TaxTMI 
TaxTMI 
2023 (6) TMI 1363
X X X X Extracts X X X X
X X X X Extracts X X X X
.... jewellery and precious metals, coal and hydrocarbons and general trade. Total sales during the previous year was Rs.62259544317/- as against Rs.72,436,477,766 /- in the preceding year. The return was accompanied with audited balance sheet, P&L account, Tax Audit Report u/s 44AB and certificate for claim u/s 80HHC. The case was selected for scrutiny. The AO had recomputed the total income and which was challenged and the appeal was partly allowed by order dated 17.03.2006. 3. The assessee has come in appeal raising following grounds of appeal :- 1. "That on the facts and in in the circumstances of the case and in law the order dated 17.03.2006 passed by the learned CIT(A) is bad in law and void ab initio. 2. That on the facts and circumstances of the case, the Ld. CIT(A) erred in law in upholding the stand of AO that interest income of Rs.37,50,64,281/- and dividend income (MTPL) of Rs.97,70,591/- are "income from other sources" thereby denying the deduction admissible u/s 80 HHC. 3. That the learned CIT(A) erred in law and in facts of the case in holding that income of Rs. 18,59,87,838/- classified as other income, though held as "Business Income" was not to be considered....
X X X X Extracts X X X X
X X X X Extracts X X X X
....for deciding afresh. 5. Miscellaneous application No. 276/Del/2007 was filed and the question of interest received on loans and advances to the staff was sought to be revisited in the light of judgment in Maruti Udyog Ltd. vs. DCIT 92 ITD 119. The bench had considered the submissions and made certain amendments in the directions which were issued to the Assessing officer to consider the assessee's claim afresh. 6. However, the ground no. 4 as raised in the appeal was found to be inadvertently left to be decided and considering the same to be error apparent from the record. The order dated 27.04.2007 was recalled to the limited extent of deciding the ground no. 4 with regard to the exclusion of other incomes. Thereafter again M.A. bearing no. 107/Del/2008 was filed which was disposed off by order dated 13.03.2009 and it was observed that there has been typographical mistake and the order dated 30.11.2007 was recalled to the extent of deciding grounds no. 3 to 6. Accordingly now ground no. 3 to 6 are required to be decided. 7. Further, Additional grounds of appeal were filed by the assessee on 25.05.2012 raising following additional ground :- "1. That the assessing officer erred....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e computing "profits of the business" in terms of clause (baa) of Explanation to section 80HHC of the Act. It was submitted that sub-section 1 of section 80HHC of the Act provides that the assessee shall, in accordance with and subject to provisions of the section, be allowed deductions of the profits derived by the assessee from the export of goods and sub-section (3) of section 80HHC of the Act statutorily prescribed what constitutes "profit derived from exports" and an artificial formula is provided provided in sub-section 3 of section 80HHC of the Act to determine the 'profits derived by an assessee from export of goods'. It was submitted that the CBDT Circular no. 564 dated 5th July, 1990 explained the effect of amendments made by the Finance Act, 1988 and which had come into effect from 1.4.89 and the amendment brought by Finance Act, 1990 which had come into effect from 1.4.91. It was submitted that this circular makes it clear that for the purpose of allowing deduction u/s 80HHC of the Act " Profit derived from export of goods or merchandise" has to be adopted as statutorily defined in sub section 3 of Section 80HHC. Ld. Counsel submitted that the board clarified that sub-s....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Sterling Foods, Mangalore, 237 ITR 579, to hold the disputed incomes to be not derived from export. In these two judgments, it was primarily held that the expression "attributable to" was wider in import than the expression "derived from". 14. To understand and examine, how far and fair the Ld. AO was, to rely these two judgments alone and reach a conclusion the first thing that this Bench will like to consider is the CBDT Circular no. 564 dated 5th July, 1990 and relevant here is judgment of Hon'ble Supreme Court in M/S Mysodet (P) Ltd vs Commr.Of Income Tax,Bangalore, CIVIL APPEAL NO. 5475 OF 2008 (Arising out of SLP(C) No. 7323 of 2007) decided on 3 September, 2008 where CBDT Circular dated 5.7.1990 CBDT was relied and Hon'ble Court quoted para 4, 6 and 9 of the Circular as below; "4. Sub-section(3) of section 80HHC statutorily fixes the quantum of deduction on the basis of a proportion of the profits of business under the head "Profits and gains of business or profession" irrespective of what could strictly be described as "profits derived from the export of goods or merchandise out of India". The deduction is computed in the following manner :- Profit of the business x ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....High Court has concluded "In computing what the profits derived from exports for the purposes of 80HHC(1) read with 80HHC(3) are, the nexus test has to be applied to exclude that which does not partake of profits that can be said to have been derived from the business of exports." 