Bombay High Court
Lupin Agrochemical (I) Ltd. vs Deputy Commissioner Of Income Tax on 29 October, 1999
Equivalent citations: [2001]75ITD278(MUM)
ORDER
M. A. Bakshi, J.M We find it convenient to dispose of these four appeals of the assessee, for assessment years 1990-91 to 1993-94, by this consolidated order. Rival contentions have been heard and records perused.
2. The assessee company is engaged in the manufacturing of agrochemical formulations and the products are used as pesticides. The common issue involved in these appeals is relating to the computation of deduction under section 80-I. The assessing officer has excluded the interest income from the income eligible for computation of deduction under section 80-I on the ground that the said income is assessable under the head 'income from other sources' and the same has nothing to do with the profits derived from industrial undertaking. For assessment year 1993-94, the assessing officer has also excluded the commission income of Rs. 18.84 lakhs from the computation of deduction under section 80-I.
3. The learned counsel for the assessee contended that the assessing officer was wrong in excluding the interest income from the eligible profits for the purpose of deduction under section 80-I as the income of interest was included in the business income of the assessee. Reliance was placed on the decision of the Delhi Bench of the Tribunal in the case of Rajasthan Petro Synthetics Ltd. v. Deputy CIT (1997) 60 ITD 682 (Del-Trib) and that of the Jabalpur Bench of the Tribunal in the case of Deputy CIT v. Vindhya Telelinks Ltd. (1997) 63 ITD 127 (Jab-Trib) in support of the contention that when borrowed money is invested in a bank for a temporary period, the income is assessable under the head 'income from business'. Reference was also made to the decision of the Supreme Court in the case of CIT v. Sterling Foods (1999) 237 ITR 579 (SC). The learned counsel for the assessee invited our attention to the grounds of appeal raised before the Commissioner (Appeals) relating to the deduction under section 80-I, where it was specifically claimed that the interest income was netted off against the expenses incurred for earning the incomes. It was contended that even if it is assumed that the interest income is assessable as income from other sources, what is to be excluded from the income is the net income in order to arrive at the eligible profits derived from industrial undertaking for the purpose of computation of deduction under section 80-I.
4. In the alternative it was contended that whereas the assessee has earned interest income, it has also paid interest on borrowed funds. Therefore, if at all any income from interest is to be excluded it should be only the excess over the interest paid on borrowed funds.
5. For assessment year 1990-91, the learned counsel for the assessee pointed out, that the assessing officer has excluded the interest income from debtors also of Rs. 36,757 when theassessing officer for assessment year 1991-92 has allowed the deduction in respect of the similar income.
6. For assessment year 1993-94 it was contended that the assessee has no objection in excluding the income from commission from the eligible profits but the expenses incurred for earning the commission have got to be excluded for working out the net commission which alone is to be excluded from the profits in order to arrive at the eligible profits for the purpose of deduction.
7. The Learned Departmental Representative on the other hand contended that the assessee had not raised any dispute about the assessment of income as income from other sources. The assessing officer has specifically held that the interest income is assessable as income from other sources and as such no objection can be entertained against such assessment. Reliance was also placed on the findings of the Commissioner (Appeals).
8. The Learned Departmental Representative further pointed out that the assessing officer has given the details of interest and has referred to the interest income from deposits at Rs. 36,757 and not as interest from debtors. The assessee had got made any claim against the finding of the assessing officer before the Commissioner (Appeals) nor was this claim made in the grounds of appeal. It was accordingly contended that the assessee may not be allowed to raise this contention at this stage.
We have given our careful consideration to the rival contentions. The contention on behalf of the assessee that the income has been assessed under the head income from business' is not well founded. The assessing officer has recorded a categorical finding that the interest income is assessable as income from other sources. In the light of his specific finding in the body of the order the mere fact that he has taken the income as per profit & loss account of the assessee will not cloud the issue. That brings ,us to the issue as to whether the assessing officer was justified in excluding the interest income in all the four years and the income from Commission in assessment year 1993-94 from the eligible profits derived from an industrial undertaking. In our considered view the issue is squarely covered by the decision of the Supreme Court in the case of Sterling Foods (supra), the decision which has been relied upon by the .learned counsel for the assessee. In this case the assessee was engaged in processing prawns and other sea food, which it exported. It also earned some import entitlements granted by the Central Government under an Export Promotion Scheme. The assessee was entitled to use the import entitlements itself or sell the same to others. It sold the import entitlements to others. Its total income for assessment year 1979-80 included the sale procced for such import entitlements. The assessee claimed relief under section 80HH of the Income Tax Act, 1961 on the profits including the sale proceeds of import entitlements. The Tribunal confirmed the disallowance made by the revenue authorities. The Division Bench of the High Court had earlier decided for assessment years 1975-76 and 1976-77 that the income made by selling the import entitlements was not a profit and gain, derived from industrial undertaking. On a reference for assessment year 1979-80 the Division Bench of the High Court decided in favour of the assessee on the basis of the retrospective amendment to section 28 of the Act by the Finance Act of 1990 making such receipts taxable as business profits. On appeal to the Supreme Court their Lordships held, reversing an the decision of the High Court, that the provisions of section 28 as amended made no difference. It was further held that the word 'derive' is usually followed by the word 'from' and it means "get, to trace from a source; arise from, originate in, show the origin or formation of". The source of import entitlements could not be said to be the industrial undertaking of the assessee. The source of import entitlements could only be said to be the export promotion scheme of the Central Government where under the export entitlements became available. There must be, for the application of the words 'derived from', a direct nexus between the profits and gains and the industrial undertaking. In the instant case, the nexus was not direct but only incidental. The industrial undertaking exported processed sea foods. By reason of such export, the export promotion scheme applied. Thereunder, the assessee was entitled to import entitlements which it could sell. The sale consideration therefrom could not be held to constitute a profit and gain derived from the assessee's industrial undertaking. It was accordingly held that the receipts from the sale of import entitlements would not be included in the income of the assessee for the purpose of computing the relief under section 80HH of the Income-tax, 1961.
