2006 (9) TMI 97 - HC - Income Tax

Court excludes certain receipts from total profits for deduction under Section 80HHC. Direct nexus with industrial undertaking required.

The High Court held that interest income, export incentive, octroi refund, and sales in India should not be included in total profits for calculating ... Deduction u/s 80HHC – Interest income, export incentive, octroi refund and Sales in India are not includible in the total turnover of the assessee (not an Indian company) for the purpose of deduction u/s 80HHC held by the HC Issues:1. Interpretation of deduction under Section 80HHC of the Income Tax Act.2. Inclusion of interest income, export incentive, octroi refund, and sales in India in total profits for calculating deduction under Section 80HHC.Issue 1: Interpretation of deduction under Section 80HHC of the Income Tax Act:The case involved a dispute regarding the interpretation of deduction under Section 80HHC of the Income Tax Act. The assessee claimed a deduction under Section 80HHC, but the Assessing Officer disallowed the claim, stating that the income in question was not part of the business income. The Tribunal and the Commissioner of Income Tax (Appeals) had initially allowed the claim, leading to the reference to the High Court for opinion.Issue 2: Inclusion of interest income, export incentive, octroi refund, and sales in India in total profits for calculating deduction under Section 80HHC:The key contention revolved around whether interest income, export incentive, octroi refund, and sales in India should be included in the total profits to calculate the deduction under Section 80HHC. The Revenue argued that these receipts should not be considered as business income and, therefore, should not be included in the total turnover for the purpose of the deduction. The Revenue relied on various judicial precedents to support their argument that such receipts did not have a direct nexus with the assessee's industrial undertaking and, hence, should not be eligible for deduction under Section 80HHC.The High Court analyzed previous judgments, including those of the Supreme Court and other High Courts, to determine the eligibility of interest income, export incentive, octroi refund, and sales in India for deduction under Section 80HHC. The court referred to the decision in Pandian Chemicals Ltd. case, emphasizing the need for a direct nexus between the profits and gains and the industrial undertaking to qualify for the deduction. Additionally, the court cited the Sterling Foods case, where it was held that certain receipts could not be considered as profits derived from the industrial undertaking.Ultimately, the High Court ruled in favor of the Revenue, holding that the interest income, export incentive, octroi refund, and sales in India should not be considered as part of the total profits for calculating the deduction under Section 80HHC. The court concluded that the Tribunal and the Commissioner of Income Tax (Appeals) erred in treating these incomes as business income eligible for deduction under Section 80HHC. Consequently, the reference was answered in favor of the Revenue, and the assessee's claim for rebate under Section 80HHC was denied.