income tax= two issues against the assessee. On the first issue, the High Court has held, relying on its judgment in Commissioner of the Income Tax vs. Kalpataru Colours and Chemicals (ITA(L) 2887 of 2009), that the entire amount received by an assessee on sale of the Duty Entitlement Pass Book (for short `the DEPB’) represents profit on transfer of DEPB under Section 28(iiid) of the Income Tax Act, 1961 (for short `the Act’). We have already decided this issue in favour of the assessee in a separate judgment in M/s Topman Exports vs. Commissioner of Income Tax, Bombay, and other connected matters and we have held that not the entire amount received by the assessee on sale of DEPB, but the sale value less the face value of the DEPB will represent profit on transfer of DEPB by the assessee. The first issue is, therefore, decided accordingly. 3. For appreciating the second issue, we may refer very briefly to the facts of the case. For the assessment year 2003-04, the assessee filed a return of income claiming a deduction of Rs.34,44,24,827/- under =We have held in our judgment in the case of M/s ACG Associated Capsules Pvt. Ltd. v. Commissioner of Income Tax that ninety per cent of not the gross interest but only the net interest, which has been included in the profits of the business of the assessee as computed under the heads `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. Since, the view taken by the High Court in the impugned order is consistent with our aforesaid view, we find no merit in this appeal and we accordingly dismiss the same. There shall be no order as to costs.

Reportable

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION
CIVIL APPEAL No. 1914 OF 2012

(Arising out of SLP (C) NO. 32450 OF 2010)

M/s ACG Associated Capsules Pvt. Ltd.

(Formerly M/s Associated Capsules Pvt. Ltd.) … Appellant

Versus

The Commissioner of Income Tax,

Central-IV, Mumbai … Respondent

WITH
CIVIL APPEAL No. 4534 OF 2008

The Commissioner of Income Tax, New Delhi … Appellant

Versus

Bharat Rasayan Limited … Respondent

J U D G M E N T
A. K. PATNAIK, J.

 
CIVIL APPEAL No. OF 2012

(Arising out of SLP (C) No. 32450 of 2010)

Leave granted.

2. This is an appeal against the judgment and order
dated 06.08.2010 of the Bombay High Court in ITA(L)
2

 
No. 1276 of 2010 deciding two issues against the

assessee. On the first issue, the High Court has held,

relying on its judgment in Commissioner of the Income

Tax vs. Kalpataru Colours and Chemicals (ITA(L) 2887

of 2009), that the entire amount received by an

assessee on sale of the Duty Entitlement Pass Book

(for short `the DEPB’) represents profit on transfer of

DEPB under Section 28(iiid) of the Income Tax Act,

1961 (for short `the Act’). We have already decided this

issue in favour of the assessee in a separate judgment

in M/s Topman Exports vs. Commissioner of Income

Tax, Bombay, and other connected matters and we

have held that not the entire amount received by the

assessee on sale of DEPB, but the sale value less the

face value of the DEPB will represent profit on transfer

of DEPB by the assessee. The first issue is, therefore,

decided accordingly.

3. For appreciating the second issue, we may refer very
briefly to the facts of the case. For the assessment

year 2003-04, the assessee filed a return of income

claiming a deduction of Rs.34,44,24,827/- under
3

 
Section 80HHC of the Act. The Assessing Officer

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 assessee filed an appeal against the assessment

order before the Commissioner of Income-Tax

(Appeals), who confirmed the order of the Assessing

Officer excluding ninety per cent of the gross interest

and gross rent received by the assessee while

computing the profits of the business for the purposes

of Section 80HHC. Aggrieved, the assessee filed an

appeal before the Income Tax Appellate Tribunal (for

short `the Tribunal’). The Tribunal held, relying on the

decision of the Delhi High Court in Commissioner of

Income-Tax v. Shri Ram Honda Power Equip [(2007) 289

ITR 475 (Delhi)], that netting of the interest could be

allowed if the assessee is able to prove the nexus

between the interest expenditure and interest income

and remanded the matter to the file of the Assessing
4

 
Officer. The Tribunal also remanded the issue of

netting of the rent to the Assessing Officer with the

direction to find out whether the assessee has paid the

rent on the same flats against which rent has 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 Assessing Officer will

decide the issue in accordance with the judgment of

the High Court in Commissioner of Income-Tax v. Asian

Star Co. Ltd. [(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 of the
5

 
Act.

