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Commissioner of Income Tax (Central) , Ludhiana Versus M/s Hero Cycles Limited, Ludhiana

2016 (9) TMI 901 - PUNJAB AND HARYANA HIGH COURT

Deduction under Section 80HHC - whether the ITAT was right in holding that interest from others and also from IDBI constitute profit from the business for the purpose of computing deduction? - Held that:- Firstly, the assessment order must reflect the correct position. Secondly, it is not always that a computation under the wrong head would have no tax effect. For instance, a loss under one head may not be permitted to be carried forward and adjusted against the loss under another head. Further, .....

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d reflect the correct position. - This view is not contrary to or in conflict with the judgment of the Division Bench in CIT vs. Avery Cycles Industries Limited ( 2006 (9) TMI 96 - PUNJAB AND HARYANA HIGH COURT ). At the cost of repetition, the Department in that case did not make an application similar to the one made by Mr. Klar before us. Nor did the Department in that case agree that a fresh assessment order would be passed in accordance with the correct position in all respects relating .....

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er to pass a fresh assessment order in accordance with the finding for all purposes. This course commends itself to us. - Mr. Mittal submitted that under sub-section (3) of Section 80HHC the profits derived from export of goods or merchandise out of India shall be the amounts which bear to the profit of the business as computed under the head “Profits and gains of business or profession”. He submitted that the Assessing Officer has computed the interest under the head “Profits or gains of bu .....

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d under the head “Profits and gains of business”. Question answered in favour of the appellant/Revenue. - Computing deduction u/s 32AB - whether all the receipts including non-business receipts viz the interest from others, the interest from IDBI, the rent receipt and the dividend income form part of the “Profit of eligible business”? - Held that:- The assessee’s case admittedly falls under clause (b) of sub-section (3) and not clause (a). Clause (b) does not provide for the profits to be co .....

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ese sub-clauses. Mr. Mittal’s submission is, therefore, rejected.It is true, as Mr. Mittal pointed out, that unlike as in Section 80HHC the words in clause (b) are not “profits of the business as computed under the head ‘Profits and gains of business’”. That, however, would make no difference. It was not necessary for the legislature to use the entire expression in clause (b) for sub-section (1) itself refers to income as including income chargeable to tax under the head “Profits and gains of bu .....

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ted 11.08.2003 this appeal was admitted on the following questions of law:- (1) Whether, on the facts and in the circumstance of the case, the ITAT was right in holding that interest from others and also from IDBI constitute profit from the business for the purpose of computing deduction under Section 80HHC ? (2) Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in law in holding that for the purpose of computing deduction u/s 32AB, all the r .....

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business. ….. ….. ….. ….. (3) For the purpose of sub-section (1), profits derived from the export of goods or mechandise out of India shall be:- (a) In a case where the business carried on by the assessee consists exclusively of the export out of India of the goods or mechandise to which this section applies, the profits of the business as computed under the head 'profits and gains of business of profession': (b) In a case where the business carried on by the .....

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the assessee was not involved in the business of money lending; that the assessee did not have a licence for money lending and that the interest on loans earned by the assessee would, therefore, fall within section 56, i.e. income from other sources and would not constitute income from business. It was further observed that the advances were made by the assessee to parties in the same group which was referred to as the Hero Group . The CIT (Appeals) upheld the order of the Assessing Officer wit .....

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0HHC after including the income as profits of business. 5. Mr. Zora Singh Klar, learned counsel appearing on behalf of the appellant submitted that the Tribunal s finding that the said interest had been assessed by the Assessing Officer under the head Profits and gains of business is factually incorrect. In this regard, he invited our attention to that part of the assessment order where the assessee's claim under section 80HHC was dealt with. It is mentioned that the business profits as calc .....

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ection 32AB and 80HHC does not indicate that the income from interest was not computed under the head Profits and gains of business while computing the income. It merely indicates that it was excluded while computing the deductions claimed under sections 32AB and 80HHC. 6. Mr. Alok Mittal, the learned counsel appearing on behalf of the respondent relied upon para 4(i) of this appeal where it is stated that by mistake in the computation of income, the said interest was not assessed under the head .....

