Export — Deduction u/s.80HHC — Only ninety percent 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.

For the A.Y. 2003-04, the assessee filed a return of income claiming a deduction of Rs.34,44,24,827 u/s.80HHC of the Act. The Assessing Officer passed the assessment order deducting 90% of the gross interest and gross rent received from the profits of business while computing the deduction u/s.80HHC and accordingly restricted the deduction u/s.80HHC to Rs.2,36,25,053. The assessee filed an appeal against the assessment order before the Commissioner of Income-tax (Appeals), who confirmed the order of the Assessing Officer excluding 90% of the gross interest and gross rent received by the assessee while computing the profits of the business for the purposes of section 80HHC. Aggrieved, the assessee filed an appeal before the Income-tax Appellate Tribunal (for short ‘the Tribunal’). The Tribunal held, relying on the decision of the Delhi High Court in CIT v. Shri Ram Honda Power Equip, (2007) 289 ITR 475 (Delhi), that netting of the interest could be allowed if the assessee is able to prove the nexus between the interest expenditure and interest income and remanded the matter to the file of the Assessing Officer. The Tribunal also remanded the issue of netting of the rent to the Assessing Officer with the direction to find out whether the assessee has paid the rent on the same flats against which rent has been received from the staff and if such rent was paid, then such rent is to be reduced from the rental income for the purpose of exclusion of business income for computing the deduction u/s.80HHC. Against the order of the Tribunal, the Revenue filed an appeal before the High Court and the High Court has directed that on remand the Assessing Officer will decide the issue in accordance with the judgment of the High Court in CIT v. Asian Star Co. Ltd., (2010) 326 ITR 56 (Bom.) in which it has been held that while determining the profits of the business as defined in Explanation (baa) to section 80HHC, 90% of the gross receipts towards interest and not 90% of the net receipts towards interest on fixed deposits in banks received by the assessee would be excluded for the purpose of working out the deduction u/s.80HHC of the Act.

Against the order of the High Court, the assessee filed a Special Leave Petition before the Supreme Court wherein leave was granted. The Supreme Court observed that Explanation (baa) 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 Explanation (baa). Thus, profits of the business of an assessee will have to be first computed under the heads ‘profits and gains of business or profession’ in accordance with the provisions of sections 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 u/s.28 of the Act will have to be included. Similarly, in computation of such profits of business, different expenses which are allowable u/s.30 to u/s.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).

Under clause (1) of Explanation (baa), 90% 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 and gains of business or profession’. The expression ‘included any such profits’ in clause (1) of Explanation (baa) would mean only such receipts by way of brokerage, commission, interest, rent, charges or any other receipt, which are included in profits of the business as computed under the head ‘profits and gains of business or profession’.

The Supreme Court therefore held that only 90% 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 form the profits of the assessee for determining ‘profits of the business’ of the assessee under Explanation (baa) to section 80HHC. For this interpretation of Explanation (baa) to section 80HHC of the Act, the Supreme Court relied on its judgment of the Constitution Bench in Distributors (Baroda) P. Ltd. v. Union of India, (1985) 155 ITR 120 (SC).

Since the High Court had set aside the order of the Tribunal and directed the Assessing Officer to dispose the issue in accordance with the judgment of the Bombay High Court in CIT v. Asian Star Co. Ltd., (2010) 326 ITR 56 (Bom.), it examined the reasons given by the High Court in its judgment and noted the fallacies therein.

In the result, the Supreme Court allowed the appeal and set aside the impugned order of the High Court and remanded the matter to the Assessing Officer to work out the deductions from rent and interest in accordance with this judgment.