2006 (7) TMI 282 - AT - Income Tax

Exclusion of Gross Receipts for Deduction under s. 80HHC Upheld by Tribunal

Ashok Leyland Limited. & others Versus Joint Commissioner Of Income-tax.

The Tribunal held that 90% of gross receipts such as interest, commission, brokerage, rent, charges, etc., should be excluded from business profits for ... Profits Of The Business Issues Involved:1. Whether interest earned from fixed deposits with the bank is connected or interlinked with carrying on the assessee's business and, therefore, is eligible for deduction under s. 80HHC from the business profits after excluding 90 per cent under Expln. (baa) to s. 80HHC of the IT Act, 1961.2. Whether the receipts on account of interest, commission, brokerage, rent, charges, or any other receipt of a similar nature are to be excluded net or gross from such profits for the purpose of computation of deduction under Expln. (baa) to s. 80HHC of the IT Act, 1961.Issue-wise Detailed Analysis:Issue 1: Interest Earned from Fixed Deposits and its Connection to BusinessThe primary issue was whether the interest earned from fixed deposits, which were a precondition for obtaining loans, should be considered as business income and thus eligible for deduction under s. 80HHC. The learned counsel for the assessee argued that the interest earned on such deposits should be netted off against the interest paid to the bank, citing the Supreme Court's decisions in CIT vs. Bokaro Steel Ltd. and Karnal Co-operative Sugar Mills Ltd., which supported netting off interest in cases where the income was inextricably linked to business expenses. The jurisdictional High Court's decision in CIT vs. A.S. Nizar Ahmed & Co. was also cited, which held that deposits made as a precondition for credit facilities were inextricably linked to business and thus should be considered as business income.However, the Department argued that the interest income should be excluded from business profits as per cl. (baa) to Explanation to s. 80HHC. The Hon'ble jurisdictional High Court in CIT vs. V. Chinnapandi and K.S. Subbiah Pillai & Co. (India) (P) Ltd. vs. CIT supported this view, stating that 90 per cent of such receipts should be excluded from business profits without any further deductions.Issue 2: Gross vs. Net Exclusion of ReceiptsThe second issue was whether the exclusion of receipts like interest, commission, brokerage, rent, charges, etc., should be on a gross or net basis. The learned counsel for the assessee argued that only the net income (after deducting related expenses) should be excluded, citing the Special Bench decision in Lalsons Enterprises vs. Dy. CIT and the principle of mutuality and set-off recognized in commercial law.The Department, however, contended that as per cl. (baa) to Explanation to s. 80HHC, 90 per cent of the gross receipts should be excluded from business profits. The Hon'ble jurisdictional High Court in CIT vs. V. Chinnapandi and K.S. Subbiah Pillai & Co. (India) (P) Ltd. vs. CIT supported this interpretation, emphasizing that the legislature intended to exclude gross receipts to simplify the calculation of export profits.Conclusion:The Tribunal concluded that, according to cl. (baa) to Explanation to s. 80HHC, 90 per cent of the gross receipts in the nature of interest, commission, brokerage, rent, charges, etc., should be excluded from the business profits for the purpose of computing the deduction under s. 80HHC. The Tribunal also clarified that no further deductions related to these receipts are permissible, aligning with the jurisdictional High Court's decisions.Specific Appeals:- ITA Nos. 856/2000 and 1290/2001: The appeals by the Revenue were allowed, confirming that 90 per cent of the gross interest should be excluded.- ITA Nos. 1147/2001, 274/2003, 2344, 2345/2003, and 35/2003: These appeals were set aside to the AO to determine whether the interest income was business income or income from other sources, with appropriate exclusions to be made based on this determination.Result:The appeals were disposed of by confirming the exclusion of 90 per cent of gross receipts from business profits as per cl. (baa) to Explanation to s. 80HHC, and specific appeals were remanded to the AO for further determination.