Madras High Court
M/S.Shri Jayajothi & Co Ltd vs The Asst. Commissioner Of on 12 April, 2022
T.C.A.Nos.127 & 128 of 2012
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED : 12.04.2022
CORAM :
THE HON'BLE MR. JUSTICE R. MAHADEVAN
AND
THE HON'BLE MR. JUSTICE J. SATHYA NARAYANA PRASAD
T.C.A.Nos.127 & 128 of 2012
M/s.Shri Jayajothi & Co Ltd.,
70 Alagai Nagar,
Rajapalayam .. Appellant in both the appeals
Versus
The Asst. Commissioner of
Income Tax, Circle I,
Virudhunagar. .. Respondent in both the appeals
T.C.A.No.127 of 2012: Appeal preferred under Section 260-A of the Income Tax
Act, 1961 against the order of the Income Tax Appellate Tribunal Madras “C”
Bench, dated 07.08.2006 passed in I.T.A.No.2904 and 2905/Mds/04.
T.C.A.No.128 of 2012: Appeal preferred under Section 260-A of the Income Tax
Act, 1961 against the order of the Income Tax Appellate Tribunal, Madras “C”
Bench, Chennai, dated 22.09.2006 passed in I.T.A.Nos.192 to 195/Mds/06.
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T.C.A.Nos.127 & 128 of 2012
For Appellant in both appeals : Mr.B.Kumar, Senior Counsel
for Mr.R.Loganathan
For Respondent in both appeals : Mrs.V.Pushpa
Junior Standing Counsel
COMMON JUDGMENT
(Judgment of the court was delivered by R.MAHADEVAN, J.)
Challenging the orders dated 07.08.2006 and 22.09.2006 passed by the
Income Tax Appellate Tribunal, Chennai “C” Bench, the appellant / assessee has
come up with these tax case appeals.
2.By order dated 27.06.2012, this court admitted the appeals on the
following substantial questions of law:
"(i) Whether margin money deposited by the
petitioner company, being essential to carry on the
business, the interest earned on such deposit of
margin money are entitled to deduction as part of
income from the business and eligible for relief
under Section 80 HHC?
(ii) Whether the Tribunal is right in holding
that the ratio in Chinnapandi's case reported in 282
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ITR 369 CIT Vs. Chinnapandi is applicable to the
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facts of the instant case?"
3.When the matters were taken up for consideration, the learned counsel
appearing for both sides in unison, submitted that the issue involved herein is
covered in favour of the assessee, as per the decision of the Hon'ble Supreme
Court in the case of ACG Associated Capsules (P) Ltd v. CIT [(2012) 18
taxmann.com 137(SC)], the relevant portion of which is usefully extracted
below:
"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).
10. 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
https://www.mhc.tn.gov.in/judis and Gains of Business or Profession". The expression "included
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T.C.A.Nos.127 & 128 of 2012
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 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.
11. For this interpretation of Explanation (baa) to Section
80HHC of the Act, we rely on the judgment of the Constitution Bench of
this Court in Distributors (Baroda) P. Ltd. v. Union of India and
Others (supra). Section 80M of the Act provided for deduction in respect
of certain intercorporate dividends and it provided in sub-section(1)
of Section 80M that "where the gross total income of an assessee being a
company includes any income by way of dividends received by it from a
domestic company, there shall, in accordance with and subject to the
provisions of this Section, be allowed, in computing the total income of
the assessee, a deduction from such income by way of dividends an
amount equal to" a certain percentage of the income mentioned in this
Section. The Constitution Bench held that the Court must construe Section
80M on its own language and arrive at its true interpretation according
to the plain natural meaning of the words used by the legislature and so
construed the words "such income by way of dividends" in sub-section (1)
of Section 80M must be referable not only to the category of income
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included in the gross total income but also to the quantum of the income
so included. Similarly, Explanation (baa) has to be construed on its own
language and as per the plain natural meaning of the words used in
Explanation (baa), the words "receipts by way of brokerage, commission,
interest, rent, charges or any other receipt of a similar nature included in
such profits" will not only refer to the nature of receipts but also the
quantum of receipts included in the profits of the business as computed
under the head "Profits and Gains of Business or Profession" referred to
in the first part of the Explanation (baa). Accordingly, if any quantum of
any receipt of the nature mentioned in clause (1) of Explanation (baa) has
not been included in the profits of business of an assessee as computed
under the head "Profits and Gains of Business or Profession", ninety per
cent of such quantum of the receipt cannot be deducted under Explanation
(baa) to Section 80HHC.
12.If we now apply Explanation (baa) as interpreted by us in this
judgment to the facts of the case before us, if the rent or interest is a
receipt chargeable as profits and gains of business and chargeable to tax
under Section 28 of the Act, and if any quantum of the rent or interest of
the assessee 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 rent or
gross interest but only the net interest or net rent, 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.