4. Learned counsel for the appellant submitted that it will

be clear from the Explanation (baa) that ninety per

cent of any receipts by way of brokerage, commission,

interest, rent, charges or any other receipt of a similar

nature included in such profits will be excluded for

determining the profits and gains of business or

profession. He argued that as the net receipts and not

the gross receipts towards interest and rent are

included in profits and gains of business or profession,

ninety per cent of such net interest and net rent and

not ninety per cent of gross interest and gross rent are

to be excluded for determining the profits of the

business under Explanation (baa) to Section 80HHC of

the Act.

5. In support of this argument, learned counsel for the
appellant relied on the decision of this Court in

Distributors (Baroda) P. Ltd. v. Union of India and

Others [(1985) 155 ITR 120] in which a Constitution

Bench of this Court has held that only the dividends

computed in accordance with the provisions of the Act,
6

 
which is included in the gross total income of the

domestic company, shall be taken into account for

working out the relief under Section 80M of the Act.

He cited the judgment in Commissioner of Income-Tax

v. Shri Ram Honda Power Equip (supra) in which the

Delhi High Court has taken a view that the word

`interest’ in Explanation (baa) to Section 80HHC

connotes `net interest’ and not `gross interest’ and,

therefore, in deducting such interest, the Assessing

Officer will have to take into account the net interest,

i.e. gross interest as reduced by expenditure incurred

for earning such interest. He submitted that the

Karnataka High Court in Commissioner of Income-Tax

v. Gokuldas Exports, etc. [(2011) 333 ITR 214 (Karn)]

has taken a similar view relying on the decision of the

High Court in Commissioner of Income-Tax v. Shri Ram

Honda Power Equip (supra).

6. Learned counsel for the appellant referred to the
Memorandum to Finance (No.2) Bill, 1991 explaining

the rationale of Explanation (baa) in which inter alia it

is stated that as some expenditure might be incurred
7

 
in earning such incomes, which in the generality of

cases is part of common expenses, and thus ad-hoc 10

per cent deduction from such incomes have been

provided for to account for these expenses. He

submitted that the High Court has not correctly

appreciated the Memorandum and has held, relying on

the Memorandum, that gross interest and gross rent

have to be deducted under Explanation (baa) to

Section 80HHC to avoid a distorted figure of export

profits.

7. Learned counsel for the Revenue, on the other hand,
relied on the reasons given by the Bombay High Court

in Commissioner of Income-Tax v. Asian Star Co. Ltd.

(supra) and submitted that the Bombay High Court

has rightly held that ninety per cent of the gross

amount received towards interest and rent have to be

excluded from the profits and gains of business for

computing the profits of the business as defined in

Explanation (baa) to Section 80HHC of the Act. He

also relied on the Memorandum to the Finance (No.2)

Bill 1991 in support of his submission that ninety per
8

 
cent of the gross interest and gross rent has to be

deducted from the profits of the assessee under

Explanation (baa).

8. Before we deal with the contentions of learned counsel

for the parties, we may extract Explanation (baa) to

Section 80HHC of the Act.

“Explanation:- For the purposes of this

section,-

(baa) “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-

(1) ninety per cent of any sum referred to in

clauses (iiia), (iiib), (iiic), (iiid) and (iiie) of

Section 28 or of any receipts by way of

brokerage, commission, interest, rent,

charges or any other receipt of a similar

nature included in such profits; and

(2) the profits of any branch, office,

warehouse or any other establishment of

the assessee situate outside India”.

