TaxTMI 
TaxTMI 
2016 (1) TMI 809
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.... the Act and the assessee also claimed deduction under Section 80HHC on this entire amount of deemed income. However, the Assessing Officer ('A.O.' ) vide his order passed under Section 143(3) dated 29.06.2005 held that under clause (baa) of the Explanation to Section 80HHC, ninety percent of the amount of deemed income had to be reduced from the profits of business since such income was of a similar nature as brokerage, commission, interest etc. and was not derived from the exports made by the assessee. 3. The assessee filed an appeal against the assessment before the Commissioner of Income Tax (Appeals), Shimla ('CIT (A)', who vide his order dated 17.01.2006 passed in Appeal No.IT/169/2005-06/SML confirmed the assessment made by the A.O. holding that such deemed income is not derived from exports in view of the judgments of the Hon'ble Supreme Court in the cases of CIT vs. Sterling Foods (237 ITR 579) and Pandian Chemicals vs. CIT (262 ITR 278). 4. The assessee thereafter filed further appeal before the ITAT and the ITAT vide impugned order passed in ITA No.211/Chandi/2006 dated 31.07.2008 allowed the assessee's appeal. 5. It is against the afores....
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....t House or a Trading House, as the case may be) issues a certificate referred to in clause (b) of sub-section (4A), that in respect of the amount of the export turnover specified therein, the deduction under this sub-section is to be allowed to a supporting manufacturer, then the amount of deduction in the case of the assessee shall be reduced by such amount which bears to the total profits derived by the assessee from the export of trading goods, the same proportion as the amount of export turnover specified in the said certificate bears to the total export turnover of the assessee in respect of such trading goods. (1A) Where the assessee, being a supporting manufacturer, has during the previous year, sold goods or merchandise to any Export House or Trading House in respect of which the Export House or Trading House has issued a certificate under the proviso to sub-section (1), 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 to the extent of profits, referred to in sub-section (1B), derived by the assessee from the sale of goods or merchandise to the Export House or Tradin....
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....o be export out of India of such goods and merchandise and the value of such goods or merchandise declared in the shipping bill or bill of export as referred to in sub-section (1) of section 50 of the Customs Act, 1962 (52 of 1962), shall, for the purposes of this section, be deemed to be the sale proceeds thereof. (3) For the purposes of sub-section (1),- (a) where the export out of India is of goods or merchandise manufactured or processed by the assessee, the profits derived from such export shall be the amount which bears to the profits of the business, the same proportion as the export turnover in respect of such goods bears to the total turnover of the business carried on by the assessee; (b) where the export out of India is of trading goods, the profits derived from such export shall be the export turnover in respect of such trading goods as reduced by the direct costs and indirect costs attributable to such export; (c) where the export out of India is of goods or merchandise manufactured or processed by the assessee and of trading goods, the profits derived from such export shall,- (i) in respect of the goods or merchandise manuf....
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....mission Scheme: Provided also that in the case of an assessee having export turnover exceeding rupees ten crores during the previous year, the profits computed under clause (a) or clause (b) or clause (c) of this sub-section or after giving effect to the first proviso, as the case may be, shall be further increased by the amount which bears to ninety per cent of any sum referred to in clause (iiie) of section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee, if the assessee has necessary and sufficient evidence to prove that,- (a) he had an option to choose either the duty drawback or the Duty Free Replenishment Certificate, being the Duty Remission Scheme; and (b) the rate of drawback credit attributable to the customs duty was higher than the rate of credit allowable under the Duty Free Replenishment Certificate, being the Duty Remission Scheme. Explanation.-For the purposes of this clause, "rate of credit allowable" means the rate of credit allowable under the Duty Free Replenishment Certificate, being the Duty Remission Scheme calculated in the manner as may be notified by t....
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....total turnover of the business carried on by the assessee. (4) The deduction under sub-section (1) shall not be admissible unless the assessee furnishes in the prescribed form, along with the return of income, the report of an accountant, as defined in the Explanation below sub-section (2) of section 288, certifying that the deduction has been correctly claimed in accordance with the provisions of this section: Provided that in the case of an undertaking referred to in subsection (4C), the assessee shall also furnish along with the return of income, a certificate from the undertaking in the special economic zone containing such particulars as may be prescribed, duly certified by the auditor auditing the accounts of the undertaking in the special economic zone under the provisions of this Act or under any other law for the time being in force. (4A) The deduction under sub-section (1A) shall not be admissible unless the supporting manufacturer furnishes in the prescribed form along with his return of income,- (a) the report of an accountant, as defined in the Explanation below sub-section (2) of section 288, certifying that the deduction has been c....
