INCOME TAX ACT, 1961

--Deduction under section 80HHC--Profits of businessExclusion of interest, rent, etc., from profits of business--The assessee filed return of income claiming deduction of Rs. 34,44,24,827 under section 80HHC. The AO passed the assessment order deducting ninety per cent of the gross interest and gross rent received from the profits of business while computing the deduction under section 80HHC and accordingly restricted the deduction under section 80HHC to Rs. 2,36,25,053. The Tribunal held, relying on the decision of the Delhi High Court in CIT v. Shri Ram Honda Power Equip (2007) 15 (I) ITCL 371 (Del-HC) : (2007) 289 ITR 475 (Del), that netting of the interest could be allowed if the assessee was able to prove the nexus between the interest expenditure and interest income and remanded the matter to the file of the AO. The Tribunal also remanded the issue of netting of the rent to the AO with the direction to find out whether the assessee has paid the rent on the same flats against which rent had 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 under section 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 AO will decide the issue in accordance with the judgment of the High Court in CIT v. Asian Star Co. Ltd. (2010) 34 (I) ITCL 251 (Bom-HC) : (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, ninety per cent of the gross receipts towards interest and not ninety per cent 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 under section 80HHC. Held: 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.

Explanation (baa) to section 80HHC 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 had to be first computed under the head Profits and Gains of Business or Profession” in accordance with provisions of sections 28 to 44D. 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 were allowable under sections 30 to 44D had to be allowed as expenses. After including such receipts of income and after deducting such expenses, the total of the net receipts were 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). [Para 9] 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 and Gains of Business or Profession”. The expression included 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 was 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 was 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. [Para 10] Explanation (baa) had 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) had 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. [Para 11] 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, 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. [Para 12]