ST - The impugned order of Tribunal on merits has held that assessee is engaged in supply of personnel to Shipping Corporation of India Ltd. and its service is taxable under Manpower Recruitment and Supply Agency Services, during material period between July, 2005 to March, 2007 - However, impugned order holds that SCN seeking to recover service tax is barred by limitation - The impugned order on finding of fact holds that assessee had informed the department that amounts received by them from Shipping Corporation of India Ltd. by way of salaries / wages payable to the staff supplied to them has in fact paid over to them and not included it in service charges - It paid tax on only service charges which were received by them - Nothing has been shown that the finding of fact arrived at by Tribunal is perverse - The question as proposed does not give rise to any substantial questions of law: HC

Appeal dismissed

Income tax - Sections 153A, 153B(i)(b) & Explanation 5 to Sec 271(1)(c)

Keywords - immunity from penalty - statement recorded during search - undisclosed income - voluntary disclosure

During the year under consideration, a search u/s 132(2) was conducted in the case of Savvy Group and various documents/books of accounts /other valuable articles were found and seized from various premises. During the course of search, partners of the assessee firm made voluntary disclosure of income of Rs.2 Crore in the statement recorded u/s 132(4) for A.Y 2007-08. Subsequently, the return was filed declaring income at Rs.1,19,12,160/- inter alia including undisclosed income of Rs.2 Crores. The scrutiny assessment was therefore finalized u/s 143(3) r/w/s 153A r/w/s 153(B)(i)(b) accepting the returned income of Rs.1,19,12,160/-. However, penalty proceedings u/s 271(1)(c) was initiated on the unaccounted income disclosed by assessee, since such unaccounted income was accepted by assessee only after the search.

On appeal, the CIT(A) accepted the submission on behalf of assessee relying upon Clause (2) of Explanation 5 of Section 271(1)(c) and quashed the penalty levied u/s 271(1)(c). On further appeal, the ITAT observed that all the three conditions of immunity provided under Clause (2) of Explanation 5 of Section 271(1)(c) were satisfied.

On appeal, the HC held that,

Whether taxpayer gets immunity from penal claws, once tax along with interest offered by him on undisclosed income stood accepted by Department without any further addition - YES: HC

++ having heard the fact that after the disclosure during search, the assessee filed its return and as such paid the tax with interest and whatever was disclosed in the return, was accepted by the AO and there was no further addition, this Court is of the opinion that assessee shall be entitled to immunity as per Clause (2) of Explanation 5 of Section 271(1)(c). Thereforefore, this Court is in complete agreement with the view taken by the Tribunal.

Revenue's appeal dismissed

Income tax - Writ - Sections 115JB, 147 & 148

Keywords - accounting entry - capital subsidy - direct transfer to capital reserve - reasons for reopening

The assessee company is engaged in the business of infrastructure development. For the relevant A.Y 2012-2013, the assessee had filed its return declaring loss of 3.92 crores which came to be scrutinized by the AO. Subsequently, on perusal of the cash flow statement and capital reserve account, it revealed that during the year, the assessee company had received capital subsidy of Rs.9,17,86,000/. It was seen that balance of capital reserve account under the head reserves & surplus of balance sheet showed increase to that extent i.e Rs.31,81,06,034/-, and thus it was evident that capital subsidy of Rs. 9,17,86,000/- was directly credited to capital reserve account in the balance sheet. In the computation of income for A.Y.2012-13, it was noticed that the company had shown Book Profit u/s 115JB for the year under consideration at Rs.5,71,43,911/-. As such, the amount of Rs.9,17,86,000/- was not considered for computation of book profit u/s 115JB as the same was directly transferred to capital reserve account in the balance sheet in contravention to its stated accounting policies. As per the AO, the company was bound to disclose in its P&L A/c the said amount as non recurring transaction or a transaction of an exceptional nature irrespective of its being capital or revenue in nature. Thus, in view of provisions of section 115JB, the receipt of Rs.9,17,86,000/- was required to be added while computing income u/s 115JB which the assessee company failed to do. In view of the same, the AO had reason to believe that income to the tune of Rs.9,17,86,000/- directly credited to capital reserve account in the balance sheet chargeable to tax u/s. 115JB had escaped assessment, resulting in issuance of reopening notice. Though the assessee raised objections to the notice of reopening, they were however dismissed.

