TaxTMI 
TaxTMI 
1999 (12) TMI 114
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.... to the extent of 1/5th of total claim i.e. Rs. 12,125. b. Out of depreciation on Motor car to the extent of 1/5th of total claim. c. Out of telephone expenses to the extent of Rs. 20,306." The Revenue has raised the following ground in its appeal: "On the facts and in the circumstances of the case, the ld. CIT(A) has erred in directing to consider the receipts from sale of export licence commission from sale of STC export counter, commission of shipping freight and processing charges of job work for working out the quantum of deduction under section 80HHC, ignoring the provisions of section 80HHC(1) which approves deduction only on profit derived from export of goods and merchandise only." 3. The assessee claimed deduction under section 80HHC at Rs. 7,25,881. Such a claim was made for the first time while filing the revised return which was revised on account of treating the amount of CCS as revenue receipt. The assessee submitted auditor's report in the prescribed form. The Assessing Officer disallowed the aforesaid claim on the ground that following items of income/receipt will not form part of "profits and gains of business" for purposes of deduction under sectio....
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....p; ------------- Total 10,24,132 ------------- The ACIT had further deducted Rs. 2,43,535 out of the profits of the business being the amount of deduction under section 32AB. This had resulted as under:  ....
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....- (-) 22.592 ------------ &....
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....p; 2,70,980.55 (b) To Others (including Rs. 35,000 on its demands) 9,90,582.12 --------------- 12,61,562.67 Bank Commission 1,71,965.65 ---------------  ....
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....ible for grant of deduction under section 80HHC of the Act. He submitted that the present appeal relate to assessment year 1989-90. The amendment so made from assessment year 1992-93 also clearly supports the assessee's contention with regard to interest receipt. Such interest received by the assessee should be treated as part of the profits and gains of business as contemplated in sub-section (3) of section 80HHC. 8. The ld. counsel drew our attention to section 80HHC(1) which provides that assessee engaged in the business of export is entitled to deduction of the profits derived by the assessee from the export of goods. Such profits from exports are required to be computed in accordance with and subject to the provisions of section 80HHC. He pointed out that such is the mandate of section 80HHC(1). 8.1 Section 80HHC(3) prescribes the mode of computation of profit derived from export business. The provisions of section 80HHC(3) as it existed prior to its amendment by the Finance Act, 1990 and which existed in the relevant year under consideration was brought to our notice by the ld. counsel, Shri Jhanwar. He pointed out that if the entire turnover of an assessee exclusively ....
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.... income. The Assessing Officer has, in fact, assessed the entire income under one head i.e. "income from business". The ld. counsel also contended that the ratio of judgment of Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 227 ITR 172(1) will not apply to the facts of this case as there the interest income relates to period prior to commencement of business and the question for consideration before the Hon'ble Supreme Court was entirely different as to whether interest income in that case was of revenue nature liable to tax or it could be set off against the liability to pay interest on funds borrowed for the purpose of acquiring the capital asset before commencement of the business of the assessee. The issue was not relating to computation of exports profits eligible for grant of deduction under section 80HHC. 10. The ld. DR submitted that interest earned by the assessee on temporary deposit on surplus funds is assessable as income from other sources as held by the Hon'ble Supreme Court in Tuticorin Alkali Chemicals & Fertilizers Ltd.'s case. The view taken by the CIT(A), is therefore, perfectly valid and justified. He relied u....
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.... CIT(A) should be set aside in relation to the Ground of appeal raised by the Revenue. 12. We have considered the submissions made by the ld. representatives of the parties and have examined the relevant provisions of law. We have also carefully gone through the orders of the ld. departmental authorities as well as the judgments, which were cited by the ld. representatives of both sides. 13. In order to appreciate the rival contentions, it is imperative to reproduce the relevant provisions of section 80HHC. Section 80HHC(1) and (3) as it existed in relevant year are reproduced below:- "(1) Where an assessee, being an Indian company or a person (other than a company) resident in India, is engaged in the business of export out of India of any goods or merchandise to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of the (profits) derived by the assessee from the export of such goods or merchandise." "(3) For the purpose of sub-section (1), profits derived from the export of goods or merchandise out of India shall be: (a) in a case where the ....
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....dance with the provisions of this section, which takes us to sub-section (3) of section 80HHC. Section 80HHC(3) as it existed in assessment year 1989-90 provides that in a case where the business carried on by the assessee consist exclusively of the export out of India of the eligible goods, the entire profits of business as computed under the head "Profits and gains of business" shall be eligible for deduction under this section. In a case where the assessee's business did not consist exclusively of export out of India of eligible goods, the same shall be the amount which bears to the profits of the business (as computed under the head "profits and gains of business"), the same proportion as the amount of the export turnover of business bears to the total turnover. In other words, the amount of deduction allowable under section 80HHC in a case, where the assessee's business partly consist of exports shall be worked out as under:- Export Turnover Profits derived in the business &nbs....
