Income Tax Appellate Tribunal - Chennai
Joint Commissioner Of Income Tax vs Global Calcium (P) Ltd. on 14 July, 2006
Equivalent citations: (2007)106TTJ(CHENNAI)179
ORDER
Mahavir Singh, J.M.
1. These are group of appeals by the Department and different assessees involving common issues and, therefore, they were heard together and are disposed of by this consolidated order. The following two common issues are before us for consideration:
(1) Whether interest earned from fixed deposits with bank is connected or interlinked with carrying on assessee's business and, therefore, is eligible for deduction under Section 80HHC from the business profits after excluding 90 per cent under Expln. (baa) to Section 80HHC of the IT Act, 1961.
(2) Whether the receipts on account of interest, commission, brokerage, rent, charges or any other receipt of a similar nature is to be excluded net or gross from such profits for the purpose of computation of deduction under Expln. (baa) to Section 80HHC of the IT Act, 1961.
2. On this issue, first of all Shri K. Ravi, learned senior counsel of the assessee argued that the issue was whether interest on deposit in lien with the bank as a precondition for sanction of loan, be netted off against the interest paid to the bank? He submitted why the ratio of the Hon'ble jurisdictional High Court in the case of CIT v. V. Chinnapandi is not applicable to the present case. He submitted that there are two streams of cases which have to be considered, that have evolved based on two different factual dispositions. Stream A is a case where the income is computed by reducing certain expenses from the gross receipt and whether the gross receipt is to be taken or net receipt, would be an issue of contention. For instance, the issue of gross interest or net interest for the purpose of Section 80M, where there were expenses for earning a dividend income. The decision of the Madras High Court in the case of V. Chinnapandi (supra) considers only the case of whether for the deduction under Section 80HHC, the expenses related to the interest income can be allowed as a deduction or not. In this context, the Court has stated that the statute has provided for a 10 per cent deduction from the gross and nothing more can be claimed as a deduction. Therefore, the ratio laid down in the decision of the Madras High Court is that there can be no further deduction apart from the statutory deduction of 10 per cent so that 90 per cent of the receipt by way of interest is to be eliminated from the profits of the business. This is also clear from the decision of the Punjab & Haryana High Court in the case of Rani Paliwal v. CIT wherein the claim of the assessee was to reduce the interest paid of Rs. 4.13 lakhs from interest earned of Rs. 6.33 lakhs and on the balance 90 per cent is to be applied.
3. The learned Counsel of the assessee further submitted that stream B is a case where, the outgo by way of expenditure is sought to be reduced by an inextricably linked income flow. That is, in the instant case, the assessee has obtained the loans from the banks based on the deposits made and the interest is paid and received from the same bank. In this case, the assessee seeks that the interest expenditure must be reduced by the interest received which is inextricably linked to the loan and, therefore, only the net interest qualifies for deduction while computing the profits and gains from business or profession and therefore, there is no gross interest that survives for being excluded while computing the export profit under Section 80HHC. Clearly the reduction of an outgo by an inextricable stream of income are upheld by the Supreme Court in the case of CIT v. Bokaro Steel Ltd. and Karnal Co-operative Sugar Mills Ltd. . In the case of Bokaro Steel (supra), the apex Court considered whether the receipts inextricably linked to the project of the assessee could be taxed or should it be netted off against the project expenses and held that it should be netted off. In the case of Kamal Co-operative Sugar Mills Ltd. (supra), the assessee was importing certain equipments and had to open an LC for this purpose, which in turn mandated a deposit with the bank. The apex Court held that, the interest has to be netted off against the cost of the equipment. Hence, the concept of an income stream being inextricably linked to the expense, the income has to be netted off against the expense. This is the precise case of the assessee in this appeal. Therefore, the ratio laid down in the case of CIT v. V. Chinnapandi (supra) will not apply to the case of the assessee.
4. Shri K. Ravi, the learned Counsel of the assessee, further submitted that the Hon'ble jurisdictional High Court in the case of CIT v. A.S. Nizar Ahmed & Co. (2003) 179 CTR (Mad) 598 : (2003) 259 ITR 244 (Mad) has held that the deposit is made in pursuance of a precondition for enjoying a credit facility. At p. 247 of the report, it was held as under:
In cases where security deposit is required to be given before enjoying a facility as in the case of supply of electricity or in a case where the deposit is a precondition for enjoying a credit facility essential for running the business, the making of the deposit would be regarded as being inextricably linked to the running of the business of the assessee, so as to enable the assessee to regard the interest derived on deposit as being part of its business income.
