C I T vs. M/S PALIWAL INDUS. P LTD.

This order shall dispose of ITA Nos.73 and 74 of 2009 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.74 of 2009. 2. ITA No.74 of 2009 has been preferred by the revenue under Section 260A of the Income Tax Act, 1961 (in short, “the Act”) against the order dated 20.12.2007, Annexure A.4 passed by the Income Tax Appellate Tribunal, New Delhi Bench 'E' passed in Miscellaneous Application No.14/DEL/06 (ITA No.3048/DEL/2003) for the assessment year 1993-94, claiming following substantial question of law:- “Whether on the facts and in the circumstances of the case, the Hon'ble ITAT was right in law in dismissing the misc. application of the revenue, on the issue of netting of interest, by the assessee, for claiming deduction under Section 80HHC, inspite of the direct decision of the Hon'ble Punjab and Haryana High Court, in the case of Rani Paliwal v. CIT 268 ITR 220?”

Briefly, the facts as narrated in ITA No.74 of 2009 may be noticed. The assessee is a private limited company and is deriving income from manufacturing and export of textile products. While framing assessment under Section 143(3) of the Act, the Assessing Officer found that the assessee had received interest income at ` 3,14,218/- on fixed deposits in the assessment year under consideration. Vide order dated 9.3.2000, Annexure A.1, the Assessing Officer held that the assessee derived income from manufacturing of fabrics and the interest on fixed deposits cannot be considered as income derived from such business. It was accordingly held that as per Clause (baa) of Explanation to Section 80HHC of the Act, 90% of such interest income had to be reduced. Aggrieved by the order, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]. Vide order dated 30.4.2003, Annexure A.2, the CIT(A) dismissed the appeal of the asessee. The assessee filed second appeal before the Tribunal. Vide order dated 29.7.2005, Annexure A.3, the appeal was allowed. Aggrieved by the order, the revenue filed a Miscellaneous application before the Tribunal to rectify the order dated 29.7.2005 in view of the judgment of this Court in the case of Smt.Rani Paliwal v. CIT, 185 CTR 333 wherein it was held that interest received on FDRs was assessable under the head 'Income from other sources'. Vide order dated 20.12.2007, Annexure A.4, the Tribunal dismissed the miscellaneous application. Hence the present appeals by the revenue.

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

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...”

The Tribunal in its order dated 29.7.2005 (Annexure A.3) while adjudicating the issue in favour of the assessee had noticed as under:- “7. Next ground in the appeal is against not allowing deduction under Section 80HHC on net interest earned by the assessee. It was noticed by the Assessing Officer that the assessee had received interest of ` 3,14,218/- on FDR. As against this, it had paid interest to the tune of ` 4,63,645/-. The Assessing officer was of the view that while applying the provisions of clause (baa) of the Explanation to section 80HHC, the profits of business have to be reduced by 90% of the interest received and the same has not to be netted against interest paid. The deduction under Section 80HHC was modified accordingly. The CIT(Appeals) confirmed the action of the Assessing Officer by relying on the order of the CIT(Appeals) in the assessee's own case for assessment year 1996-97. 8. This issue has since been settled by the Special Bench of the Tribunal in the case of Lalsons Enterprises reported in 80 ITD 25 wherein netting of interest for the purposes of explanation (baa) has been upheld. We direct the Assessing Officer to follow the said decision.”

Thereafter, a miscellaneous application was filed by the revenue for modification of order dated 29.7.2005, Annexure A.3 which was dismissed vide order dated 20.12.2007, Annexure A.4, affirming the said order. 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 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 rejecting the miscellaneous application filed by the revenue. Accordingly, the substantial question of law is answered against the revenue and in favour of the assessee.

As a result, both the appeals are dismissed. (Ajay Kumar Mittal) Judge October 09, 2012 (Gurmeet Singh Sandhawalia) 'gs' Judge