Income Tax Appellate Tribunal - Amritsar
Sakay Traders vs Addl. Cit on 31 May, 2005
Equivalent citations: [2006]98ITD242(ASR), (2006)96TTJ(ASR)451
JUDGMENT
Jogdiner Pall, A.M :
By this order, we shall dispose of this appeal of the assessee filed against the order of the CIT(A), Jalandhar, for the assessment year 1998-99.
2. The only grievance of the assessee projected through its grounds of appeal is that the learned CIT(A) was not justified in upholding the order of the assessing officer in disallowing part of the claim of the assessee for deduction under section 80HHC. The facts of the case are that the assessee had credited interest from banks amounting to Rs. 59,66,540 on MRs in the bank to the P&L alc. While computing the deduction under section 80HHQ the assessee had reduced 90 per cent of interest received from the net profit for the purpose of computing deduction under section 80HHC as per Expln. (baa) below section 80HHQ4B) inserted by the Finance (No. 2) Act, 1992, with effect from 1-4-1992. While completing the assessment, the assessing officer treated the interest on MRs as income from other sources and thereby reduced deduction under section 80HHC from Rs. 2.23 crores to Rs. 2.17 crores.
3. Being aggrieved, the assessee impugned the action of the assessing officer in appeal before the CIT(A). It was explained before the CIT(A) that whether interest income should be treated as income from other sources or income from business would not make any material difference in view of clause (baa) of Explanation below section 80HHQ(4A) of the Income Tax Act, which was introduced with effect from 1-4-1992. Reference was also made to Explanatory Notes for explaining the purpose of inserting such Explanation. It was explained that while these items were in the nature of income but had no element of turnover and, therefore, it gave a distorted picture of export profits which were to be computed as per the existing formula given in section 80HHC(3). It was also explained that the assessee had itself reduced 90 per cent of the interest for the purpose of computing the deduction under section 8011HC and only 10 per cent of such amount remained as business profit for the purpose of computing deduction under section 801111C. The learned CIT(A) considered these submissions and held that for the purpose of computing deduction under section 801-114C, interest @ 90 per cent was required to be reduced only if it was held as "profits and gains of the business" under clause (baa) of Explanation 801111C. According to him, interest on FDRs was not a business profit and, therefore, remaining 10 per cent of the interest was not to be considered for the purpose of computing deduction under section 80HI1C. Accordingly, the learned CIT(A) upheld the order of the assessing officer, The assessee is aggrieved by the order of the CIT(A). Hence, this appeal before us.
4. The learned Authorised Representative for the assessee drew our attention to p. 4 of the paper book which is a copy of Explanatory Notes when clause (baa) of Explanation 8011HC was inserted in the Act. He submitted that the clause (baa) of the Explanation refers only to the nature of receipts by way of brokerage, commission and rent charges or any other receipt of a similar nature. It does not say that such receipt should only be or from a business profit. lie submitted that 1 (baa) of Explanation to section 80HHC refers to reduction to the extent of 90 per c of the gross amount and this view is also covered by the judgment of jurisdictional High Court in the case of Rani Paliwal v. CIT (2003) 185 CTR (PM) 333.. (2004) 268 ITR 220 (PM), where it was held that reduction of 90 per cent in respect of items of the nature mentioned therein including interest was to be reduced from gross amount and not in respect of net amount. He submitted that the assessee had reduced interest @ 90 per cent in respect of gross amount and not in respect of net, amount. He further referred to the judgment of Hon'ble Punjab & Haryana High Court in the case of Liberty Footwear Co. v. CIT (2004) 191 CTR (PM) 378, where it was held that even if receipts from machinery hire charges and building rent were assessable as business income, 90 per cent of the same had yet to be excluded for computing profits of the business for the purpose of deduction under section 80H11C. Thus---it was submitted that the learned CIT(A) was not justified in excluding 10% of the amount of interest -for the purpose of computing deduction under section 80HHC ~
