Commissioner of Income Tax-I, Coimbatore vs Veejay Marketing

P. Jyothimani, J.—The Revenue has preferred these tax case appeals as against the order 12.5.2004 passed by the Income Tax Appellate Tribunal, Chennai, ''B'' Bench, in ITA Nos. 1062 and 1063/(Mds)/1998, for the assessment years 1993-94 and 1994-95, suggesting the following substantial questions of law: Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in holding that only 90% of the net commission and not the gross commission receipts has to be deducted while arriving at the "profits of business" in terms of Explanation (baa) to Section 80HHC?

Pursuant to the earlier order of this Court dated 1.11.2011, the appellant has taken steps to serve the respondent/assessee through the Department and it is seen that the respondent/assessee has in fact been served on 23.11.2011 and proof of service has also been filed. Inspite of the name of the assessee having been printed in the cause list, there is no appearance on behalf of the assessee/respondent. Therefore, we proceed to decide the issue on merits.

The issue involved is as to whether while arriving at the ''profit of the business'' in terms of Explanation (baa) to Section 80HHC, 90% of the net commission has to be deducted or the gross commission receipts?

While completing the assessment for the assessment years 1993-94 and 1994-95 u/s 143(3) of the Act, the assessing officer found that the assessee has reduced 90% of the net commission while working out the profit of business under the above said explanation (baa) to Section 80HHC of the Act. But, at the time of assessment, the assessee has pleaded that only 90% of the net commission receipts have to be deducted to arrive at the profit of the business. Therefore, it has shown only the net commission receipts. The assessing officer, from the working sheet filed by the assessee in 44AC in their 80HHC claim, found that the assessee has set off commission payments against the commission receipts and has taken only the net commission and deducted only 90% therefrom. Therefore, the assessing officer held that 90% of gross commission receipts has to be deducted from the profit of the business and accordingly made deductions u/s 80HHC for the said assessment years.

Aggrieved against the said orders of the assessing officer, the assessee filed appeals before the Commissioner of Income Tax (Appeals). The appellate authority has held that only 90% of the net commission has to be deducted from the profit of the business and accordingly, directed the assessing officer to redo the exercise. It was as against the said order of the Commissioner of Income Tax (Appeals), the Revenue has preferred appeals before the Income Tax Appellate Tribunal.

The Income Tax Appellate Tribunal, by following the decision of the Income Tax Appellate Tribunal, Delhi Bench ''E'' (Special Bench) in Lalsons Enterprises v. Dy. CIT [2004] 89 ITD 25, has held that only 90% of the net commission has to be reduced from the profit of the business for determining deduction u/s 80HHC of the Act.

On a reference to the said decision of the Special Bench of the Tribunal, which has been followed by the Income Tax Appellate Tribunal, it is clear that the Special Bench has dealt with the case of net interest and not commission. The operative portion of the said order would run thus:

...Whether for purpose of applying Explanation (baa) below Section 80HHC(4B) while reducing 90 percent of receipt by way of interest from profits of business, it is only 90 percent of net interest remaining after allowing a set-off of interest paid, which has a nexus with interest received, that can be reduced and not 90 percent of gross interest - Held, yes.

It is as against the said order of the Tribunal, the Revenue has filed the above appeals on the above substantial question of law.

The issue has been decided by this Court in Commissioner of Income Tax Vs. V. Chinnapandi, wherein the Division Bench of this Court has held that for the purpose of giving deduction u/s 80HHC of the Act, the same must be from the gross interest received by the assessee, the operative portion of which is extracted hereunder:

In view of the above, we are of the view that 90 percent of the interest that is deductible for the claim u/s 80HHC of the Act is from the gross interest received by the assessee and that the amount of interest paid by the assessee should not be deducted therefrom and, hence, we answer the above question in favour of the Revenue and against the assessee and allow the tax case filed by the Revenue.

It is seen that the Delhi High Court in the Rishi Dev Batra Vs. Dr. (Mrs.) Anup Suri has taken a different view and that came to be considered by the Division Bench of this Court in The Commissioner of Income Tax Vs. Devraj Nensee and Co., in which, this Court has reiterated the earlier decision in V. Chinnapandi (supra), which is as follows:

The Delhi High Court judgment in Rishi Dev Batra Vs. Dr. (Mrs.) Anup Suri has considered the two decisions of this Court and also the Punjab and Haryana High Court judgment relied on by this Court in Commissioner of Income Tax Vs. V. Chinnapandi, ) and ultimately taken a view after taking an analogy from the then existing provision of section 80M, that the principle of netting appears to logically get attracted as no prudent businessman would allow taxation of the interest income de hors the expenditure incurred for earning such income. It further held that the words "included any such profits" following the words "receipts by way of interest, commission, brokerage, etc.", is a clear pointer to the fact that only business income has been determined by applying accounting standards as well as the provisions contained in the Act, claim as deduction, expenditure laid out for the purposes of earning such business income. The Delhi High Court observed that this court while considering Commissioner of Income Tax Vs. V. Chinnapandi, has followed the decision of K.S. Subbiah Pillai and Co. (India) Pvt. Ltd. Vs. Commissioner of Income Tax, ), the interest receipt was treated as income from other sources and not as business income.

In view of the consistent stand taken by this Court, by following the ratio laid down in V. Chinnapandi (supra), the reasons given by the Tribunal in the impugned order is not sustainable. Accordingly, the impugned order of the Tribunal stands set aside and the substantial question of law is answered in favour of the Revenue. In the result, the appeals stand allowed. However, there is no order as to costs.