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Income Tax Appellate Tribunal, DELHI BENCHES ‘E’ : NEW DELHI
Before: SH. G.S.PANNU, HON’BLE & SH. ANUBHAV SHARMA
The Assessee has come in appeal against order dated 17.03.2006 in appeal no. 91/2005-06 for the assessment year 2003-04 passed by Commissioner of Income Tax (Appeals)-VIII, New Delhi (hereinafter referred to as the ‘First Appellate Authority’ or in short ‘Ld. F.A.A.’) in appeal before it against order dated 28.10.2005 u/s 143(3) of the Income Tax Act, 1961 passed by DCIT, Circle 5(1), New Delhi ( herein after referred to as ‘Ld. Assessing officer or in short Ld. AO’).
ITA No. 1722/Del/2006 M/s. MMTC Ltd. 2
The facts in brief are the assessee is a Govt, of India Enterprise and is engaged in business of manufacturing of medallions and jewellery, soya oil and DOC, Mica Paper and powder, and trading in minerals, non ferrous metals, fertilizers, agro products, gems, 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.
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. That on the facts and circumstances of the case, the 2. 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 for the purpose of working out deduction u/s 80 HHC. 4. That on the facts and circumstances of the case, the Ld. CIT(A) erred in law in upholding the action of the AO that deduction u/s 80HHC is admissible against “Income from Business” and not against “Gross Total Income” as per Income Tax Act. That on the facts and circumstances of the case, the 5. Ld. CIT(A) erred in law in applying the provisions of Section 80 AB to the ‘Head of Income’, that is, business income instead of the ‘Nature of Income’, that is income derived from exports (covered u/s 80 HHC) and thereby upholding the rejection of claim of deduction u/s 80 HHC admissible to the appellant.
ITA No. 1722/Del/2006 M/s. MMTC Ltd. 3 That on the facts and circumstances of the case, the 6. Ld. CIT(A) erred in law in applying the judgement of Supreme Court in the case of IPCA Labortries Ltd. vs DCIT ( 266 ITR 521) to the case of appellant since it had exported only trading goods governed by Sec. 80 HHC (3) (b) of the Act. That on the facts and circumstances of the case, the 7. Ld. CIT(A) erred in law in upholding the action of the Assessing Officer in not netting of the interest expense against interest income, which is intimately linked to each other, while working out indirect expenses for the purpose of calculating deduction admissible u/s 80HHC of the Act.
That the Appellant craves leave to alter, amend, add, delete, modify, substitute any ground of appeal in any time before disposal of appeal.”
Earlier by order dated 27.04.2007 the bench while partly allowing the appeal had directed the Assessing officer to treat interest income of 18.08 crores received on credit sales for it customers as business income and the interest earned on advances giving to the staff was directed to be classified as income from other sources. The interest for Rs. 16.62 crores earned from bank was directed to be reassessed in the light of judgment of Hon’ble Delhi High Court in Shri Ram Honda Powers. Equipment Ltd. (2007) 289 ITR 475 (Del) and relying the decision of Hon’ble Supreme Court of India in case of IPCA Labortries Ltd. vs DCIT ( 266 ITR 521). The bench had held that provisions of Section 80HHC there is no infirmity in the order of lower tax authorities who applied the aforesaid decision. Lastly, in regard to the netting of interest income against interest expenditure. The matter was restored back to the file of Assessing Officer for deciding afresh.
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
ITA No. 1722/Del/2006 M/s. MMTC Ltd. 4 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.
Further, Additional grounds of appeal
were filed by the assessee on 25.05.2012 raising following additional ground :- “1. That the assessing officer erred on facts and in law in not allowing credit for corporate taxes paid by MMTC Transnational Pte. Ltd. (MTPL), Singapore, to the extent of dividends received by appellant from MTPL in India.”
8. As the additional grounds arise out of questions of facts and law involved in the impugned order but not covered by other grounds. So same are allowed to be raised.