5. The learned departmental Representative, on the other hand, heavily relied on the orders of the authorities below.
6. We have heard both the parties and carefully considered the rival submissions with reference to facts, evidence and material on record. We have also gone through the orders of the authorities below. Now, the first issue that requires to be decided whether interest declared by the assessee was a business income or income from other sources ? The second question related to this issue is that whether 10 per cent of interest can be considered against the expenses incurred for earning such interest even if it is held to be taxable under the head 1ncome from other sources" ? A copy of P&L a/c is placed at p. 1 of the paper book. The same shows that there is no debit on account of interest in the P&L a/c. The assessee has credited interest of Rs. 59,66,540 to its P&L a/c and the computation of deduction under section 80HHC is at p. 3 of the paper book which shows that 90 per cent of the amount of entire interest of Rs. 59,66,540 which worked out to Rs. 53,64,486 was reduced from the profits and gains of the business as per Expln. (baa) to section 80H11C. In the case of Rani Paliwal v. CIT (supra), the Hon11e High Court has held that 90 per cent of the gross interest received by the assessee was required to be reduced for the purpose of computing deduction under section 80HHQ3) and the amount of interest- paid by the assessee could not be deducted from the gross amount of interest for the purpose of reducing 90 per cent of the same. In the case of K.S. Subbiah Pillai & Co. (India) (P) Ltd. v. CIT (2003) 179 (P&H) CTR (Mad) 522 : (2003) 260 ITR 304 (Mad), the following two questions were raised before the Hon'ble Madras High Court :
1. Whether on a true construction of the Expln. (baa) to section 80HHC of the Income Tax Act, 1961, interest, rent and commission are to be deducted from export profits or only net receipts, if any, after taking into account the payments ?
2. Whether on a true construction of the Expln. (baa) to section 80HHC of the Income Tax Act, all the net receipts by way of interest, rent and commission should be aggregated before deduction and only the net balance, if any, should be deducted from export profits ?"
By referring to clause (baa) of Explanation to section 8011HQ the Hon'ble High Court held that o y the amounts already included in the computation of "profits and gains of business or profession" were required to be reduced to the extent of 90 per cent and, therefore, interest paid and claimed as deduction in the computation of profits and gains of the business cannot be set off against the interest received and computed under 1ncome from other sources". Thus, it was held that the interest paid by the assessee and claimed against the profits and gains of the business could not be adjusted against the interest received for the purpose of reducing 90 per cent of the interest for the purpose of computing deduction under section 801111C. The ratio of this judgment is also more or less the same as that of Hon'ble Punjab & Haryana High Court in the case of Smt. Rani Paliwal (supra). In any case, this issue is, not before us because assessee has not reduced 10.per cent of net interest, it has reduced 10 per cent from gross amount. In fact, there is no interest paid by the assessee.
6.1 In this case, the assessee has credited interest of Rs. 59,66,540 to the P&L a/c as business income and the same is included in the profits and gains of the business. However, the revenue has taken a view that such interest was taxable under the head, 1ncome from other sources". We find from a copy of the assessment order for the earlier assessment year 1997-98 that the assessee had earned interest on FDRs and 90 per cent thereof which worked out to Rs. 5,96,654 was reduced for the purpose of computing deduction under section 80HHC by treating the, same as. part of the business profit. This action of the assessee for the assessment year under reference was in consonance with the treatment given for the earlier assessment years and allowed by the assessing officer. However, for the assessment year under reference, the A0.1as treated such interest as income from other sources. The assessee is not in the business of money-lending. In fact, almost the en ' tire income of the assessee is exempt under section 80HHC and the interest earned by the assessee is on surplus funds available. Therefore, the interest earned on surplus funds could not be considered as profit derived from .export of goods, as it does not have any direct or immediate nexus with the export business of the assessee. This view also funds support from the judgment of Hon'ble Supreme Court in the case of Pandian Chemicals Ltd. v. CIT (2003) 183 CTR (SC) 99 : (2003) 262 ITR 278 (SC). In fact, the case of the assessee stands on much weaker footing as keeping the surplus money in FDRs had no connection with the business of the assessee. Moreover, no specific arguments were advanced by the learned counsel in support of the contention that such income was taxable as business profit. Therefore, we confirm the findings of the authorities below and reject this ground of appeal in treating the interest as income from other sources.
6.2 The next issue that requires to be considered by this Bench is whether clause (baa) of Explanation to section 80HHC will come into operation for the purpose of computing deduction under section 80HHQ if the interest is held to be taxable as inc6me from other sources. In this connection, it would be appropriate to reproduce hereunder clause (baa) of Explanation to section 80HHC :
"(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 (hic) 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;"
A bare reading of the, clause (baa) shows that it shall come into operation only if the interest income forms part of the profits of the business computed under the head "Profits and gains of business or profession". In case such interest income is held to be taxable under the head 1ncome from other sources", the same would not form part of the profits of the business and clause (baa) will not be applicable to this case. Such interest would be liable to be computed under the head 'Income from other sources".
