Delhi High Court
Commissioner Of Income Tax vs M/S High Polymer Labs Ltd. on 19 April, 2012
Author: Sanjiv Khanna
Bench: Sanjiv Khanna, R.V. Easwar
$~R-59
* IN THE HIGH COURT OF DELHI AT NEW DELHI
% Date of Decision : 19th April, 2012.
+ ITA No.133/2006
COMMISSIONER OF INCOME TAX ..... Appellant
Through Mr. Sanjeev Sabharwal, sr. standing
counsel
versus
M/S HIGH POLYMER LABS LTD. ..... Respondent
Through Mr. Badri Nath, Adv.
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE R.V. EASWAR
SANJIV KHANNA,J: (ORAL)
In this appeal which pertains to assessment year 1996-97, the
following two substantial questions of law were framed vide order
dated 22.08.2006 :
"1) Whether the Income Tax Appellate Tribunal was
correct in law in holding that the assessee is entitled to
reduce interest paid by it on bank overdrafts from the
interest received on FDRs while calculating deductions
under Section 80HHC read with Explanation (baa) of the
Income Tax Act, 1961.
ITA 133/2006 Page 1 of 7
2) Whether the Income Tax Appellate Tribunal was
correct in law in holding that profit from the sale of EDP
receipts under the duty remission scheme cannot be
excluded from the profits of business as per Explanation
(baa) for purposes of computing the deductions under
Section 80HHC of the Income Tax Act, 1961."
2. High Polymer Labs Ltd., the respondent-assessee is a
company, which is engaged in exports. For the assessment year in
question they had claimed deduction under Section 80HHC of the
Act and for the purpose of computation had included (i) interest
earned on FDRs which had been deposited with the bank to obtain
credit facilities for the purpose of export and (ii) receipts from group
companies/firms for use of computers called EDP receipts as income
derived from exports.
3. The Assessing Officer did not treat the two receipts as income
derived from exports and re-computed the deduction under Section
80HHC, which got reduced from Rs.60,83,721/- to Rs.56,98,703/-.
4. The aforesaid finding recorded by the Assessing Officer were
affirmed in the first appeal by the Commissioner of Income Tax
(Appeals). The Commissioner of Income Tax (Appeals) further held
that the income by way of interest was not income derived from
exports and even netting of interest income for the purpose of
Explanation (baa) to Section 80HHC was not permissible. He held
that EDP receipts cannot form part of business income and should be
ITA 133/2006 Page 2 of 7
treated as „income from other sources‟.
5. On further appeal, the Tribunal has held that the two incomes
have to be taken into consideration for the purpose of Explanation
(baa) to Section 80HHC. Finding recorded is that the interest earned
on FDR, which was placed with the bank for the purpose of export
trade were assessable under the head „income from business‟. With
regard to the EDP income also it has been held that this income was
chargeable under the head „income from business‟ as the group
companies had utilized computers and office equipment belonging to
the respondent-assessee.
6. Thus, both interest income and income from EDP it has been
held are assessable under the head „income from business‟ and not
under the head „income from other sources‟. To this extent, finding
of the Tribunal is clear and lucid.
7. There is no doubt that the two incomes are not derived from
exports but this aspect is not required to be examined by us. The
assessee has also accepted the said position. The only question,
raised is whether these two incomes can be taken into consideration
while applying Explanation (baa) to Section 80HHC. The issue is no
longer in dispute and has been answered in the case of ACG
Associated Capsules Pvt. Ltd. Vs. Commissioner of Income Tax,
Central-IV, Mumbai (2012) 3 SCC 321. In this decision, it has been
held :-
ITA 133/2006 Page 3 of 7
"11. 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 (iii-a), (iii-b), (iii-c), (iii-d) and (iii-e) 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;"
12. 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). Thus, 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 44-D of the
Act. In the computation of such profits of business, all
receipts of income which are chargeable as profits and
ITA 133/2006 Page 4 of 7
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 44-D 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).
13. 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 44-D 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
ITA 133/2006 Page 5 of 7
deducted from the profits of the assessee for determining
"profits of the business" of the assessee under
Explanation (baa) to Section 80-HHC."
8. The Supreme Court in this case also referred to the earlier
decision of the constitution bench in Distributors (Baroda) (P) Ltd.
Vs. Union of India (1986) 1 SCC 43 and thereafter observed in para
16 and 17 as follows :
"16. 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 80-HHC.
17. 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
ITA 133/2006 Page 6 of 7
with Sections 30 to 44-D 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 80-HHC. 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 80-HHC for determining
the profits of the business."
9. In view of the aforesaid position, the questions of law
mentioned above are answered in affirmative, in favour of the
assessee and against the Revenue. The appeal is disposed of. No
order as to costs.
SANJIV KHANNA, J.
R.V.EASWAR, J. APRIL 19, 2012 vld ITA 133/2006 Page 7 of 7