9. Arguments were heard and record has been perused. The ground wise findings are as below.
10. Ground no. 3; Facts are that the assessee had submitted gross income of Rs. 19,13,55,170/-. However, the Ld. AO had made additions on account of accrued interest dividend income and other incomes which assessee had claimed as business income but the Ld. AO allowed the same treating as business income not derived from exports and therefore reduced interest and dividend income to arrive at business income in negative and also in the alternative reduced 90% of the interest income and 90% of other income
ITA No. 1722/Del/2006 M/s. MMTC Ltd. 5 including dividend income, by invoking provisions of Explanation (baa) of Section 80HHC and arriving in negative adjusted business profit.
It was argued by Ld Counsel of assessee that Ld. CIT(A) has erred in not appreciating the scheme of allowance of deduction u/s 80HHC in its correct perspective. It was submitted that assessee during the year under consideration was engaged both in the export of manufactured goods as well as in export of trading goods i.e. goods manufactured by other as a merchant exporter. It was submitted that still export of trading goods constituted the major portion of total export of the assessee and therefore, the concept of exclusion of other incomes is relevant for determining profits for exports of manufactured goods and not from export of trading goods. It was submitted that staff quarter rent, gains in foreign exchange, liabilities written back and Miscellaneous Receipts which comprised of sale of tender forms, sale of scrap, legal charges etc. were operational business receipts and eligible for deduction u/s 80HHC of the Act. It was submitted that very narrow interpretation has been given by the Ld. Assessing Officer by holding that aforesaid incomes were business incomes but not derived from business of export and therefore not eligible for computing deduction u/s 80HHC of the Act. It was submitted that Ld. AO has fallen in error in reducing 90% of the aforesaid receipts while 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
ITA No. 1722/Del/2006 M/s. MMTC Ltd. 6 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-section (3) of Section 80HHC of the Act statutorily fixes the quantum of deduction allowable under that section irrespective of what could strictly be described as “profit derived from export of goods”. 11.1 Ld. Counsel relied the following judgments : “1. International Research Park Laboratories vs. ACIT : 212 ITR (AT) 1, 50, ITD 37 2. P.R.Prabhakar vs. CIT : 284 ITR 584 3. Pearl Polymers Limited : 80 ITD 1 (SB) (Del.) 4. Harisons Malayalam Limited V. DCIT : 60 ITD 306 (Coch.) 5. CIT vs. Parry Agro Industries Ltd. : 257 ITR 41 (Ker) 6. Rajeev Enterprises V. AO : 261 ITR (AT) 34 7.Alfa Laval India Ltd. vs. DCIT : 266 ITR 418 (Bom.) 8. CIT vs. Bangalore Clothing Co. : 260 ITR 371 9. CIT vs. kar Mobiles Ltd. : 333 ITR 478 (Ker) 10. CIT vs. Sociedade de Fomento Industrial Ltd. 335 ITR 472 (Bom) 11. DCIT vs. B.A. Aswathaiah & Bros. : 72 TTJ 714 (Bang.) 12. Kadra Mills (CBE) Ltd. v. JCIT : 76 TTJ 38 (Chennai) 13. Mitsu Ltd. v. Asstt. CIT : 142 ITD 157 (Ahd.) 14. ACIT vs. GKN Sinter Metal (P.) Ltd. : 153 ITD 311 (Pune) 15. CIT vs. Metalman Auto (P.) Ltd. : 336 ITR 434
On the basis of these judgments cited it was also submitted that expenses like interest from customers and sale tax receipt of interest, commissioner labour charges, scrap of sales insurance receipt etc. have been considered to be income derived from the business. It was submitted that the aforesaid incomes are inextricably linked with the business of the assessee and derived from export and the assessing officer erred in excluding 90% of the aforesaid income from eligible profits while computing in deduction 80HHC of the Act.
ITA No. 1722/Del/2006 M/s. MMTC Ltd. 7 12.1 On behalf of Revenue it was submitted that as the receipts have no nexus to exports the same have to be excluded for Section 80HHC deduction and the ld. DR relied the judgment dated 08.04.2010 of Hon’ble Bombay High Court in of 2009, the Commissioner of Income Tax vs. M/s. Dresser Rand India Pvt. Ltd. while distinguishing the judgment in Bangalore Clothing Company 260 ITR 371 (Bom.) and relying the judgment in Ravindranathan Nair 295 ITR 228 (SC).