6.3 However, in the present case, it is noted that the assessee had maintained only one complete P&L a/c where the GP along with other receipts including interest of Rs. 59,66,540 were credited. All the expenses relating to business including expenses relating to earning of interest income have been debited to the P&L a/c. Even if the interest income is taxed under the head "Income from other sources", it would be unfair to deny deduction of proportionate expenses necessary for earning such income. In case the proportionate expenses for earning such income are reduced from the P&L a/c, the same would result in increase in export profit for which the assessee would be entitled to deduction under section 80HHC. Now, the question that requires to be considered is that what would be the extent of proportionate expenses for earning such interest income. As mentioned earlier, clause (baa) of Explanation to section 80HHC was inserted by the Finance (No. 2) Act, 1991, with effect from 1-4-1992. The rationale for reducing the amount of interest, commission, rent, brokerage and receipts of similar nature included in the P&L a/c was explained by the Explanatory Note as given in (1991) 96 C7~ (St) 200: (1991) 190 ITR (St) 299 was that the assessee must have incurred atleast some expenses for earning such income. Therefore, the legislative intent was to restrict the reduction to the extent of 90 per cent and not to the extent of 100 per cent. Thus, the amount of 10 per cent of such receipts was considered to be as forming part of the expenses for earning such income. Therefore, to that extent part of receipts was held to be included in the business profit for the purpose of computing deduction under section 80HHC because expenses for earning such income are already charged to P&L a/c. This issue had also come up before the Tribunal, Chandigarh Bench, in the case of Hero Exports (P) Ltd. v. Asstt. CIT in ITA No. 803/Chandi/1997, for the assessment year 1994-95, where it was held that such expenses to the extent of 10 per cent would not fall in the category of direct costs or indirect costs mentioned in clause (b~ to section 80HHC(3) for the purpose of computing profits of export of trading of goods. The relevant findings recorded in the aforesaid order are as under
"11. We have heard both the parties and given our thoughtful consideration to the rival submissions. We have also examined the facts, evidence and materiel on record. From the facts detailed above, it is obvious that the assessee had revised the claim for deduction under section 80HHC during the course of assessment proceedings by filing a letter dated 27-12-1996, duly supported by auditor's report in Form No. 1OCCAC. There was no need for the assessee to file a revised return in order to revise its claim for deduction under section 80HHC. Such claim could be made even by filing a letter. The same was duly considered by the assessing officer and the CIT(A). Therefore, the assessee cannot be faulted on this ground that the claim was revised during the course of assessment proceedings. As regards the merits of the claim, the dispute relates only to computation of profits from export of trading goods. In the return of income, the assessee had shown such profits at Rs. 6,010 and in the revised claim; the assessee had shown such profit at Rs. 19,332. Sub-cl. (b) of section 80HHC(3) provides that in case the export out of India is of trading goods, the profits derived from such export shall be export turnover in respect of such trading goods as reduced by the direct costs and indirect costs attributable to such exports. 'Direct costs" have been defined in item (d) of Explanation as to costs directly attributable to the trading goods exported out of India including the purchase price of such goods. Item (d) of Explanation to section 80HHQ3) defines "indirect costs" as to mean costs not being direct costs, allocated in the ratio of export turnover in respect of trading goods to the total turnover. Clause (baa) of Explanation to section 80HHC provides for reduction by 90 per cent of items referred to in clauses (iiia), (iiib) and (iiic), and other items mentioned therein. This Explanation was inserted by the Finance (No. 2) Act, 1991, with effect from 1-4-1992. In the Explanatory Notes referred to above, it has been explained that the rationale behind reducing the amount by 90 per cent and retaining 10 per cent interest thereof is that the assessee must have incurred some expenses for earning such income which is part of common expenses. Therefore, it is natural to assume that 10 per cent of such expenses in respect of those items, which in this case are in the form of duty drawback of Rs. 1,33,317, is to be considered for earning such income. Therefore, these expenses would not fall. in the category of "direct costs" or 1ndirect costs" mentioned in clause (b) of section 80HHC(3) for the purposes of computing profits on exports of trading goods. We have also seen that the assessee has not included 10 per cent of export incentives in the business profit from