Income tax Act, 1961 - Section 80HHC(3) - Computation of deduction under Section 80HHC - treatment of income from sale of shares – HELD – computation of deduction under Section 80-HHC of the 1961 Act would be made as per clause (b) to sub-section (3) to Section 80-HHC of the 1961 Act, as it existed before substitution and amendment by Finance (No. 2) Act, 1991 - for assessment year 1989-1990 for the purpose of Section 80-HHC(3) of the 1961 Act, income/profit earned from sale of shares would be included in the amount which bears to the profits of the business as computed under the head ‘profits and gains of business or profession’. The receipt/gross amount from sale of shares would be included in the total turnover - income by way of interest in the assessment years 1989- 1990, 1990-1991 and 1991-1992, being income taxable under the head ‘income from other sources’, would be compulsorily excluded for the purpose of computation of deduction under Section 80-HHC(3) of the 1961 Act – Appeal is disposed of

 

2023-VIL-15-SC-DT

 

IN THE SUPREME COURT OF INDIA

 

CIVIL APPEAL NO. 7751 OF 2012

WITH

CIVIL APPEAL NO. 7753/2012

CIVIL APPEAL NO. 7754/2012

CIVIL APPEAL NO. 7752/2012

 

DATE: 12.04.2023

 

M/s MAGNUM INTERNATIONAL TRADING COMPANY (P) LTD

 

Vs

 

COMMISSIONER OF INCOME TAX, DELHI II

 

CORAM

SANJIV KHANNA & M.M. SUNDRESH, JJ.

 

ORDER

 

This common order and judgment will dispose of these appeals by the appellant/assessee – M/s. Magnum International Trading Company (P) Ltd., which relate to assessment years 1989-1990, 1990- 1991 and 1991-1992.

 

The question raised pertains to computation of deduction under Section 80-HHC of the Income tax Act, 1961 [For short, ‘1961 Act’.], as applicable to the aforesaid assessment years.

 

At the outset, we may observe that this Court in P.R. Prabhakar v. Commissioner of Income Tax, Coimbatore [(2006) 6 SCC 86.] has held that the amendments made to Section 80-HHC(3) of the 1961 Act vide Finance (No. 2) Act, 1991, substituting sub-section (3) to Section 80-HHC of the 1961 Act and prescribing a different formula, are applicable with effect from 01.04.1992. The amendments do not have a retrospective effect. Hence, we are not required to examine the computation of the deduction under Section 80-HHC of the 1961 Act by applying the provisions, as applicable with effect from 01.04.1992.

 

Following the reasoning and dictum in P.R. Prabhakar (supra), we have no difficulty in holding that the impugned judgment dated 29.10.2009 of the Delhi High Court in I.T.A. Nos. 1141 of 2006, 1149 of 2006, 1150 of 2006, 1503 of 2006, 1504 of 2006, 1505 of 2006, 1506 of 2006, 1507 of 2006, 1560 of 2006, 1675 of 2006, 137 of 2007 and 196 of 2007, inter alia, applying the substituted and amended provisions of Section 80-HHC(3) of the 1961 Act, vide Finance (No. 2) Act, 1991, is unsustainable. However, as the case is very old and we do not perceive and find any difficulty in deciding these appeals on merits by applying the provisions of the 1961 Act, as they existed and are applicable to the assessment years 1989-1990, 1990-1991 and 1991-1992, we proceed to do so.

 

In the assessment year 1989-1990, the assessing officer had excluded the interest income of Rs. 1,03,28,913/- (Rupees one crore three lakh twenty eight thousand nine hundred and thirteen only) and income from sale of shares of Rs.1,15,52,953/- (Rupees one crore fifteen lakhs fifty two thousand nine hundred fifty three only) while computing the deduction under Section 80-HHC of the 1961 Act in terms of the proportionality formula prescribed under sub-section (b) to Section 80-HHC(3) of the 1961 Act, which reads thus:

 

“80-HHC. Deduction in respect of profits retained for export business.—

 

***

 

(3) For the purposes of sub-section (1), profits derived from the export of goods or merchandise out of India shall be,–

 

***

 

(b) in a case where the business carried on by the assesse does not consist exclusively of the export out of India of the goods or merchandise to which this section applies, the amount which bears to the profits of the business (as computed under the head “Profits and gains of business or profession”) the same proportion as the export turnover bears to the total turnover of the business carried on by the assesse.”

