (baa) to Section 80HHC to avoid a distorted figure of export profits.
7.
Learned
counsel for the Revenue, on the other hand, relied on the reasons given by the
Bombay High Court in Commissioner of Income-Tax v. Asian Star Co. Ltd. (supra) and
submitted that the Bombay High Court has rightly held that ninety per cent of the
gross amount received towards interest and rent have to be excluded from the profits
and gains of business for computing the profits of the business as defined in Explanation
(baa) to Section 80HHC of the Act. He also relied on the Memorandum to the Finance
(No.2) Bill 1991 in support of his submission that ninety per 8 cent of the gross
interest and gross rent has to be deducted from the profits of the assessee under
Explanation (baa).
8.
Before
we deal with the contentions of learned counsel for the parties, we may extract
Explanation (baa) to Section 80HHC of the Act. "Explanation:- For the purposes
of this section,- (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), (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".
9.
Explanation
(baa) extracted above states that "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 the receipts of the nature mentioned in clauses
(1) and (2) of the Explanation (baa). 9Thus, profits of the business of an
assessee will have to be first computed under the head "Profits and Gains
of Business or Profession" in accordance with provisions of Section 28 to 44D
of the Act. In the computation of such profits of business, all receipts of income
which are chargeable as profits and gains of business under Section 28 of the Act
will have to be included.
Similarly, in computation
of such profits of business, different expenses which are allowable under Sections
30 to 44D have to be allowed as expenses. After including such receipts of income
and after deducting such expenses, the total of the net receipts are profits of
the business of the assessee computed under the head "Profits and Gains of
Business or Profession" from which deductions are to made under clauses
(1) and (2) of Explanation (baa).
10.
Under
Clause (1) of Explanation (baa), ninety per cent of any receipts by way of brokerage,
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 profits of the assessee for determining "profits of the business"
of the assessee under Explanation (baa) to Section 80HHC.
11.
For
this interpretation of Explanation (baa) to Section 80HHC of the Act, we rely on
the judgment of the Constitution Bench of this Court in Distributors (Baroda) P.
Ltd. v. Union of India and Others (supra). Section 80M of the Act provided for deduction
in respect of certain intercorporate dividends and it provided in sub-section (1)
of Section 80M that "where the gross total income of an assessee being a company
includes any income by way of dividends received by it from a domestic company,
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 from such income
by way of dividends an amount equal to" a certain percentage of the income
mentioned in this Section.
The Constitution Bench
held that the Court must construe Section 80M on its own language and arrive at
its true interpretation according to the plain natural meaning of the words used
by the legislature and so construed the words "such income by way of dividends"
in sub-section (1) of Section 80M must be referable not only to the category of
income included in the gross total income but also to the quantum of the income
so included.
Similarly,
Explanation (baa) has to be construed on its own language and as per the plain natural
meaning of the words used in Explanation (baa), the words "receipts by way
of brokerage, commission, interest, rent, charges or any other receipt of a similar
nature included in such profits" will not only refer to the nature of receipts
but also the quantum of receipts included in the profits of the business as computed
under the head "Profits and Gains of Business or Profession" referred
to in the first part of the Explanation (baa).
Accordingly, if any
quantum of any receipt of the nature mentioned in clause (1) of Explanation
(baa) has not been included in the profits of business of an assessee as
computed under the head "Profits and Gains of Business or Profession",
ninety per cent of such quantum of the receipt cannot be deducted under Explanation
(baa) to Section 80HHC.
12.
12.If
we now apply Explanation (baa) as interpreted by us in this judgment to the facts
of the case before us, if the rent or interest is a receipt chargeable as profits
and gains of business and chargeable to tax under Section 28 of the Act, and if
any quantum of the rent or interest of the assessee is allowable as an expense
in accordance with Sections 30 to 44D of the Act and is not to be included in
the profits of the business of the assessee as computed under the head "Profits
and Gains of Business or Profession", ninety per cent of such quantum of the
receipt of rent or interest will not be deducted under clause (1) of Explanation
(baa) to Section 80HHC.
In other words, ninety
per cent of not the gross rent or gross interest but only the net interest or
net rent, which has been 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 for determining
the profits of the business.
13.
The
view that we have taken of Explanation (baa) to Section 80HHC is also the view
of the Delhi High Court in Commissioner of Income-Tax v. Shri Ram Honda Power
Equip (supra) and the Tribunal in the present case has followed the judgment of
the Delhi High Court. On appeal being filed by the Revenue against the order of
the Tribunal, the High Court has set aside the order of the Tribunal and directed
the Assessing Officer to dispose of the issue in accordance with the judgment
of the Bombay High Court in Commissioner of Income-Tax v. Asian Star Co. Ltd. (supra).
We must, thus, examine whether reasons given by the High Court in its judgment in
Commissioner of Income-Tax v. Asian Star Co. Ltd. (supra) were correct in law.
14.
On
a perusal of the judgment of the High Court in Commissioner of Income-Tax v. Asian
Star Co. Ltd. (supra), we find that the reason which weighed with the High
Court for taking a different view, is that rent, commission, interest and brokerage
do not possess any nexus with export turnover and, therefore, the inclusion of such
items in the profits of the business would result in a distortion of the figure
of export profits.
