2016 (8) TMI 155 - HC - Income Tax

Supreme Court Ruling on Tax Deductions: Key Clarifications on Sections 80HHC, 115JA, 80HH, and 80IA

DY CIT - CENTRAL CIRCLE-1 Versus RUBAMIN LIMITED

DY CIT - CENTRAL CIRCLE-1 Versus RUBAMIN LIMITED - TMI Issues Involved:1. Deduction under Section 80HHC in case of negative profit.2. Consideration of net interest vs. gross interest for deduction under Section 80HHC.3. Determination of book profits under Section 115JA without reducing the amount deductible under Section 80HHC.4. Inclusion of interest income in eligible profits for deductions under Sections 80HH and 80IA.Detailed Analysis:1. Deduction under Section 80HHC in Case of Negative Profit:The appellant challenged the ITAT's decision to restore the matter to the Assessing Officer (AO) to consider the deduction under Section 80HHC despite negative profits. The Supreme Court in IPCA Laboratory Ltd. v. Deputy Commissioner of Income-Tax clarified that deduction under Section 80HHC cannot be permitted in cases of loss or negative profit. The court emphasized that the entire turnover is considered in computing total income, and a disclaimer does not reduce the turnover of the export house. Losses must be considered in computing income, and negative profits cannot be used for deductions. Thus, the contention raised by the revenue was accepted, and the question was answered in favor of the revenue and against the assessee.2. Consideration of Net Interest vs. Gross Interest for Deduction under Section 80HHC:The issue of whether net interest or gross interest should be considered while computing deduction under Section 80HHC was addressed by the Supreme Court in ACG Associated Capsules Pvt. Ltd. v. Commissioner of Income-Tax. The court held that only ninety percent of the net interest, not the gross interest, included in the profits of the business should be deducted under Explanation (baa) to Section 80HHC. The Tribunal's decision to consider net interest was upheld, and the question was answered in favor of the assessee and against the revenue.3. Determination of Book Profits under Section 115JA without Reducing the Amount Deductible under Section 80HHC:The ITAT's direction to the AO to determine the book profits without reducing the amount deductible under Section 80HHC was reviewed. The Supreme Court in Commissioner of Income-Tax v. Packworth Udhyog Ltd. held that deductions under Section 80HHC must be computed in accordance with sub-sections (3) and (3A) of Section 80HHC. The court clarified that the ceiling in Section 80HHC (1B) does not apply to deductions in the computation of book profit under Section 115JB. The eligible deduction of export profit must be computed as per the method provided in Section 80HHC. The question was answered in favor of the assessee and against the revenue.4. Inclusion of Interest Income in Eligible Profits for Deductions under Sections 80HH and 80IA:The ITAT's direction to include interest income in eligible profits for computing deductions under Sections 80HH and 80IA was examined. The Supreme Court in Pandian Chemicals Ltd. v. Commissioner of Income Tax and the Gujarat High Court in Commissioner of Income Tax v. Gaskets and Radiators Distributors held that interest income does not have a direct or immediate nexus with the industrial activities of the assessee and thus cannot be treated as income derived from the industrial undertaking for the purpose of Sections 80HH and 80IA. The question was answered in favor of the revenue and against the assessee.Conclusion:The appeals were disposed of with the following outcomes:- Deduction under Section 80HHC is not permitted in case of negative profit.- Net interest should be considered instead of gross interest for computing deduction under Section 80HHC.- Book profits under Section 115JA should be determined without reducing the amount deductible under Section 80HHC.- Interest income should not be included in eligible profits for deductions under Sections 80HH and 80IA.