Delhi High Court
Cit vs Anil Chanana on 6 August, 2012
Author: R.V. Easwar
$~31
* IN THE HIGH COURT OF DELHI AT NEW DELHI
% Date of Decision : 6th, August, 2012.
+ ITR 4/1997
CIT ..... Petitioner
Through : Mr. Sanjeev Sabharwal, sr. standing counsel
with Mr. Puneet Gupta, jr. standing counsel
versus
ANIL CHANANA ..... Respondent
Through: Ms. Shashi M. Kapila and Mr. Pravesh
Sharma, Advs.
CORAM:
MR. JUSTICE S. RAVINDRA BHAT
MR. JUSTICE R.V. EASWAR
R.V. EASWAR, J: (OPEN COURT)
This is a reference made at the instance of the Commissioner of Income Tax,
Delhi-VII under Section 256(1) of the Income Tax Act (hereinafter referred to as "the
Act"). The following questions of law were referred to us for opinion :
"1. Whether, on the facts and in the circumstances of the case, the
I.T.A.T was right in law in holding that section 80--HHC(3)(b) would
be applicable even where assessee's local business consists of dealing
in goods different from the ones exported.
2. Whether the ITAT was right in law in holding that section 80
AB is not relevant for the purpose of computing deduction u/s 80-HHC.
3. Whether the ITAT was right in law in holding that interest
earned by assessee was in the nature of business income.
4. Whether the ITAT was right in law in holding domestic business
need not have any nexus with the export business for the purpose of
deduction u/s 80-HHC.
ITR 4/1997 Page 1 of 5
5. Whether ITAT was right in law in holding that for deduction u/s
80-HHC, the domestic business need not have any turnover and it need
have only profit."
2. The brief facts giving rise to the reference may be noticed. The assessee is an
individual engaged in the export business. In the return of income filed for the
assessment year 1991-92, he claimed deduction of `33,63,149/- under Section 80HHC
of the Act. While completing the assessment under Section 143(3), the Assessing
Officer noticed that the assessee had claimed deduction under the aforesaid Section
even in respect of rent and interest. These items of receipt were also treated as part of
the turnover. He was of the opinion that deduction under Section 80HHC could only
be allowed to the extent of the profits from the export business as envisaged by
Section 80AB of the Act and accordingly, proposed to exclude the rent and interest
receipts from the computation of the deduction. The assessee however, submitted that
the proposal of the Assessing Officer would be contrary to the scheme of the
deduction envisaged by Section 80HHC. According to him the formula to be applied
for determining the export profits was the one prescribed in sub-section (3) of Section
80HHC, which was as under :
Export Profits = Profits of Business x (Export Turnover ÷ Total Turnover)
It was the contention of the assessee that he was carrying on the business of money
lending and the interest from this activity would amount to "profits of the business"
and since sub-section (3) of Section 80HHC prescribed a formula which was
mandatory, those profits cannot be excluded while applying the formula. The
Assessing Officer did not accept the assessee's contention and re-worked the
deduction at `15,97,672/- in the following manner :
"Net Profit Rs.38,71,008/-
Less :
Interest Rs.22,41,296/-
Rent Rs. 35,640/- Rs.22,76,936/-
ITR 4/1997 Page 2 of 5
Rs.15,94, 072/-
Add:
Expenses related
To interest & Rent. Rs. 3,600/-
Rs.15,97,672/-
3. It may be noticed that the Assessing Officer excluded both the interest and rent
receipts from the computation of the profits of the business for the purpose of
calculating the deduction under Section 80HHC, but in this reference we are
concerned only with the interest receipts. So far as the rent is concerned, even before
the tax authorities the assessee does not press for the deduction. Accordingly, on 3rd
August, 2012 we had reframed the questions referred to us by the Tribunal and
consider it appropriate to deal with only one question of law which is "Whether the
ITAT was right in law in holding that the domestic business need not have any nexus
with export business for the purpose of deduction under Section 80HHC?". As the
question shows, the real objection of the income tax authorities in this case is that the
interest income, even if it is assessed as business income on the footing that the
assessee was carrying on money lending business, still it represented domestic profits
and not export profits and therefore, a mechanism should be devised by which the
domestic profits are excluded from the profits of the business for the purpose of
applying the formula prescribed by Section 80HHC(3).
4. The CIT(Appeals) having upheld the view of the Assessing Officer, the
assessee preferred a further appeal to the Tribunal which held, following the order of
the Special Bench of the Tribunal in the case of International Research Park
Laboratories Ltd. Vs. ACIT (1995) 212 ITR (AT)1(Del.)(SB), that Section 80AB had
no application for computing the export profits under Section 80HHC since the latter
section was a complete code by itself. The Tribunal also held that the assessee had
advanced monies to various parties from time to time for which purpose it had also
ITR 4/1997 Page 3 of 5
borrowed monies and considering the volume, frequency, continuity and regularity of
the transactions of advancing the monies, the activity constituted money lending
business and the interest therefrom was assessable as profits of the business. It further
noted that in the case of International Research Park Laboratories Ltd. (supra) it was
held that a statutory formula having been prescribed, it is not permissible to exclude
the domestic profits from the profits of the business in order to arrive at the export
profits and that even if the domestic business (the money lending activity in the
present case) was not capable of having any "turnover", the deduction under Section
80HHC cannot be denied and it had to be computed proportionately from the formula
prescribed by the sub-section.
5. It is from the aforesaid order of the Tribunal that the question of law extracted
above arises for decision. We find that the question stands covered in favour of the
assessee by a judgment of the Supreme Court in the case of P. R. Prabhakar Vs.
Commissioner of Income Tax (2006) 284 ITR 548 where the order of the Special
Bench cited (supra) stands approved. It was clarified that the amendment made to
clause (baa) of the Explanation below Section 80HHC which defines "profits of the
business" in such a manner as to exclude receipts like interest, commission etc. which
did not have an element of turnover, was introduced prospectively by the Finance
(No.2) Act, 1991 w.e.f. the assessment year 1992-93 and the amendment did not
operate retrospectively. It was therefore held that for the assessment years prior to the
assessment year 1992-93, it would not be permissible to exclude interest receipts even
if the business from which interest arose did not have an element of turnover. The
Supreme Court expressly referred to the order the Special Bench of the Tribunal cited
above and approved the same. Mr. Sabharwal, ld. senior standing counsel for the
revenue initially took time to ascertain whether the amendment was brought into force
w.e.f. 1.4.1987 or w.e.f. 1.4.1992. After ascertaining the same, he submitted that the
amendment which would apply to the present controversy came into force only from
ITR 4/1997 Page 4 of 5
1.4.1992 and therefore would not apply to the assessment year 1991-92 which is the
year in reference.
6. In the aforesaid view of the matter we answer the question of law, as reframed
by us, in the affirmative, in favour of the assessee and against the revenue. There
shall, however, be no order as to costs.
R.V. EASWAR, J.
S. RAVINDRA BHAT, J.
AUGUST 06, 2012
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