Appreciating the submissions and the matter on record it can be observe that in the case in had the Ld. AO referred to the Judgment of Hon’ble Supreme Court in Cambay Electric Supply vs The Commissioner Of Income Tax 113 ITR 84 and Commissioner Of Income Tax, vs 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".
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 Export turnover / Total turnover
ITA No. 1722/Del/2006 M/s. MMTC Ltd. 8
The term "export turnover" under the existing provisions, means the sale proceeds (excluding freight and insurance) receivable by the assessee in convertible foreign exchange. In other words, the FOB value of exports. The Finance Act, 1990 has restricted the definition of the term "export turnover" to mean FOB sale proceeds actually received by the assessee in convertible foreign exchange within six months of the end of the previous year or within such further period as the Chief Commissioner/Commissioner may allow in this regard. 9. Thus, in the case of an assessee who is doing export business exclusively, "export turnover and total turnover" would be identical, if the entire sale proceeds are brought into India in convertible foreign exchange within the prescribed time limit. In that case, the entire profit under the head "Profits and gains of business or profession" (which will include the three export (incentives) will be deductible under Section 80HHC. However, in order to arrive at the amount deductible under Section 80HHC in the case of an assessee doing export business as well as some other domestic business, the fraction of "export turnover" to "total turnover", will be applied to his profits computed under the head "Profits and gains of business or profession", (which again will include the three export incentives). The operation of section 80HHC read with section 28, as amended by the Finance Act, 1990, can be illustrated by way of the following examples…. :” And it was held by Hon’ble Supreme court that “The above Circular indicates vide Para 4 of the Circular that Section 80HHC(3) statutorily fixes the quantum of deduction on the basis of a proportion of business profits under the head "profits and gains of business or profession irrespective of what could strictly be described as profits derived from export of goods out of India.” 15. The issue has been also considered by Hon’ble Delhi High Court in Commissioner of Income Tax V Shri Ram Honda Power Equip [2007] 289 ITR 475 while dealing with the question “(a) Does the expression 'profits derived from such export' occurring in Sub-section (3) read with Explanation (baa) restrict the profits available for deduction in terms of Sub-section (1) to only those items of income directly relatable to the business of export?”
ITA No. 1722/Del/2006 M/s. MMTC Ltd. 9
And the Hon’ble 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.”
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 the above formula gave a distorted figure of export profits when receipts like interest, commission, etc., which do not have an element of turnover are included by the assessee in the profit and loss account. Therefore, Explanation (baa) came to be introduced. Under that Explanation profits of the business, for the purposes of Section 80HHC, does not include receipts which do not have an element of turnover like rent, commission, interest, etc. However, as some expenditure might be incurred in earning such incomes an ad hoc 10 per cent. deduction from such incomes is provided to account for those expenses. However, learned counsel for the Department cannot invoke Explanation (baa) in every matter involving receipts by way of brokerage, commission, interest, rent, labour charges, etc. These items of income have got to be seen in the context of the business activity of the assessee. To give an example, in the case of a manufacturing company which undertakes exports, receipt of interest or commission may not be operational income because they do not have the element of turnover and consequently Explanation (baa) will apply. However, that will not be the case if the assessee is carrying on ITA No. 1722/Del/2006 M/s. MMTC Ltd. 10 the business of financing because in the case of financing, the interest income which accrues to the assessee will have the element of turnover and in such a case, receipts like interest, will not attract Explanation (baa). The point which we would like to make, therefore, is that in every matter the Assessing Officer will have to ascertain whether receipt of interest, commission, labour charges, etc., were a part of operational income. We cannot lay down any standard test for deciding what would constitute operational income. Broadly, the Department will have to consider the memorandum and articles of association of the company, the nature of the business, the nature of the activity and such other tests, The Department will also have to ascertain as to what is the dominant business of the company and whether receipts like interest, commission, etc., accrue as a part of the main business activity or whether they accrue out of incidental business. In the case of CIT v. K. K. D oshi and Co. [2000] 245 ITR 849 (Bom), the assessee had received Rs. 19.60 lakhs as service charges. It was