He submitted that it is absolutely clear that the jurisdictional High Court has held that in all cases where the margin money deposit bears fruit by way of interest, it should be construed as a fruit for the business endeavor and be held as "income from business". In view of the above cited decision, since the assessee has made a deposit which is a precondition for enjoying a facility essential for running the business, then it is inextricably linked to the running of the business of the assessee and partakes the character of business income.
5. He further referred to the latest decision of the Madras High Court in the case of CIT v. Sharp Industries rendered on 17th Jan., 2006. The decision was delivered in the context of entitlement of the assessee to claim deduction of interest income under Section 80HHC. Though this decision was against an order under Section 154 r/w Section 80HHC, this decision captures the essence of the principle applicable to the subject of deduction of interest income. The decision was also rendered under the amended provision of Section 80HHC, which is applicable in the instant case of the assessee. The Madras High Court has relied on its own decision in the case of CIT v. N.S.C. Shoes wherein it was held that interest income is also eligible for deduction if it is included in the computation of profits and gains of business. Thus, the jurisdictional High Court has reiterated well laid down principles of deduction of interest under Section 80HHC.
6. He further submitted that if interest income is assessed as business income and there are interests paid, then the decision of the Special Bench of the Tribunal in the case of Lalsons Enterprises v. Dy. CIT (2004) 82 TTJ (Del)(SB) 1048 : (2004) 89 ITD 25 (Del)(SB) will squarely apply. The AO in the present case has assessed the interest income as income from business and it is not the case of the Department that the interest income should be assessed as income from other sources. Having conceded that the interest income is to be assessed as business income, it is natural that the decision of Lalsons Enterprises (supra) should be applied. He submitted that any suggestion that the word "receipts" appearing in the Explanation refers to gross receipts is negated by the last there (sic) words "included in such receipts". What is included in "such receipts" is only the net income by way of interest (i.e., interest receipt minus interest expenditure). The Circular No. 621 explaining the provisions of Expln. (baa) [(1992) 101 CTR (St) 1: (1992) 195 ITR (St) 154] recognizes that there may be some common expenses and estimates an ad hoc 10 per cent of such common expenses to be allowed as deduction against the receipts such as interest, brokerage, commission, etc. But this deduction is only for common expenses. Deduction in respect of expenditure which has a nexus with the receipts of the nature referred to in the Explanation has to be allowed further, which is not prohibited. Such common expenses are generally the indirect or fixed expenses which every businessman has to incur to continue in business, such as salaries and wages, other administrative expenses and so on. In addition to such common expenses there may be expenses which have a direct bearing or nexus with the receipts by way of interest, commission, brokerage, rent, etc. If such receipts are to be taken out of profits of the business on the footing, that they have no connection with the business profits or the turnover, it seems only fair and reasonable to hold that the expenditure having a nexus with such receipts should also be taken out of the business profits on the same footing. The word "receipts" used in the clause does not refer to gross receipts merely because the word "net" is not used before it; nor does it mean, as was suggested on behalf of the Department, to denote what "actually comes in" or what is "actually received by the assessee". This is because of the controlling words, imposing a qualification or condition, which follow, to the effect that the receipts should be those that have been included in the business profits. In the computation of the business profits, only the net income arising out of the receipts are included.
7. The learned Counsel of the assessee further referred to Section 171 of the Contract Act (Banker's lien), which states as under:
General items of bankers: Bankers, factors, wharfingers, attorneys of a High Court and policy brokers may, in the absence of a contract to the contrary, retain as a security for a general balance of account any goods bailed to them, but no other persons have a right to retain as a security for such balance goods bailed to them, unless there is an express contract to that effect.
