2016 (1) TMI 809 - HC - Income Tax

Court clarifies exclusion of income under Section 41(1) for Section 80HHC deductions. Independent incomes not from exports excluded.

Commissioner of Income Tax Versus M/s Purewal And Associates Ltd.

The court clarified that income chargeable under Section 41(1) should be excluded under clause (baa) of Section 80HHC for computing deductions. The court ... 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 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 because if any other meaning is assigned to the aforesaid fiction 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 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 take into account the net interest i.e. gross interest as reduced by expenditure incurred for earning such interest. - Decided in favour of assessee. Issues Involved:1. 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.Issue-Wise Detailed Analysis:1. Income Chargeable to Tax under Section 41(1) and its Exclusion under Clause (baa) of Explanation to Section 80 HHC:The case revolves around the interpretation of Section 80 HHC of the Income Tax Act, specifically whether income deemed under Section 41(1) should be excluded under clause (baa) of the Explanation to Section 80 HHC for computing deductions. The assessee received a waiver of interest amounting to Rs. 2,24,46,466/- from Punjab National Bank, which was offered as income under Section 41(1) and claimed as a deduction under Section 80HHC. The Assessing Officer (A.O.) held that 90% of this deemed income had to be reduced from the profits of the business as it was not derived from exports.The Commissioner of Income Tax (Appeals) upheld the A.O.'s decision, referencing the Supreme Court judgments in CIT vs. Sterling Foods and Pandian Chemicals vs. CIT, which emphasized that such income was not derived from exports. However, the Income Tax Appellate Tribunal (ITAT) allowed the assessee's appeal, leading to the current appeal by the Revenue.The key legal question admitted was whether income chargeable under Section 41(1) should be excluded under clause (baa) for computing the deduction under Section 80HHC. The Revenue argued that the ITAT misconstrued the Supreme Court's decision in Commissioner of Income-Tax vs. K. Ravindranathan Nair, which held that independent incomes like incentive profits should be excluded from business profits for Section 80HHC purposes.The court reviewed Section 80HHC and its Explanation (baa), which defines 'profits of the business' as profits computed under the head 'Profits and gains of business or profession' reduced by 90% of receipts like brokerage, commission, interest, rent, etc., which are independent incomes with no nexus to export turnover.The court analyzed precedents, including K. Ravindranathan Nair, which clarified that independent incomes not derived from export activities should be excluded from business profits under clause (baa). The court also considered other judgments, such as Shri Ram Honda Power Equip and ACG Associated Capsules Pvt. Ltd., which emphasized the exclusion of independent incomes from business profits for Section 80HHC purposes.The court concluded that the income chargeable under Section 41(1) is independent and not derived from export activities, thus 90% of such income should be excluded from business profits under clause (baa). However, the court also noted that if the liability incurred by the assessee for interest was previously allowed as a deduction, it would not change its nature and become independent income. Therefore, only the net interest included in business profits should be considered for exclusion under clause (baa).Conclusion:The court answered the question by clarifying that while computing interest under clause (baa), the Assessing Officer should consider the net interest (gross interest reduced by expenditure incurred for earning such interest). The appeal was dismissed with this clarification, and parties were to bear their own costs.