High Court · 2007

IN THE HIGH COURT OF JUDICATURE AT MADRASDated : 04.09.2007Coram :THE HONOURABLE MR.JUSTICE K.RAVIRAJA PANDIANandTHE HONOURABLE MRS.JUSTICE CHITRA VENKATARAMANTax Case (Appeal) No.284 of 2004The Commissioner of Income Tax,IXChennai.Appellantv.Devraj Nensee & Co.,Chennai.RespondentTax Case Appeal preferred under section 260A of the Income taxAct, 1961 against the order dated 20.01.2003 made in ITANo.254/Mds/00 by the Income Tax Appellate Tribunal, 'C' Bench,Madras against the order of the Commissioner of Income Tax(Appeals) Chennai-34 in GT/Appeal No.ITA.308/97-98 date of order5.11.99 against the Deputy Commissioner of Income Tax SpecialRange X, Chennai in PAN/GIR No.301-D/94-95 date of order 24.3.97.For Appellant:Mr.K.SubramaniFor Respondent :Mr.V.S.JayakumarJUDGMENT(Judgment of the Court was deliveredby K.RAVIRAJA PANDIAN, J.)The revenue has filed the appeal framing the followingquestions of law :“1. Whether on the facts and in the circumstancesof the case, the Tribunal was right in holding that thereduction of 90% of the receipts from interest should betaken into account after adjustment of expenses for thepurpose of computing the profits of the business undersection 80HHC.2. Whether on the facts and in the circumstances ofthe case, the Tribunal was right in equating income fromcommission, rent, brokerage to income from interest with https://hcservices.ecourts.gov.in/hcservices/ respect to incurring of expenditure?”2. The material facts of the case proceed as follows : Theassessee filed return of income claiming deduction under section80HHC of the Income Tax Act, 1961. The assessing officerfinalised the assessment after, inter alia, deducting 90% interestreceived for the purpose of 80 HHC deduction. Aggrieved by theassessment order, the assessee filed an appeal before theCommissioner of Income Tax (Appeals) on the ground that theinterest earned from the sister concern is part of the appellant'sbusiness profits and therefore the same cannot be reduced. As analternative plea, it was contended that the interest paid to thesister concern for the loans obtained from them should be deductedfrom the interest received from them and only the net amountshould be taken. The Commissioner of Income Tax (Appeals)dismissed the appeal on that issue. The assessee filed a furtherappeal before the Income Tax Appellate Tribunal. The Tribunalheld that since there was bound to be an expenditure directlyrelatable in earning such income, only the net amount of interestshould be taken. Aggrieved by the order of the Tribunal, thepresent appeal is filed.3. Learned counsel for the revenue submitted that theTribunal has erred in bringing a new concept of “net interest”,which is not contemplated under the statute. In an enactment, moreso, in a fiscal enactment, the statutory provision has to beinterpreted, having regard to the terminology employed in theprovision. It is impermissible for the Tribunal to add or deletesome words into or from the provision for the purpose ofinterpretation. The terminology employed in clause (baa) of theexplanation to Section 80HHC is very clear to the effect that anyreceipt by way of brokerage, commission, interest, rent, chargesor any other receipt of similar nature included in such profit.So, the incorporation of net interest by the Tribunal is erroneousand the order so made has to be set aside. However, the learnedcounsel appearing for the assessee has submitted that in theabsence of any clear terminology as to whether the term interestdenotes gross or net interest, having regard to the scheme of theAct, it has to be construed only as a net interest and netting ofinterest is permissible. For that purpose, he relied on a decisionof the Delhi High Court in the case of CIT v. Shri Ram Honda PowerEquip, (2007) 289 ITR 475.4. We heard the argument of the learned counsel on eitherside and perused the materials on record.5. The explanation to Section 80HHC in clause (baa) defines“profits of the business” for the purpose of that section. Thatclause reads thus :“(baa) ‘profits of the business’ means the profits ofthe business as computed under the head ‘Profits and https://hcservices.ecourts.gov.in/hcservices/ gains of business or profession’ as reduced by—(1) ninety per cent. of any sum referred to inclauses (iiia), (iiib) and (iiic) of section 28 or ofany receipts by way of brokerage, commission,interest, rent, charges or any other receipt of asimilar nature included in such profits ; and(2) the profits of any branch office, warehouseor any other establishment of the assessee situateoutside India.”The said clause does not refer to net interest. It refers,inter alia, to the interest included in the profits and gains ofthe business or profession.6. From the appellate order, it could be seen that thereceipt of the income has not been regarded as an income ofbusiness. The Appellate Order proceeds to the effect that theassessee's main business was export of precious stone. It couldtherefore not be said that the earning of interest was related toor part of that business. Even otherwise the interest received inquestion were not earned in the course of export business of theappellant firm and interest receipt was not in anyway related tothe proceeds of export/profit from the export business. Havingstated so, the appellate authority also negatived the plea of theassesseee that the assessing officer should have netted theinterest received from the interest payment. In the Tribunalorder, the Tribunal has observed that in computing profit underthe heads of “profits and gains of business or profession”, thereceipt like brokerage, commission, interest, rent, charges,etc., would normally be assessable under the head of “income fromother sources”. It might also be in certain circumstancesassessable under the “head of business”. It further observed thatunder what ever head the income is computed, the concept was thatfor earning an income like brokerage, commission, interest, therecould be some expenditure, which was directly relatable and wasexpended in earning such income and on that basis, it is concludedthat the netting is permissible.7. The question similar to the one in the case on hand hasbeen considered by the Division Bench of this Court in the case ofK.S.Subbiah Pillai& Co. (India) P. Ltd. v. CIT, 260 ITR 304,wherein after extracting the explanation, the Court held that theclause (baa) does not refer to net interest. It refers, interalia, to the interest included in the profits and gains of thebusiness or profession. The Court further held that clause (baa)under the Explanation to section 80HHC defines profits of thebusiness as computed under the head “Profits and gains of businessor profession”. The deductions to be made are from the amount ofprofit so computed and not from the amount computed under anyother head of income of that assessee. The reference to “suchprofits” in sub-clause (1) of clause (baa) can only be to the https://hcservices.ecourts.gov.in/hcservices/ profits of the business computed under the head “Profits and gainsof business or profession”. Addition of prefix “the” to “profits”in clause (baa), while referring to the “profits and gains ofbusiness or profession” makes it clear that it is only the amountsalready included in that computation which are now to be reducedto the extent of 90 per cent., if those items are included in sub-clause (1) of that definition. Interest paid and claimed asdeduction in the computation of profits and gains for business,cannot be set off against interest received and computed underincome from “other sources”. 8. In the other decision of this Court in the case of CIT v.Chinnapandi, (2006) 282 ITR 389, after referring to clause (baa)of explanation to Section 80HHC, it was held that on a plainreading of the provision, it is clear that what the provisionstipulates is that “profits of the business” for the purpose ofsection 80HHC of the Act mean the profits of the business ascomputed under the head “Profits and gains of business orprofession”. While computing such profits under the head “Profitsand gains of business or profession”, if any receipt by way ofbrokerage, commission, interest, rent, charges or any otherreceipt of a similar nature is included in such profits, the samehas to be reduced by 90 per cent from the profits computed asaforesaid. The deductions to be made are from the amount ofprofits so computed and not from the amount computed under anyother head of income of that assessee. No reference of netinterest is mentioned in the said clause. What was to be seen wasthe nature of receipt as contemplated under the clause. Once thereceipt of the interest is known, 90 per cent of the same is to bereduced from the profits without deducting any amount. In order tocome to the conclusion, the Court has relied on the decision of K.S. Subbiah Pillai and Co. (India) P. Ltd. v. CIT (2003) 260 ITR304 and the Punjab and Haryana High Court judgment in the case ofRani Paliwal v. CIT reported in [2004] 268 ITR 220.9. The Delhi High Court judgment in CIT v. Shri Ram HondaPower Equip, (2007) 289 ITR 475 has considered the two decisionsof this Court and also the Punjab Haryana High Court judgmentrelied on by this Court in Chinnapandi case and ultimately taken aview after taking an analogy from the then existing provision ofSection 80M, that the principle of netting appears to logicallyget attracted as no prudent businessman would allow taxation ofthe interest income de hors the expenditure incurred for earningsuch income. It further held that the words “included any suchprofits” following the words “receipts by way of interest,commission, brokerage, etc.”, is a clear pointer to the fact thatonly net interest would be includible in arriving at the businessprofit. Once business income has been determined by applyingaccounting standards as well as the provisions contained in theAct, the assessee would be permitted to, in terms of section 37 ofthe Act, claim as deduction, expenditure laid out for the purposesof earning such business income. The Delhi High Court https://hcservices.ecourts.gov.in/hcservices/ observed that this Court while considering Chinnapandi case hasfollowed the decision of K.S.Subbiah Pillai case and held thatthe deduction within the meaning of explanation (baa) waspermissible only on gross interest and not net interest, withoutnoticing that K.S.Subbiah Pillai case, the interest receipt wastreated as an income from other source of business income. 10. But the facts of the present case, as stated earlier, theappellate authority has not regarded the interest income asbusiness income. Thus, the reliance of the Delhi High CourtJudgment in CIT v. Shri Ram Honda Power Equip, (2007) 289 ITR 475by the assessee would not advance its case any further. In view ofthe binding decision of this Court in K.S.Subbbiah Pillai case(260 ITR 304) and the Chinnapandi case (282 ITR 389), the firstquestion of law is answered in negative. The second question oflaw does not arise for consideration as nothing of that sort wasdiscussed and finding was given by the authorities. Hence theorder of the Tribunal is set aside by allowing the appeal. Sd/Asst.Registrar/true copy/Sub Asst.Registrarmf/uskTo1. The Asst.Registrar, Income-tax Appellate Tribunal Chennai2. The Commissioner of Income-tax (Appeals) - IV, Chennai3. The Deputy Commissioner of Income-tax Spl.Range X, Chennai.4.The Asst.Registrar,Income Tax Appellate Tribunal,Shastri Bhavan, Rajaji Salai, Chennai -34.+1cc to Mr.V.D.Gopal, Advocate Sr 55713+1cc to Mr.M.Muralikumaran, Advocate Sr 55224MRD (CO)km/21.9.T.C. (A) No.284 of 2004