held that the service charges of Rs. 19.60 lakhs did not have the element of turnover because the 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 assessee and the processes carried on for manufacturing garments for others under job work contracts. The Tribunal has further found, on the facts, that the activity of labour job involved use of machinery, labour and material which were also forming part of the activity of manufacturing garments for its own sales. The Tribunal further found that there was no difference between manufacturing of garments for the assessee's own sales and manufacturing of garments for others on labour job basis. These are ITA No. 1722/Del/2006 M/s. MMTC Ltd. 11 findings of fact. They have not been challenged in the memo of appeal. The memo of appeal proceeds only on the basis that because the receipt is by way of labour charges, Explanation (baa) stood attracted. As stated above, each case will have to be examined by the Assessing Officer. As stated above, in each case of receipt of labour charges, rent, interest commission, etc., the Assessing Officer will have to ascertain whether the element of turnover existed. In the present case, the Tribunal has found, on the facts, that there was an element of job work turnover and, therefore, the Tribunal concluded on the facts of this case that the receipt of labour charges was not in the nature of brokerage, commission, rent, interest or charges as mentioned in Explanation (baa) to Section 80HHC. Further, the assessee received Rs. 66,35,083 as processing charges. This can be seen from the profit and loss account. The company is engaged in manufacture and sale of garments, both domestically and by way of exports. The processing charges earned was by using the entire undertaking of the company which also manufactured garments for domestic sales and export sales and which processing charges were earned by incurring expenditure for the factory like wages, electricity charges, etc., debited in the profit and loss account. That, the income of Rs. 66,35,083 was only an income from business and the expenditure for earning this income is included in several items of expenditure debited in the profit and loss account. In these circumstances, we do not wish to interfere with the finding of fact recorded by the Tribunal. As stated above, if the receipt of labour charges (job work charges), interest, commission, etc., accrues by way of operating income then it falls outside Explanation (baa). In the present case, the receipt accrued from manufacturing activity, The Tribunal has found 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.”
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,
ITA No. 1722/Del/2006 M/s. MMTC Ltd. 12 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-alone’ provision of Section 80HHC of the Act has to be construed on its own wordings. A distinction sought to be made in respect of the definition of “profits of the business” under sub-section (baa) of the Explanation, to mean the profits of the business as computed under the head “Profits and gains of business or profession”, which incorporates the entire procedure for computing the business income under Section 28 to 44 of the Act. Dehors Section 80HHC of the Act, the consistent approach is that where the statutory provision talks of “income derived from” the business activity in question, the nexus theory should be applied in order to determine whether a particular item of income is business income or not.” 17.2 The Hon’ble High court the answered the question as follows; ‘44. On the question No. 3, we hold that the earning of the income convertible from foreign exchange by way of interest, is not necessary so long as the interest is derived from business of export, and has direct and proximate nexus, with the income earned out of the profits retained for the export business. The earning of the income convertible from foreign exchange, is not a test for determining, as to whether deduction is allowable in respect of the income derived from the profits retained for export business. The question No. 3, is also decided in favour of the Revenue and against the assessee.”
So, if the earning of the income convertible from foreign exchange, is not a test for determining, as to whether deduction is allowable in respect of the income derived from the profits retained for export business. Then not having earning in foreign exchange, from an activity integral to the export activity, is not a test to deny receipts as allowable deduction. In the case in hand, receipt of ITA No. 1722/Del/2006 M/s. MMTC Ltd. 13 the nature Staff quarter rent, Misc Receipts, gains in exchange, liabilities written back, included in ‘other income’, when examined, apparently have source in activity of export trading. To have any contrary view, the Ld. AO was required to examine each head of ‘other income’ and conclude about nature of receipt.
However, in the case in hand, the Ld. AO has erred in emphasizing on the words “not derived from export” on the basis of nomenclature of head of income alone. What can be observed is that the assessment order is silent about the reasons and discussion of nature of heads of 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.
