In Commissioner of Income Tax vs. Nirma Ltd., following issues were raised:  

• While claiming deduction under sections 80HH, 80-I and 80HHC, whether gross profit or net thereof, that is gross profit minus expenditure incurred for earning such profit, which shall be excluded?
• While calculating deduction under sections 80-IA and 80HH, sale consideration from scrap shall be included?
• For deduction under sections 80HH and 80HHC, whether interest from business debtors shall be included?
• Whether expenditure in connection with expansion of existing business would be allowed as revenue expenditure?

Facts: The assessee being a company was engaged in the business of manufacturing and marketing toiletry products. The company filed its return of income declaring the total income at Rs. 43,63,56,523/= after claiming deductions under Sections 80I, 80IA, 80HH & 80HHC of the Act. The assessment was completed after scrutiny, determining the total income at Rs. 113.17 Crores [rounded off]. Being aggrieved by the order, the assessee appealed to the Commissioner of Income-Tax and to the Tribunal. The Tribunal allowed the appeal of the assessee and partly allowed the appeal of the revenue, dismissing the cross objection of the assessee. Thereafter, the Revenue appealed to the Court. Held:

• The Court viewed the Explanation (baa) to section 80HHC(1) for determining the profits of the business. Applying the said Explanation to the case in hand, ninety per cent of 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 for determining the profits of the business. Thus, gross profit minus expenditure incurred for earning such profit shall be excluded.
• It was stated that this Court had followed the decision rendered in Harjivandas Juthabhai Zaveri (supra) with respect to sale of scrap and the same has been dismissed. Thus, the issue was in favour of the assessee.
• Relying on the decision of Nirma Industries Limited v. Deputy CIT,the Court upheld the assessee’s claim for deduction under section 80I of the Act on the interest received on late payment of sale consideration as amount derived from eligible business.
• The Court noticed that the assessee through its existing administrative mechanism started a new facility for production of soda ash and had also set up facility for production of a material called ‘lab’ for its captive consumption for the purpose of its existing manufacturing business. It is no doubt that the assessee is engaged in the business of manufacture of soap and the soda ash and ‘lab’ so produced is used by way of captive consumption. Thus, it is clear that it was an expansion of the existing business, applying the tests laid down by this Court in the case of Alembic Glass Industries Ltd. Hence, expense incurred on expansion of existing business shall be allowed as revenue expenditure.

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