export of trading goods as the same has been separately worked out. Accordingly, the revised computation of profits from export of trading goods given by the assessee at Rs. 1,91,832 is quite correct and is in conformity with the legislative intent of apportioning 10 per cent of receipts mentioned in Expln. (baa) to section 80HHC(4B) for common expenses. As regards the objection raised by the revenue that section 80HHC(3) does not provide for such adjustment, the same is not correct. We have to separately compute the business profits from trading goods by reducing the direct and indirect costs from export turnover in respect of such trading goods. This also implies that expends, which related to earning of export incentives as explained by the CBDT in'. the Explanatory Notes could note be considered against the profits from trading goods. The decision of the Tribunal, Bombay Bench, in the case of XYZ v. Asstt. CIT (supra) also supports this view. We ate unable to accept the submission of the learned departmental Representative that the same is distinguishable on facts. No doubt, the same relates to reducing the interest cost, but this item is also covered under Expln. (baa) to section 80MC(4B). Having regard to these facts and circumstances of the case, we are of the considered opinion that the CIT(A) was not justified in sustaining the action of the assessing officer in not allowing deduction of Rs. 1,39,317 under section 80HHC. Accordingly, we set aside the order of the CIT(A) and direct the assessing officer to allow deduction under section 80HHC of Rs. 1, 39,317. This ground of appeal is allowed."
Subsequently, this issue also came to be considered by the Tribunal Special Bench, in the case of Surendra Engg. Corpn. v. Asstt. CIT (2003) 78 TTJ (Mumbai) (SB) 347 : (2003) 86 ITD 121 (Mumbai) (SB) where it was held that 10 pert cent of the items mentioned in clause (baa) of Explanation to section 80HHC must be attributed as indirect costs- to earning of such income, and to that extent, indirect expenses debited to the P&L alc be reduced for the purpose of computing deduction under section 80HHC (B) of the Income Tax Act. Thus, it was held that any indirect costs which can reasonably be attributed to trading goods of receipts otherwise export turnover of trading goods will have to be left out of consideration at threshold itself. Such action is in conformity with the legislative intent.
6.4 The reasoning given therein can equally be considered for the purpose of apportioning part of. such expenses debited to P&L alc to interest income which is liable to be taxed under the head 1ncome from other sources" because it cannot be said that expenses required to be incurred for earning such income from business would be different from. earning such income under the head 1ncome from other sources" when the income is the same. In fact, if the legislature could consider 10 per cent of such expenses for earning of export incentives like duty draw back cash subsidy, it would not be unreasonable to apportion 10 per cent of such expenses against income from interest and 1ncome from other sources". In the case of CIT v. United General Trust Ltd. (1994) 116 CTR (SC) 194 : (1993) 200 )M 488 (SC), the Hon'ble Apex Court has held that proportionate management expenses had to be deducted from the gross dividend income for the purpose of the relief under section 80M. The rationale behind the same is that part of management expenses have to be equally considered against earning of 'Income from other sources'. A copy of the P&L alc is at p. 1 of the paper book, which shows profit of Rs. 2,77,38,679.97 inclusive of bank interest of Rs. 59,66,540. Total expenses debited to P&L a/c aggregate to Rs. 2,69,39,537. Thus, it would be fair, appropriate and reasonable to apportion 10. per cent of expenses of bank interest19f Rs-59,66,540 which works out to Rs. 5,96,654 against earning of bank interest. If those expenses are apportioned towards interest income which is liable 0 tax under the head 'Income from other sources' and is to be separately computed, the same would result in increase in export profits of Rs. 5,96,654. The same would be entitled to deduction under section 80MC.
6.5 In the light of these facts and circumstances of the case, we are of the view that 10 per cent of interest receipts of Rs.,59,66,540 is attributable to expenses for earning such interest income and, therefore, to such an extent, the costs of such amount are required to be reduced from the expenses charged to the P&L a/c. The same would result in increasing the export profits entitled to deduction under section 80MC. Thus, even if interest income is considered to be taxable under the head 'Income from other sources', the same would not affect the quantum of deduction under section 80HHC as claimed by the assessee. Accordingly, we set aside the order of the CIT(A) and direct the assessing officer to allow deduction under section 80HHC as claimed by the assessee. This ground of appeal is allowed.
7. In the result, the appeal of the assessee is allowed.