TMI Blog1999 (12) TMI 114X X X X Extracts X X X X X X X X Extracts X X X X ..... of depreciation on Motor car to the extent of 1/5th of total claim. c. Out of telephone expenses to the extent of Rs. 20,306." The Revenue has raised the following ground in its appeal: "On the facts and in the circumstances of the case, the ld. CIT(A) has erred in directing to consider the receipts from sale of export licence commission from sale of STC export counter, commission of shipping freight and processing charges of job work for working out the quantum of deduction under section 80HHC, ignoring the provisions of section 80HHC(1) which approves deduction only on profit derived from export of goods and merchandise only." 3. The assessee claimed deduction under section 80HHC at Rs. 7,25,881. Such a claim was made for the first time while filing the revised return which was revised on account of treating the amount of CCS as revenue receipt. The assessee submitted auditor's report in the prescribed form. The Assessing Officer disallowed the aforesaid claim on the ground that following items of income/receipt will not form part of "profits and gains of business" for purposes of deduction under section 80HHC:- Rs. (a) (i) R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f business by the amount of deduction allowable in section 32AB to tune of Rs. 2,43,535. The assessee is in appeal against the confirmation of the action of the Assessing Officer in respect of these two items. 5. Sh. Jhanwar, ld. counsel for the assessee submitted that as far as the Ground No. 2 of assessee's appeal is concerned, it has no merit as deduction allowable under section 32AB, will have to be deducted for computing the profits and gains of business as per the provisions of Income-tax Act, 1961. He, therefore, expressed that he would not like to press Ground No. 2 of assessee's appeal. Hence, Ground No. 2 of assessee's appeal is rejected. 6. As regards Ground No. 1 relating to non-consideration of interest receipts of Rs. 1,27,446 as part of business income, for purposes of computation of deduction under section 80HHC of Income-tax Act, 1961, the ld. counsel contended that the view taken by the Assessing Officer and confirmed by the CIT(A) is clearly contrary to the provisions of law. He drew our attention towards the details of financial expenditure/interest expenditure appearing in the audited profit and loss account for the previous year arid which as on 31-3-1989 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... import entitlements and export incentives etc. were considered as part of profits of business eligible for grant of deduction under section 80HHC of the Act. He submitted that the present appeal relate to assessment year 1989-90. The amendment so made from assessment year 1992-93 also clearly supports the assessee's contention with regard to interest receipt. Such interest received by the assessee should be treated as part of the profits and gains of business as contemplated in sub-section (3) of section 80HHC. 8. The ld. counsel drew our attention to section 80HHC(1) which provides that assessee engaged in the business of export is entitled to deduction of the profits derived by the assessee from the export of goods. Such profits from exports are required to be computed in accordance with and subject to the provisions of section 80HHC. He pointed out that such is the mandate of section 80HHC(1). 8.1 Section 80HHC(3) prescribes the mode of computation of profit derived from export business. The provisions of section 80HHC(3) as it existed prior to its amendment by the Finance Act, 1990 and which existed in the relevant year under consideration was brought to our notice by the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out of total interest receipt of Rs. 1,27,446. But that amount is also assessable as business income. The Assessing Officer has, in fact, assessed the entire income under one head i.e. "income from business". The ld. counsel also contended that the ratio of judgment of Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. v. CIT [1997] 227 ITR 172(1) will not apply to the facts of this case as there the interest income relates to period prior to commencement of business and the question for consideration before the Hon'ble Supreme Court was entirely different as to whether interest income in that case was of revenue nature liable to tax or it could be set off against the liability to pay interest on funds borrowed for the purpose of acquiring the capital asset before commencement of the business of the assessee. The issue was not relating to computation of exports profits eligible for grant of deduction under section 80HHC. 10. The ld. DR submitted that interest earned by the assessee on temporary deposit on surplus funds is assessable as income from other sources as held by the Hon'ble Supreme Court in Tuticorin Alkali Chemicals Fertilizers Ltd.'s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee from exports of eligible goods. He, therefore, strongly urged that order of the CIT(A) should be set aside in relation to the Ground of appeal raised by the Revenue. 12. We have considered the submissions made by the ld. representatives of the parties and have examined the relevant provisions of law. We have also carefully gone through the orders of the ld. departmental authorities as well as the judgments, which were cited by the ld. representatives of both sides. 13. In order to appreciate the rival contentions, it is imperative to reproduce the relevant provisions of section 80HHC. Section 80HHC(1) and (3) as it existed in relevant year are reproduced below:- "(1) Where an assessee, being an Indian company or a person (other than a company) resident in India, is engaged in the business of export out of India of any goods or merchandise to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of the (profits) derived by the assessee from the export of such goods or merchandise." "(3) For the purpose of sub-section (1), profits derived fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its eligible for deduction under section 80HHC will have to be computed in accordance with the provisions of this section, which takes us to sub-section (3) of section 80HHC. Section 80HHC(3) as it existed in assessment year 1989-90 provides that in a case where the business carried on by the assessee consist exclusively of the export out of India of the eligible goods, the entire profits of business as computed under the head "Profits and gains of business" shall be eligible for deduction under this section. In a case where the assessee's business did not consist exclusively of export out of India of eligible goods, the