8. He referred to general lien and relied on Syndicate Bank v. Vijay Kumar (1992) SCC 330: 74 Comp Cas 597, where at the instance of the borrower the bank issued the guarantee against the pledge of the fixed deposit of the borrower and ultimately, the bank guarantee was discharged, it was held that the bank retained the general lien on the fixed deposit for the payment of its claim against the borrower and the fixed deposit cannot be attached by any other creditor. He further submitted that according to the Halsbury Laws of England--4th Edn. Vol. 2 para 210, the right of general lien of the banker is judicially recognized and attaches to all securities received by him as deposited with him by a person who is a customer, or by a third person on a customer's account, and to money paid in by, or to the account of a customer unless there is a contract, express or implied, inconsistent with the lien.
9. He further submitted that when the debtor had got a fixed deposit and that he owes amount to the bank, both of them have got to be taken into consideration and after deducting the amount due to the Bank, the Bank is bound to return the balance amount to its customer. The deposit becomes a loan, when merges in the general fund of the bank and becomes the property of the bank. Two rights flow out of the relationship of debtor and creditor, viz., (1) -the right of the customer to demand repayment of the amounts due to him if and when he so desires, and (2) the right of the bank to appropriate the monies, funds and securities of the customer coming into its possession in the course of their dealings for repayment of the customer's indebtedness. This latter right is known as banker's lien and it rests on the principle of the law merchant that any credit given by bank to a customer is given on the faith that sufficient monies and securities belonging to the customer will come into the possession of the bank in the due course of further transactions. The right is akin to the right of set off which obtains between persons occupying the relation to debtor and creditor and between whom there exist mutual demands. As mutuality is essential to the validity of a set off, it is necessary that before one demand can be set off against another, both must mutually exist between the same parties and between them in the same capacity. It has been held in the case of Brahmayya & Co. v. K.P. Thangavelu Nadar AIR 1956 Mad 570 that a lien under Section 171 can be exercised only over property of someone else and not his own property. Thus when goods are deposited with or securities are placed in the custody of a bank it would be correct to speak of the rights of the bank over the security or the goods as a lien because the ownership of goods or securities would continue to remain in the customer. But, when monies are deposited in a bank as a fixed deposit, the ownership of the monies passes to the bank and the right of the bank over the monies lodged with it would not be really a lien at all. It would be more correct to speak of it as a right of set off or adjustment.
10. He further submitted that Mulla on Indian Contracts provides that the statutory law in India does not expressly refer to banker's lien in respect of cash deposits. But money has been held to be a species of goods over which lien may be exercised. A banker's lien can attach to money so long as it remains an earmarked sum of money, but money paid into a bank to be credited to the current account of the person making the payment does not constitute a bailment, so that there is no question of lien. However, the banker's right to combine the customer's accounts is distinguishable from the banker's lien. As the banker 'owns' the money standing to the credit of the customer's account he can have no lien over it. A lien is confined to securities and property in the banker's custody. A set off is in relation to money and may arise from a contract or from mercantile usage or by operation of law. The term 'lien' cannot be properly used in reference to the claim of the bank upon a general deposit for the funds of which, are the property of the bank itself. The term 'set off should be applied in such cases. The rule of English law that the bank has a lien, or more appropriately a right to set off against all monies of the customers in his hands has been accepted in India. The banker is at liberty to transfer the deposits of a customer to set off and liquidate debts due from the customer, even a surety, in whatever account the money may be, current or deposit, but mutuality must exist between the same parties. He submitted that therefore the set off or netting off of interest receivable and interest payable is sanctioned by law and upheld by the Courts. This is a commercial transaction and the applicable commercial law as upheld by the jurisdictional High Court.
11. The learned Counsel of the assessee further submitted that in the case of Bhanu Constructions Co. Ltd. (ITA No. 404/Hyd/1996), a guarantee extended by the bank was invoked and the bank instead of paying off the margin money deposit, continued to hold the deposit as it is and debited the payout by debiting the cash credit account thereby increasing the interest payable by the assessee as well as paying interest to the assessee. The Hyderabad Bench of the Tribunal held that though for the purpose of accounting, the transactions may appear to be independent transactions, one by way of FDR as margin and another by way of loan taken by the assessee, yet in truth and reality, there was only one transaction, more particularly in view of the fact that the guarantee was invoked and guarantee money paid formed part of the total loans. Interest on FDR which was kept as margin money for giving guarantee could not be seen de hors the inaction of the bank to adjust the margin against the guarantee invoked. On the other hand, interest was payable on the loan amount including the guarantee amount, yet, on the other hand, interest on margin FDR was taxed, a fact which could not be said to be justified in the eyes of law. He also submitted that the decision of the Madras High Court in the case of K.S. Subbiah Pillai & Co. (India) (P) Ltd. v. CIT has negatived the set off of interest assessed as income from other sources against the interest paid. This case does not deal with interest assessed as business income. This decision has no applicability in a case where the deposits are driven by business considerations and conversely, this decision has applicability only when the deposits are surplus deposits. The ratio of decision of the Madras High Court in A.S. Nizar Ahmed (supra) would apply to a case where the deposit is driven by business consideration.