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 deduction u/s 80 HHC which seems to be self contradictory state of affairs. In this context, the judgment relied by Ld. Counsel of Assessee of Hon’ble Bombay High Court in Alfa Laval India Ltd. vs Deputy Commissioner Of Income Tax 2004 266 ITR 418 Bom, { as confirmed by Hon’ble Supreme Court in [2008]170 Taxman
ITA No. 1722/Del/2006 M/s. MMTC Ltd. 14 615 (SC)}, is relevant where too the AO had assessed the interest income from customers, sales-tax set off, etc. under the head income under the head 'Profits and gains of business or profession', but excluded the same from the business profits while computing the deduction under Section 80HHC of the Act. Hon’ble Bombay High Court held;
“17. In our opinion, the submissions made on behalf of the assessee deserve to be accepted. In the present case, the AO has computed the income by way of interest from the customers, sales- tax set off, claims, refunds; etc. under the head 'Profits and gains of business or profession'. To put it differently, the AO has not assessed the interest income from customers, sales-tax set off, etc. under the head 'Income from other sources' or under any other head. Having assessed these income under the head 'Profits and gains of business or profession', it was not open to the AO to treat these income as if assessed under the head 'Income from other sources', so as to exclude the same from the business profits while computing the deduction under Section 80HHC of the IT Act. Perusal of the assessment order clearly shows that the amounts in question have not been assessed under the head 'Income from other sources', but, the same have been assessed under the head 'Profits and gains of business or profession'. Under Section 80HHC(3) relevant to asst. yr. 1989-90, the deduction was to be computed with reference to the profits of the business as computed under the head 'Profits and gains of business or profession'. In the present case, the interest income from customers and sales-tax set off have been computed and assessed under the head 'Profits and gains of business or profession' as part of the operational income and not under the head 'Income from other sources'. Therefore, the said income could not be deducted from the business profits while computing the deduction under Section 80HHC of the IT Act. The decisions relied upon by the Tribunal have been distinguished 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 ITA No. 1722/Del/2006 M/s. MMTC Ltd. 15 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.”
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 Commissioner Of Income Tax decided on 22 March, 2002 was considering a case where while framing the assessment under Section 143(3) of the Act, 1961, for the asst. yrs. 1996-97 and 1997-98, the AO excluded 90 per cent of other receipts, viz. yarn conversion charges, miscellaneous income like gunny bag sales, insurance claim and premium on hank yarn obligation while arriving at the adjusted business profit for the purpose of computation of relief under Section 80HHC of the Act . It was held by the Tribunal ;
“25. We have heard rival submissions and considered the facts and materials available on record including that of the decisions relied upon by both the parties. After a careful consideration of the same, we are of the opinion that the Expln. (baa) of Sub-section (4B) of Section 80HHC speaks of only "Profits of business" as computed under the head "Profits and gains of business or profession" and not profits derived from export. Further, the items of receipts such as miscellaneous incomes like gunny bag sales, scrap sales, insurance claim, premium on hank yarn obligation, etc. do not have even a semblance of the items mentioned in Expln. (baa) viz., brokerage, commission, interest, rent, charges or any other receipts of similar nature. The purpose of Expln. (baa) is only to exclude certain items mentioned therein while arriving at the "profits of the business" and not the profits derived from the export. There is force in the contention of the learned counsel that the case laws relied upon by the learned Departmental Representative are not relevant or applicable to the facts of the case on hand as we are not arriving at the income
ITA No. 1722/Del/2006 M/s. MMTC Ltd. 16 derived from export as contended by the learned Departmental Representative but only arriving at the profits of the business. Hence, we are of the opinion that the Revenue authorities have committed a mistake in removing these items of income from the profits of the business while computing deduction under Section 80HHC of the Act. Hence, we direct the AO not to exclude the above items as not forming part of business profits in computing relief under Section 80HHC of the Act.”
In this context Hon’ble Supreme Court of India in ACG Associated Capsules Private Ltd. (Formerly Associated Capsules Private Ltd. v. CIT [2012] 343 ITR 89 (SC) is also relevant where with regard to items covered under the Expln. (baa) 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).