On Writ, the HC held that,

Whether when assessee had made full disclosure of receipts by way of accounting treatment during scrutiny assessment and same was accepted by the AO, then no reopening is permitted beyond four years on basis of such accounting entry - YES: HC

++ it is noted that the return filed by assessee was taken in scrutiny. After such scrutiny assessment, reopening notice came to be issued beyond a period of four years from the end of relevant assessment year. The question of failure on part of the assessee to disclose truly and fully all material facts therefore, becomes relevant. The AO's main objection to the treatment given by the assessee to subsidy of 9.17 crores was that such amount was directly credited to Capital Reserve account by the assessee which resulted into non consideration of such amount for computation of assessee's book profit. According to him, such treatment was not in consonance with the accounting treatment such receipt should have met. However, in the reasons recorded itself, he referred to the audit report in which it was stated that the company had received non monetary grants and the same is accounted on the basis of its acquisition cost. The assessee had treated the Government grants as promoter's contribution and credited to Capital Reserve account and treated as part of shareholders' funds. Whatever be the correctness of such accounting treatment, the assessee had made the full disclosure about the treatment given to such subsidy and the reason therefore. During the course of assessment proceedings also, this aspect had further come to the notice of AO. Thus not only there was sufficient disclosure in the return filed by assessee with respect to the entry in question, this was also noticed by AO during the scrutiny assessment. If therefore, the AO had any doubt or dispute about the manner in which the assessee treated such subsidy, it was always open for him and in fact, required of him to object then. In any case, reopening of assessment beyond a period of four years would not be permissible under such circumstances.

Assessee's petition allowed

Income Tax - Section 43(5).

Keywords: Gold trading accounts - Rate fluctuation - Speculative loss & Turnover capital.

The assessee-company, engaged in commodities and providing consultancy in prospecting of minerals, filed return for the relevant AY. During assessment, the AO noticed that the assessee had purchased gold and sold the same quantity of gold after incurring a loss. The AO further noticed that the assessee had sold the gold immediately on purchase at a loss. The assessee explained that in order to get direct supply from MMTC, the assessee was required to had huge turnover in Bullion for five years and as it did not had that much of capital to leave the commodity and store it. However, the AO treated the whole gold trading accounts a sham and added Rs. 2.51 cr to the total income of the assessee. On appeal, the CIT(A) also confirmed the order of the AO and further concluded that such loss of Rs. 2.61 cr was a speculative loss. On further appeal by the assessee, the Tribunal remand the matter back to the file of the AO for fresh consideration.

On appeal, the High Court held that,

Whether the assessee can challenge a decision of remand, alleging that there was command to the AO to decide the matter in a particular manner, without completely reading the order - NO: HC

Whether therefore, when the matter is remanded back to the AO to decide the matter in accordance with law, there is no need for the High Court to entertain the appeal - YES: HC

++ the assessee is attempting to do before us is to read one line or one sentence or one word of this paragraph or the order. Then, possibly there is merit in the apprehension of the assessee. That is not how one should read the order. The order should be read as a whole, including the paragraph highlighted before us. When so read, we do not think that there can be a command to the Assessing Officer to decide the matter, particularly remanded to him/her, in a manner otherwise than in accordance with law. Once the Assessing Officer has to decide the matter in accordance with law, on such remand, then, we do not think that we should entertain the Appeal. No substantial question of law arises therein.

Assessee's appeal dismissed

Income tax - Section 69B

Keywords - acquisition of immovable property - deemed income - date of signing MoU - transfer of share - unaccounted investment

The assessee and his wife acquired a propoerty namely "Golf Links Software Park Tower" worth Rs. 250 Crores merely by transfer of shares of M/s M. D. Properties Pvt Ltd., at face value of Rs. 10 Lakhs. Accordingly, the matter was referred to the DVO for deterination of fair market value. Since those shares were registered on July 06, 2007 in the books of M. D. Properties Pvt Ltd in assesse's name, the AO made an addition of Rs. 75,21,72,000/- (difference between declared value and actual market value) as unaccounted investment u/s 69B for the A.Y 2008-2009. However, the CIT(A) held that this addition should be made for A.Y 2005-2006 when the MoU was signed and blank share transfer form, duly signed, was handed over to the assessee. Hence, the AO was directed to consider this issue for the A.Y 2005-2006. When the matter went before the Tribunal, the question was answered in favour of assessee.

