Bombay High Court

Jamnadas G. Hundalani vs Asstt. Cit & Anr. on 29 January, 2001

Equivalent citations: (2004) 87 TTJ Mumbai 268

ORDER

M.A. Bakshi, V.P.

We find it convenient to dispose of these two appeals of the assessee for assessment years 1990-91 and 1991-92 by this consolidated order. Rival contentions have been heard and record perused.

2. One of the common issues involved in these appeals is relating to the computation of deduction under section 80HHC. The assessee had derived income from exports, interest on loans, hiring charges for surplus space and LIC commission. Deduction under section 80HHC was claimed on the entire income except LIC commission. Under section 80HHC(3) the profits derived from exports is to be worked out in proportion to the export turnover vis-a-vis total turnover. The assessee has taken the export turnover and the total turnover as same. In other words whereas income from sources other than exports is included in the profits, these items have not been taken into account for working out the total turnover. As a result of this, deduction has been claimed in respect of the entire profits including income from commission, interest on loans, rent of surplus space, etc.

3. The assessing officer held that the assessee was engaged in the business of export of readymade garments. The interest income had been earned by the assessee on the loans advanced to the relatives and family concerns and that advancing money to the relatives and sister-concerns was not the business of the assessee and, therefore, the interest income did not have the character of business income. Similarly, in regard to commission and rent from godown, it was held that the income was assessable as income from other sources. The deduction under section 80HHC was accordingly worked out by excluding such income from profits of business.

4. The assessee appealed to the Commissioner (Appeals) and the latter agreed with the view of the assessing officer. Before the Commissioner (Appeals), as an alternative contention, the assessee had pleaded that atleast the interest received should be set off against the interest paid. This contention was also rejected on the ground that earning of interest income was assessable under the head 'Income from other sources' and the payment of interest was adjustable against the business income.

5. The assessee is in appeal before us. The learned counsel for the assessee contended that apart from the exports, the assessee has also earned interest income from relatives and sister-concerns. That the income from commission was on exports and therefore, it was to be treated as export profits. Similarly for rental charges, it was contended that the assessee had surplus space in its business premises which was let out and, therefore, the income was assessable as business income. It was further, pointed out that though in assessment years 1986-87 and 1987-88 the assessee had shown the income from warehousing as income from property, for assessment years 1988-89 and 1989-90 the income was shown as income from business. The assessing officer has assessed the same under section 143(1)(a) of the Act. It was further pointed out that in assessment year 1990-91 the assessing officer excluded the income from all the three sources on net basis for purposes of section 80HHC. However, for assessment year 1991-92 the assessing officer has taken the gross figure for exclusion in working out the deduction under section 80HHC.

6. Relying upon the decision of the Special Bench of the Tribunal in the case of International Research Park Laboratories Ltd. v. Assistant Commissioner (1994) 50 ITD 37 (Del) (SB) it was contended that the income from commission on exports should be deemed to be the profits derived from exports. That in the aforementioned decision of Special Bench it was held that the clause (baa) to Explanation to section 80HHC by the Finance No. 2 Act of 1991 inserted by amendment is applicable prospectively and not retrospectively.

7. In support of the contention that only the net income as against the gross income should be excluded, the learned counsel relied upon the decision of the Bombay Bench of the Tribunal in the case of Pink Star v. Dy. CIT (2000) 72 TTD 137 (Bom) and it is claimed that the said decision has been affirmed by the Bombay High Court in CIT v. Pink Star (2000) 245 ITR 757 (Bom). Reliance was also placed upon the decision of the Bombay High Court in the case of CIT v. Punit Commercial Ltd. (2000) 245 ITR 550 (Bom), in support of the contention that in the case of a person who is an 100 per cent exporter, the deduction permissible under section 80HHC is with reference to the entire profits as per the P&L a/c. Referring the decision of the Bombay High Court in the case of CIT v. KK Doshi & Co. (2000) 245 ITR 849 (Bom) where their Lordships have held that service charges received by the assessee do not constitute the business income for the purpose of computing export profits under section 80HHC, it was pleaded by the learned counsel that this decision may be applicable for the rental income from the warehousing but not in respect of other income.

8. The learned departmental Representative on the other hand contended that in assessment year 1986-87 the assessment has been made under section 143(1) (a) and interest income earned by the assessee was excluded from business profits, The interest having been earned on surplus and, therefore, it cannot be related to the export income of the assessee. Reliance was placed on the decision of the Bombay Bench of the Tribunal in the case of Mathani Steels Ltd. v. Dy. CIT (1996) 57 TTD 584 (Bom) in support of the contention that deduction under section 80HHC is permissible only in respect of profits derived from exports. Reliance in,support of this proposition was also placed on the following decisions :

(1) Kariinjee (P) Ltd. v. MC (1989) 35 TTJ (Bom) 288

(2) Berlia & Co. v. Assistant Commissioner (1998) 67 ITD 347 (Coch)

(3) Smt. TC. Usha v. Dy. CIT (1999) 70 ITD 279 (Coch)

9. The learned departmental Representative also pointed out that the decisions cited on behalf of the assessee are not applicable in view of the decision of the Supreme Court in the case of CIT v. Sterling Foods (1999) 237 ITR 579 (SC). It was contended that though the issue for consideration of the Supreme Court was not under section 80HHC, but the word 'derived from' has been interpreted to mean the income, which originates from the source. Reliance was also placed on the decision of the Bombay High Court in the case of KK Doshi & Co. (supra) which is stated to be directly on the point. He accordingly contended that the appeal of the assessee may be dismissed.