16. Reference is also relevant to the judgment of the Hon'ble Bombay High Court in Commissioner Of Income-Tax vs Bangalore Clothing Co. 2003 260 ITR 371 Bom, wherein Hon'ble High Court made it obligatory on the Assessing Officer to ascertain whether receipt of were a part of operational income and held; "14. We do not find any merit in the argument advanced on behalf of the Department. In this case, we are concerned with profits from the business of exports of goods manufactured by the assessee. Therefore, the export profits were required to be computed in the ratio of export turnover to total turnover as contemplated by the above formula. Explanation (baa) was introduced into the Act by the Finance (No. 2) Act, 1991, with effect from April 1, 1992. Under the Circular of the Central Board of Direct Taxes bearing No. 621, dated December 19, 1991 (see [1992] 195 ITR (St.) 154), it has been stated that th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....charges were received for a seasonal activity which was not an integral part of the manufacturing activity. Therefore, the test to be applied in all such matters is, whether interest, service charges, commission accrue out of the main business activity of the company and whether they were operational income. The case of K. K. Doshi and Co. [2000] 245 ITR 849 (Bom) shows, that service charges of Rs. 19.60 lakhs did not represent operational income and, therefore, came within Explanation (baa). However, we find that the Department just looks at the nomenclature of the receipt and if it finds that the nomenclature is rent, interest, commission then without any further inquiry into the nature of business, the Department invokes Explanation (baa) which is not the purpose and the object of that Explanation. In the present case, the receipt in question is labour charges. However, this nomenclature may not be accurate. In the present case, the assessee is a manufacturer and exporter of garments. In the present case, the Tribunal has recorded a finding of fact which is not challenged, namely, that there was no difference between the activities relating to export business carried on by the a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d that job processing activity was linked to the manufacturing activity of the assessee. In the circumstances, on the facts, the judgments cited by the Department do not apply to this case. Lastly, we may point out that, in this case, there is no challenge to the findings of facts recorded by the Tribunal in relation to the processing activity forming part of the manufacturing activity of the assessee." 17. Then Hon'ble Rajasthan High Court, in M/S. Reliance Trading Corporation v. The Ito, Ward No. 2(3), Jaipur & Anr. 2015 ITR 376 53 was considering the question; "(3) In case the assessee is not earning income in convertible foreign exchange by way of an interest on the money advanced, even then, whether the assessee is eligible for deduction under section 80 HHC of the Act?" 17.1 Hon'ble Rajasthan High Court considered the Judgment of Hon'ble Kerala High Court in Ravindranathan Nair Case (supra) and while acknowledging the proximate nexus test, held in para 37; "37. In sub-section (3) of Section 80HHC of the Act, the words used are, "derived from". In our view, the words "derived from", are of restricted meaning, and are not as wide as are "attributable to". The 'stand-alo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....expenses of Rs. 18,59,87,838/- classified as "other income" and though held as "Business Income" but not considered for the purpose of working out deduction u/s 80 HHC. Ld AO merely mentioned that these incomes are not derived from the export. No reason is mentioned except reliance of two Judgments. Nothing is discussed as to how these items of income have no nexus with the earning of export so as to be left out from working of deduction u/s 80HHC. The Ld AO was required to examine them in context to the business activity of the assessee so as to hold that these incomes are not operational income and do not have element of turnover. Merely on the basis of nomenclature of the receipt the incomes were considered 'business income' but not derived from export, so not eligible for working out the deduction u/s 80HHC. 20. Even otherwise, this distinction in income based on use of expression "attributable to" and "derived from" is not of any significance in the present case where Ld. AO has himself concluded that these incomes are part of "business income". As the Ld AO though held these disputed head as "Business Income" but has not considered them for the purpose of working out deducti....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nguished in the case of Bangalore Clothing Co. (supra). In the case of Bangalore Clothing Co. (supra), it is held that the AO must ascertain the nature of receipt in each case independently. Interest income may or may not be out of business activity. If it is not part of operational business income, then, the AO would have been justified in excluding the same for the purpose of deduction under Section 80HHC of the Act. However, in the present case, the AO has accepted that the interest income received from customers as well as sales-tax set off are assessable under the head 'Profits and gains of business or profession'. Therefore, having accepted that the said income as part of the business profit, the same could not be excluded from business profits while calculating deduction under Section 80HHC of the Act." 21. Next it can be appreciated that Ld. AO has invoked clauses (1) and (2) of Explanation (baa) of Section 80HHC to deduct 90% of these incomes to arrive at adjusted profit for the purpose of computation of deduction u/s 80HHC. However, every income or receipt is not subject to this concept of proportanalism. Tribunal Chennai Bench in Kadri Mills (Cbe) Ltd. vs Joint....