On appeal, the HC held that,

Whether once disclosure of investments made by the assessee in books of account is found to be satisfactory by the AO, then it is not a case of clandestine transaction attracting Sec 69B - YES: HC

++ the marginal heading or note to Section 69-B reads as "Amount of investments etc not fully disclosed in books of account". If in any financial year, the Assessee has made investment or is found to be the owner of the valuable articles as mentioned in this Section and the AO finds that the amount expended on making such investments or in acquiring valuable article exceeds the amount recorded in this behalf in the books of account maintained by the Assessee for any source of income and the Assesee offers no explanation about such excess amount or the explanation offered by him is not, in the opinion of the AO, satisfactory, the excess amount may be deemed to be the income of assessee for such financial year;

++ now, the valuation report brought on record valued the property at Rs. 250 Crores. However, this was not acted upon by the AO. He has not considered that report for making any addition. However, the Departmental Valuation Officer indicating the fair market value of the property to be Rs. 40 Crores. That was based on the basis of sale instances. Pertinently, no document whatsoever was found during the course of search to show that assessee had made any payment over-and-above that recorded in the books of account. The Revenue did not rest its case on perusal of the entries in the books of account but recorded the statement of the vendors. They have also confirmed that they have not received any consideration over and above that was paid by cheque. Thus, even if the acquisition of shares was for consideration of Rs. 10 Lakhs, at that time, M. D. Properties Pvt Ltd had an outstanding liability of HDFC Bank of Rs. 38.90 Crores. Thus, the assumption that the property was acquired at Rs. 10 Lakhs, is found by the Tribunal to be incorrect. When the Assessee entered into a MoU with a group known as Virwani Group for acquisition of the property, the fair market value was determined at Rs. 40 Crores. Hence, the Tribunal concluded that it is not possible to hold that there was huge evasion of tax or the transaction was clandestine;

++ the CIT(A)'s findings heavily relied upon by Revenue's counsel, are rightly termed as conjectures and surmises, by assessee's counsel. There is no condition precedent for the application and invocation of Section 69-B, which stood satisfied. The CIT(A) was possibly not aware of these prerequisites or preconditions. Hence, sweeping and general observations made by him would not support the Revenue's action and the Tribunal has rightly held that the Revenue has not discharged the burden placed on it by law.

Revenue's appeal dismissed

CX - Appeal filed by assessee against the order passed by Tribunal rejecting the application filed by assessee for rectification of mistake in order dated 04.05.2010 - Before considering as to whether the application seeking for rectification of mistake or not, court is required to consider as to whether such an application was maintainable before Tribunal - Answer to the said question is in negative, that is, against the assessee and in favour of Revenue - This is so because there should be two assessees before the Tribunal; one of whom is the is before the court and the other is M/s.Velvette International Pharma Products Ltd. - Both are stated to manufacture an Herbal Ayurvedic Cough Syrup - The Tribunal by the common order dated 04.05.2010 rejected the plea raised by both the assessees - However, for the reasons best known, assessee before court did not file any appeal against the said order - M/s.Velvette International Pharma Products Ltd. preferred an appeal which was partly allowed by the judgment dated 19.10.2011 - The said assessee has filed an appeal to the Supreme Court against judgement dated 19.10.2011 - Thus, the order of remand has not fructified because of the pendency of the appeal at the instance of said assessee - Tribunal would have absolutely no jurisdiction to entertain an application for rectification, because the correctness of order passed by Tribunal dated 04.05.2010 has been decided by Division Bench, though at the instance of other assessee and the doctrine of Merger would apply - Thus, the Tribunal should have dismissed the application for rectification on the ground that it is not maintainable - In any event, the grounds now canvassed in rectification application require a long drawn reasoning, which is impermissible in a review application - Thus, no ground found to interfere with the order passed by Tribunal: HC

Appeal dismissed

CX - Ministry's Deemed Credit Order TS/36/94 TRU - Any manufacturer whose total clearances did not exceed Rs. 2 crores was entitled to benefit of exemption under Notfn 1/93-C.E - No doubt the benefits under this notfn were limited to clearances of Rs. 75 lacs but this does not mean that manufacturers whose clearances exceeded Rs. 75 lacs were not availing the exemption under the notfn - The only interpretation which can be given is that the wording used in notfn identifies the category of manufacturers who are satisfying the criteria as set out in Notfn 1/93-C/E and are availing of benefit of said notfn - The Trade note limiting this benefit to those manufacturers whose clearances do not exceed Rs. 75 lacs is totally illegal and against the deemed credit order issued by the Ministry - Though the department may be bound by its trade note, the industry is not bound by the same and has a right to challenge the same - Questions are answered in favour of the assessee: HC

