Section 80HHC computation: sales tax excluded from turnover, while only business income receipts face the 90 per cent clause (baa) reduction.

Sales tax and Central sales tax are not included in total turnover for computing deduction under section 80HHC, following the court's earlier binding view, so this issue was resolved against the Revenue. Under clause (baa) of the Explanation, the 90 per cent exclusion applies only to receipts actually included in business profits under the head of business income; where interest and portfolio income are assessed as income from other sources, no such reduction is made for section 80HHC purposes. Rental income was also addressed on the same footing as non-business receipt treatment was in issue. The result was mixed, with one issue favouring the assessee and the other favouring the Revenue.

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Issues: (i) Whether sales tax and Central sales tax are to be included in the total turnover for computing deduction under section 80HHC of the Income-tax Act, 1961; (ii) Whether interest income, portfolio income and rental income are to be included in business profits, and whether 90 per cent of such receipts is to be excluded under clause (baa) of the Explanation to section 80HHC while computing the deduction.

Issue (i): Whether sales tax and Central sales tax are to be included in the total turnover for computing deduction under section 80HHC of the Income-tax Act, 1961.

Analysis: The issue stood covered by the earlier decision of the same court holding that sales tax and Central sales tax do not form part of total turnover for the purpose of section 80HHC computation. The question was therefore answered by following that binding view.

Conclusion: The issue was decided against the Revenue and in favour of the assessee.

Issue (ii): Whether interest income, portfolio income and rental income are to be included in business profits, and whether 90 per cent of such receipts is to be excluded under clause (baa) of the Explanation to section 80HHC while computing the deduction.

Analysis: Clause (baa) applies only to receipts that are included in profits of business as computed under the head 'profits and gains of business or profession'. Where interest and portfolio income are assessed under the head 'Income from other sources' and are not part of business income, there is no occasion to reduce 90 per cent of those receipts for the purpose of section 80HHC. The same treatment cannot be given to such income under two different heads for assessment and deduction.

Conclusion: The issue was decided in favour of the Revenue and against the assessee.

Final Conclusion: The appeal succeeded only in part, with the first question answered against the Revenue and the second question answered in its favour, leaving the overall result to operate as a partial relief to both sides.

Ratio Decidendi: For deduction under section 80HHC, only receipts that are actually included in business profits can be subjected to the 90 per cent exclusion under clause (baa), and sales tax and Central sales tax are not to be treated as part of total turnover.

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