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 expression "included any such profits" in clause (1) of the Explanation (baa) would mean only such receipts by way of brokerage, commission, interest, rent, charges or any other receipt which are included in the profits of the business as computed under the head "Profits and Gains of Business or ITA No. 1722/Del/2006 M/s. MMTC Ltd. 17 Profession". Therefore, if any quantum of the receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature is allowed as expenses under Sections 30 to 44D of the Act and is not included in the profits of business as computed under the head "Profits and Gains of Business or Profession", ninety per cent of such quantum of receipts cannot be reduced under Clause (1) of Explanation (baa) from the profits of the business. In other words, only ninety per cent of the net amount of any receipt of the nature mentioned in clause (1) which is actually included in the profits of the assessee is to be deducted from the profits of the assessee for determining "profits of the business" of the assessee under Explanation (baa) to Section 80HHC.
If this Bench now applies Explanation (baa) as interpreted in this ACG Associated Capsules Private Ltd. Case, to the facts of present case. Then if the receipt of the nature Staff quarter rent, Misc Receipts, gains in exchange, liabilities written back are chargeable as profits and gains of business and chargeable to tax under Section 28 of the Act, and if any quantum of these receipts is allowable as an expense in accordance with Sections 30 to 44D of the Act and is not to be included in the profits of the business of the assessee as computed under the head "Profits and Gains of Business or Profession", ninety per cent of such quantum of the receipt of rent or interest will not be deducted under clause (1) of Explanation (baa) to Section 80HHC. In other words, ninety per cent of not the gross of these receipts but only the net, 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 80HHC for determining the profits of the business. But no such exercise was taken up by the Ld. AO
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.
ITA No. 1722/Del/2006 M/s. MMTC Ltd. 18 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.
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 submitted that as per sub section (1) of section 80HHC of the Act an exporter is entitled to deduction in respect of profits derived from export and in case of an exporter like present assessee who is engaged in both export of trading goods i.e. goods other than, one manufactured by the assessee and also goods manufactured by the assessee, then the profits derived from export which formed the basis for deduction under the said section is computed in accordance with formula prescribed in sub-section (3) of sub section 80HHC of the Act. It was submitted that Chapter VI-A of the Act deals with deduction to be made in computing total income. According to section 80A of the Act, in computing the total income of assessee deductions specified in section 80C to 80U are allowed from gross total income. It was submitted that the only limitation contained in sub section 2 of section 80A is that the aggregate deduction under Chapter VI-A of the Act cannot exceed the gross total income which is defined in section 80B(5). It was submitted that the aforesaid interpretation establishes that first the gross total income has to be computed and thereafter deductions if any under Chapter VI-A of the Act have to be made. It was submitted that in the case of assessee the profit eligible for deduction u/s 80HHC of the Act is the profit which stood included in the gross total income and because of loss suffered in ITA No. 1722/Del/2006 M/s. MMTC Ltd. 19 other business and exclusion of interest and dividend income, the overall computation under the head “profit and gains of business or profession” was arrived at a negative figure by the Assessing officer. It was submitted that it is incorrect to say that the profits from export of goods did not form part of gross total income to deny deduction u/s 80HHC of the Act in respect thereof. It was submitted that in assessee’s own case for assessment year 2001-02 relying IPCA Laboratories Ltd. case the Tribunal has held that since business income of assessee was negative after excluding interest, dividend and miscellaneous income, no deduction was allowable under that section. Ld. Counsel submitted that the aforesaid decision for assessment year 2001-02 is challenged and pending before Hon’ble High Court. It was submitted that in IPCA case issue involved was regarding computation of deduction u/s 80HHC (3)(c) of the Act and the issue regarding allowance of deduction was not subject matter 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.
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.
ITA No. 1722/Del/2006 M/s. MMTC Ltd. 20
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.
