(O&M) COMMISSIONER OF INCOME TAX vs. M/S PALIWAL OVERSEAS LTD.

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ITA/479/2005HC Punjab & HaryanaPHHC01072317200510 October 2012Author: MR. JUSTICE AJAY KUMAR MITTAL,MR. JUSTICE GURMEET SINGH SANDHAWALIA4 pages
AI SummaryDismissed

What did the High Court hold?

The High Court held that the Tribunal was right in allowing the miscellaneous application filed by the assessee. The Court relied on the Supreme Court's decision in ACG Associated Capsules Private Limited v. Commissioner of Income Tax, which held that ninety per cent of only the net interest, which has been included in the profits of the business, is to be deducted under clause (1) of Explanation (baa) to Section 80HHC for determining the profits of the business, not the gross interest. Therefore, the Tribunal's order allowing the netting of interest was in conformity with the Apex Court's ruling. The substantial question of law was answered against the revenue and in favour of the assessee. The appeals were dismissed.

What were the facts?

The assessee, M/s Paliwal Overseas Limited, is a limited company engaged in manufacturing and export of cotton handloom items. For the assessment year 1993-94, the Assessing Officer reduced the deduction claimed under Section 80HHC of the Income Tax Act, 1961, by excluding the total interest received (` 9,42,827/-) from business profits, even though interest paid (` 22,58,432/-) was higher. The assessee appealed to the CIT(A), which directed that the interest not be excluded. The revenue appealed to the ITAT, which initially allowed the revenue's appeal. The assessee then filed a miscellaneous application arguing that net interest income, not gross interest receipts, should be excluded under Explanation (baa) to Section 80HHC. The ITAT allowed this miscellaneous application, leading to the present appeals by the revenue.

What were the issues?

1. Whether, on the facts and in the circumstances of the case, the Hon'ble ITAT was correct in law in rectifying its earlier order under section 254(2) of the I.T.Act to allow netting of interest against express provisions of Explanation (baa) to Section 80HHC of the Act? Assessee's Contention: The assessee contended that while working out the deduction under Section 80HHC of the Act, 90% of the receipt by way of interest had to be excluded from the profits of the business, taking into account net interest income and not gross interest receipts. The assessee relied on the Supreme Court's decision in ACG Associated Capsules Private Limited v. Commissioner of Income Tax. Revenue's Contention: The revenue argued that the ITAT was incorrect in rectifying its earlier order to allow netting of interest, as it was against the express provisions of Explanation (baa) to Section 80HHC of the Act. The revenue's initial appeal was allowed by the ITAT on the ground that 90% of gross interest receipts should be excluded.

Which sections of the Income-tax Act were involved?

Section 80HHC,Section 254(2),Section 260A

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH Date of decision:10.10.2012 Commissioner of Income Tax (Central) Ludhiana ...Appellant Versus M/s Paliwal Overseas Limited

...Respondent CORAM: HON'BLE MR.JUSTICE AJAY KUMAR MITTAL HON'BLE MR. JUSTICE GURMEET SINGH SANDHAWALIA Present: Mr. Vivek Sethi, Advocate for the appellant. Mr. Rajiv Sharma, Advocate for the respondent. Ajay Kumar Mittal,J.

1.

This order shall dispose of ITA Nos.479 and 480 of 2005 as according to learned counsel for the parties, identical question of law and facts are involved in both the cases. However, the facts are being extracted from ITA No.479 of 2005. 2. ITA No.479 of 2005 has been preferred by the revenue under Section 260A of the Income Tax Act, 1961 (in short, “the Act”) against the order dated 11.6.2004, Annexure A.4 passed by the Income Tax Appellate Tribunal, Delhi Bench 'G', Delhi passed in Miscellaneous Application No.58(Del) 2003 in ITA No.4151(Del) 1997 for the assessment year 1993- 94, claiming following substantial question of law:- “Whether on facts and in the circumstances of the case, the Hon'ble ITAT was correct in law in rectifying its earlier order under section 254(2) of the I.T.Act to allow netting of interest against express provisions of Explanation (baa) to Section 80HHC of the Act?

