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)

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  

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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  

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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  

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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,  

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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  

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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  

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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).  

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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  

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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.     

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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  

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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  

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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  

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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.  

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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  

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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.

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                                                          .…………………….CJI. (S. H. Kapadia)

.……………………….J.                                                                      (A. K. Patnaik)

………………………..J.                                                                      (Swatanter  Kumar)

New Delhi, February 08, 2012.    

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