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. 8. The question that arises is if in view of the assessment order having computed the interest under the head Profits and gains of business , we are precluded from considering whether the interest falls under the head Income from other sources . Mr. Mittal contended that the Assessing Officer having computed the income on the basis that it falls under the head Profits and gains of business , the authorities and the Courts are bound to proceed on that basis for all purposes including for the pu .....

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pass a fresh assessment order after considering the income under the correct head for all purposes in the assessment order. 9. We will, however, first examine whether the interest received falls under the head Profits and gains of business or under the head Income from other sources . 10. The Assessing Officer noted that the details submitted by the assessee regarding the loans in the relevant assessment year as well as in the earlier years reveal that the interest was received from persons to .....

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e CIT (A) held that interest received from loans and advances given to Directors or individuals or other sister concerns for any liability paid on behalf of certain parties to be income from other sources and, accordingly, excluded the same from the eligible profits to which Section 32AB is applicable. If that is correct, it must also be excluded from the eligible profits to which Section 80HHC is applicable. 11. Mr. Mittal, however, contended that the assessee s Memorandum of Association and in .....

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known that usually the Memorandum of Association entitles a company to carry on various activities, although the company has no intention of doing so at the time of the preparation of the Memorandum of Association. Such objects are included for convenience in the event of the company deciding in future to undertake such activities for otherwise it would require the company to go through the procedure of making an application before the Court or the Company Law Board for amending its Memorandum .....

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therefore, be computed under the head Income from other sources and not under the head Profits and gains of business . 12. Mr. Mittal submitted that the Assessing Officer having assessed the said income under the head Income from business was bound to consider it as business income while considering the assessee s claim under Section 32AB and Section 80HHC. He relied upon the judgment of a Division Bench of this Court in CIT Vs. M/s Avery Cycles Industries Limited, [2008] 296 ITR 393. The Divis .....

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clearly available in the definition of "profits of the business", contained in Clause (baa) of Section 80HHC of the Act, as reproduced above, from where it is evident that 'profits of the business" means the profits and gains of business or profession, as computed under the head "Profits and gains of business or profession" as reduced by the items, provided for in the definition. A perusal of the assessment order shows that while dealing with the deduction under Sec .....

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ealing under the head "Income from other sources". While considering the appeal filed by the assessee on this issue, the CIT(A) rejected the same. Before the Tribunal, the assessee succeeded. 14. Once at the time of passing of the assessment order in computing the income from business or profession, the amount of receipt of interest, as mentioned above, has been shown and assessed as income from business or profession, there is no reason for reducing the same out of the income from bus .....

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calculation of profits of the business in terms of Clause (baa) of Section 80HHC of the Act after reducing therefrom 90 per cent of the amount, so referred in the clause. 13. In CIT Vs. M/s Avery Cycles Industries Limited, [2008] 296 ITR 393, while dealing with the deduction under section 80HHC, the interest received was held to be not connected with the business activity and the assessing officer treated the same as income from other sources, but, while computing the income from business or pro .....

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nstituted business income or not. The matter before us, however, does not rest at the same stage or in the same terms as it did in the case before the Division Bench. In that case, the Department did not make any application for the Assessing Officer to recompute the assessment in accordance with the correct position. The Department did not contend there that the amount received was not, in fact, business income. It retained its stand and, in any event, does not appear to have applied to the Cou .....

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usiness income and is, therefore, liable to be taxed under the head Income from other sources . He stated that the Revenue would press for the interest to be computed under the correct head, namely, Income from other sources and not under the head Profits and gains of business for all purposes and not merely for the purpose of sections 32AB and 80HHC. A statement to this effect was not made to the Division Bench in CIT vs. M/s Avery Cycles Industries Limited (supra). The case is, therefore, dist .....

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. To put it differently, the Assessing Officer has not assessed the interest income from customers, sales tax set off, etc. under the head Income from other sources or under any other head. Having assessed these incomes under the head Profits and gains of business or profession , it was not open to the Assessing Officer to treat these incomes as if assessed under the head Income from other sources , so as to exclude the same from the business profits while computing the deduction under section .....

