Commissioner of Income Tax vs Nahar Spinning Mills Ltd.

Rajesh Bindal, J.—The Revenue has approached this Court by filing the present appeal against order clt. 29th Nov., 2005 passed by the Income Tax Appellate Tribunal, Chandigarh Bench "A" Chandigarh (for short ''the Tribunal''), In ITA No. 798/Chd/2001 for the asst. yr. 1998-99 raising the following substantial questions of law

(i) Whether on the facts and the circumstances of the case, the Hon''ble Tribunal was right in law in holding that sales-tax, and Central sales-tax be excluded from the total turnover of the assessee while computing deduction u/s 80HHC?

(ii) Whether on the facts and circumstances of the case, the Hon''ble Tribunal was right in law in directing not to reduce 10 per cent of the interest income from the profit of business for the purpose of computation of deduction u/s 80HHC of the IT Act?

While issuing notice, the question No. 1 was not considered to be a question of law as the same was found to be covered against the Revenue by a judgment of this Court dt. 22nd May, 2006 in IT Appeal No. 293 of 2005 in CIT v. Vardhman Polytex Ltd. reported at (2006) 203 CTR (P&H) 397- Ed. and accordingly notice was issued to the assessee only with reference to question No. 2, which we proceed to deal with for final disposal, with the consent of counsel for the parties.

The assessee in the present case is engaged in the business of manufacture,. trading and export of cotton yarn, woollen hosiery garments. The return for the assessment year in question was filed on 30th Nov., 1998 declaring its income at Rs. 10,03,94,830. The same was processed u/s 143(1)(a) of the Act on 17th March, 1999 at the income of Rs. 10,08,96,943. Statutory notice dt. 18th May, 1999 u/s 143(2) of the Act was served upon the assessee on 22nd May, 1999, which was followed by detailed questionnaire. During the course of assessment, it was found that assessee had declared income of Rs. 6,33,18,491 as interest under the head ''Income from other sources''. During the assessment claim of the assessee that interest income shown by it under the head income from other sources is in fact income chargeable under the head income from business and profession. This claim was sought to be made by the assessee during the course of assessment proceedings, by submitting a letter on 14th Oct., 2000, which was beyond the period prescribed for filing of revised return. It was claimed that the assessee should be given the benefit of it for calculation of deduction u/s 80HHC of the Act but the claim made by the assessee was not accepted by the AO and the interest income was reduced while computing income from business and profession and the same was separately assessed under the head ''Income from other sources''. The income so determined under the head income from business and profession only was considered for the purpose of calculating deductions u/s 80HHC of the Act.

Aggrieved against the order of assessment, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals) [for short, ''the CIT(A)'']. Before the CIT(A) it was admitted by the assessee that the interest income was shown in the return as income from other sources. However, the CIT(A) accepted the plea raised by the assessee and held that the interest income declared by the assessee in the return, as income from other sources, is to be treated as business income for the purpose of calculation of deduction u/s 80HHC of the Act and thereafter referring to Expln. (baa) thereof, directed the AO to exclude 90 per cent of such income. Aggrieved against the order passed by the CIT(A) on this issue, Revenue went in appeal before the Tribunal raising following ground of appeal:

The learned CIT(A) has further erred both in law and on fact of the case in holding that interest income of Rs. 6,33,18,491 is business income as against income from other sources taken by the AO for the purposes of computing deduction u/s 80HHC.

A perusal of the order passed by the Tribunal shows that it did not at all deal with the issue raised by the Revenue rather misdirected itself in referring to and relying upon the judgment in Rani Paliwal Vs. Commissioner of Income Tax, , which was not at all applicable in the facts and circumstances of the case. The issue involved in Rani Paliwal''s case (supra) was as to whether 90 per cent of the gross interest received by the assessee, as included in the profit of business, was to be excluded or the net interest, which was answered in favour of the Revenue. However, issue in the present case primarily was as to whether the income declared by the assessee under the head income from other sources could be claimed to be income from business and profession at the time of framing the assessment and for the purpose of computing the deduction u/s 80HHC of the Act. Since the issue has not at all been touched by the Tribunal, we deem it appropriate to remit the matter back to the Tribunal for considering the issue and pass fresh order after hearing counsel for the parties.

The parties are directed to appear before the Tribunal for further hearing on 31st May, 2007.

The appeal is disposed of in the manner indicated above.