X X X X Extracts X X X X
X X X X Extracts X X X X
....a) and their treatment, it was held; "9. Explanation (baa) extracted above states that "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 the receipts of the nature mentioned in clauses (1) and (2) of the Explanation (baa). 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 provisions of Section 28 to 44D 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 44D 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 made under clauses (1) and (2) of Explanation (baa). 10. Under Clause (1) of Explanation....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of Explanation (baa) to Section 80HHC for determining the profits of the business. But no such exercise was taken up by the Ld. AO 24. Therefore the wholesome effect of above is that Ld AO and so did the learned CIT(A) erred in law and in facts of the case in holding that income of Rs. 18,59,87,838/- classified as other income, though held as "Business Income" was not to be considered for the purpose of working out deduction u/s 80 HHC. Consequently, the ground number 3 is decided in favour of the assessee. Ld. AO shall recompute the deduction u/s 80HHC, by considering these receipts without deducting 90% of these, while computing adjusted profits. 25. In regard to ground no. 4 to 6, on behalf of the assessee the Ld Counsel submitted that as assessee is the merchant and also exporter of manufactured goods. The deductions have to be allowed with the strait jacket formula prescribed in sub section (3) of section 80HHC. It was submitted that the Assessing Officer has fallen in error while holding the deduction u/s 80HHC of the Act is to be restricted to business income forming part of the gross total income and therefore assessee is not entitled to deduction u/s 80HHC. It was submi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tter of the dispute. It was submitted that in the present case the issue pertains to the question of set off of deduction computed in terms of section 80HHC (3)(c) of the Act in arriving as the total income. Ld. Counsel relied for judgment of Hon'ble Supreme Court of India in CIT vs. Williamson Financial Services 297 ITR 17 and Bombay High Court in V. M. Salgaoncar Sales International vs. ACIT : 281 CTR 191. 26. Ld. Counsel relied judgment of Hon'ble Supreme Court of India in Commissioner of Income Tax v. Reliance Energy Ltd (2021) 127 taxmann.com 69 to draw an analogy, where in regard to section 80IA it is held that the scope of sub section 5 of section 80IA is limited to determination of quantum of deduction under sub section (1) of section IA by treating 'eligible business' as 'only source of income' and sub section 5 cannot be pressed into service for reading a limitation of deduction under sub-section (1) only to business income. 27. Ld DR however endorsed the findings of Ld Tax authorities below. It was submitted that in assesse's own case relying IPCA Case, findings have been given against the assessee and matter is pending before Hon'ble High Court. 28. In regard to thes....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pose of computing the deduction under that section, the amount of income of that nature as computed in accordance with the provisions of this Act (before making any deduction under this Chapter) shall alone be deemed to be the amount of income of that nature which is derived or received by the assessee and which is included in his gross total income." As stated above, Section 80AB was inserted in the year 1981 to get over a judgment of this Court in Cloth Traders (P) Ltd. (supra). The Circular dated 22.09.1980 issued by the CBDT makes it clear that the reason for introduction of Section 80AB of the Act was for the deductions under Part C of Chapter VI-A of the Act to be made on the net income of the eligible business and not on the total profits from the eligible business. A plain reading of Section 80AB of the Act shows that the provision pertains to determination of the quantum of deductible income in the 'gross total income'. Section 80AB cannot be read to be curtailing the width of Section 80-IA. It is relevant to take note of Section 80A(1) which stipulates that in computation of the 'total income' of an assessee, deductions specified in Section 80C to Section 80U of the Ac....