In regard to these grounds it can be observed that the assessee had reported profit of the business at R 2,47,088,375/- while profits from export of trading goods at 33,78,35,239/-. The Gross Total Income (Revised) was submitted at Rs. 19,13,55,170 and the ld AO arrived at Business income of (-) 913479702/- after reducing the interest income and dividend and in alternative the adjusted business profit is calculated at (-)Rs. 313591737/ after reducing the interest income and 90% of other income including dividend income. 29. Now, in regard to manner of treating interest income of assessee the issue has been restored to the files of Ld AO. Therefore, the effect giving order has to passed by the ld AO and the Business income has to be re-calculated. Similarly on determination of ground no 3 as above and also the interest income issue as determined by previous orders, the ‘Adjusted business profit’ has to be recalculated. Therefore, by merely relying the decision of Hon’ble Supreme Court in IPCA Laboratories Ltd. Case, the 80HHC deduction can not be declined as adjusted business profit has to be recomputed and may not be in minus. 29.1 At the same time in regard to the applicability of Section 80AB for not allowing deduction u/s 80HHC, as AO arrived at net loss from the profit and gains of business and profession, the judgement of Hon’ble Supreme Court in the case of Commissioner of Income Tax-1 versus Reliance Energy Ltd. [2021]127 taxmann.com69 ( SC) now hold the key where Hon’ble apex Court has held; 9. The controversy in this case pertains to the deduction under Section 80-IA of the Act being allowed to the extent of ‘business income’ only. The claim of the Assessee that deduction under Section 80-IA should be allowed to the 5 (1986) 3 SCC 538 6 [2010] 328 ITR 448 (Bombay) 9 | Page extent of ‘gross total
ITA No. 1722/Del/2006 M/s. MMTC Ltd. 21 income’ was rejected by the Assessing Officer. It is relevant to reproduce Section 80AB of the Act which is as follows: “80AB. Deductions to be made with reference to the income included in the gross total income. — Where any deduction is required to be made or allowed under any section included in this Chapter under the heading “C. — Deductions in respect of certain incomes” in respect of any income of the nature specified in that section which is included in the gross total income of the assessee, then, notwithstanding anything contained in that section, for the purpose 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 Act shall be allowed from his ‘gross total income’. Sub-section (2) of Section 80A of the Act provides that the aggregate amount of the deductions under Chapter VI-A shall not exceed the ‘gross total income’ of the Assessee. We are in agreement with the Appellate Authority that Section 80AB of the Act which deals with determination of deductions under Part C of Chapter VI-A is with respect only to computation of deduction on the basis of ‘net income’.
Therefore, these grounds no 4 to 6 are allowed for statistical purpose while directing the Ld. AO to recompute the deduction u/s 80HHC, while giving effect to the judgment of Hon’ble Supreme court in Commissioner of Income Tax-1 versus Reliance Energy Ltd.( Supra).
ITA No. 1722/Del/2006 M/s. MMTC Ltd. 22
Additional ground of appeal; In regard to the additional ground as raised it can be observed that there is no dispute to the fact that MMTC Transnational Pte. Ltd. (MTPL) is a company incorporated under the laws of Singapore, is a 100% subsidiary of the assessee from which the assessee received dividend income of Rs. 95,95,039/- in the relevant previous year. The Ld. AO had followed the previous year’s assessment while holding that dividend income received from MTPL, cannot be treated as business income. Admittedly, in assessee’s own case for assessment year 2006-07 and 2007-08 in and ITA No. 3891/Del/2011. The issue was restored to the files of Assessing officer. As with regard to assessment year 2001-02 this additional ground was admitted in assessee’s own case and the Ld. AO has allowed the claim while giving effect to the order of Tribunal for Assessment year 2001-02 vide order dated 22.12.2017. The copy of which is on record from page no. 21-43 of the paper book.
32. In the light of aforesaid, the additional ground as admitted stands restored to the file of ld. AO with similar direction for allowing the credit of taxes paid in Singapore on the dividend income as per the provisions of DTAA in accordance with law. Accordingly, the ground is allowed in favour of the assessee.
33. As a sequel to the determination of the grounds covered by this order, the appeal is allowed, with aforesaid consequences, as directed in ground wise findings.