Appeal allowed

CX - COD of of 717 days - Assessee had filed application for COD in which it was pointed out interalia that an exemployee, who was dealing with service tax and legal matters of company resigned on 12.5.2015 and last date for filing the appeal was 15.6.2015 - While leaving the job, said employee did not inform the management about the passing of order by Commissioner which required to be challenged - Subsequently, one Nilesh Rohitbhai Shah traced the order and brought to the notice of management, upon which, the decision to file the appeal was taken - The assessee had also filed affidavit of Shri Nilesh Shah before the Tribunal - Thus it can be seen that though delay was not very short, same was properly explained - Delay is condoned: HC

Appeal allowed

CX - Appeal has challenged the order of Tribunal 2011-TIOL-321-CESTAT-DEL - The amount involved is Rs. 30,22,774/- - As the amount involved is less than the limit prescribed in Circular issued by Central Board of Indirect Taxes & Customs (Judicial Cell) dated 11.07.2018, the appeal be dismissed as not maintainable - However, it is made clear that dismissal of present appeal will not be taken as upholding the order passed by Tribunal as the legal issue raised therein is left open to be considered in an appropriate case: HC

Appeal dismissed

CX - Appellant has challenged the order of Tribunal 2017-TIOL-1990-CESTAT-CHD - The amount involved is Rs 45,32,842/- - As the amount involved is less than the limit prescribed in the Circular issued by the Central Board of Indirect Taxes & Customs (Judicial Cell) dated 11.07.2018, the present appeal be dismissed as not maintainable - However, it is made clear that dismissal of present appeal will not be taken as upholding the order passed by Tribunal as the legal issue raised therein is left open to be considered in an appropriate case: HC

Appeal dismissed

CX - Petition filed against impugned order 2016-TIOL-2749-HC-P&H-CX - It is not in dispute that against the order passed by Commissioner, remedy of appeal is available before the Tribunal - Considering the fact that initially order was set aside and that order was recalled by this Court on 11.05.2018, in case appeal is filed within one month from the date of receipt of copy of the order, the same shall be considered and decided by Tribunal on merits subject to compliance of pre-conditions for entertainment of appeal - The writ petition stands disposed of accordingly: HC

Writ petition disposed of

CX - The appellant has challenged the order of Tribunal in 2017-TIOL-2704 -CESTAT-CHD - Amount involved is Rs. 40,06,525/- - As amount involved is less than the limit prescribed in Circular issued by Central Board of Indirect Taxes & Customs (Judicial Cell) dated 11.07.2018, the appeal dismissed as not maintainable - However, it is made clear that dismissal of appeal will not be taken as upholding the order of Tribunal as the legal issue raised therein is left open to be considered in an appropriate case: HC

Appeal dismissed

Cus - Earlier, the matters were heard by another Division Bench and court was informed that after elaborately hearing the parties, Division Bench opined that the cases might require some marginalization of penalties and accordingly, directed the assessee to pay a sum of Rs.40,000/- and Rs.10,000/- respectively - A memo has been filed by assessee reporting compliance of the directions issued by Division Bench vide order dated 16.9.2016 - The matters can be put at rest by confirming the amounts already remitted by assessee pursuant to the order dated 16.9.2016 as the penalties, which shall be imposable on assessee and that no further amount shall be demanded: HC

Appeals allowed

Cus - Pursuant to search and seizure proceedings conducted by DRI, gold jewellery and other like valuables were detained which were found in the bank locker - The key was seized and consequently articles were detained on 07.07.2017 - Since then, the petitioner has not been afforded access to the jewellery - Though it is not a direct seizure or detention the effect of such action is that the petitioner has been deprived of use of her property - The period provided under Section 110 i.e. six months elapsed, the Revenue could have – if it chose to extend that period provided the powers were resorted to within the six month period - Even that option was not exercised - Consequently, upon the expiry of one year, the one year period had ended - The petitioner is, therefore, clearly entitled to release of all the articles in her locker as well as the locker key - Since the customs authorities have inventorized these goods, it is open for them to continue with the adjudication proceedings as and when they issue SCN: HC

Writ petition allowed

2018-TIOL-1436-ITAT-DEL

MOTOROLA INDIA PVT LTD Vs ACIT: DELHI ITAT (Dated: August 24, 2018)

