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Income Tax - Sec 80HHC - insurance claim received on destruction of stock-in-trade is eligible to be included in 'business profit' for purpose of exports benefits: Bombay HC

By TIOL News Service

MUMBAI, JULY 5, 2010: SECTION 80HHC has been one of the most disputed incentivising Sections of the I-T Act. It has undergone amendments so many times that each amendment claimed its own pound of litigation-flesh. In the latest case the issue before the High Court was - Whether insurance claim received by the assessee on destruction of stock in trade was eligible to be included in “business profit” for the purpose of deduction u/s 80HHC, despite the jurisdictional HC decision in the case of Dresser Rand India Ltd (2010-TIOL-281-HC-MUM-IT) and the Apex Court ruling in the case of K.Ravindarnathan Nair (2007-TIOL-202-SC-IT). And the anser is YES.

Facts of the case

The assessee received insurance claim from the insurance company on the damage of the goods and included the amount in the “business profits” while computing the deduction of 80HHC. The AO took the view that the insurance claim was a receipt in the nature of commission brokerage and hence by virtue of explanation (baa) the same was not business profit. CIT (A) affirmed the order of the AO. ITAT allowed the appeal of the assessee. Appeal was filed before the High Court wherein the counsel of the revenue argued that in view of the Apex Court judgment in K Ravindernathan Nair case, insurance claim constituted an independent income which was not relatable to the export turnover. Hence, the Bench was urged that 90% of the insurance claim was liable to be excluded from the profits of the business under Explanation (baa) to Section 80 HHC.

After hearing both sides the Bench held that,

++ under Explanation (baa), the profits of business are defined to mean the profits of business as computed under the head ''profits and gains of business or profession''. This has to be reduced under Clause (1) by ninety percent of any sum referred to in clauses (iiia), (iiib) and (iiic) of Section 28 which are in the nature of incentive incomes or “of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits”. Receipts by way of brokerage, commission, interest, rent or charges have been held, by the judgment of the Supreme Court in Ravindranathan Nair’s case to constitute independent incomes. Being independent incomes unrelated to export, Parliament contemplated that ninety percent of such receipts would have to be reduced from the profits of business as defined in Explanation (baa);

++ In the present case, the insurance claim related to the stock in trade and it was only an insurance claim of that nature which formed the subject matter of the appeal. Now, it cannot be disputed that if the stock in trade of the assessee were to be sold, the income that was received from the sale of goods would constitute the profits of the business as computed under the head of profits and gains of business or profession. The income emanating from the sale would not be sustainable to a reduction of ninety percent for the simple reason that it would not constitute a receipt of a nature similar to brokerage, commission, interest, rent or charges. A contract of insurance was a contract of indemnity. The insurance claim in essence indemnified the assessee for the loss of the stock in trade. The indemnification that was made to the assessee must stand on the same footing as the income that would have been realized by the assessee on the sale of the stock in trade. In these circumstances, the insurance claim on account of the stock in trade did not constitute an independent income or a receipt of a nature similar to brokerage, commission, interest, rent or charges. Hence, such a receipt would not be subject to a deduction of ninety percent under clause (1) of Explanation (baa).

(See 2010-TIOL-460-HC-MUM-IT in 'Income Tax')


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