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.... customs station as defined in the Customs Act, 1962 (52 of 1962); (ba) "total turnover" shall not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act, 1962 (52 of 1962): Provided that in relation to any assessment year commencing on or after the 1st day of April, 1991, the expression "total turnover" shall have effect as if it also excluded any sum referred to in clauses (iiia), (iiib), (iiic), (iiid) and (iiie) of section 28; (baa) "profits of the business" means the profits of the business as computed under the head "Profits and gains of business or profession" as reduced by- (1) ninety per cent of any sum referred to in clauses (iiia), (iiib), (iiic), (iiid) and (iiie) of section 28 or of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits; and (2) the profits of any branch, office, warehouse or any other establishment of the assessee situate outside India; (bb) [***] (c) "Export House Certificate" or "Trading House Certificate" means a valid ....
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....ndependent incomes" constituted part of the gross total income, these had to be excluded from gross total income because such receipts had no nexus with the export turnover. 11. The Hon'ble Apex Court further observed that processing charges, which are part of gross total income, form an item of independent income like rent, commission, brokerage, etc., and, therefore, 90% of the processing charges have also to be reduced from the gross total income to arrive at the business profits and, therefore, it has also to be included in the total turnover in the formula for arriving at the business profits in terms of the clause (baa) of the Explanation to section 80HHC(3). It was further held by the Hon'ble Supreme Court that:- "In the above formula there existed four variables, namely, business profits, export turnover, total turnover and 90 per cent. of the sums referred to in clause (baa) to the said Explanation. In the computation of deduction under section 80 HHC all four variables had to be taken into account. All four variables were required to be given weightage. The substitution of section 80 HHC(3) secures profits derived from the exports of eligible goods. Th....
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....the four variables one has to ascertain whether the receipt has an attribute of export turnover." 12. What can be deduced from the judgment in K. Ravindranathan Nair's case (supra) is that any independent income which is not derived from the export activities in terms of Section 80 HHC (2) of the Act but is otherwise assessed as business income, 90% of such receipts have to be reduced from the profits of the business in terms of Explanation (baa) to Section 80 HHC of the Act. 13. Now, we proceed to deal with the precedents as relied upon by learned counsel for the assessee to canvass that since all liability incurred by the assessee-company in respect of the interest had infact earlier been allowed as deduction while computing the profit of the export business, then merely because such liability ceases to exist, the same will not undergo a change in its nature and become an independent income. 14. In Commissioner of Income-Tax versus Shri Ram Honda Power Equip [2007] 289 ITR 475 (Delhi), after taking into consideration the entire law on the subject, the learned Division Bench of Delhi High Court summarized the legal position as follows:- "To summarise our conc....
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....t the 'profits of the business' for the purposes of Section 80HHC(3): (a) 90% of any sum referred to in Clauses (iiia), (iiib) and (iiic) of Section 28 i.e. export incentives; (b) 90% 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, warehouse or any other establishment of the assessed 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 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] 8 ITR 25 (Delhi) 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). (ix) Where, as a result of the computation of pr....
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.... Thus, profits of the business of an assessee will have to be first computed under the head "profits and gains of business or profession" in accordance with the provisions of Sections 28 to 44-D of the Act. In the computation of such profits of business, all receipts of income which are chargeable as profits and gains of business under Section 28 of the Act will have to be included. Similarly, in computation of such profits of business, different expenses which are allowable under Sections 30 to 44-D have to be allowed as expenses. After including such receipts of income and after deducting such expenses, the total of the net receipts are profits of the business of the assessee computed under the head "profits and gains of business or profession" from which deductions are to be made under clauses (1) and (2) of Explanation (baa). 18. It was held that under clause (1) of Explanation (baa), ninety per cent of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in any such profits are to be deducted from the profits of the business as computed under the head "profits and gains of business or profession". The expres....
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....e assessee as computed under the head "profits and gains of business or profession", 90% of such quantum of the receipt of interest or rent will not be deducted under clause (1) of Explanation (baa) to Section 80 HHC. In other words, 90% of not the gross rent or gross interest but only the net interest or net rent which has been included in the profits of business of the assessee as computed under the head "profits and gains of business or profession" is to be deducted under clause (1) of Explanation (baa) to Section 80 HHC for determining the profits of the business. 21. Now what emerges from the aforesaid exposition of law is that as per Section 80 HHC deduction is to be allowed from the profits derived by the assessee from the exports of goods or merchandise while computing the gross total income and the object of this Section is to grant an incentive to earners of foreign exchange and the matter, therefore, essentially has to be considered with reference to that object. Under sub-section (3) of Section 80 HHC, the mechanism for determination of profits derived from export of goods or merchandise has been prescribed for the purposes of sub-section (1). Clause (a) thereof deal....