13. The view that we have taken of Explanation (baa) to Section
80HHC is also the view of the Delhi High Court in Commissioner of
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Income-Tax v. Shri Ram Honda Power Equip (supra) and the Tribunal in
the present case has followed the judgment of the Delhi High Court. On
appeal being filed by the Revenue against the order of the Tribunal, the
High Court has set aside the order of the Tribunal and directed the
Assessing Officer to dispose of the issue in accordance with the judgment
of the Bombay High Court in Commissioner of Income-Tax v. Asian Star
Co. Ltd. (supra). We must, thus, examine whether reasons given by the
High Court in its judgment in Commissioner of Income-Tax v. Asian Star
Co. Ltd. (supra) were correct in law.
14. On a perusal of the judgment of the High Court in Asian Star
Co. Ltd. (supra), we find that the reason which weighed with the High
Court for taking a different view, is that rent, commission, interest and
brokerage do not possess any nexus with export turnover and, therefore,
the inclusion of such items in the profits of the business would result in a
distortion of the figure of export profits. The High Court has relied on a
decision of this Court in Commissioner of Income-Tax v.
K.Ravindranathan Nair [(2007) 295 ITR 228 / 165 Taxman 282 (SC)] in
which the issue raised before this Court was entirely different from the
issue raised in this case. In that case, the assessee owned a factory in
which he processed cashew nuts grown in his farm and he exported the
cashew nuts as an exporter. At the same time, the assessee processed
cashew nuts which were supplied to him by exporters on job work basis
and he collected processing charges for the same. He, however, did not
include such processing charges collected on job work basis in his total
turnover for the purpose of computing the deduction under Section
80HHC (3) of the Act and as a result this turnover of collection charges
was left out in the computation of profits and gains of business of the
assessee and as a result ninety per cent of the profits of the assessee
arising out of the receipt of processing charges was not deducted under
clauses (1) of the Explanation (baa) to Section 80HHC. This Court held
that the processing charges was included in the gross total income from
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cashew business and hence in terms of Explanation (baa), ninety per cent
of the gross total income arising from processing charges had to be
deducted under Explanation (baa) to arrive at the profits of the business.
In this case, this Court held that the processing charges received by the
assessee were part of the business turnover and accordingly the income
arising therefrom should have been included in the profits and gains of
business of the assessee and ninety per cent of this income also would
have to be deducted under Explanation (baa) under Section 80HHC of the
Act. In this case, this Court was not deciding the issue whether ninety per
cent deduction is to be made from the gross or net income of any of the
receipts mentioned in clause (1) of the Explanation (baa).
15. The Bombay High Court has also relied on the Memorandum
explaining the clauses of the Finance Bill, 1991 contained in the circular
dated 19.12.1991 of the Central Board of Direct Taxes to come to the
conclusion that the Parliament intended to exclude items which were
unrelated to the export turnover from the computation of deduction and
while excluding such items which are unrelated to export for the purpose
of Section 80HHC, Parliament has taken due note of the fact that the
exporter assessee would have incurred such expenditure in earning the
profits and to avoid a distorted figure of export profits, ninety per cent of
the receipts like brokerage, commission, interest, rent, charges are sought
to be excluded from the profits of the business. In our considered opinion,
it was not necessary to refer to the explanatory Memorandum when the
language of Explanation (baa) to Section 80HHC was clear that only
ninety per cent of receipts by way of brokerage, commission, interest,
rent, charges or any other receipt of a similar nature included in such
profits computed under the head profits and gains of business of an
assessee could be deducted under clause (1) of Explanation (baa) and not
ninety per cent of the quantum of any of the aforesaid receipts which are
allowed as expenses and therefore not included in the profits of business
of the assessee.
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16. In the result, we allow the appeal and set aside the impugned
order of the High Court and remand the matter to the Assessing Officer to
work out the deductions from rent and interest in accordance with this
judgment. No costs."
4.In the light of the aforesaid decision, which is squarely applicable to the
facts of the present case, these appeals are allowed by setting aside the orders
impugned herein. Consequently, the matter is remanded to the Assessing Officer
to work out the deductions from rent and interest in accordance with the
aforesaid decision. No costs.
(R.M.D., J.) (J.S.N.P., J.)
12.04.2022
gba/msr
Internet : Yes
Index : Yes / No
To
1.The Asst. Commissioner of Income Tax, Circle I,
Virudhunagar.
2.The Income Tax Appellate Tribunal
Madras C Bench.
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T.C.A.Nos.127 & 128 of 2012
R.MAHADEVAN, J.
and
J.SATHYA NARAYANA PRASAD, J.
gba/msr
T.C.A.Nos.127 & 128 of 2012
12.04.2022
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