2013 (2) TMI 884 - HC - Income Tax

High Court upholds exclusion of exchange gain, miscellaneous receipts from business profits under sec. 80 HHC.

The Commissioner of Income Tax-V, Pune Versus Altas Copco (India) Ltd.

The Commissioner of Income Tax-V, Pune Versus Altas Copco (India) Ltd. - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether net exchange gain and miscellaneous receipts are to be excluded from business profits for computation of deduction under section 80HHC when they are alleged to be income from an independent source unconnected with export business. (Questions (a) and (b) treated together) 2. Whether an amount written off as irrecoverable inter-corporate deposit (ICD) is allowable as a business loss / bad debt where the assessee had been advancing surplus funds as ICDs and had offered interest thereon to tax as business income. (Question (c)) 3. Whether agency commission paid to obtain government orders is disallowable on grounds that (i) it is not deductible business expenditure, or (ii) it is against public policy, where identical claims were allowed by the Tribunal in earlier assessment years and those orders were not challenged by the revenue. (Questions (d) and (e)) ISSUE-WISE DETAILED ANALYSIS Issue 1 - Inclusion of net exchange gain and miscellaneous receipts in business profits for section 80HHC deduction Legal framework: Section 80HHC provides a deduction computed with reference to profits and gains of export business; the correct measure requires identification of income that constitutes business profits from exports versus income from independent sources. Determination depends on whether particular receipts are connected with export business. Precedent treatment: The Tribunal's treatment in the present appeal is to include the challenged receipts within business profits for computation of section 80HHC deduction; the revenue relied on a decision of the jurisdictional High Court in a different case (referred to by name in the record) and sought application of that ratio here. Interpretation and reasoning: The Court treated questions (a) and (b) as interconnected facets of whether the receipts in question are separable as independent-source income and thus excluded from the base for section 80HHC. The appeal was admitted on question (a), indicating that the Court recognizes this as a pure point of law suitable for consideration. However, the written judgment as quoted stops after admitting the question and does not set out further reasoning or a final determination on the admitted question in the excerpt provided. Ratio vs. Obiter: The Court explicitly treats question (b) as a different facet of question (a). Admission of question (a) means the point is regarded as potentially deterministic; absent further reasoning in the text supplied, no conclusive ratio is articulated in the excerpt. Conclusion: Question (a) (and hence (b)) was admitted by the Court for consideration. The record does not contain the Court's final determination on whether net exchange gain and miscellaneous receipts were properly included in business profits for section 80HHC computation; the point remains framed for adjudication. Cross-reference: See Issue 2 and Issue 3 for the Court's approach to factual findings and precedential reliance where the Tribunal or lower authorities made findings of fact or applied earlier unchallenged Tribunal orders. Issue 2 - Allowability of ICD write-off as business loss / bad debt Legal framework: Deductions for business losses and bad debts depend on a nexus between the loss or debt and the taxpayer's business activities. Distinction arises between amounts falling within ordinary business operations and those that are investments or lending outside the ordinary course; statutory provisions such as section 36(1)(vii) (referenced) govern deductibility where applicable. Precedent treatment: The assessing officer disallowed the deduction on the ground that the write-off had nothing to do with the assessee's business. The Commissioner of Income Tax (Appeals) and the Tribunal allowed the deduction, treating the amount as a business loss, after factual findings that the assessee regularly advanced surplus funds as ICDs and had been assessing interest thereon as business income. Interpretation and reasoning: The Tribunal's decision was founded on findings of fact: (i) the assessee lent surplus funds as intercorporate deposits to multiple companies; (ii) interest on such ICDs had been offered to tax as business income in earlier years and accepted by the revenue; (iii) the particular ICD to Vitara Chemicals Ltd. became irrecoverable after the company became sick and proceedings under the Negotiable Instruments Act failed to secure recovery; (iv) consequently, the write-off was treated as a business loss/bad debt connected with the assessee's lending activity, which formed part of its business operations. Ratio vs. Obiter: The Court declined to entertain question (c) because the Tribunal's ruling rested on factual findings; where an appellate fact-finding supports the allowance, interference is not warranted. This establishes the ratio that where a deduction is allowed based on findings that the taxpayer's lending activities formed part of the business and interest from such lending was taxed as business income, a subsequent write-off may be allowable as business loss - absent grounds to disturb the factual conclusions. Conclusion: The Court found no fault with the Tribunal's deletion of the disallowance of Rs. 48,00,000 and refused to entertain the legal challenge to that allowance because it was based on findings of fact; the write-off was held to be properly treated as a business loss under the facts found by the Tribunal. Issue 3 - Deductibility and public policy implications of agency commission for obtaining government contracts Legal framework: Deductibility of commission payments requires they be revenue expenditures incurred wholly and exclusively for the purposes of business. Public policy or illegality can disentitle an expenditure to deduction if the payment is criminal or otherwise against public policy; proof of illegality or taint is required to sustain disallowance on that ground. Precedent treatment: The Tribunal allowed the commission expenses in the present assessment year by following its earlier orders in multiple prior assessment years in which commission expenses incurred by the assessee were allowed. Those earlier Tribunal orders were not shown to have been challenged by the revenue. Interpretation and reasoning: The Court observed that (i) the Tribunal followed its own earlier decisions in the assessee's case for several assessment years where similar commission expenses were allowed; (ii) the revenue had not challenged those earlier Tribunal orders; and (iii) neither before the Tribunal nor before the Court did the revenue distinguish the earlier facts from the facts of the present year or otherwise demonstrate that the payments were illegal or contrary to public policy. In those circumstances, the Court found no basis to fault the Tribunal's reasoning or to sustain disallowance on the ground of public policy. Ratio vs. Obiter: The Court's disposition is founded on the principle of consistency and the binding effect (for practical purposes) of unchallenged earlier Tribunal findings in the same assessee's case; where revenue does not distinguish earlier unchallenged allowances or challenge them, similar claims in subsequent years will ordinarily be allowed absent fresh contrary material. This is treated as the decisive reasoning (ratio) for not entertaining questions (d) and (e). Conclusion: The Tribunal's deletion of the disallowance of Rs. 8,94,369 being agency commission was upheld; the Court declined to entertain the revenue's contention that such payments were against public policy because the revenue had not challenged earlier Tribunal orders allowing similar deductions and had not distinguished those facts from the present year. Overall disposition and principles highlighted 1. Questions grounded in, or dependent upon, findings of fact made by the Tribunal (here, the nature of lending activity and taxation of interest as business income) will not ordinarily be entertained by the Court absent cogent reason to disturb those findings. 2. Where a tribunal consistently allows an item of expenditure across multiple assessment years and such orders remain unchallenged by the revenue, subsequent attempts to disallow the same expenditure in later years require the revenue to distinguish the facts or show error; failure to do so justifies the tribunal's following of earlier unchallenged orders. 3. The question whether particular receipts are to be excluded from the computation of export-based deductions under section 80HHC (e.g., net exchange gains, miscellaneous receipts) was admitted for consideration as a pure legal question, separate from issues resolved on findings of fact; the record excerpt does not contain the Court's final ruling on that admitted question.