Income tax - Sections 43B(f) & 80HHE

Keywords - bad debts written off - estimated value of accrued leave - provision for leave encashment - rental income - trade debt recoverable

A) The assessee is a subsidiary of Motorola Incorporation, USA, and is engaged in the business of software development services, import and resale of mobile phones, installation and commissioning of the cellular network and market support services and distribution of the products. For the relevant A.Y 2003–04, the assessee had filed its return declaring gross total income of Rs. 51,47,06,984/-, after making a provision for leave encashment of Rs. 4,16,33,651/- by invoking the provisions of section 43B(f). During the course of assessment, the AO noted that until the A.Y 2002-03, the assessee was disallowing the said provision, however, for this year it had not been disallowed, and therefore, the AO raised the query. In response, the assessee submitted that the claim of provision for leave encashment was actually an estimated value of accrued leave as per policy of the company and only those persons who resign could avail the leave encashment. Therefore, as the same had not become payable at the end of the year, the provision of section 43B(f) did not apply. The assessee further submitted that the provision of section 43B(f) did not apply to it as the provision was towards leave encashment and it was not a sum payable in lieu of leave. The AO however rejected the contention of assessee and disallowed such sum u/s 43B(f) of the Act.

B) During the course of assessment, the assessee claimed the bad debts written off being the tax deduction at source by the customers of assessee for which neither the certificates were received nor claimed as advance tax in the return. The assessee justified its claim stating that the amount in question was actually written off. However, the AO allowed the claim of assessee of Rs. 90,24,070/– and the balance claim of Rs. 2,59,22,469/– was disallowed. On appeal, the CIT(A) confirmed the disallowance of the bad Debt, which was arising out of the tax deduction at source written off by the assessee. The AO responded that the TDS written off did not constitute a debt related to business of the company. As per the details filed by assessee, the claim was arising out of the tax deduction at source made by the deductible/customer while releasing payment to the assessee which was duly shown as income of assessee on account of sale made, the credit for which had not been received or claimed by asssessee. It was thereafter noted by the CIT(A) that it could be treated as admissible expenditure only if it was proved that the amount in question could not be claimed, as the tax deduction at source was either actually not deducted on after deduction not deposited at all. Therefore, the CIT(A) confirmed the disallowance holding that assessee had not cared to take the credit of TDS deducted and therefore same could not be, trade debt recoverable from the concerned customers.

C) The assessee company had also claimed deduction u/s 80HHE of Rs. 36,50,192 while filing its return and submitted that, it had claimed such deduction based on the certificate issued by CA in Form 10CCAF under the provisions of section 80HHE. The AO however noted that assessee had reduced the rental income after allowing proportionate depreciation for the space rented out. He also noted that there was no such provision u/s Income tax Act. Therefore, he reduced the whole rental income at the rate of 90% from the profits of the business of assessee. It was further noted by him that assessee had not reduced the income from interest stating that the expenditure relatable to interest income exceeds the interest income. Therefore, the AO also reduced 90% of interest income from the eligible profit. In addition, thereby against the claim of assessee of Rs. 3650192/–, the deduction was worked out at Rs. 34,54,016/–. On appeal, the CIT(A) also rejected the claim of assessee holding that in view of the decision of jurisdictional High Court in case of CIT versus Liberty footwear private limited 287 ITR 339 (Punjab and Haryana), it was the gross interest received by assessee which was to be considered in terms of Explanation (baa) to section 80HHC and not the net interest for the purpose of arriving at the profits of business.

On appeal, the ITAT held that,

Whether provision for leave encashment for accrued leave shall be allowable only in the year in which such sum is paid, irrespective of the previous year in which liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him - YES: ITAT

Whether when the provision made for leave salary has not been exercised on or before the due date of filing return, then such provision cannot be allowed as deduction in the year in which it was framed - YES: ITAT