same shall be the amount which bears to the profits of the business (as computed under the head "profits and gains of business"), the same proportion as the amount of the export turnover of business bears to the total turnover. In other words, the amount of deduction allowable under section 80HHC in a case, where the assessee's business partly consist of exports shall be worked out as under:- Export Turnover Profits derived in the business X --------------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , will be excluded. What is included in profits is the net receipt of interest and not the gross receipt. Such a view has been taken by the ITAT, Mumbai in the case of Pink Star a copy of the relevant pages of the said decision has been submitted by the assessee during the course of hearing. The said decision was rendered by Hon'ble Sh. Pradeep Parikh AM, sitting with Hon'ble Sh. M.A. Bakshi. This decision contains elaborate and convincing reasons in support of the conclusion that credits and debits of the same nature should be netted out against each other in order to avoid any distortion in the profits for the purposes of grant of deduction under section 80HHC. In that case the assessee had shown net debit of Rs. 34,24,095 as interest paid to the Bank. No credit on account of interest was reflected in the profit and loss account. The assessee submitted the details of interest to the Assessing Officer which disclosed that debit in Bank interest amounted to Rs. 36,21,595 and credit in Bank interest was Rs. 1,97,500. The net amount of interest expenditure was thus shown at Rs. 34,24,095 in the profit and loss account. The Assessing Officer reduced the profits of business by 90 per c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... posit and the act of borrowing on such deposit could not be viewed as representing two different transactions; (b) that there was thus a nexus between the deposit and the borrowing; and (c) that the principle of mutual dealings could be inferred". 15. In the present case the total interest payments and bank commission was Rs. 14,33,528. The amount of interest received by the assessee was only Rs. 1,27,446. The assessee has debited the net amount of Rs. 13,06,081 as financial expenses in the profit and loss account. The Assessing Officer has computed the entire income under only one head of income. He has not assessed the interest receipt of Rs. 1,27,446 under any separate head nor under the head "income from other sources". The necessity of netting the interest debit and interest credit or netting the receipt and expenditure of same nature can be more aptly explained by the following illustrations:- Manufacturing, Trading Profit and Loss Account Cost of goods Rs. 60.00 Lakhs Export Sales Rs. 105.00 Lakhs manufactured Interest payments Rs. 20.00 Lakhs Interest Rs. 15.00 Lakhs Payments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... period when such interest income was earned. In the present case, the assessee is engaged in the business of export of goods. The meagre amount of interest receipts derived by the assessee, partly on export sales itself and partly by way of investment of surplus funds for temporary period, had a direct nexus with the interest expenditure. The amount of interest receipt simply reduced the burden of interest cost to that extent. It cannot, therefore, be said that such interest receipt can be assessed to tax under the head "income from other sources". Such interest receipt would only reduce the interest expenditure. Therefore, this item will also fall for consideration while computing the profits and gains of business in accordance with the provisions of Income-tax Act, 1961. 17. On a careful consideration of the entire relevant facts and judgments, we are of the view that the CIT(A) has erred in directing the Assessing Officer to reduce the profits of business by an amount of Rs. 1,27,446 representing interest receipt for purposes of computing deduction under section 80HHC of the Act. The Assessing Officer directed to include such interest receipt while computing the profits of bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ussion that if the various items of credits in the profit and loss account are assessable under the head "profits and gains of business", such items of income will form part of the profits of business for purposes of grant of deduction under section 80HHC. Let us examine the various items of income under consideration in the light of aforesaid principles of law. 23. The receipt by way of sale of import licences to the tune of Rs. 5,55,081 are clearly assessable to tax under the head "profits and gains of business". During the course of hearing a reference was also made to the judgment of Hon'ble Supreme Court in the case of Sterling Foods. In this case it has been held by the Hon'ble Supreme Court that sale consideration of import entitlements cannot be held to constitute profits and gains derived from assessee's industrial undertaking for the purpose of computing deduction under section 80HHC as the source of import entitlements is the export promotion scheme of the Central Government and not the industrial undertaking. The provisions of section 80HHC provide for grant of deduction at prescribed percentage out of income derived from assessee's industrial undertaking. Section 80H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved by the assessee for the job work done by them. The assessee had to incur various expenditure like electricity, repairs, maintenance etc. for earning such job charges. The job charges so received by the assessee are also assessable as profits and gains of business. In fact the Assessing Officer has himself taken all the aforesaid income/receipts into consideration while computing assessee's income under the head "profits and gains of business". The CIT(A) has, therefore rightly directed the Assessing Officer to take this item also into consideration for computing the deduction allowable under section 80HHC of the Act. 27. We may also clarify here that the Assessing Officer will be entitled to check the working of deduction claimed under section 80HHC of the Act. He will be entitled to examine as to what is the correct amount of export turnover and what is the correct amount of total turnover for purposes of working out the deduction allowable under section 80HHC of the Act. He may also examine the question as to whether the sale of import licences, processing charges and other receipts referred to in the grounds of appeal raised by the Revenue, will form part of total turnover ..... X X X X Extracts X X X X X X X X Extracts X X X X
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