10. We have given our careful consideration to the rival contentions. The assessee has derived income from exports. Besides, income has been earned on account of commission, interest on loans, rent, etc. In computing the deduction under section 80HHC the assessee has taken the entire profits as the profits of business derived from exports. Though the learned counsel for the assessee has relied upon several decisions in support of his claim, the issue is now covered by the decision of the jurisdictional High Court in the case of KK Doshi & Co. (supra). Their Lordships of the Bombay High Court has held that for purposes of deduction under section 80HHC the profits derived from exports are such as have nexus with the export activity of the assessee. In this case their Lordships have held that the service charges received by a diamond dealer is not to be included in the profits derived from exports and the said amount is to be excluded from the P&L a/c for the purpose of deduction under section 80HHC. Similarly in'the case of CIT v. S.G. Jhaveri Consultancy Ltd. (2000) 245 ITR 854 (Bom) their Lordships of the Bombay High Court held that for purposes of working the deduction under section 80HHC the receipts by way of brokerage commission, interest, rent or any other receipt of similar nature which do not have nexus with the sale proceeds from export activities are to be excluded from the P&L a/c for purposes of working the deduction under section 80HHC.

11. Respectfully following the aforementioned decisions of the Bombay High Court, the contention on behalf of the assessee that deduction should be computed in respect of the entire profits and gains as per P&L a/c is rejected.

12. We now consider the contention on behalf of the assessee that the net interest income as against the gross interest only be excluded from the profits as per P&L a/c. For assessment year 1990-91 the assessing officer had taken, into account net interest income for the purpose of exclusion from the profits disclosed in the P&L a/c. For asst, yr. 1991-92 the assessing officer has taken gross income from interest for the purpose of exclusion. He has also reduced the profits by a sum of Rs. 2,50,188 being the interest on borrowings for business. It is the contention of the assessee that the Bank interest amounting to Rs. 52,769 on the money charged for the purpose of business has been separately debited to the P&L a/c. It is further contended that the assessee had earned gross interest of Rs. 4,23,676 and had paid interest of Rs. 2,50,188 and accordingly reflected the net interest income of Rs. 1,73,488 in the P&L a/c. However, the learned counsel for the assessee has cited decision of the Tribunal in the case of Pink Star (supra) in support of the claim that it is net interest income which is to be taken into account for the purpose of exclusion under Expln. (baa). However, this is subject to the condition that the interest paid has the nexus with the interest earned. Since there are counter-claims on behalf of the assessee and the revenue, we consider it just and reasonable to restore this issue back to the Me of assessing officer for the purpose of verification. In case of interest of Rs. 2,50,188,it does not have any nexus with earning of interest of Rs. 4,23,676 then such interest is not to be deducted from the gross interest and on the other hand if the interest so paid is relating to the business of the assessee, then, as done by the assessing officer, the said amount has to be deducted from the profits disclosed in the P&L a/c. On the other hand if the nexus between the interest paid and interest earned is established, the assessing officer has to take net income for the purposes of exclusion under Expln. (baa) to section 80HHC. The assessing officer is accordingly directed to verify the claim of the assessee and recompute the deduction in the light of above directions.

13. We may clarify that the claim of netting of income is restricted to interest income. No such claim has been made regarding rental income and commission. Our decision relating to deduction under section 80HHC for assessment year 1990-91 shall also apply to assessment year 1991-92.

14. In assessment year 1990-91, the only other issue is relating to the addition of Rs. 60,000 on account of inadequate household expenses. The assessing officer had come to the conclusion that the assessee had withdrawn only Rs. 24,000 for household expenses, which were considered to be inadequate. The contention on behalf of the assessee is that the assessing officer has not taken into account the withdrawals of the parents of the assessee who Were living with the assessee. Since the withdrawals of the parents were about Rs. 94,000 it was contended that there was no justification for the addition of Rs. 36,000.

15. Since we have remanded the issue relating to the computation of interest for deduction under section 80HHC to the assessing officer, we consider it reasonable to restore this issue also to the Me of the assessing officer with the direction to verify the claim of the assessee. In case the parents of the assessee have withdrawn the sum of Rs. 94,000 for household expenses, then there will be no justification for addition of Rs. 36,000. The assessing officer shall decide thi's issue fresh in accordance with law and our observations after giving an opportunity of being heard to the assessee.

16. For statistical purposes the appeals of the assessee are partly allowed.