++ as far as provision of leave encashment is concerned, it is found that assessee has made a provision for leave encashment of Rs. 416,33,651/-. This sum was not paid during the year and therefore, is outstanding as provision for leave encashment payable. The only issue is whether the provision of section 43B(f) applies to that or not. As per provisions of section 43B (f), any deduction otherwise allowable under the Act in respect of any sum payable by assessee as an employer in lieu of any leave at the credit of his employees shall be allowed irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him only in computing the income referred to in section 28 of the previous year in which some such sum is actually paid by him. Therefore irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him, any such provision for leave encashment for accrued leave shall be allowable only in the year in which such sum is paid. According to the assessee the above sum is payable to the employees who leaves the job by resigning. It is not payable to any employees who are working with the company. The assessee claimed that the liability created would keep getting accumulated and not payable until the employee leaves the company. In the decision of Bharat Earthmovers - 2002-TIOL-123-SC-IT-LB, the Supreme Court has held that such liability is a provision made by assessee for meeting the liability incurred by it under the leave encashment scheme proportionate with the entitlement earned by the employees of the company would be allowable as deduction the year in which the provision was made for that liability;

++ there cannot be any doubt that leave encashment liability is an eligible deduction available to the assessee. But, in view of the clear-cut provisions of the law that from 1 April 2002, leave salary payable by the assessee as an employer to his employees is brought within the purview of section 43B. However, the relaxation contained in the 1st proviso is available. Further, it is clarified that once deduction of the provision made in an earlier year's is allowed, no deduction is permissible in respect of the same amount once again on payment basis. Therefore, if the assessee has made the provision of leave salary which has not been paid on or before the due date prescribed under the Income tax Act for filing of return, then such provision cannot be allowed as deduction in the year in which the provision is made but the payment has not been made before the due date of filing of the return. In view of this, there is no infirmity in the order of the lower authorities;

Whether once TDS stands deposited by the debtor, then only such sum is recoverable by the creditor towards his tax liability from the government and hence adjusted against the pre-existing liability - YES: ITAT

++ as far as the claim of bad debts is concerned, the CIT(A) has not allowed the claim of assessee for tax deduction at source not recovered from the various the payments of customers as according to him the assessee has not cared to take the credit of the tax deducted at source and therefore the same cannot become a trade debt recoverable from the concerned customer. However the CIT(A) has mentioned that it can be treated as an admissible expenditure only if it is proved that the amount in question could not be claimed as the tax deduction at source was either not actually deducted or after deduction not deposited at all and the TDS certificates was not issued by the concerned debtor. On the same reasoning, had the TDS certificates been issued by the customers or debtors to the assessee, the assessee would have claimed the same as tax paid against his liability for payment of tax. In the present case, the assessee has neither presented the TDS certificates issued by the customers and claimed them as taxes paid by it, nor does the Revenue have any evidences that credit of such TDS has been allowed to the assessee against any tax payable. Therefore, it is apparent that assessee has not been issued TDS certificate by the customers. In view of this, the amount becomes receivable from the debtors only. It is not the case of Revenue that assessee has not shown the income portion arising out of that sum in its P&L A/c for the amount of TDS not received from the customers of same have not been written off to the P&L A/c. In view of this, there is no merit in the reasoning of CIT(A) that the assessee had not cared to take the credit of TDS deducted and therefore it cannot be recovered from the concerned customer. In fact, unless the tax deduction at source sum is deposited by the debtor, then only such sum is recoverable by the assessee towards his tax liability from the government of India and adjusted against the pre-existing liability, otherwise the same sum is recoverable from the debtor only. In view of this, the assessee should have been allowed the deduction of the amount on account of Tax deducted by the customers towards TDS, but no such deduction certificates has been presented to the assessee as bad debt;

Whether ninety per cent of only net interest income but not gross interest income, needs to be reduced from the eigible business, for purposes of determining deduction u/s 80HHE - YES: ITAT

++ as far as deduction u/s 80HHE is concerned, the claim of the assessee is that 90% of the rental income to be reduced from the eligible profit of the business, should also be reduced by the proportionate depreciation on the building of assessee. Further, 90% of the net interest income should be reduced and not the gross interest. This issue has been considered by the Supreme Court in ACG Associated Capsules P Ltd V CIT, by observing that: "....Explanation (baa) 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 Explanation (baa). 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 the provisions of sections 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 u/s 28 will have to be included. Similarly, in computation of such profits of business, different expenses which are allowable u/ss 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). Therefore, if the rent or interest is a receipt chargeable as profits and gains of business and chargeable to tax u/s 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", 90% of such quantum of the receipt of rent or interest will not be deducted under clause (1) of Explanation (baa) to section 80HHC...." Therefore, in view of the decision of Supreme Court, the AO is directed to allow the claim of deduction u/s 80HHE by reducing only 90% of the net interest income and net rental income from the eligible business.

Assessee's appeal partly allowed