10. We may now deal with the contention on behalf of the assessee that the interest income should be set off against the expenditure by way of interest paid on borrowed capital. In this connection the decision of the Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT (1997) 227 ITR 172 (SC) is relevant. In this case their Lordships of the Supreme Court held that income-tax is attracted at the point when the income is earned. Taxability of income is not dependent upon its destination or the manner of its utilisation. It has to be seen whether at the point of accrual the amount is of revenue nature. If so, the amount will have to be taxed. It has further been held that interest income is always of revenue nature unless it is received by way of damages or compensation. If a person borrows money for business purposes but utilises that money to earn interest however temporarily the interest so generated will be his income. This income can be utilised by the assessee whichever way he likes. He may or may not discharge his liability to pay interest with this income. Merely because it was utilised to repay the interest on the loan taken by the assessee, it did not cease to be his income. When the question, is whether a receipt of money is taxable or not or whether certain deductions from that receipt are permissible in law or not the question has to be decided according to the principles of law and not in accordance with the accountancy practice. Accounting practice cannot override section 56 or any other provision of the Income Tax Act.
11. It was further held by their Lordships of the Supreme Court that under the Income Tax Act, 1961 the total income of a company is chargeable to tax under section 4 and it has to be computed in accordance with the provisions of the Act. Section 14 lays down six heads for the purpose of computation of income. Their Lordships further held that it is possible for a company to have six different sources of income each one of which is chargeable to income-tax profits and gains of business or profession is only one of the heads under which the a company's income is liable to be assessed to tax. Their Lordships further held that if a company keeps the surplus funds in short-term deposits in order to earn interest such interest will be chargeable under section 56. In other words, if the capital of a company is fruitfully utilised instead of being kept idle, the income thus generated will be of revenue nature and not an accretion to capital. Whether the company raised the capital by issue of shares or debentures or by borrowing will not make any difference to this principle. If borrowed capital is used for the purpose of earning the income that income will have to be taxed in accordance with law. It was further held that the amount of interest received by the company flows from its investments and is its income and clearly taxable even though the interest amount is earned by utilising the borrowed capital. It is true that the company will have to pay 'interest on the money borrowed by it. But that cannot be a ground for exemption of interest earned by the company by utilising the borrowed as its income. Any set off or deduction of any expenditure can only be made in accordance with the provisions of the Act.
12. Reference may also be made to the decision of the Supreme Court in the case of CIT v. Bokaro Steel Ltd. (1999) 236 ITR 315 (SC). In this case their Lordships of the Supreme Court have reiterated at Page 321 "During these assessment years, the respondent assessee invested the amounts borrowed by it for the construction work which were not immediately required, in short-term deposits and earned interest. It has been held in these proceedings that the receipt of interest amount to income of the assesee from other, sources. The assessee has not filed any appeal from this finding which is given against it. In any case this question is now concluded by the decision of this court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra). Hence we are not called upon to examine that issue". At Page 323 their Lordships of the Supreme Court have further noted "the company may also as in that case keep the surplus funds in short-term deposits in order to earn interest. Such interest will be chargeable under section 56 of the Income Tax Act". Their Lordships further held that the interest earned by investing borrowed capital in short-term deposits is an independent source of income connected with the construction activities or business activities of the assessee.
13. In the light of the above decisions of the Supreme Court we have no doubt in our mind that the deduction under section 80-I is limited in respect of the profits derived from industrial undertaking and the income derived from investing money in banks, be it out of the borrowed money for otherwise, is an independent source of income and it is not an income derived from the industrial undertaking. Similarly, the income from commission is not derived from the industrial undertaking. That again is an independent source of income. It may fall within the category of income from business but not an income derived from the industrial undertaking. We are therefore of the considered view that the revenue was justified in not taking into account the interest income in all the four assessment years and income from commission in assessment year 1993-94 in the computation of deduction under section 80-I. We therefore confirm the disallowance.
14. to 21. (These paras are not reproduced here as they involve minor issues).