2004 (7) TMI 13 - HC - Income Tax

Section 80HHC - Explanation (baa) inserted by Finance (No. 2) Act 1991 w.e.f. 1st April 1992 - A plain reading of the aforementioned Explanation clearly shows that the Tribunal was right in holding that even though the rent and hire charges 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 s. 80HHC - we partly allow this appeal and modify the order of the Tribunal by holding that for the purposes of computing deduction under s. 80HHC only 90 per cent of income from rent and hire charges be excluded from the profits of business as computed under the head Profits and gains of business or profession

Summary

Issues involved:
1. Interpretation of provisions related to deduction under section 80HHC of the Income Tax Act, 1961.
2. Exclusion of hire charges and building rent from business income for computation of deduction under section 80HHC.
3. Application of Explanation (baa) below clause (b) of section 80HHC(4C) for determining profits of the business.
4. Discrepancy in the exclusion of income from rent and hire charges for deduction under section 80HHC.

Issue 1: Interpretation of provisions related to deduction under section 80HHC:
The case involved the interpretation of provisions related to deduction under section 80HHC of the Income Tax Act, 1961. The dispute arose when the Assessing Officer (AO) excluded machinery, hire charges, and building rent from the business income of the assessee, affecting the claim for deduction under section 80HHC.

Issue 2: Exclusion of hire charges and building rent for computation of deduction under section 80HHC:
The AO excluded hire charges and building rent from the business income of the assessee, thereby reducing the claim for deduction under section 80HHC. The Commissioner of Income Tax (Appeals) (CIT(A)) held that the AO was not justified in excluding these receipts and reducing the deduction claim. However, the Tribunal reversed this decision and restored the AO's order, emphasizing the exclusion of 90% of hire charges and rent for computing the deduction under section 80HHC.

Issue 3: Application of Explanation (baa) for determining profits of the business:
The Tribunal applied Explanation (baa) below clause (b) of section 80HHC(4C) to determine the profits of the business for computing the deduction under section 80HHC. This Explanation, inserted by the Finance (No. 2) Act, 1991, mandated the exclusion of 90% of certain receipts, including hire charges and rent, from the profits of the business.

Issue 4: Discrepancy in the exclusion of income from rent and hire charges for deduction under section 80HHC:
The Tribunal's decision to exclude 90% of income from rent and hire charges for computing the deduction under section 80HHC was upheld. However, a discrepancy was noted in the Tribunal's order, where the entire income from hire charges and rent was excluded instead of just 90%. The appellant's counsel pointed out this error, leading to the partial allowance of the appeal. The Court modified the Tribunal's order, directing the exclusion of only 90% of income from rent and hire charges for computing the deduction under section 80HHC.

This detailed analysis of the judgment highlights the key issues involved in the case and the court's interpretation and application of relevant provisions of the Income Tax Act, 1961.