TaxTMI 
TaxTMI 
TaxTMI 
2008 (7) TMI 595
X X X X Extracts X X X X
X X X X Extracts X X X X
....venience we are taking the facts as appearing in I.T.A. No. 298 of 2003 CIT v. Paprika Wear. 5. The assessee is a partnership firm, which had filed its return of income for the assessment year 1995-96 on October 27, 1995 declaring income of Rs. 41,16,376. The said return was processed under section 143(3)(a) of the Act. Thereafter the Assessing Officer proceeded to pass regular assessment under section 143(3) of the Act, vide order dated March 3, 1997. The Commissioner of Income-tax (hereinafter referred to "the CIT") was of the opinion that the order of the Assessing Officer was erroneous in so far as it was prejudicial to the interests of the Revenue. Thus he exercised the powers conferred on him under section 263 of the Act. 6. According to him, the Assessing Officer had failed to apply clause (baa) of the Explanation to sub-section (4A) of section 80HHC of the Act. Hence he directed notice to the assessee. 7. In response to the notice issued to the assessee, it submitted that the interest was earned on fixed deposits and the deposits were solely and exclusively for the purpose of business. Similar deductions have been allowed by the Assessing Officer for ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....by us. Thus before hearing the appeals on the merits, we have formulated the following substantial questions of law : "(1) Whether in the facts and circumstances of the case, the Commissioner of Income-tax was justified in invoking the powers conferred on him under section 263 of the Act, without specifically holding therein as to how the order of the Assessing Officer was erroneous and prejudicial to the interests of the Revenue ? (2) Whether on a true construction of the Explanation (baa) appended to sub-section (4A) of section 80HHC of the Act, interest, rent, commission earned by the assessee are to be deducted from the export profits or only net receipts, if any, after taking into account the payments made by the assessee for the purposes of computing deductions under section 80HHC of the Act ?" 11. The aforesaid substantial question of law at No. (1), would arise for our consideration in I. T. A. No. 298 of 2003 and I. T. A. No. 327 of 2003, whereas question (2) as formulated herein above would arise for consideration in I. T. A. No. 25 of 2003 only. 12. Taking up question (1), we have to first examine, if the Commissioner of Income-tax was jus....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... contained in sub-section (2), an order in revision under this section may be passed at any time in the case of an order which has been passed in consequence of, or to give effect to, any finding or direction contained in an order of the Appellate Tribunal, National Tax Tribunal, the High Court or the Supreme Court. Explanation.-In computing the period of limitation for the purposes of sub-section (2), the time taken in giving an opportunity to the assessee to be reheard under the proviso to section 129 and any period during which any proceeding under this section is stayed by an order or injunction of any court shall be excluded." 13. A bare reading of the aforesaid provision makes it abundantly clear that the Commissioner has power to call for and examine the record of any proceedings under the Act provided he is of the opinion that the order is erroneous in so far as it is prejudicial to the interests of the Revenue. Only thereafter notices can be directed to be issued to the assessee so as to call for his objections. 14. We have carefully gone through the order passed by the Commissioner in this regard. The order does not show or reflect any cogent and v....
X X X X Extracts X X X X
X X X X Extracts X X X X
....g been decided in favour of the assessee, which goes to the root of the matter and we may not be called upon to address question (2) at all. But as mentioned hereinabove, this question does not arise in I. T. A. No. 25 of 2003, in which only question (2) arises for consideration. Thus we are now addressing the second question. 20. To appreciate the legal position with regard to the applicability of the Explanation (baa) to the facts of the case, we reproduce in succeeding para relevant provisions of law, as applicable to the facts of the appeal. 21. As has been mentioned hereinabove section 80HHC was first inserted by the Finance Act, 1983 with effect from April 1, 1983, but it has undergone several changes so far, that is to say, 11 times it has been amended. The relevant part of the provisions which are applicable to the facts of this case as they exist, are mentioned here in below. "80HHC. Deduction in respect of profit retained for export business.-(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,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....orted in CIT v. V. Chinnapandi [2006] 282 ITR 389 settle the issue in favour of the Revenue. Reliance has also been placed on two judgments of the Supreme Court reported in CIT v. K. Ravindranath Nair [2007] 295 ITR 228 and Hero Exports v. CIT [2007] 295 ITR 454 (SC). In the matter of Rani Paliwal [2004] 268 ITR 220 only this much finding has been recorded by the Punjab and Haryana High Court which is reproduced hereinbelow (page 222) : "This issue relates to the inclusion of interest as part of the assessee's `business income' for working out the deduction claimed under section 80HHC of the Act. The total interest received by the assessee during the relevant assessment year was Rs. 6,33,454 and the total interest paid by the assessee was Rs.4,12,982. The Assessing Officer was of the view that 90 per cent. of the gross amount of interest of Rs.6,33,454 was liable to be deducted from the profits of the business for the purpose of deduction. He, therefore, reduced the quantum of deduction under section 80HHC of the Act accordingly. The Commissioner of Income-tax (Appeals), however, took a different view in appeal and allowed 90 per cent. of the amount of interest to be deduct....