9. Explanation (baa) extracted above 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).
9

 
Thus, profits of the business of an assessee will have to be

first computed under the head “Profits and Gains of

Business or Profession” in accordance with provisions of

Section 28 to 44D of the Act. 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 are allowable under Sections 30 to 44D have to be

allowed as expenses. After including such receipts of

income and after deducting such expenses, the total of the

net receipts are 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).

 
10. 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
1

 
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 is 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

is 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.
1

 
11. For this interpretation of Explanation (baa) to Section

80HHC of the Act, we rely on the judgment of the

Constitution Bench of this Court in Distributors (Baroda)

P. Ltd. v. Union of India and Others (supra). Section 80M

of the Act provided for deduction in respect of certain

intercorporate dividends and it provided in sub-section

(1) of Section 80M that “where the gross total income of

an assessee being a company includes any income by

way of dividends received by it from a domestic

company, there shall, in accordance with and subject to

the provisions of this Section, be allowed, in computing

the total income of the assessee, a deduction from such

income by way of dividends an amount equal to” a

certain percentage of the income mentioned in this

Section. The Constitution Bench held that the Court

must construe Section 80M on its own language and

arrive at its true interpretation according to the plain

natural meaning of the words used by the legislature

and so construed the words “such income by way of

dividends” in sub-section (1) of Section 80M must be

referable not only to the category of income included in
1

 
the gross total income but also to the quantum of the

income so included. Similarly, Explanation (baa) has 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) has

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.

 
12.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
1

 
gains of business and chargeable to tax under Section

28 of the Act, 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. In

other words, 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.

 
13. The view that we have taken of Explanation (baa) to

Section 80HHC is also the view of the Delhi High Court in

Commissioner of Income-Tax v. Shri Ram Honda Power Equip

(supra) and the Tribunal in the present case has followed

the judgment of the Delhi High Court. On appeal being filed
1

 
by the Revenue against the order of the Tribunal, the High

Court has set aside the order of the Tribunal and directed

the Assessing Officer to dispose of the issue in accordance

with the judgment of the Bombay High Court in

Commissioner of Income-Tax v. Asian Star Co. Ltd. (supra).

We must, thus, examine whether reasons given by the High

Court in its judgment in Commissioner of Income-Tax v.

Asian Star Co. Ltd. (supra) were correct in law.

 
14. On a perusal of the judgment of the High Court in

Commissioner of Income-Tax v. Asian Star Co. Ltd. (supra),

we find that the reason which weighed with the High Court

for taking a different view, is that rent, commission, interest

and brokerage do not possess any nexus with export

turnover and, therefore, the inclusion of such items in the

profits of the business would result in a distortion of the

figure of export profits. The High Court has relied on a

decision of this Court in Commissioner of Income-Tax v. K.

Ravindranathan Nair [(2007) 295 ITR 228 (SC)] in which the

issue raised before this Court was entirely different from the

issue raised in this case. In that case, the assessee owned a

factory in which he processed cashew nuts grown in his
1

 
farm and he exported the cashew nuts as an exporter. At

the same time, the assessee processed cashew nuts which

were supplied to him by exporters on job work basis and he

collected processing charges for the same. He, however, did

not include such processing charges collected on job work

basis in his total turnover for the purpose of computing the

deduction under Section 80HHC (3) of the Act and as a

result this turnover of collection charges was left out in the

computation of profits and gains of business of the assessee

and as a result ninety per cent of the profits of the assessee

arising out of the receipt of processing charges was not

deducted under clauses (1) of the Explanation (baa) to

Section 80HHC. This Court held that the processing

charges was included in the gross total income from cashew

business and hence in terms of Explanation (baa), ninety

per cent of the gross total income arising from processing

charges had to be deducted under Explanation (baa) to

arrive at the profits of the business. In this case, this Court

held that the processing charges received by the assessee

were part of the business turnover and accordingly the

income arising therefrom should have been included in the
1

 
profits and gains of business of the assessee and ninety per

cent of this income also would have to be deducted under

Explanation (baa) under Section 80HHC of the Act. In this

case, this Court was not deciding the issue whether ninety

per cent deduction is to be made from the gross or net

income of any of the receipts mentioned in clause (1) of the

Explanation (baa).

