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2016 (1) TMI 809 - HIMACHAL PRADESH HIGH COURT

2016 (1) TMI 809 - HIMACHAL PRADESH HIGH COURT - TMI - Income chargeable to tax under Section 41(1) - whether 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? - Held 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 Se .....

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created with respect to Section 41(1), it would be against the basic purpose and object of Section 80 HHC of the Act. If that be so, 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 assess .....

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d 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 take into account the net interest i.e. gross interest as reduced by expenditure incurred for earning such interest. - Decided in favour of assessee. - ITA .....

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Chandigarh, passed in ITA No.211/Chandi/2006 dated 31.07.2008, Assessment Year 2001-02. 2. The brief facts are that during the previous year relevant to Assessment Year 2001-02, the assessee received a waiver of interest of ₹ 2,24,46,466/- as a result of one time settlement with Punjab National Bank. This amount was offered in the return as Whether the reporters of the local papers may be allowed to see the Judgment? income under Section 41(1) of the Act and the assessee also claimed deduc .....

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ppeal against the assessment before the Commissioner of Income Tax (Appeals), Shimla ('CIT (A)', who vide his order dated 17.01.2006 passed in Appeal No.IT/169/2005-06/SML confirmed the assessment made by the A.O. holding that such deemed income is not derived from exports in view of the judgments of the Hon'ble Supreme Court in the cases of CIT vs. Sterling Foods (237 ITR 579) and Pandian Chemicals vs. CIT (262 ITR 278). 4. The assessee thereafter filed further appeal before the ITA .....

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uction 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 .....

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f the export business and merely because such liability ceases to exist, the same will not undergo a change in its nature and become an independent income. We have heard the learned counsel for the parties and have gone through the records of the case. 8. Section 80 HHC of the Act reads thus:- "Deduction in respect of profits retained for export business. 80HHC. (1) Where an assessee, being an Indian company or a person (other than a company) resident in India, is engaged in the business of .....

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ed to as an Export House or a Trading House, as the case may be) issues a certificate referred to in clause (b) of sub-section (4A), that in respect of the amount of the export turnover specified therein, the deduction under this sub-section is to be allowed to a supporting manufacturer, then the amount of deduction in the case of the assessee shall be reduced by such amount which bears to the total profits derived by the assessee from the export of trading goods, the same proportion as the amou .....

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n computing the total income of the assessee, a deduction to the extent of profits, referred to in sub-section (1B), derived by the assessee from the sale of goods or merchandise to the Export House or Trading House in respect of which the certificate has been issued by the Export House 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 .....

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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 expression "competent authority" means the Rese .....

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ed to a separate account maintained for the purpose by the assessee with any bank outside India with the approval of the Reserve Bank of India. Explanation 2.-For the removal of doubts, it is hereby declared that where any goods or merchandise are transferred by an assessee to a branch, office, warehouse or any other establishment of the assessee situate outside India and such goods or merchandise are sold from such branch, office, warehouse or establishment, then, such transfer shall be deemed .....

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shall be the amount which bears to the profits of the business, the same proportion as the export turnover in respect of such goods bears to the total turnover of the business carried on by the assessee; (b) where the export out of India is of trading goods, the profits derived from such export shall be the export turnover in respect of such trading goods as reduced by the direct costs and indirect costs attributable to such export; (c) where the export out of India is of goods or merchandise m .....

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rading 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 turno .....

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me proportion as the export turnover bears to the total turnover of the business carried on by the assessee: Provided also that in the case of an assessee having export turnover 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) of se .....

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Remission Scheme: Provided also that in the case of an assessee having export turnover 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 (iiie) of section 28, the same proportion as the export turnover bears to the total turnover of the bus .....

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lowable" means the rate of credit allowable under the Duty Free Replenishment Certificate, being the Duty Remission Scheme calculated in the manner as may be notified by the Central Government: Provided also that in case the computation under clause (a) or clause (b) or clause (c) of this sub-section is a loss, such loss shall be set off against the amount 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 .....

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ding 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 I .....

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e supporting manufacturer consists exclusively of sale of goods or merchandise to one or more Export Houses or Trading Houses, the profits of the business; (b) in a case where the business carried on by the supporting manufacturer does not consist exclusively of sale of goods or merchandise to one or more Export Houses or Trading Houses, the amount which bears to the profits of the business the same proportion as the turnover in respect of sale to the respective Export House or Trading House bea .....

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the assessee shall also furnish along with the return of income, a certificate from the undertaking in the special economic zone containing such particulars as may be prescribed, duly certified by the auditor auditing the accounts of the undertaking in the special economic zone under the provisions of this Act or under any other law for the time being in force. (4A) The deduction under sub-section (1A) shall not be admissible unless the supporting manufacturer furnishes in the prescribed form a .....

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f 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 exclude .....

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for the purposes of this section. Explanation.-For the purposes of this section,- (a) "convertible foreign exchange" means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of [the Foreign Exchange Management Act, 1999 (42 of 1999)], and any rules made thereunder; (aa) "export out of India" shall not include any transaction by way of sale or otherwise, in a shop, emporium or any other establishme .....

