Facts of the Case

The Revenue filed appeals before the Delhi High Court against the common order passed by the Income Tax Appellate Tribunal relating to Assessment Years 2003-04 and 2004-05. The issue raised was regarding treatment of miscellaneous income and interest income while computing deduction under Section 80HHC.

The Assessing Officer had accepted miscellaneous income and interest income as part of the business income of the assessee. While computing deduction under Section 80HHC, the Assessing Officer reduced 90% of such other income in accordance with Explanation (baa). However, while calculating book profits under Section 115JB, only 30% of deduction under Section 80HHC was allowed by invoking Section 80HHC(1B).

The assessee challenged the restriction of deduction to only 30% for MAT computation purposes.

Issues Involved

  1. Whether miscellaneous income and interest income should be excluded while computing eligible profits under Section 80HHC.
  2. Whether such income forms part of business income after having been accepted by the Assessing Officer.
  3. Whether deduction under Section 80HHC while computing book profits under Section 115JB should be restricted to 30% by applying Section 80HHC(1B).

Petitioner’s Arguments (Revenue)

  • The Revenue contended that miscellaneous income and interest income should be reduced while computing deduction under Section 80HHC.
  • It argued that such income could not be regarded as export profits and therefore should not form part of eligible deductions.
  • The Revenue further sought reduction of these incomes for purposes of computation under Section 115JB as well.

Respondent’s Arguments (Assessee)

  • The assessee submitted that the Assessing Officer had already treated miscellaneous income and interest income as part of business income.
  • Once accepted as business income, such amounts necessarily formed part of profits of business for purposes of computation under Section 80HHC.
  • The assessee further argued that restricting deduction to only 30% under Section 80HHC(1B) while computing book profits under Section 115JB was legally incorrect.

Court Findings / Court Order

The Delhi High Court observed that the Revenue had proceeded on an incorrect understanding of the computation mechanism under Section 80HHC.

The Court clarified that:

  • Export profits are computed under Section 80HHC(3) using the following formula:

Profits derived from exports = Profits of business × Export turnover / Total turnover

  • Miscellaneous income and interest income had never been treated as export turnover.
  • The Assessing Officer had accepted such income as part of business income.
  • Consequently, such income would continue to constitute profits of business subject to adjustment under Explanation (baa).
  • Therefore, no further exclusion of miscellaneous income and interest income was required.

The Court further relied upon the Supreme Court judgment in Ajanta Pharma v. CIT (327 ITR 305 SC) and held that deduction under Section 80HHC for purposes of computation under Section 115JB should be allowed in full and not restricted to 30%.

Accordingly, no substantial question of law arose for consideration and the appeals of the Revenue were dismissed.

Important Clarification

The judgment clarifies that once miscellaneous income and interest income are accepted as business income by the Assessing Officer, the Revenue cannot subsequently seek exclusion of such income from profits of business while computing deduction under Section 80HHC.

The decision also reiterates the principle laid down by the Supreme Court in Ajanta Pharma v. CIT (327 ITR 305 SC) that deduction under Section 80HHC while computing MAT under Section 115JB is allowable in entirety and cannot be restricted under Section 80HHC(1B).

 Sections Involved

  • Section 80HHC of the Income Tax Act, 1961
  • Section 80HHC(1B) of the Income Tax Act, 1961
  • Section 80HHC(3) of the Income Tax Act, 1961
  • Explanation (baa) to Section 80HHC
  • Section 115JB of the Income Tax Act, 1961
  • Section 288A of the Income Tax Act, 1961

Link to download the order - https://delhihighcourt.nic.in/app/case_number_pdf/2013:DHC:2440-DB/BDA10052013ITA202013.pdf

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