The High Court has relied
on a decision of this Court in Commissioner of Income-Tax v. K. Ravindranathan Nair
[(2007) 295 ITR 228 (SC)] in which the issue raised before this Court was
entirely different from the issue raised in this case. In that case, the
assessee owned a factory in which he processed cashew nuts grown in his farm and
he exported the cashew nuts as an exporter. At the same time, the assessee processed
cashew nuts which were supplied to him by exporters on job work basis and he collected
processing charges for the same.
He, however, did not include
such processing charges collected on job work basis in his total turnover for
the purpose of computing the deduction under Section 80HHC (3) of the Act and as
a result this turnover of collection charges was left out in the computation of
profits and gains of business of the assessee and as a result ninety per cent
of the profits of the assessee arising out of the receipt of processing charges
was not deducted under clauses (1) of the Explanation (baa) to Section 80HHC.
This Court held that the
processing charges was included in the gross total income from cashew business and
hence in terms of Explanation (baa), ninety per cent of the gross total income arising
from processing charges had to be deducted under Explanation (baa) to arrive at
the profits of the business. In this case, this Court held that the processing charges
received by the assessee were part of the business turnover and accordingly the
income arising there from should have been included in the 1profits and gains
of business of the assessee and ninety per cent of this income also would have to
be deducted under Explanation (baa) under Section 80HHC of the Act. In this case,
this Court was not deciding the issue whether ninety per cent deduction is to be
made from the gross or net income of any of the receipts mentioned in clause
(1) of the Explanation (baa).
15.
The
Bombay High Court has also relied on the Memorandum explaining the clauses of the
Finance Bill, 1991 contained in the circular dated 19.12.1991 of the Central
Board of Direct Taxes to come to the conclusion that the Parliament intended to
exclude items which were unrelated to the export turnover from the computation
of deduction and while excluding such items which are unrelated to export for the
purpose of Section 80HHC, Parliament has taken due note of the fact that the
exporter assessee would have incurred such expenditure in earning the profits and
to avoid a distorted figure of export profits, ninety per cent of the receipts like
brokerage, commission, interest, rent, charges are sought to be excluded from the
profits of the business.
In our considered opinion,
it was not necessary to refer to the explanatory Memorandum when the language
of Explanation (baa) to Section 80HHC was clear that only ninety per cent of receipts
by way of brokerage, commission, interest, rent, charges or any other receipt
of a similar nature included in such profits computed under the head profits and
gains of business of an assessee could be deducted under clause (1) of Explanation
(baa) and not ninety per cent of the quantum of any of the aforesaid receipts
which are allowed as expenses and therefore not included in the profits of business
of the assessee.
16.
In
the result, we allow the appeal and set aside the impugned order of the High
Court and remand the matter to the Assessing Officer to work out the deductions
from rent and interest in accordance with this judgment. No costs. CIVIL APPEAL
No. 4534 of 2008 This is an appeal against the order dated 19.01.2007 of the
Delhi High Court in I.T.A. No. 541 of 2006. 12. The facts of this case very briefly
are that Bharat Rasayan Limited (for short `the assessee') filed a return of income
tax claiming a deduction of Rs.72,76,405/- under Section 80HHC of the Act.
In the assessment order,
the Assessing Officer held that ninety per cent of the gross interest has to be
excluded from the profits of the business of the assessee under Explanation (baa)
to Section 80HHC of the Act and deducted ninety per cent of the gross interest
of Rs.50,26,284/- from the profits of the business of the assessee. The
assessee preferred an appeal contending that only ninety per cent of the net interest
should have been deducted from the profits of the business of the assessee under
Explanation (baa) to Section 80HHC, but the Commissioner of Income Tax (Appeals)
rejected this contention of the assessee.
Aggrieved, the
assessee filed an appeal before the Income Tax Appellate Tribunal (for short `the
Tribunal') and the Tribunal allowed the appeal of the assessee and held that
the assessee was entitled to deduct the expenses from the interest received and
only ninety per cent of the net amount of interest could be excluded under Explanation
(baa) to Section 80HHC and remitted the matter to the Assessing Officer to
examine whether there is factually an excess between the interest paid and interest
received and take a fresh decision.
The Revenue filed an appeal
against the order of the Tribunal before the High Court, but by the impugned
order the High Court following its decision in Commissioner of Income-Tax v. Shri
Ram Honda Power Equip (supra) sustained the order of the Tribunal and dismissed
the appeal. 3. We have held in our judgment in the case of M/s ACG Associated
Capsules Pvt. Ltd. v. Commissioner of Income Tax that ninety per cent of not the
gross interest but only the net interest, which has been included in the profits
of the business of the assessee as computed under the heads `Profits and Gains
of Business or Profession' is to be deducted under clause (1) of Explanation (baa)
to Section 80HHC for determining the profits of the business. Since, the view
taken by the High Court in the impugned order is consistent with our aforesaid
view, we find no merit in this appeal and we accordingly dismiss the same. There
shall be no order as to costs.
..........................CJI.
(S. H. Kapadia)
.............................J.
(A. K. Patnaik)
.............................J.
(Swatanter Kumar)
New
Delhi,
February
08, 2012.
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