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TMI Blog2012 (6) TMI 437X X X X Extracts X X X X X X X X Extracts X X X X ..... n under section 80HHC of the Act, the Assessing Officer proceeded to reopen the assessment by issu- ing notice under section 148 of the Act and after considering the reply of the assessee, the Assessing Officer completed the assessment on October 3, 2000, by holding that the deduction claimed under section 80HHC of the Act was not in accordance with the Explanation (baa). Being aggrieved by the said order, the assessee filed an appeal before the Commissioner of Income-tax (Appeals), who allowed the appeals by his order dated April 24, 2002. The Revenue being aggrieved by the said order, preferred an appeal before the Appellate Tribunal, which confirmed the order of the Appellate Commissioner and rejected the appeals on December 13, 2004. The Revenue being aggrieved by the said order has preferred an appeal I.T. A. No. 2568 of 2005 before this court. 4. For the assessment year 1995-96, the respondent-assessee filed return of income on October 13, 1995, declaring the total income of Rs. 5,33,740 as a registered firm. The Assessing Officer found that the claim made under section 80HHC of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), was not in accordance with the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e profits of business and that the objects and reasons given by amending section 80HHC clarifies the intention of the Legislature and makes it clear that it is the gross income from the commission which has to be taken into con- sideration for deduction and not the net commission. In the said objects and reasons it has been stated as under : "It is, therefore, proposed to clarify that 'profits of the business' for the purpose of section 80HHC will not include receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature. As some expenditure might be incurred in earning these incomes, which in the generality of cases is part of common expenses, it is proposed to provide ad hoc 10 per cent. deduction from such incomes to account for these expenses." 9. Per contra, learned counsel appearing for the respondent by supporting the order of the Tribunal has brought to our notice a decision of the Divi- sion Bench of this court in the case of CIT v. Gokuldas Exports in I. T. A. No. 25 of 2003, disposed of on July 9, 2008,-since reported in [2011] 333 ITR 214 (Karn), which has followed the decision of the Delhi High Court in the case of CIT v. S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t arrived at would become part of the profits and gains of business. There- fore, the question for consideration is, while deducting 90 per cent. of the commission in calculating the profits of the business, whether the gross commission is to be deducted or net commission is to be deducted. In the definition at section 80HHC(baa) it is specifically mentioned what is to be deducted is 90 per cent. of any receipts by way of commission "included in such profits". Therefore, it is clear it is not the receipt of 90 per cent. of the entire commission, it is 90 per cent. receipt of commission included in pro- fits and gains of business. In fact, that is what both the appellate authorities have held relying on several judgments of the various courts. Though there appears to be no direct decision in so far as commission is concerned, support is drawn from other judgments which have a bearing on the subject. The apex court in the case of CIT v. Lakshmi Machine Works [2007] 290 ITR 667 (SC) while dealing with section 80HHC has held as under (page 683) : "The principal reason for enacting the above formula was to dis- allow a part of section 80HHC concession when the entire deduction claimed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ature intended to have a formula to ascertain export profits by apportioning the total business profits on the basis of turnovers. Apportionment of profits on the basis of turnover was accepted as a method of arriving at export profits." 13. The Supreme Court in the case of Hero Exports v. CIT [2007] 295 ITR 454 (SC) at para 14 held as under (page 465) : ". . . the assessee has two incomes with 'one common pool of expenses' and since 'principle of attribution' has been retained in the scheme of section 80HHC, both in terms of section 80HHC(3), clause (e) to the Explanation to section 80HHC(3)(a), (b) and (c) and in clause (baa) to the Explanation to section 80HHC, instead of going into lengthy exercise of dividing such common expenses, the assessee has estimated the reduction of export turnover by 10 per cent. of the other income of Rs. 1,60,000 (in the above example). Ultimately, clause (baa) to the Explanation is itself based on the assumption that 10 per cent. of the income would be an expense. We make it clear that we are not reading Explanation (baa) into section 80HHC(3)(b). What we say is as a guidance value/factor, 10 per cent. of the total other income of Rs. 1,60,000 wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e applied to exclude that which does not partake of profits that can be said to have been derived from the business of exports. (ii) In the specific context of clause (baa) of the Explanation to section 80HHC, while determining the 'profits of the business', the Assessing Officer has to undertake a two-step exercise in the follow- ing sequence. He has to first 'compute' the profits of the 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 pro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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