 
15. The Bombay High Court has also relied on the

Memorandum explaining the clauses of the Finance Bill,

1991 contained in the circular dated 19.12.1991 of the

Central Board of Direct Taxes to come to the conclusion that

the Parliament intended to exclude items which were

unrelated to the export turnover from the computation of

deduction and while excluding such items which are

unrelated to export for the purpose of Section 80HHC,

Parliament has taken due note of the fact that the exporter

assessee would have incurred such expenditure in earning

the profits and to avoid a distorted figure of export profits,

ninety per cent of the receipts like brokerage, commission,

interest, rent, charges are sought to be excluded from the

profits of the business. In our considered opinion, it was
1

 
not necessary to refer to the explanatory Memorandum

when the language of Explanation (baa) to Section 80HHC

was clear that only ninety per cent of receipts by way of

brokerage, commission, interest, rent, charges or any other

receipt of a similar nature included in such profits

computed under the head profits and gains of business of

an assessee could be deducted under clause (1) of

Explanation (baa) and not ninety per cent of the quantum of

any of the aforesaid receipts which are allowed as expenses

and therefore not included in the profits of business of the

assessee.

 
16. In the result, we allow the appeal and set aside the

impugned order of the High Court and remand the matter to

the Assessing Officer to work out the deductions from rent

and interest in accordance with this judgment. No costs.

CIVIL APPEAL No. 4534 OF 2008

This is an appeal against the order dated 19.01.2007

of the Delhi High Court in I.T.A. No. 541 of 2006.
1

 
2. The facts of this case very briefly are that Bharat

Rasayan Limited (for short `the assessee’) filed a return of

income tax claiming a deduction of Rs.72,76,405/- under

Section 80HHC of the Act. In the assessment order, the

Assessing Officer held that ninety per cent of the gross

interest has to be excluded from the profits of the business

of the assessee under Explanation (baa) to Section 80HHC

of the Act and deducted ninety per cent of the gross interest

of Rs.50,26,284/- from the profits of the business of the

assessee. The assessee preferred an appeal contending that

only ninety per cent of the net interest should have been

deducted from the profits of the business of the assessee

under Explanation (baa) to Section 80HHC, but the

Commissioner of Income Tax (Appeals) rejected this

contention of the assessee. Aggrieved, the assessee filed an

appeal before the Income Tax Appellate Tribunal (for short

`the Tribunal’) and the Tribunal allowed the appeal of the

assessee and held that the assessee was entitled to deduct

the expenses from the interest received and only ninety per

cent of the net amount of interest could be excluded under

Explanation (baa) to Section 80HHC and remitted the
1

 
matter to the Assessing Officer to examine whether there is

factually an excess between the interest paid and interest

received and take a fresh decision. The Revenue filed an

appeal against the order of the Tribunal before the High

Court, but by the impugned order the High Court following

its decision in Commissioner of Income-Tax v. Shri Ram

Honda Power Equip (supra) sustained the order of the

Tribunal and dismissed the appeal.

 
3. We have held in our judgment in the case of M/s ACG

Associated Capsules Pvt. Ltd. v. Commissioner of Income Tax

that ninety per cent of not the gross interest but only the

net interest, which has been included in the profits of the

business of the assessee as computed under the heads

`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. Since,

the view taken by the High Court in the impugned order is

consistent with our aforesaid view, we find no merit in this

appeal and we accordingly dismiss the same. There shall be

no order as to costs.

 
2

 
……………………..CJI.

(S. H. Kapadia)

………………………..J.

(A. K. Patnaik)

 
………………………..J.

(Swatanter

Kumar)

New Delhi,

February 08, 2012.

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