TMI Blog2008 (7) TMI 595X X X X Extracts X X X X X X X X Extracts X X X X ..... ble and plausible - The appeal stands disposed of - 25, 298, and 327 of 2003 - - - Dated:- 9-7-2008 - DEEPAK VERMA, ANAND BYRAREDDY JJ JUDGMENT Deepak Verma Actg. C. J.- Heard Sri M. V. Sheshachala, learned counsel for the appellants and Sri S. Sarangan, Sri K. P. Kumar, learned senior counsel with Sri S. Parthasarathi, learned counsel for the respondents. Sri Indra Kumar, learned senior counsel, Sri A. Shankar and Sri Ashok Kulkarni appeared on our request as amicus curiae. 2. This order shall govern disposal of I. T. A. No. 25 of 2003, I. T. A. No. 298 of 2003 and I. T. A. No. 397 of 2003, as in all these appeals the same substantial question of law arises for our consideration. Thus they were heard analogously and are being disposed of by a common order. 3. The aforesaid three appeals have been preferred by the Revenue under section 260A of the Income-tax Act, 1961, against three different but identical orders passed by the Income-tax Appellate Tribunal. 4. For the sake of convenience we are taking the facts as appearing in I.T.A. No. 298 of 2003 CIT v. Paprika Wear. 5. The assessee is a partnership firm, which had filed its return of income for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order was considered to be erroneous and prejudicial to the interests of the Revenue warranting exercise of revisional power and which order was to be revised and deserved to be set aside. (2) The Commissioner of Income-tax further gravely erred in not addressing the contention raised by the assessee that it is the net interest which is to be reckoned and not interest earned alone ignoring the interest payments. Critical examination of the impugned order passed by the Tribunal shows that the aforesaid question No. 1 has not at all been considered or answered by the Tribunal either way. 10. A perusal of the memo of appeal filed by the Revenue reflects that even though some other substantial questions of law have been formulated in the same but after having heard the learned counsel for the parties and after perusal of the record, we are of the opinion that only the following two substantial questions of law would arise in the appeals which are required to be answered by us. Thus before hearing the appeals on the merits, we have formulated the following substantial questions of law : "(1) Whether in the facts and circumstances of the case, the Commissioner of Income- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , him under the orders or directions issued by the Board or by the Chief Commissioner or Director General or Commissioner authorised by the Board in this behalf under section 120; (b) `record' shall include and shall be deemed always to have included all records relating to any proceeding under this Act available at the time of examination by the Commissioner ; (c) where any order referred to in this sub-section and passed by the Assessing Officer had been the subject-matter of any appeal, filed on or before or after the 1st day of June, 1988, the powers of the Commissioner under this sub-section shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in such appeal. (2) No order shall be made under sub-section (1) after the expiry of two years from the end of the financial year in which the order sought to be revised was passed. (3) Notwithstanding anything contained in sub-section (2), an order in revision under this section may be passed at any time in the case of an order which has been passed in consequence of, or to give effect to, any finding or direction contained in an order of the Appellate Tribunal, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n cleared and the doubt still looms large in the minds of the Revenue, which resulted into passing of the order by the Assessing Officer, allowing the deduction under section 80HHC of the Act as claimed by the assessee, which according to him was lawfully permitted. In this regard see (i) Malabar Industrial Company v. CIT [2000] 243 ITR 83 (SC). (ii) CIT v. Max India Ltd. [2007] 295 ITR 282 (SC). 18. In view of the aforesaid settled legal position, we are of the considered opinion that the Commissioner of Income-tax committed a grave error in invoking the jurisdiction conferred on him under section 263 of the Act. Thus the said question (1) is answered in favour of the assessee and against the Revenue. 19. Even though answer to this question would have been sufficient to dismiss the two appeals, i.e., I. T. A. No. 298 of 2003 and I. T. A. No. 327 of 2003 as the said question having been decided in favour of the assessee, which goes to the root of the matter and we may not be called upon to address question (2) at all. But as mentioned hereinabove, this question does not arise in I. T. A. No. 25 of 2003, in which only question (2) arises for consideration. Thus we are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee while computing the profits of business for the purpose of computing deduction under section 80HHC of the Act and 90 per cent. of interest earned has to be reduced. It was therefore contended that the impugned order of the Tribunal cannot be sustained in law when it allows net interest to be reduced from the profits of the business. 24. On the other hand learned counsel for the assessee submitted that it is the net interest which is to be reckoned and not interest receipts alone for the purpose of claiming deductions under the aforesaid provision of law. 25. Both sides have cited very many authorities of High Courts and the Supreme Court to put across their rival contentions. 