 

On the question of treatment/head of income from sale of shares, we must record that the assessing officer has contradicted himself. In the assessment order, after a detailed discussion, on the one hand, it has been held that income from sale of shares is income from ‘profits and gains of business or profession’ [For short, ‘income from business’ or ‘business income’.], which is not taxable as ‘income from capital gains’, yet for the purpose of computation of deduction under Section 80-HHC(3) of the 1961 Act, income from sale of shares has not been treated as ‘income from business’.

 

In view of the finding, as recorded by the assessing officer, on the head under which income from sale of shares is taxable, which finding has attained finality, we have no difficulty in accepting the plea and stand of the appellant/assessee – M/s. Magnum International Trading Company (P) Ltd., that income from sale of shares should be treated as ‘income from business’ for computation of deduction under clause (b) to Section 80-HHC(3) of the 1961 Act.

 

Needless to say, once the income from sale of shares is to be included under the head ‘income from business’, the amount will also be included in the total turnover of the business.

 

With regard to interest income, we are in agreement with the stand of the Revenue that this income should be taxed as ‘income from other sources’. The Commissioner of Income Tax (Appeals) had reversed the findings given by the assessing officer on the ground that the surplus funds had been utilized for earning interest income. He held that surplus funds were ‘transitory surplus funds’ and utilization of the same for earning interest income cannot take away the character of ‘business income’ from such interest. In our opinion, this finding is fallacious and wrong. The surplus funds, when deposited in a bank or otherwise to earn interest, are not taxable under the head ‘income from business’, but under the head ‘income from other sources’. This income does not have direct nexus nor earned by way of business activity. Accordingly, the interest income is not to be treated as ‘income from business’ for computation of the deduction in terms of clause (b) to Section 80- HHC(3) of the 1961 Act.

 

The same reasoning would equally apply in the appeals for assessment years 1990-1991 and 1991-1992, in which years, the issue relates to treatment of interest income, that is, whether it should be taxed under the head ‘income from business’ or under the head ‘income from other sources’. In consonance with our findings recorded above, the income earned in the assessment years 1990-1991 and 1991-1992 of Rs. 95,83,895/- (Rupees ninety five lakhs eighty three thousand eight hundred ninety five only) and Rs.1,18,56,913/- (Rupees one crore eighteen lakhs fifty six thousand nine hundred and thirteen only) respectively, will be taxable under the head ‘income from other sources’.

 

Accordingly, Civil Appeal nos. 7752/2012 and 7753/2012, both pertaining to the assessment year 1989-1990, and Civil Appeal nos. 7751/2012 and 7754/2012, pertaining to the assessment years 1990- 1991 and 1991-1992, are partly allowed, albeit with the direction and clarification that:

 

(i) computation of deduction under Section 80-HHC of the 1961 Act would be made as per clause (b) to sub-section (3) to Section 80-HHC of the 1961 Act, as it existed before substitution and amendment by Finance (No. 2) Act, 1991;

 

(ii) for assessment year 1989-1990 for the purpose of Section 80-HHC(3) of the 1961 Act, income/profit earned from sale of shares would be included in the amount which bears to the profits of the business as computed under the head ‘profits and gains of business or profession’. The receipt/gross amount from sale of shares would be included in the total turnover; and

 

(iii) income by way of interest in the assessment years 1989- 1990, 1990-1991 and 1991-1992, being income taxable under the head ‘income from other sources’, would be compulsorily excluded for the purpose of computation of deduction under Section 80-HHC(3) of the 1961 Act.

 

Pending application(s), if any, shall stand disposed of.

 

DISCLAIMER: Though all efforts have been made to reproduce the order accurately and correctly however the access, usage and circulation is subject to the condition that publisher is not responsible/liable for any loss or damage caused to anyone due to any mistake/error/omissions.