3.

Briefly, the facts as narrated in ITA No.479 of 2005 may be noticed. The assessee is a limited company and is deriving income from manufacturing and export of cotton handloom items. For the accounting year 1992-93 relevant to the assessment year 1993-94, return declaring income of ` 2,55,920/- was filed on 30.12.1993. During the course of assessment proceedings, the Assessing Officer made additions/disallowances on various issues. These included reduction in deduction claimed under Section 80HHC of the Act. The Assessing Officer observed that the respondent had received total interest of ` 9,42,827/- but the same had not been reduced from the business profits in accordance with the provisions of Clause (baa) of Explanation to Section 80HHC on the ground that interest paid at `22,58,432/- was more than the interest received. The Assessing Officer computed deduction under Section 80HHC of the Act after reducing the total amount of interest at ` 9,42,827/- from profits of the business and allowed deduction under Section 80HHC of the Act amounting to ` 3,21,72,621/-. Assessment under Section 143(3) of the Act was completed at an income of ` 2,69,390/- on 22.2.1996, Annexure A.

1.

Aggrieved by the order, the assessee went in appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]. Vide order dated 21.5.1997, Annexure A.2, the appeal was partly allowed and it was directed that interest amounting to ` 9,42,827/- be not excluded from business profits while computing deduction under Section 80HHC of the Act. Not satisfied with the order, the revenue preferred an appeal before the Tribunal. Vide order dated 21.10.2002, Annexure A.3, the appeal was allowed. Aggrieved by the order, the assessee filed a Miscellaneous application before the Tribunal on 24.1.2003 against the order dated 21.10.2002 contending that while working out deduction under Section 80HHC of the Act, 90% of receipt by way of interest had to be excluded from profits of business taking net interest income and not the gross interest receipts. The Tribunal allowed the said application vide order dated 11.6.2004, Annexure A.

4.

Hence the present appeals by the revenue.

4.

We have heard learned counsel for the parties and perused the record.

5.

The issue involved herein is whether it is the net interest which has to be taken into account while computing deduction under Section 80HHC of the Act as per Explanation (baa) to Section 80HHC(4C) of the Act. The Hon'ble Supreme Court in ACG Associated Capsules Private Limited v. Commissioner of Income Tax, (2012) 3 SCC 321 held as under:- “26....that ninety per cent of not the gross interest but only the net interest, which has been included in the profits of the 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 80HHC for determining the profits of the business. Since the view taken by the High Court in the impugned order is consistent...”

6.

The Tribunal in the present case vide order dated 21.10.2002, Annexure A.3 decided the issue in favour of the revenue holding that under the new provision effective from 1.4.1992, it is the 90% of receipt by way of interest which has to be excluded from the profits of the business and not the amount after netting of interest receipt and interest paid. Moreover, the interest paid was not on loans utilised for making the deposits on which the interest was received. Thereafter, a miscellaneous application was filed by the assessee for modification of order dated 21.10.2002, Annexure A.3 contending that while working out deduction under Section 80HHC of the Act, 90% of receipt by way of interest had to be excluded from profits of business taking net interest income and not the gross interest receipts. The said application was allowed vide order dated 11.6.2004, Annexure A.

4.

The effect of the same would be that it is the net interest which has to be taken into consideration while computing deduction under Section 80HHC as per Clause (baa) of the explanation to Section 80HHC of the Act. The order passed by the Tribunal in the miscellaneous application being in conformity with the order of the Apex Court in ACG Associated Capsules Private Limited's case (supra), it is held that the Tribunal was right in allowing the miscellaneous application filed by the assessee. Accordingly, the substantial question of law is answered against the revenue and in favour of the assessee.

7.

As a result, both the appeals are dismissed. (Ajay Kumar Mittal) Judge October 10, 2012 (Gurmeet Singh Sandhawalia) 'gs' Judge

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