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2016 (1) TMI 809

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..... , then the exclusion of 90% of the deemed income under Section 41(1) of the Act is not in accordance with the correct interpretation of Explanation (baa) to Section 80 HHC of the Act and, therefore, the ITAT, in such circumstances, has rightly allowed the appeal of the assessee. That apart, it would also be noticed that the liability incurred by the assessee company in respect of the interest had infact been earlier allowed as deduction while computing the profits of the export business, the same will not now undergo a change in its nature and become an independent income. However, in terms of the judgment passed by the Hon'ble Supreme Court in ACG Associated's case (2012 (2) TMI 101 - SUPREME COURT OF INDIA ), the benefit would only be available on the net interest which had been included in the profits of the business of the assessee as computed under the head "profits and gains of business or profession" that alone will be deducted under clause (1) of the Explanation (baa) to Section 80 HHC of the Act for determining the profits of the business and not the gross interest. Thus while computing the interest under clause (baa) of the Explanation, the Assessing Officer will ta .....

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..... er dated 09.01.2009, the same was admitted on the following substantial question of law:- Whether income chargeable to tax under Section 41(1) of the Income Tax Act is to be excluded under clause (baa) of the Explanation to Section 80 HHC of the Act, for the purposes of computing the deduction allowable to the assessee under that section? 6. It is vehemently argued by Shri Vinay Kuthiala, Senior Advocate, assisted by Ms.Ashima, Advocate, for the revenue that ITAT has misconstrued the decision of the Hon'ble Supreme Court in Commissioner of Income-Tax versus K.Ravindranathan Nair [2007] 295 ITR 228 (SC) wherein it has been held by the Hon'ble Supreme Court that under clause (baa) of the Explanation to Section 80HHC, incentive profits and certain independent incomes had to be excluded from the profits for the purpose of this Section, therefore, the receipts had no nexus with the export turnover as it is only the income derived from export that alone could be considered for deduction and not income from other sources. 7. On the other hand, Shri Vishal Mohan, learned counsel for the assessee, would contend that since the liability incurred by the assessee company i .....

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..... or Trading House.] (1B) For the purposes of sub -sections (1) and (1A), the extent of deduction of the profits shall be an amount equal to- (i) eighty per cent thereof for an assessment year beginning on the 1st day of April, 2001; (ii) seventy per cent thereof for an assessment year beginning on the 1st day of April, 2002; (iii) fifty per cent thereof for an assessment year beginning on the 1st day of April, 2003; (iv) thirty per cent thereof for an assessment year beginning on the 1st day of April, 2004, and no deduction shall be allowed in respect of the assessment year beginning on the 1st day of April, 2005 and any subsequent assessment year. (2)(a) This section applies to all goods or merchandise, other than those specified in clause (b), if the sale proceeds of such goods or merchandise exported out of India are received in, or brought into, India by the assessee (other than the supporting manufacturer) in convertible foreign exchange, within a period of six months from the end of the previous year or, within such further period as the competent authority may allow in this behalf. Explanation.-For the purposes of this clause, the exp .....

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..... rnover in respect of such goods bears to the adjusted total turnover of the business carried on by the assessee; and (ii) in respect of trading goods, be the export turnover in respect of such trading goods as reduced by the direct and indirect costs attributable to export of such trading goods: Provided that the profits computed under clause (a) or clause (b) or clause (c) of this sub-section shall be further increased by the amount which bears to ninety per cent of any sum referred to in clause (iiia) (not being profits on sale of a licence acquired from any other person), and clauses (iiib) and (iiic) of section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee: Provided further that in the case of an assessee having export turnover not exceeding rupees ten crores during the previous year, the profits computed under clause (a) or clause (b) or clause (c) of this sub-section or after giving effect to the first proviso, as the case may be, shall be further increased by the amount which bears to ninety per cent of any sum referred to in clause (iiid) or clause (iiie), as the case may be, of section 2 .....

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..... nt which bears to ninety per cent of- (a) any sum referred to in clause (iiia) or clause (iiib) or clause (iiic), as the case may be, or (b) any sum referred to in clause (iiid) or clause (iiie), as the case may be, of section 28, as applicable in the case of an assessee referred to in the second or the third or the fourth proviso, as the case may be, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee. Explanation.-For the purposes of this sub-section,- (a) adjusted export turnover means the export turnover as reduced by the export turnover in respect of trading goods; (b) adjusted profits of the business means the profits of the business as reduced by the profits derived from the business of export out of India of trading goods as computed in the manner provided in clause (b) of subsection (3); (c) adjusted total turnover means the total turnover of the business as reduced by the export turnover in respect of trading goods; (d) direct costs means costs directly attributable to the trading goods exported out of India including the purchase price of such goods; (e) i .....

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..... be prescribed and verified in the manner prescribed that in respect of the export turnover mentioned in the certificate, the Export House or Trading House has not claimed the deduction under this section: Provided that the certificate specified in clause (b) shall be duly certified by the auditor auditing the accounts of the Export House or Trading House under the provisions of this Act or under any other law. (4B) For the purposes of computing the total income under subsection (1) or sub-section (1A), any income not charged to tax under this Act shall be excluded. (4C) The provisions of this section shall apply to an assessee,- (a) for an assessment year beginning after the 31st day of March, 2004 and ending before the 1st day of April, 2005; (b) who owns any undertaking which manufactures or produces goods or merchandise anywhere in India (outside any special economic zone) and sells the same to any undertaking situated in a special economic zone which is eligible for deduction under section 10A and such sale shall be deemed to be export out of India for the purposes of this section. Explanation.-For the purposes of this section,- (a) converti .....