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the interest income from customers and sales tax set off have been computed and assessed under the head Profits and gains of business or profession as part of the operational income and not under the head Income from other sources . Therefore, the said income could not be deducted from the business profits while computing the deduction under section 80HHC of the Incometax Act. The decisions relied upon by the Tribunal have been distinguished in the case of Bangalore Clothing Co. [2003] 260 ITR .....

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nterest income received from customers as well as sales tax set off are assessable under the head Profits and gains of business or profession . Therefore, having accepted the said income as part of the business profit, the same could not be excluded from business profits while calculating deduction under section 80HHC of the Act. 16. Assuming that the said income is income from business, Mr. Klar s approach commends itself to us. It would lead to a correct assessment order being passed. To leave .....

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passing the final assessment order, they do not take the trouble of mentioning the amount under the correct head of income. If that is so, it is erroneous. 18. Firstly, the assessment order must reflect the correct position. Secondly, it is not always that a computation under the wrong head would have no tax effect. For instance, a loss under one head may not be permitted to be carried forward and adjusted against the loss under another head. Further, an error in including the income under the .....

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w is not contrary to or in conflict with the judgment of the Division Bench in CIT vs. Avery Cycles Industries Limited (supra). At the cost of repetition, the Department in that case did not make an application similar to the one made by Mr. Klar before us. Nor did the Department in that case agree that a fresh assessment order would be passed in accordance with the correct position in all respects relating to the assessment. There is no warrant for knowingly including amounts under a wrong head .....

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course commends itself to us. 20. Mr. Mittal submitted that under sub-section (3) of Section 80HHC the profits derived from export of goods or merchandise out of India shall be the amounts which bear to the profit of the business as computed under the head Profits and gains of business or profession . He submitted that the Assessing Officer has computed the interest under the head Profits or gains of business . He was bound by the terms of sub-section (3) itself to consider the same as business .....

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in favour of the appellant/Revenue. 23. It was initially conceded that the answer to question No.2 would follow the answer to question No.1. Mr. Mittal, however, raised an additional contention based on Section 32AB as regards this question. 24. Section 32AB, as it then was and so far as it is relevant, read as under:- Investment deposit account 32-AB..- (1) Subject to the other provisions of this section, where an assessee, whose total income includes income chargeable to tax under the head Pro .....

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in the deposit account under clause (a), in accordance with, and for the purposes specified in, a scheme (hereafter in this section referred to as the scheme) to be framed by the Central Government, or if the assessee is carrying on the business of growing and manufacturing tea in India, to be approved in this behalf by the Tea Board, the assessee shall be allowed a deduction (such deduction being allowed before the loss, if any, brought forward from earlier years is set off under Section 72) of .....

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partner, or as the case may be, any member of such firm, association of persons or body of individuals. (2) For the purposes of this section, - (i) eligible business or profession shall mean business or profession, other than- (a) the business of construction manufacture or production of any article or thing specified in the list in Eleventh Schedule carried on by an industrial undertaking, which is not a small-scale industrial undertaking as defined in section 80HHA; (b) the business of leasing .....

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in respect of such eligible business or profession are maintained be an amount arrived at after deducting an amount equal to the depreciation computed in accordance with the provisions of sub-section (1) of Section 32 from the amounts of profits computed in accordance with the requirements of Parts II and III of the Sixth Schedule to the Companies Act, 1956 (1 of 1956), as increased by the aggregate of- …. ….. ……. ……. ……. (b) in a case whe .....

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even if under the Income Tax Act, the income falls under the head Income from other sources and not under the head Profits and gains of business , the assessee would be entitled to a deduction on the amount of profit computed in accordance with Part-II and Part-III of the VIth Schedule of the Companies Act. He based his contention essentially on sub-section (3)(b) of Section 32AB which admittedly is applicable to the assessee s case. 26. Firstly, it is necessary to note that sub-section (1) mak .....

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sub-section (2) is not well-founded. Indeed the assessee s business is an eligible business within the meaning of sub-section (2). Sub-section (2) only specifies what an eligible business is. Every eligible business is, however, not entitled to a deduction under Section 32AB. An eligible business is entitled to a deduction only in respect of its income chargeable to tax under the head Profits and gains of business or profession . 28. Mr. Mittal then relied upon sub-section (3)(b). He contends t .....

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