26. According to the Revenue, judgments of the Punjab and Haryana High Court reported in Rani Paliwal v. CIT [2004] 268 ITR 220, the Madras High Court reported in CIT v. V. Chinnapandi [2006] 282 ITR 389 settle the issue in favour of the Revenue. Reliance has also been placed on two judgments of the Supreme Court reported in CIT v. K. Ravindranath Nair [2007] 295 ITR 228 and Hero Exports v. CIT [2007] 295 ITR 454 (SC). In the matter of Rani Paliwal [2004] 268 ITR 220 only this much finding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. No reference of net interest is mentioned in the said clause. What we have to see is only the nature of receipt as contemplated under the clause. No deduction is permissible. Once the receipt of the interest is known, 90 per cent. of the same is to be reduced from the profits without deducting any amount. This court in the case of K. S. Subbiah Pillai and Co. (India) P. Ltd. v. CIT [2003] 260 ITR 304, held as follows (page 305) : `The clause does not refer to net interest. It refers, inter alia, to the interest included in the profits and gains of the business or profession . . . . Clause (baa) under the Explanation to section 80HHC defines profits of the business as computed under the head "Profits and gains of business or profession". The deductions to be made are from the amount of profit so computed and not from the amount computed under any other head of income of that assessee. The reference to "such profits" in sub-clause (1) of clause (baa) can only be to the profits of the business computed under the head "Profits and gains of business or profession". Addition of prefix "the" to "profits" in clause (baa), while referring to the profits and gains of business or p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business under the head `Profits and gains of business or profession.' In other words, he will have to compute business profits, in terms of the Act, by applying the provisions of sections 28 to 44 thereof. (iii) In arriving at the profits of the business by the above method, the Assessing Officer will exclude all such incomes which partake of the character of `income from other sources' which in any event are treated under sections 56 and 57 of the Act and are therefore not to be reckoned for the purposes of section 80HHC. (iv) Where surplus funds are parked with the bank and interest is earned thereon it can only be categorised as income from other sources. This receipt merits separate treatment under section 56 of the Act which is outside the ring of profits and gains from business and profession. It goes entirely out of the reckoning for the purposes of section 80HHC. (v) Interest earned on fixed deposits for the purposes of availing of credit facilities from the bank, does not have an immediate nexus with the export business and therefore has to necessarily be treated as income from other sources and not business income. (vi) Once business income has been determined by applyi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upreme Court pronounced by it. Therefore it is our duty to see if the controversy as mentioned hereinabove with regard to liability of the deductions under clause (baa) to the Explanation of section 80HHC has been set at rest by the Supreme Court or not. 30. Sri Indra Kumar, learned senior counsel appearing as amicus curiae contended that Circular No. 621 dated December 19, 1991 [1992] 195 ITR (St.) 154, 176, 178, of the Central Board of Direct Taxes contains explanatory notes on the provisions relating to direct taxes under the Finance (No. 2) Act, 1991. He has drawn our attention to the heading "Modification of provisions relating to exemption of income from exports". Clause 32 thereof reads as under : "32. The provisions of section 80HHC of the Income-tax Act, as they existed, had given rise to some misinterpretations and certain doubts. Moreover, certain genuine difficulties were also witnessed in certain types of transactions. The Finance Act has, therefore, amended section 80HHC in order to address to these problems." 31. Further attention has also been drawn to clause 32.10 and 32.11, which are also reproduced herein below : "32.10. The existing formula often ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the Revenue both. 37. In the matter of Ravindranathan Nair [2007] 295 ITR 228, the question that was basically and primarily projected was exclusively with processing charges which is manifest from the following paragraph (page 231) : "The narrow dispute which arises for determination is : whether the Department was right in including the processing charges, amounting to Rs. 1,54,68,811, in the total turnover while arriving at export profits under section 80HHC(3) of the Act, as it stood at the material time." 38. Thus whatever findings have been recorded by the Supreme Court were not directly relatable to the question posed in this appeal. It has therefore been contended by the learned counsel for the assessee that the same would only be an obiter and cannot be said to be a binding precedent. It was therefore submitted that the question with regard to consideration of the Explanation (baa) was not at all there before the Supreme Court in the matter of Ravindranathan Nair (supra). 39. Similarly in the matter of Hero Exports, the Supreme Court was essen-tially dealing with section 80HHC(3)(b) and Explanation (e). It did not have the occasion to consider clause (baa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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