Commissioner of Income Tax vs Themis Chemicals Ltd.

D.A. Mehta, J.—The following question has been referred by the Tribunal, Ahmedabad Bench ''B'' u/s 256(1) of the Income Tax Act, 1961 (hereinafter referred to as the Act) at the instance of the revenue:

Whether, on the facts and in the circumstances of the case, the Hon''ble Tribunal was legally justified in holding that the interest on FDRS treated as income from other sources should be reduced by the interest paid in relation to the borrowings for business of exports in order to allow the higher relief u/s 80HHC of the Income Tax Act.

The assessment year is 1992-93. The assessee company claimed deduction u/s 80HHC. In relation to the same the assessing officer observed as under:

Deduction u/s 80HHC is worked out separately and taken accordingly. (Annexure enclosed).

Thereafter, in the Annexure showing working of deduction u/s 80HHC of the Act the assessing officer has deducted (1) under the head ''Income from other sources'' three items totalling to Rs. 25,26,984; (2) under the head ''Other income'', 90 per cent of Rs. 40,84,762; and (3) under the head ''Other income debited'' 90 per cent of Rs. 51,91,479, which also includes one item ''interest received Rs. 12,94,672.''

The assessee challenged the said part of the computation along with other grounds before Commissioner (Appeals) who has after reproducing Explanation (baa) appearing in Section 80HHC of the Act recorded "it is evident that interest is to be reduced for computing deduction u/s 80HHC of the Act, and hence the working of assessing officer is upheld."

The assessee carried the matter in second appeal before the Tribunal. The assessee contended before the Tribunal that the interest amounting to Rs. 12,94,672 is received during the course of business and the assessee has paid large amount of interest to the bank and other financial institutions and hence only the net balance may be excluded. The finding of the Tribunal reads:

We have heard the parties. We are of the opinion that the claim of the assessee is justified. The assessee receives interest and pays interest. Therefore, only net of such amount has to be taken into consideration for the purposes of this computation. We, accordingly, so direct.

Heard learned senior standing counsel Shri M.R. Bhatt for the applicant revenue and Shri T.P. Hemani, learned advocate for the respondent assessee.

Reference is required to be returned unanswered in absence of basic facts which would enable the court to answer the question. Explanation (baa) reads as under:

Explanation : For the purpose 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) and (iiic) 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;

On a plain reading the term "profits of business" as used in Section 80HHC, more particularly Sub-section (1) and Sub-section (3) of the Act, means the profits of the business as computed under the head "Profits and gains of business or profession" which is to be reduced by items mentioned in clauses (1) and (2). Therefore, before any amount can be reduced one has to record a finding as to what are the profits of business as computed under the head "Profits and gains of business or profession". As noted hereinbefore, neither the Tribunal nor the Commissioner (Appeals) nor the assessing officer have even attempted to read the provision and apply the same. There is no finding as to whether the profits of business computed under the head "Profits and gains of business or profession" include interest received by the assessee. The question referred to the court suggests that the interest which has been received on fixed deposit receipts is treated as "income from other sources". However, the computation part of the assessment order refers to only two items under the head "Income from other sources" : (1) dividend and (2) excess stock.

In the circumstances, the contention of the revenue that because the question suggests that interest on FDRS has been treated as "income from other sources", the court must proceed on such a footing cannot be accepted in absence of any finding by the Tribunal. The finding has to be, in the first instance, that the profits of business include, or do not include, such item of interest under the head "Profits and gains of business or profession".

Hence, the reference is returned unanswered leaving it open to the Tribunal to first of all record correct facts and then record a correct finding. The reference stands disposed of accordingly.