TaxTMI 
TaxTMI 
2015 (2) TMI 365
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....he Act (for short the Clause). The business activity of the respondent was such that in every assessment year, it earned interest on the deposits made by it in the course of business on the one hand, and incurred liability to pay interest on the amount borrowed by it for that very purpose on the other hand. The respondent insisted that it is only the difference between the two, that deserves to be reduced from the profits and gains from profession or business, to the extent of 90%, under the Clause. In other words, it wanted the process of netting to be undertaken in this behalf, and to restrict the deduction to the net interest, and not the gross interest. The appellant on the other hand took the view that unless the respondent has borrowed the amount, on which it has been paying interest for the purpose of business; the corresponding interest cannot be taken into account, for this purpose. Basically, they insisted that netting cannot be undertaken and even if it is to be done, it should be confined only in respect of the amounts, that are borrowed for the purpose of business, and not otherwise. Orders of assessment on those lines were passed. The respondent filed appeals befor....
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....e untenable distinction between the deposits made through borrowed funds on the one hand and own funds of the appellant on the other hand, and the same is untenable under the Act. Learned counsel submits that the Commissioner as well as the Tribunal have taken into account, the real purport of the relevant provisions of law as well as the precedents on the subject; and arrived at just and proper conclusions. The controversy in this case is only about the deduction of interest under the Clause. To appreciate the same from the correct perspective, it becomes necessary to have a glance at the salient features of Section 80HHC of the Act. The provision itself runs into 8 closely printed pages. The main object is reflected under Sub- Section (1), which reads: 80HHC. Deduction in respect of profits 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, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduct....
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....y in this behalf was explained by this Court in M/s. Aurobindo Pharma Limited, Hyderabad vs. Commissioner of Income Tax (R.C.No.78 of 2000, dated 11.07.2014) as under: From a perusal of both the provisions referred to above, it becomes clear that the ratio between the turnover in respect of the exported goods on the one hand and the total turnover of the business carried by the assessee on the other hand would reflect the ratio between the profits of export and the rest of the business. This method appears to have been evolved with a view to cushion the uncertainity in one sector, with the profits earned in the other sector and vice versa. For instance, if the total turnover of the business of an assessee is Rs. 10,00,000/-, the turnover in respect of exported goods is Rs. 4,00,000/- and the company has earned total profit of Rs. 3,00,000/-, the profit earned through export shall be deemed to be 40% thereof, amounting to Rs. 1,20,000/-. This is irrespective of the actual profit that has been earned through export. The actual difficulty is experienced in arriving at the profits of the business. Indiscriminate posting of profits may result in loss to the revenue, since the prop....
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.... the exercise referable to the Clause is for the purpose of determining the profits and gains of business or profession, which happens to be a factor in the formula for determining the former. In a way, it is a process of weeding out the elements, which are alien to the activity of export. Interest is one such component, by which the profits and gains of business or profession are to be reduced by 90%. It hardly needs any emphasis that the profits and gains of a business are to be determined by following the procedure prescribed under Sections 28 to 42 of the Act. The resultant figure must be reduced to the extent of 90% of the components mentioned in Sub-clause (1). Even for the activity of business or profession, that qualifies for deduction under Section 80HH, it may become necessary for an assessee to pay interest on the funds borrowed, and sometimes to make deposits and earn corresponding interest thereon in a given assessment year. If the income in the form of interest on the deposits so made and the expenditure incurred in the form of interest paid on loans borrowed by the assesssee have become part of the exercise of determining the profits and gains, the same exercis....
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....ts separate treatment under Section 56 of the Act which is outside the ring of profit and gains from business and profession. It goes entirely out of the reckoning for the purposes of Section 80HHC. (v), (vi) & (vii) -------- (viii) The word 'interest' in Clause (baa) of the Explanation connotes 'net interest' and not 'gross interest'. Therefore, in deducting such interest, the AO will take into account the net interest i.e. gross interest as reduced by expenditure incurred for earning such interest. The decision of the Special Bench of the ITAT in Lalsons [(2004) 88 ITD 25 (Delhi)] [Sic] to this effect is affirmed. In holding as above, we differ from the judgments of the Punjab & Haryana High Court in Rani Paliwal [(2004) 268 ITR 220]and the Madras High Court in Chinnapandi [(2006) 282 ITR 389]and affirm the ruling of the Special Bench of the ITAT in Lalsons [(2004) 8 ITR 25 (Delhi)]. We are in agreement with the same. The only sentence, which we propose to added to Clause (i) is that by whatever terminology one may call it, it is the same component of interest that has gone into, while computing profits and gains of business or profession in wh....