Gujarat High Court Judgments — 2007

The High Court, in respectful agreement with the ratio laid down in the case of COMMISSIONER OF INCOME-TAX Vs UPNISHAD INVESTMENT PVT. LTD. AND ORS reported in [2003] 260 ITR 532, answered the referred questions. The first question was answered in the negative, in favour of the revenue and against the assessee. This implies that the Tribunal was not right in holding that interest on debentures issued by companies other than local authorities, companies, or corporations established by a central, state, or provincial act is not liable to be computed as income under the head “interest” on securities. The second question was answered in the affirmative, in favour of the assessee and against the revenue. This means that interest on debentures is to be considered income only when received by the assessee, not merely when it has become due. The reference was disposed of accordingly.

The High Court, in respectful agreement with the ratio of the judgment in COMMISSIONER OF INCOME-TAX Vs UPNISHAD INVESTMENT PVT. LTD. AND ORS [2003] 260 ITR 532, answered the referred questions. The first question was answered in the negative, meaning the Tribunal was not right in holding that interest on debentures issued by companies other than specified entities is not taxable under the head 'interest' on securities. This implies the revenue's position on this point was upheld. The second question was answered in the affirmative, meaning interest on debentures is to be considered income only when received by the assessee and not merely when it has become due. This implies the assessee's position on this point was upheld. The reference was disposed of accordingly, with no order as to costs.

The High Court answered the referred questions based on the ratio of the judgment in Commissioner of Income-tax Vs Upnishad Investment Pvt. Ltd. and Ors. ([2003] 260 ITR 532). The Court respectfully agreed with the ratio of that judgment. Consequently, the first question was answered in the negative, meaning the interest on debentures, under the specified circumstances, is indeed liable to be computed as income under the head 'interest' on securities, which is in favor of the revenue and against the assessee. The second question was answered in the affirmative, indicating that interest on debentures is to be considered income only when received by the assessee and not merely when it has become due, which is in favor of the assessee and against the revenue. The reference was disposed of with no order as to costs.

The High Court, in respectful agreement with the ratio of the judgment in COMMISSIONER OF INCOME-TAX Vs UPNISHAD INVESTMENT PVT. LTD. AND ORS reported in [2003] 260 ITR 532, answered the referred questions. The first question was answered in the negative, meaning the interest on debentures issued by companies other than those specified is indeed liable to be computed as income under the head "interest" on securities, which is in favour of the revenue and against the assessee. The second question was answered in the affirmative, meaning interest on debentures is to be considered income when it has become due, not necessarily when it is received, which is in favour of the assessee and against the revenue. The reference was disposed of with no order as to costs.

The High Court of Gujarat, in its judgment dated December 12, 2007, answered the two questions of law referred by the Income Tax Appellate Tribunal. The Court respectfully agreed with the ratio of the judgment in COMMISSIONER OF INCOME-TAX Vs UPNISHAD INVESTMENT PVT. LTD. AND ORS reported in [2003] 260 ITR 532. Consequently, the first question was answered in the negative, meaning in favor of the revenue and against the assessee. This implies that the interest on debentures, under the specified circumstances, is indeed liable to be computed as income under the head 'interest' on securities. The second question was answered in the affirmative, in favor of the assessee and against the revenue. This means that interest on debentures is to be considered income only when it is received by the assessee, not merely when it becomes due. The reference was disposed of with no order as to costs.

The High Court held that the ITAT was justified in its decision. The Court followed the authoritative pronouncement of the Supreme Court in Commissioner of Income-Tax v. Lakshmi Machine Works, (2007) 290 ITR 667 (SC). The Supreme Court had reasoned that the formula in Section 80HHC is designed to disallow a part of the concession when the deduction claimed does not entirely relate to exports. Therefore, a schematic interpretation is necessary. Receipts like brokerage, commission, interest, and rent, which do not have a nexus with export activity, were excluded by amendments. Similarly, excise duty and sales tax should also be excluded from 'total turnover' under Section 80HHC to ensure the formula remains workable. Consequently, the reference was answered against the Revenue and in favour of the assessee. The operative direction was to uphold the ITAT's finding.

The High Court held that the ITAT's judgment did not indicate whether the Fifth proviso to Section 80HHC, inserted by the Taxation Law (Amendment) Act, 2005, with retrospective effect from April 1, 1992, was considered. Given this omission, the High Court was of the opinion that the matter deserved to be remitted to the ITAT for fresh consideration. The ITAT is to re-examine the question referred to the High Court in light of the aforementioned Fifth proviso and the amendment made by the Fifth Act of 2005. The operative direction is to remit the matter to the ITAT for fresh consideration.

The High Court held that the ITAT was justified in its decision. The Court relied on the Supreme Court's decision in Commissioner of Income-Tax v. Lakshmi Machine Works (2007) 290 ITR 667 (SC). The Supreme Court had reasoned that the formula in Section 80HHC is designed to disallow a part of the concession when the deduction cannot be entirely attributed to exports, requiring a schematic interpretation. Receipts like brokerage, commission, interest, and rent, which have no nexus with exports, are excluded. Following this principle, the Supreme Court held that excise duty and sales tax also cannot form part of the 'total turnover' under Section 80HHC, as their inclusion would render the formula unworkable. Therefore, the High Court answered the reference against the Revenue and in favour of the assessee.