High Court of Punjab and Haryana

Commissioner of Income-tax-III, Ludhiana

v.

Malwa Cotton Spinning Mills Ltd.

ADARSH KUMAR GOEL AND RAJESH BINDAL, JJ.

IT APPEAL NO. 94 OF 2006

December 22, 2006

Section 80HHC of the Income-tax Act, 1961 - Deductions - Exporters - Assessment year 1994-95 - Whether interest received by assessee from its customer on account of delay in payment even if assessed as business income was to be reduced therefrom for purpose of calculation of profits of business to calculate relief admissible under section 80HHC - Held, yes

FACTS

The assessee received interest from its customers on delayed payment of dues. The Assessing Officer held that said interest income was liable to be reduced from income for calculating relief under section 80HHC. The assessee contended that only 90 per cent of the net amount of interest could be reduced from the profits eligible for calculating relief under section 80HHC. The Assessing Officer, however, rejected the assessee’s contention and reduced 90 per cent if gross interest received by the assessee from its customers from the profits eligible for deduction under section 80HHC. On appeal, the Commissioner (Appeals) upheld the order of the Assessing Officer. On appeal, the Tribunal held that interest received from the customers was income from business and not from other sources.

HELD

In view of provisions of section 80HHC the assessee was entitled to deduction to the extent of profits derived from export. Explanation (baa) appended to clause 4 of section 80HHC defines the term “profits of the business” as profits and gains of business or profession reduced, inter-alia, by 90 per cent of sum referred to in clauses (iiia), (iiib), (iiic), (iiid) and (iiie) of section 28 or receipts of brokerage, commission, interest, rent charges or any other receipt of similar nature included in such profits. [Para 5]

Clause (baa) of section 80HHC, talks of procedure, as to how profits of business are to be computed. It provides that in case, incomes of the kind including interest are included in the profits of business, 90 per cent thereof shall be reduced therefrom. It does not make any distinction between the interest earned from source ‘A’ or source ‘B’. Interest from wherever it is earned retains the character of interest. Be it an interest from the customer on delayed payment of dues. It was not in dispute in the instant case that interest income from the customer on delayed payment of dues was included in the business income and assessed as such. [Para 6]

In the instant case, interest received by the assessee on delayed payment by the customer had been assessed as business income. It was at the time of determination of profits of business for the purpose of clause (baa), that the interest component added therein was to be excluded to give effect to the provisions in its true letter and spirit. [Para 7]

Thus, even the interest which was received from the customer on account of delay in payment, even if assessed as business income but would have to be reduced therefrom for the purpose of calculation of profits of business to calculate the relief admissible under section 80HHC. [Para 8]