ACG ASSOCIATED CAPSULES P.LTD. vs. C.I.T CENTRAL-IV MUMBAI

C.A. No.-001914-001914 - 2012Supreme Court08 February 2012Bench: S.H. KAPADIA A.K. PATNAIK SWATANTER KUMAR20 pages
For Petitioner: RASHMIKUMAR MANILAL VITHLANIFor Respondent: B. V. BALARAM DAS
AI SummaryPartly Allowed

What were the facts?

This judgment consolidates two appeals. The first appeal (arising out of SLP (C) No. 32450 of 2010) by M/s ACG Associated Capsules Pvt. Ltd. (assessee) is against the Bombay High Court's order dated 06.08.2010. The High Court had decided two issues against the assessee. For assessment year 2003-04, the assessee claimed a deduction under Section 80HHC. The Assessing Officer excluded 90% of gross interest and rent from business profits for this computation, restricting the deduction. The Commissioner (Appeals) confirmed this. The Income Tax Appellate Tribunal (Tribunal) remanded the matter to the Assessing Officer, allowing netting of interest and rent if nexus was proven. The Revenue appealed to the High Court, which directed the Assessing Officer to decide in accordance with its ruling in CIT v. Asian Star Co. Ltd., holding 90% of gross receipts of interest should be excluded. The second appeal (Civil Appeal No. 4534 of 2008) by the Commissioner of Income Tax, New Delhi (Revenue) is against the Delhi High Court's order dated 19.01.2007, which upheld the Tribunal's decision allowing the assessee (Bharat Rasayan Limited) to deduct expenses from interest received before calculating the 90% exclusion under Section 80HHC.

What did the Supreme Court hold?

The Supreme Court held that for the first issue concerning the sale of DEPB, the assessee's contention is accepted, following its prior decision in M/s Topman Exports vs. Commissioner of Income Tax. It was held that only the sale value less the face value of the DEPB represents profit on transfer. For the second issue concerning the computation of deduction under Section 80HHC, the Court held that ninety per cent of the net interest and net rent, which are included in the profits of the business, should be deducted under clause (1) of Explanation (baa) to Section 80HHC, not ninety per cent of the gross amounts. The Court reasoned that the language of Explanation (baa) is clear that only ninety per cent of receipts included in profits can be deducted, and this implies net receipts after accounting for expenses incurred in earning them. The Court found it unnecessary to refer to the explanatory Memorandum to the Finance Bill, 1991, as the statutory language was unambiguous. The Court allowed the first appeal, setting aside the High Court's order and remanding the matter to the Assessing Officer for recalculation of deductions from rent and interest. The second appeal was dismissed as it was consistent with the Court's view.

What were the issues?

1. Whether the entire amount received by an assessee on sale of the Duty Entitlement Pass Book (DEPB) represents profit on transfer of DEPB under Section 28(iiid) of the Income Tax Act, 1961 (the Act). 2. Whether, for computing the deduction under Section 80HHC of the Act, ninety per cent of the gross interest and gross rent received by the assessee should be excluded from business profits, or ninety per cent of the net interest and net rent after deducting related expenses. Assessee's arguments: For issue 1: The assessee relies on this Court's judgment in M/s Topman Exports vs. Commissioner of Income Tax, Bombay, holding that only the sale value less the face value of the DEPB represents profit. For issue 2: The assessee argues that Explanation (baa) to Section 80HHC refers to net receipts, not gross receipts, for exclusion. They rely on this Court's decision in Distributors (Baroda) P. Ltd. v. Union of India and Others, and the Delhi High Court's ruling in CIT v. Shri Ram Honda Power Equip, which held that 'interest' in Explanation (baa) connotes 'net interest'. They also cite the Karnataka High Court's decision in CIT v. Gokuldas Exports, etc. The assessee contends that the Memorandum to the Finance (No.2) Bill, 1991, supports netting of expenses as it acknowledges expenditure incurred in earning such incomes. Revenue's arguments: For issue 2: The Revenue relies on the Bombay High Court's reasoning in CIT v. Asian Star Co. Ltd., arguing that ninety per cent of the gross amount received towards interest and rent should be excluded. They also refer to the Memorandum to the Finance (No.2) Bill, 1991, to support their submission.

Which sections of the Income-tax Act were involved?

Section 28(iiid),Section 80HHC,Section 28

AI-generated summary — verify with the full judgment below

Cause title — parties, addresses and appearances
Reportable IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL No. 1914 OF 2012 (Arising out of SLP (C) NO. 32450 OF 2010) M/s ACG Associated Capsules Pvt. Ltd. (Formerly M/s Associated Capsules Pvt. Ltd.) … Appellant Versus The Commissioner of Income Tax, Central-IV, Mumbai … Respondent WITH CIVIL APPEAL No. 4534 OF 2008 The Commissioner of Income Tax, New Delhi … Appellant Versus Bharat Rasayan Limited … Respondent

J U D G M E N T (for short ‘the DEPB’) represents profit on transfer of DEPB under Section 28(iiid) of the

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