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ise beyond the customs station as defined in the Customs Act, 1962 (52 of 1962); (ba) "total turnover" shall not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act, 1962 (52 of 1962): Provided that in relation to any assessment year commencing on or after the 1st day of April, 1991, the expression "total turnover" shall have effect as if it also excluded any sum referred to in clauses .....

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fits of any branch, office, warehouse or any other establishment of the assessee situate outside India; (bb) [***] (c) "Export House Certificate" or "Trading House Certificate" means a valid Export House Certificate or Trading House Certificate, as the case may be, issued by the Chief Controller of Imports and Exports, Government of India; (d) "supporting manufacturer" means a person being an Indian company or a person (other than a company) resident in India, manuf .....

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, 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 t .....

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rofits computed in terms of sections 28 to 44D. In other words, receipts constituting independent income having no nexus with exports were required to be deducted from business profits under clause (baa). 10. The Hon'ble Supreme Court observed that a bare reading of clause (baa)(1) indicates that receipts by way of brokerage, commission, interest, rent charges, etc., formed part of the gross total income being business profits. But for the purpose of working out of formula and in order to av .....

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refore, 90% of the processing charges have also to be reduced from the gross total income to arrive at the business profits and, therefore, it has also to be included in the total turnover in the formula for arriving at the business profits in terms of the clause (baa) of the Explanation to section 80HHC(3). It was further held by the Hon'ble Supreme Court that:- "In the above formula there existed four variables, namely, business profits, export turnover, total turnover and 90 per cent .....

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r. This aspect needs to be kept in mind while interpreting clause (baa) to the said Explanation. The said clause stated that 90 per cent of incentive profits or receipts 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 .....

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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 attributable to exports. This was the reason for this court to hold that indirect taxes like excise duty which are recovered by .....

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Government the tax recovered is for the Government. It may be an income in the conceptual sense or even under the Income-tax Act but while working out the formula under section 80HHC(3) of the Income-tax Act and while applying the four variables one has to ascertain whether the receipt has an attribute of export turnover." 12. What can be deduced from the judgment in K. Ravindranathan Nair's case (supra) is that any independent income which is not derived from the export activities in t .....

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siness, then merely because such liability ceases to exist, the same will not undergo a change in its nature and become an independent income. 14. In Commissioner of Income-Tax versus Shri Ram Honda Power Equip [2007] 289 ITR 475 (Delhi), after taking into consideration the entire law on the subject, the learned Division Bench of Delhi High Court summarized the legal position as follows:- "To summarise our conclusions: (i) In computing what the profits derived from exports for the purposes .....

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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 la .....

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for the purposes of Section 80HHC. (v) Interest earned on fixed deposits for the purposes of availing 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 applying accounting standards as well as the provisions contained in the Act, the assessed would be permitted to, in terms of Section 37 of the Act, claim as de .....

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ssion, interest, rent, charges or any other receipt of a similar nature included in such profits; and (c) profits of any branch, office, warehouse or any other establishment of the assessed situate outside India. (viii) The word "interest" in clause (baa) of the Explanation connotes "net interest" and not "gross interest". Therefore, in deducting such interest, the AO will take into account the net interest i.e. gross interest as reduced by expenditure incurred for .....

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he AO treats the interest receipt as business income, then deduction should be permissible, in terms of Explanation (baa) of the net interest i.e. the gross interest less the expenditure incurred for the purposes of earning such interest. The nexus between obtaining the loan and paying interest thereon (laying out the expenditure by way of interest) for 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 appli .....

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ome-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 .....

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in Shri Ram Honda's case (supra), it was held by the Hon'ble Supreme Court that the profits of business "as contemplated under Explanation (baa) means the profit of business as computed under the head "profits and gains of business or profession" as reduced by the receipts of the nature mentioned in clauses (1) and (2) of Explanation (baa). Thus, profits of the business of an assessee will have to be first computed under the head "profits and gains of business or pro .....

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f the net receipts are profits of the business of the assessee computed under the head "profits and gains of business or profession" from which deductions are to be made under clauses (1) and (2) of Explanation (baa). 18. It was held that under clause (1) of Explanation (baa), ninety per cent of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in any such profits are to be deducted from the profits of the business a .....

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, rent, charges 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 ac .....

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ded 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 first part of the Explanation (baa). Accordingly, if any quantum of any receipt of the nature mentioned in clause (1) of Explanation (baa) has not been included in the profits of business of an assessee as computed under the head "profits and gains .....

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s not to be included in the profits of the business of the assessee as computed under the head "profits and gains of business or profession", 90% of such quantum of the receipt of interest or rent will not be deducted under clause (1) of Explanation (baa) to Section 80 HHC. In other words, 90% of not the gross rent or gross interest but only the net interest or net rent which has been included in the profits of business of the assessee as computed under the head "profits and gains .....

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, essentially has to be considered with reference to that object. Under sub-section (3) of Section 80 HHC, the mechanism for determination of profits derived from export of goods or merchandise has been prescribed for the purposes of sub-section (1). Clause (a) thereof deals with an assessee where the business is export of goods or merchandise manufactured by the assessee. Clause (b) relates to an assessee whose business is of export outside India of trading goods, whereas, clause (c) applies to .....

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y 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 i .....

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