Income Tax Appellate Tribunal - Mumbai
Kantilal Chhotalal vs Deputy Commissioner Of Income Tax on 30 April, 1998
Equivalent citations: [1999]68ITD395(MUM)
ORDER
Vimal Gandhi, Vice President
1. This appeal by the assessee for the asst. yr. 1992-93 is directed against the order of the CIT revising assessment order dt. 14th November, 1994 under s. 263 of the IT Act to reduce deduction allowed under s. 80HHC of the IT Act. According to the learned CIT, the AO excluded 90 per cent of net amount of consultancy fees of Rs. 1,78,528 instead of correct gross receipt of Rs. 6,84,932. Thus, the AO allowed deduction of Rs. 4,43,029 in excess under s. 80HHC and to the above extent, the assessment order was erroneous and in so far, prejudicial to the interests of the Revenue. He revised the order under s. 263 of the IT Act.
2. The assessee has come up in appeal. The dispute relates to the issue whether gross or net amount of consultancy fees received by the assessee is to be considered. In the relevant assessment year under s. 80HHC, the assessee was entitled to proportionate deduction of profits derived from export in certain proportion to the profit from business as provided by sub-s. (3) of the said section. Clause (baa) of the Explanation to the above section inserted by Finance (No. 2) Act, 1991 w.e.f. 1st April, 1992, has defined profits of business 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 per cent of any sum referred to in cls. (iiia), (iiib) and (iiic) of s. 28 or of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in profits; and (2) the profits of any branch, office, warehouse or any other establishment of the assessee situate outside India;"
It is clear that "profits of business" for purposes of this section are to be reduced by 90 per cent of any sum referred to in the three clauses of s. 28 or of any receipts by way of brokerage, commission, etc. as provided in sub-cl. (1) referred to above. It is the case of the learned CIT that while making 90 per cent of deduction of consultancy fees, the AO took into account amount of Rs. 1,78,528 whereas he should have taken net amount of Rs. 6,84,972. In other words, the commission paid for earning commission was not to be deducted.
3. Shri Hero Rai, the learned Advocate of the assessee, vehemently argued that for purposes of above section, what was to be deducted was "net amount of receipt" and not "gross amount". He cited and relied upon the decision of the Hon'ble Supreme Court in the case of Distributors (Baroda) (P) Ltd. vs. Union of India & Ors. (1985) 155 ITR 120 (SC). It was further contended by the learned counsel for the assessee that the AO had examined facts and circumstances of the case in the light of statutory provision and arrived at a reasonable view. Thus, when the AO took one of two possible views, the provision of s. 263 had no application. He further argued that s. 80HHC was an incentive provision and was liable to liberal construction. It is not permissible for the CIT to substitute his own judgment in place of that of the AO. For the proposition, the learned counsel for the assessee relied upon the decision of the Hon'ble Bombay High Court in the case of CIT vs. Gabriel India Ltd. (1993) 203 ITR 108 (Bom).
4. The learned Departmental Representative supported the impugned order of the learned CIT and contended that gross amount of receipt credited to the P&L a/c is to be deducted. The legislature in its wisdom allowed 10 per cent of expenditure and, therefore, 90 per cent of above was to be deducted while arriving at the "business profit".
5. We have given careful thought to the rival submissions of the parties. In our considered opinion, the language of cl. (baa) is quite clear and controversy relating to gross or net amount of receipts referred to in cl. (1) is being unnecessarily raised. The profits and gains of business and profession are required to be reduced by 90 per cent of receipts mentioned in the clause and included in "such profits" i.e., profits and gains of business. Thus, receipts to be deducted are controlled by the words "included in such profits" and the matter is to be resolved by looking at the receipt which is included in the "profits and gains of business". In a case where the receipt included in the computed profit is clear and there is no dispute about the receipt or the expenditure claimed against such a receipt, the particular quantum included in "such profit" has to be taken into account. This figure cannot be different from the one included in "such profit". This proposition is supported by following observation of the Hon'ble Supreme Court in the case of Distributors (Baroda) (P) Ltd. vs. Union of India & Ors. (supra) :
"If income by way of dividends from a domestic company computed in accordance with the provisions of the Act is included in the gross total income, or in other words, forms part of the gross total income, the condition specified in the opening part of sub-s. (1) of s. 80M would be fulfilled and the provision enacted in that sub-section would be attracted. What is included in the gross total income in such a case is a particular quantum of income belonging to the specified category. Therefore, the words 'such income by way of dividends' 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. It is obvious, as a matter of plain grammar, that the words 'such income by way of dividends' must have reference to the income by way of dividends mentioned earlier and that would be income by way of dividends from a domestic company which is included in the gross total income."
6. The second category of cases where receipts by way of brokerage, commission, interest, etc. are credited to the P&L a/c and against them some expenditure are claimed in a common account, the exact amount claimed as expenditure, is neither available nor discernible. In several decisions, the Courts held that expenditure on proportionate basis against such receipts is to be taken into account and net income is to be determined. For determining such net income different formulate like proportionate receipt, etc. etc. were suggested. In order to override such a situation, the legislature has laid down a formula uniformly applicable. Thus, where expenditure against type of receipts is not available, 90 per cent of such a receipt is to be deducted for determining profits of business. Having regard to the purpose, setting and language of the statutory provision, there is no justification to hold that first net receipt included in the profit of business be estimated (determined) and thereafter 90 per cent of the same should be deducted from the computed profits of business. The legislature has laid down that 90 per cent of receipt is to be deducted from "profits of business" and there is no justification to deviate from the formula laid down by the statutory provisions.
6.1 It is thus clear that a case can fall under one of the two categories, the first category being the case where the amount of receipt by way of brokerage, commission, etc. included in the computed profit is available. In such cases, 90 per cent of the said such amount is to be deducted from the computed business profit. In other cases where net amount of receipt included in the computed profit is not available on account of common mixed expenditure account, the expenditure attributable to receipts mentioned in sub-cl. (1) is not to be determined on estimate basis, but 90 per cent of receipt taken in computed "profit" is to be deducted.
7. Having regard to the principle emerging from plain language of the cl. (baa) referred to above, the facts in the present case are plain and simple. The AO computed business income of the assessee starting with net profit of Rs. 3,76,02,601. The above figure included receipt of "other income" including consultancy fees of Rs. 74,43,443 credited to the P&L a/c as per Schedule Q. In the Schedule Q, the detail of Rs. 74,43,443 is given and includes net consultancy receipt of Rs. 1,78,528. In the amount credited to the P&L a/c, consultancy fees included is not Rs. 6,84,932 but Rs. 1,78,528 after deducting expenses therefrom amounting to Rs. 5,06,403. In the assessment and in the computation of business profit, the expenditure specifically claimed against the receipt have been allowed and net amount of consultancy fee assessed is Rs. 1,78,528. Thus, when net amount of receipt included in the profits and gains of business is available, there is no question of going to the figure of gross amount of consultancy receipt. The case falls in category (1) discussed above. The AO was right in deducting 90 per cent of above receipt out of business income and not the gross receipt as held by the learned CIT in the impugned order.
Therefore, there was no error in the assessment order envisaged under s. 263 of the IT Act. The learned CIT was wrong in invoking the above provision and in modifying the assessment order. The revision made by the learned CIT is hereby cancelled and the assessment order is restored.
8. In the result, the assessee's appeal is allowed.