2012 (2) TMI 101 - SC - Income Tax

Whether entire amount received on sale of the Duty Entitlement Pass Book (DEPB) represents profit on transfer of DEPB Held that - Not the entire amount but the sale value less the face value of the DEPB will represent profit on transfer of DEPB. See Topman Exports vs CIT(2012 - TMI - 210467 - SUPREME COURT OF INDIA) Decided in favor of assessee. Computation of deduction u/s 80HHC - 90% exclusion of net interest/rent or gross interest/rent Held that - Ninety per cent of not the gross interest/rent but only the net interest/rent which has been included in the profits of the business of the assessee as computed under the heads PGBP is to be deducted under clause (1) of Explanation (baa) to Section 80HHC for determining the profits of the business. Matter remanded back to A.O. to work out the deductions Decided in favor of assessee

Summary

Issues Involved:
1. Whether the entire amount received on the sale of Duty Entitlement Pass Book (DEPB) represents profit on transfer of DEPB under Section 28(iiid) of the Income Tax Act, 1961.
2. Whether ninety percent of the gross interest and gross rent received should be excluded from the profits of business for computing the deduction under Section 80HHC of the Income Tax Act, 1961, or whether only ninety percent of the net interest and net rent should be excluded.

Issue-wise Detailed Analysis:

Issue 1: DEPB Profit Calculation
The first issue pertains to whether the entire amount received by an assessee on the sale of DEPB represents profit on transfer of DEPB under Section 28(iiid) of the Income Tax Act, 1961. The High Court, relying on its judgment in Commissioner of Income Tax vs. Kalpataru Colours and Chemicals, held that the entire amount received on the sale of DEPB is considered profit. However, the Supreme Court, in a separate judgment in M/s Topman Exports vs. Commissioner of Income Tax, decided that not the entire amount but the sale value less the face value of the DEPB will represent the profit on transfer of DEPB. Therefore, the Supreme Court decided this issue in favor of the assessee, holding that only the excess of the sale value over the face value of DEPB constitutes profit.

Issue 2: Exclusion of Gross vs. Net Interest and Rent for Section 80HHC Deduction
The second issue involves the computation of profits for the purpose of deduction under Section 80HHC of the Income Tax Act. The Assessing Officer had deducted ninety percent of the gross interest and gross rent from the profits of the business while computing the deduction. The Tribunal, however, held that netting of the interest and rent could be allowed if the assessee proves the nexus between the interest expenditure and interest income, remanding the matter to the Assessing Officer for verification.

The High Court directed that the Assessing Officer follow the judgment in Commissioner of Income Tax v. Asian Star Co. Ltd., which held that ninety percent of the gross receipts towards interest and rent should be excluded from the profits of the business.

The Supreme Court, however, interpreted Explanation (baa) to Section 80HHC, which defines "profits of the business" as profits computed under the head "Profits and Gains of Business or Profession" reduced by ninety percent of any receipts by way of brokerage, commission, interest, rent, charges, or similar nature included in such profits. The Court emphasized that only the net amount of such receipts included in the profits should be considered, not the gross amount. This interpretation was supported by the judgment of the Constitution Bench in Distributors (Baroda) P. Ltd. v. Union of India, which held that only the net income included in the gross total income should be considered for deductions.

Applying this interpretation, the Supreme Court concluded that ninety percent of not the gross rent or gross interest but only the net interest or net rent, which has been included in the profits of the business, should be deducted under clause (1) of Explanation (baa) to Section 80HHC. This view was consistent with the Delhi High Court's judgment in Commissioner of Income Tax v. Shri Ram Honda Power Equip.

The Supreme Court set aside the High Court's order and remanded the matter to the Assessing Officer to recompute the deductions in accordance with this judgment, emphasizing that only the net amounts should be considered for exclusion.

Separate Judgment:
In a related case, the Supreme Court upheld the view that only ninety percent of the net interest, not the gross interest, should be excluded from the profits of the business for the purpose of Section 80HHC deduction, consistent with its judgment in the main case. The appeal was dismissed, affirming the Tribunal and High Court's consistent approach with the Supreme Court's interpretation.

Conclusion:
The Supreme Court provided clarity on the computation of profits for DEPB sales and deductions under Section 80HHC, emphasizing that only net amounts of interest and rent should be considered for exclusion, thus favoring the assessee's interpretation over the Revenue's approach of excluding gross amounts.