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the amount computed under any other head of income of that assessee. The reference to "such profits" in sub-clause (1) of clause (baa) can only be to the profits of the business computed under the head "Profits and gains of business or profession". Addition of prefix "the" to "profits" in clause (baa), while referring to the profits and gains of business or profession makes it clear that it is only the amounts already included in that computation which are now to be reduced to the extent of 90 per cent., if those items are included in sub-clause (1) of that definition . . . . In view of the above, we are of the view that 90 per cent. of the interest that is deductible for the claim under section 80HHC of the Act is from the gross interest received by the assessee and that the amount of interest paid by the assessee should not be deducted there from and, hence, we answer the above question in favour of the Revenue and against the assessee and allow the tax case filed by the Revenue. No costs." 28. Further the Delhi High Court in the matter of CIT v. Shri Ram Honda Power Equip [2007] 289 ITR 475 has taken a contra view after elaborately discussing the judgments of var....
X X X X Extracts X X X X
X X X X Extracts X X X X
....irely out of the reckoning for the purposes of section 80HHC. (v) Interest earned on fixed deposits for the purposes of availing of credit facilities from the bank, does not have an immediate nexus with the export business and therefore has to necessarily be treated as income from other sources and not business income. (vi) Once business income has been determined by applying accounting standards as well as the provisions contained in the Act, the assessee would be permitted, in terms of section 37 of the Act, to claim as deduction, expenditure laid out for the purposes of earning such business income. (vii) In the second stage, the Assessing Officer will deduct from the profits of the business computed under the head `Profits and gains of business or profession' the following sums in order to arrive at the `profits of the business' for the purposes of section 80HHC(3) : (a) 90 per cent. of any sum referred to in clauses (iiia), (iiib) and (iiic) of section 28, i.e., export incentives; (b) 90 per cent. of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits; and (c) profits of any branch, office, wa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ome misinterpretations and certain doubts. Moreover, certain genuine difficulties were also witnessed in certain types of transactions. The Finance Act has, therefore, amended section 80HHC in order to address to these problems." 31. Further attention has also been drawn to clause 32.10 and 32.11, which are also reproduced herein below : "32.10. The existing formula often gives a distorted figure of export profits when receipts like interest, commission, etc. which do not have element of turnover are included in the profit and loss account. 32.11. It has, therefore, been clarified that `profits of the business' for the purpose of section 80HHC will not include receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature. As some expenditure might be incurred in earning these incomes, which in the generality of cases is part of common expenses, ad hoc 10 per cent. deduction from such incomes is provided to account for these expenses." 32. In the light of this clarificatory explanation, Sri Indra Kumar, learned counsel submitted that ad hoc 10 per cent. deduction from such incomes is provided to account for ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....er and cannot be said to be a binding precedent. It was therefore submitted that the question with regard to consideration of the Explanation (baa) was not at all there before the Supreme Court in the matter of Ravindranathan Nair (supra). 39. Similarly in the matter of Hero Exports, the Supreme Court was essen-tially dealing with section 80HHC(3)(b) and Explanation (e). It did not have the occasion to consider clause (baa) of the Explanation appended to section 80HHC. Thus the aforesaid two judgments of the Supreme Court do not render help to the Revenue, to arrive at a conclusion in its favour. 40. The relevant part of the order of the Supreme Court in the matter of Hero Exports [2007] 295 ITR 454 is reproduced hereinbelow, which makes it clear that it was not dealing specifically with clause (baa) appended to the Explanation (page 465) : "We make it clear that we are not reading Explanation (baa) into section 80HHC(3)(b). What we say is as a guidance value/factor, 10 per cent. of the total other income of Rs. 1,60,000 would be fair estimate. This guidance value is not flowing from clause (baa) but from the scheme of section 80HHC read with the Memorandum to the ....