TaxTMI 
TaxTMI 
2010 (7) TMI 631
X X X X Extracts X X X X
X X X X Extracts X X X X
....sessing authority by his order dated January 25, 2001, held that excise duty and sales tax should be added back when computing the total turnover for allowing deduction under section 80HHC of the Act. That 90 per cent. of the gross agency commission should be taken to compute "profits of business". The bad debt written off was disallowed as the assessee had failed to prove that it was a trade debt, it had become bad and it was written off as irrecoverable in its accounts. Aggrieved by the said order, the assessee preferred an appeal. The appellate authority upheld the contention of the assessee who allowed the appeal and granted the relief sought for by setting aside the order of the assessing authority to that extent. Aggrieved by the said order, the Revenue preferred an appeal to the Tribunal. The Tribunal by its order dated August 17, 2004, has affirmed the order of the appellate authority and dismissed the appeal. Aggrieved by the same, the Revenue is before us. The appeal was admitted to consider the following substantial questions of law : (1) Whether the appellate authorities were correct in holding that for the purpose of computation of deduction under section 80H....
X X X X Extracts X X X X
X X X X Extracts X X X X
....such turnover. Since excise duty sales tax did not involve any such turn over, such taxes had to be excluded. Commission, interest, rent, etc. do yield profits, but they do not partake of the character of turnover and, therefore, they were not includible in the `total turnover' . . . . if so, then excise duty and sales tax also cannot form part of the `total turnover' under section 80HHC(3), otherwise the formula becomes unworkable . . . sales tax and excise duty also do not have any element of `turnover' which is the position even in the case of rent, commission, interest etc. It is important to bear in mind that excise duty and sales tax are indirect taxes. They are recovered by the assessee on behalf of the Government. Therefore, if they are made relatable to exports, the formula under section 80HHC would, become unworkable. This reasoning is confined to the workability of the formula in section 80HHC(3) as it stood at the material time." 7. In the light of the aforesaid authoritative pronouncement of the apex court, the appellate authority and the Tribunal were justified in setting aside the order passed by the assessing authority and holding that the excise duty and ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ins of business or profession. In arriving at the profits and gains section 28 stipulates that the income referred to of section 28 shall be computed in accordance with the provisions of sections 30 to 43(d) which in substance provides for the deductions to be made out of total income. Section 37 deals with expenses to be deducted which are not provided for in sections 30 to 36. It provides that, any expenditure not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". 13. In this background of this provision, in the instant case the assessee has income from exports, income from manufacturing activities within the country and also income from commission. In so far as the income from commission is concerned, if any expenses is expended in earning the said income under section 37 of the Act, the said expenses is deductible and after such deduction, the amount arrived at would become part of the profits and gains of business. Therefore, the questi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....oss receipts but on profits and gains. The charge is not on gross receipts but on profits and gains properly so-called. Gross receipts or sale proceeds, how-ever, include profits . . . Therefore, schematic interpretation for making the formula in section 80HHC workable cannot be ruled out. Similarly, purposeful interpretation of section 80HHC which has undergone so many changes cannot be ruled out, particularly, when those legislative changes indicate that the Legislature intended to exclude items like commission and interest from deduction on the ground that they did not possess any elements of `turnover' even though commission and interest emanated from exports . . . This is because the very basis for computing section 80HHC deduction was `business profits' as computed under section 28, a portion of which had to be apportioned in terms of the above ratio of export turnover to total turnover. Section 80HHC(3) was a beneficial section. It was intended to provide incentives to promote exports. The incentive was to exempt profits relatable to exports. In the case of combined business of an assessee having export business and domestic business the Legislature intended to have a formul....
X X X X Extracts X X X X
X X X X Extracts X X X X
....; 18. The Delhi High Court had an occasion to consider a similar provision in the case of CIT v. Shri Ram Honda Power Equip. [2007] 289 ITR 475 (Delhi) where it was held as under : "The idea of section 80HHC is to ensure that the exporter gets the benefit of the profits derived from export and not to depress the profit further. Therefore, it can only be the net interest which can be included in the profits. If netting were not to be permitted the result would be that the profits of the exporter would be depressed by an item that is expenditure incurred on earning interest, which does not form part of the profit at all. This could not have been the intention of the Legislature. Explanation (baa) is relatable only to clause (a) of section 80HHC(3) and not to clause (b) thereof. These operate in distinct areas and no inter-mixing is contemplated. Hence the word `interest' in clause (baa) to the Explanation in section 80HHC is indicative of `net interest', i.e., gross interest less the expenditure incurred by the assessee in earning such interest. To summarise the conclusions : (i) In computing what the profits derived from exports for the purposes of section 80H....
X X X X Extracts X X X X
X X X X Extracts X X X X
....similar nature included in such profits ; and (c) profits of any branch, office, warehouse or any other establishment of the assessee situate outside India. (viii) The word `interest' in clause (baa) of the Explanation connotes `net interest' and not `gross interest'. Therefore, in deducting such interest, the Assessing Officer will take into account the net interest, i.e., gross interest as reduced by expenditure incurred for earning such interest. (ix) Where, as a result of the computation of profits and gains of business and profession, the Assessing Officer treats the interest receipt as business income, then deduction should be permissible, in terms of Explanation (baa) of the net interest i.e., the gross interest less the expenditure incurred for the purposes of earning such interest. The nexus between obtaining the loan and paying interest thereon (laying out the expenditure by way of interest) for the purpose of earning the interest on the fixed deposit, to draw an analogy from section 37, will require to be shown by the assessee for application of the netting principle." 19. In fact, the aforesaid judgment has been followed by a Division Bench of this court in th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....it of the profits derived from export and not to depress the profit further. Therefore, it can only be the net commission, interest, rent, etc., which can be included in the profits. If netting were not to be permitted the result would be that the profits of the exporter would be depressed by an item that is expenditure incurred on earning commission, interest, rent, etc., which does not form part of the profit at all. This could not have been the intention of the Legislature. Hence the words "commission, interest, rent, etc.", in clause (baa) to the Explanation in section 80HHC is indicative of "net interest", i.e., gross amount less the expenditure incurred by the assessee in earning such amount. Where, as a result of the computation of profits and gains of business and profession, the Assessing Officer treats the commission, interest, rent receipt as business income, then deduction should be permissible, in terms of Explanation (baa) of the net commission, interest, rent, etc., i.e., the gross commission, interest, rent, etc., less the expenditure incurred for the purposes of earning such commission, interest, rent, etc. 21. In the light of the aforesaid discussion, we....