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..... handise and selling such goods or merchandise to an Export House or a Trading House for the purposes of export; (e) special economic zone shall have the meaning assigned to it in clause (viii) of the Explanation 2 to section 10A.] 9. In K.Ravindranathan Nair's case (supra) which has been heavily relied upon by the learned Senior Counsel for the revenue, we find that while interpreting explanation (baa) to section 80HHC of the Act, it was held that the formula in section 80HHC(3) provided for a fraction of export turnover divided by the total turnover to be applied to business profits calculated after deducting 90 per cent of the sums mentioned in clause (baa) of the explanation. Profit incentives like rent, commission, brokerage charges, etc., though formed part of the gross total income, had to be excluded as these were independent incomes which had no element of export turnover. All the four variables in the section were required to be kept in mind and if all the four variables are kept in mind, it becomes clear that every receipt is not income and every income would not necessarily include the element of export turnover. It was further observed that clause (baa .....

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..... pts by way of brokerage, commission, interest, rent, charges or any other receipt of like nature included in business profits, had to be deducted from business profits computed in terms of sections 28 to 44D of the Income-tax Act. In other words, receipts constituting independent income having no nexus with exports were required to be reduced from business profits under clause (baa). A bare reading of clause (baa)(1) indicates that receipts by way of brokerage, commission, interest, rent, charges, etc., formed part of gross total income being business profits. But for the purposes of working out the formula and in order to avoid distortion of arriving at the export profits, clause (baa) stood inserted to say that although incentive profits and independent incomes constituted part of gross total income, they had to be excluded from gross total income because such receipts had no nexus with the export turnover. Therefore, in the above formula, we have to read all the four variables. On reading all the variables it becomes clear that every receipt may not constitute sale proceeds from exports. That, every receipt is not income under the Income-tax Act and every income may not be att .....

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..... 80HHC, while determining the 'profits of the business', the AO has to undertake a two-step exercise in the following 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 profits of the business by the above method, the AO will exclude all such incomes which partake 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. The AO will apply the law as explained in the judgments of the Kerala High Court referred to above which have been affirmed by the Hon'ble Supreme Court in Ravindra Nathan's case supra. (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 Page 0528 receipt merits separate treatment under Section 56 of the Act which is outside the ring of profit and gains from b usiness and profession. .....

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..... r the purpose of earning the interest on the fixed deposit, to draw an analogy from Section 37, will require to be shown by the assessed for application of the netting principle. 15. In Commissioner of Income-Tax versus Bhansali Engineering Polymars Ltd. [2008) 306 ITR 194 (Bom), it was held by a learned Division Bench of the Bombay High Court that the interest received on delayed payments from sundry debtors to whom the industrial unit of the assessee had sold goods could be treated as interest income derived from such industrial undertaking even though the assessee had realised income from other sources. 16. In Commissioner of Income-Tax versus Sociedade De Fomento Industrial Ltd. [2011] 335 ITR 472 (Bom) a learned Division Bench of the Bombay High Court held that though the main object of the assessee was to extract iron ore and export the same, the interest received from the bank and intercorporate deposits earned out of surplus funds by the assessee could not be said to be an activity which was not includible in the business profits for the purpose of Section 80 HHC. In such a situation, it could not be said that the assessee had not carried out the business of placing .....

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..... rges or any other receipt of a similar nature is allowed as expenses under Sections 30 to 44D of the Act and is not included in the profits of business as computed under the head profits and gains of business or profession , ninety per cent of such quantum of receipts cannot be reduced under Clause (1) of Explanation (baa) from the profits of the business. In other words, only ninety per cent of the net amount of any receipt of the nature mentioned in clause (1) which is actually included in the profits of the assessee is to be deducted from the profits of the assessee for determining profits of the business of the assessee under Explanation (baa) to Section 80HHC. 19. It was further held that Explanation (baa) has to be construed on its own language and as per the plain natural meaning of the words used in Explanation (baa), the words receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits will not only refer to the nature of receipts but also the quantum of receipts included in the profits of the business as computed under the head profits and gains of business or profession referred to in the f .....

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..... fits of the business which are determined in terms of clause (baa) of the Explanation to Section 80 HHC of the Act. The said Explanation provides that the expression profits of the business means, the profits as computed under the head profits and gains of business or profession , as reduced by 90% of the sums referred to in clauses (iiia), (iiib) and (iiic) of Section 28 or any receipt by way of brokerage, commission, interest, rent, charges and any other receipt of the similar nature included in such profits. 22. It would also be noticed that Section 41(1) creates a legal fiction and can be extended for the purpose of allowing deduction from profits of the business as referred to in Section 80 HHC of the Act. The income chargeable to tax under Section 41(1) of the Act is from reversal of any loss, expenditure or trading liability which had extinguished or ceased to exist. The legal fiction can only be extended to the extent that the provisions of Section 80 HHC have to be understood excluding the legal fiction created by deeming provisions contained in Section 41(1) of the Act as the source of income which is chargeable cannot be related to export of goods or merchandise .....

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