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....been held by different Benches that the word "receipt" used in Explanation (baa) would mean the net receipts and not the gross receipts. It is clear from the plain language of the said Explanation (baa) that 90 per cent of interest receipt which is included in profits of business, will be excluded. What is included in profits is the net receipt of interest and not the gross receipt. Such a view has been taken by the ITAT, Mumbai in the case of Pink Star a copy of the relevant pages of the said decision has been submitted by the assessee during the course of hearing. The said decision was rendered by Hon'ble Sh. Pradeep Parikh AM, sitting with Hon'ble Sh. M.A. Bakshi. This decision contains elaborate and convincing reasons in support of the conclusion that credits and debits of the same nature should be netted out against each other in order to avoid any distortion in the profits for the purposes of grant of deduction under section 80HHC. In that case the assessee had shown net debit of Rs. 34,24,095 as interest paid to the Bank. No credit on account of interest was reflected in the profit and loss account. The assessee submitted the details of interest to the Assessing Officer whic....
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....opinathan [1998] 229 ITR 801 has held as under:- "That the assessee was to be assessed on the interest received as reduced by the amount of interest paid on the loan taken on the security of such deposit, and that the Tribunal was right in holding: (a) that the act of making the deposit and the act of borrowing on such deposit could not be viewed as representing two different transactions; (b) that there was thus a nexus between the deposit and the borrowing; and (c) that the principle of mutual dealings could be inferred". 15. In the present case the total interest payments and bank commission was Rs. 14,33,528. The amount of interest received by the assessee was only Rs. 1,27,446. The assessee has debited the net amount of Rs. 13,06,081 as financial expenses in the profit and loss account. The Assessing Officer has computed the entire income under only one head of income. He has not assessed the interest receipt of Rs. 1,27,446 under any separate head nor under the head "income from other sources". The necessity of netting the interest debit and interest credit or netting the receipt and expenditure of same nature can be more aptly explained by the following illustrations:-....
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.... of an incentive provision like 80HHC is that the interest receipt which has a direct nexus with interest payments, should be adjusted against each other and only the net amount can be said to have been included in the amount of net profit. In the aforesaid illustration, the interest payments are Rs. 20.00 lakhs and the interest receipts are Rs. 15.00 lakhs. No interest income can therefore, be reduced from the amount of net profits eligible for grant of deduction under section 80HHC of the Act. 16. We are aware about the decision of Hon'ble Supreme Court in Tuticorin Alkali Chemicals & Fertilizers Ltd.'s case. The facts of that case are entirely different. In that case the interest income which was sought to be adjusted against interest expenditure of capital nature relating to the period prior to commencement of business was held to be liable to tax under the head "income from other sources". The interest expenditure pertaining to the period prior to commencement of business is required to be capitalised and such interest had to be added to the cost of assets like plant and machinery etc. The interest income received during pre-production period, which is clearly of a revenue ....
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....d the order of the CIT(A) in relation to this ground. 21. After considering the submissions made by the ld. representatives of both the parties, we are of the view that it will be just and proper to direct the Assessing Officer to restrict the disallowance to Rs. 4,000 only out of telephone expenses claimed by the assessee. The Assessing Officer is directed to grant relief accordingly. 22. We will now deal with the ground raised by the Revenue in its appeal. As a matter of fact the entire discussion relating to interpretation of section 80HHC(1) read with section 80HHC(3) equally applies to the ground raised by the Revenue in their appeal. We have already held in the earlier part of this order while dealing with the Ground No. 1 of assessee's appeal that for the purpose of computing deduction under section 80HHC, the first requirement is to compute the profits of the business assessable under the head "profits and gains of business" in accordance with the relevant provisions of the Act. If the business of the assessee consists exclusively of export of eligible goods, 100 per cent deduction of such profits assessable under the head "profits and gains of business" will be allow....
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....export profits within the meaning of section 80HHC(1) read with section 80HHC(3). The CIT(A) has rightly directed the Assessing Officer to take the said income into consideration for working out deduction under section 80HHC. 24. The next item of Rs. 2,19,190 being commission received from STC on export counter trade is also a part of business income of the assessee. Such commission was received by the assessee from State Trading Corporation in respect of export business carried out through the STC. Such a receipt is, assessable as business income under section 28. The CIT(A) has, therefore, rightly directed the Assessing Officer to take this item also into consideration for purpose of computing deduction allowable under section 80HHC. 25. Likewise the commission on shipping freight, aarth, claims and octroi refund to the tune of Rs. 51,241 are also receipts derived by the assessee in the ordinary course of business. Such receipts also form part of the business income and the same is required to be taken into consideration for computing the profits and gains of business under the relevant provisions of Income-tax Act, 1961. The CIT(A), has therefore, rightly held that such re....