12. While concluding, the learned Counsel of the assessee submitted that based on the jurisdictional High Court decision in the case of A.S. Nizar Ahmed (supra), interest from deposit, which is a precondition for sanction of credit facilities, should be assessed as business income. In the instant case, the deposit is an earmarked security for the sanction of the limits. If the interest is assessed as business income and there are interest payments, these have to be netted off. This is upheld by Lalsons Enterprises (supra) which has not been upset by any decision of any High Court. The contract law has also sanctioned the set off of accounts between the banker and the client when they interact in the same capacity. This principle has been accepted by various decisions as submitted hereinabove. The concept of mutual dealing and set off of interest on FDR earmarked as a security to the bank against the interest payable to the bank has been upheld by the Hyderabad Bench of the Tribunal. The decisions of the Hon'ble Madras High Court in K.S. Subbiah Pillai (supra) and V. Chinnapandi (supra) will not apply to the facts of the instant case and are distinguishable.
13. Shri R. Vijayaraghavan, the learned senior counsel of the assessee argued that Section 80HHC was introduced with a view to give relief under the IT Act for profits from exports. However, the Government right from the introduction of the section never wanted the profits of export activity to be separately computed (as in the case of relief available to new industrial undertaking under Sections 80HH, 80-I, 80J, etc.). When Section 80HHC was introduced from the asst. yr. 1983-84, relief was granted on the basis of export turnover as well as the incremental turnover over the earlier period. Relief under Section 80HHC was later on changed to profits derived from export from the asst. yr. 1986-87. Here also the Government did not require the profits from export to be separately computed. The legislature put forth a thumb-rule of determining the profits from export. The profits and gains of the entire business of the assessee was divided by the total turnover which will give the average rate of profit per rupee of turnover of the business. This average rate of profit is to be multiplied by the export turnover, which will give the deemed profits of the business from the export--at the same rate of profitability for the entire business. It was immaterial whether exports actually yielded profits.
14. The learned Counsel of the assessee further submitted that the profits and gains for the entire business have to be taken and no part of it is to be excluded therefrom, as not relating to exports or otherwise (CBDT Circular No. 564, dt. 5th July, 1990 [(1990) 85 CTR (St) 53: (1990) 184 ITR (St) 37]. Such exclusion is not contemplated in view of the fact that such profits or gain is to be multiplied by the ratio of export turnover to total turnover. Therefore no profits can be excluded as not being related to exports or relief cannot be denied because there is no profits from exports. There is no such restriction under Section 80HHC and the formula prescribed in Sub-section (3) will otherwise become redundant. Therefore, prior to the introduction of Expln. (baa) whatever was assessed under the head 'Profits and gains of business' have to be taken without any exclusion. The legislature found that there were certain receipts, which though may be treated as business income, was not part of any main line of business activities and did not involve use of resources like machinery, labour, capital, etc. They were merely profits from sundry transactions like brokerage, commission, etc. These profits also enhanced the relief under Section 80HHC even though they did not relate to any of the main business activity. Hence such receipts were sought to be excluded by the introduction of Expln. (baa) from asst. yr. 1992-93.
15. He submitted that Expln. (baa) provides for exclusion of 90 per cent of the receipts like brokerage, commission, etc., from the business profits. This would show that the legislature wanted to exclude only such receipts where the expenditure for earning the same is not more than 10 per cent of the receipts. Further the words "brokerage, commission .... any other receipts of similar nature" would show that the principle of ejusdem generis is to be applied and only such receipts, which have underlying common characteristics, should be excluded from Expln. (baa) [Asstt. CIT v. Herbal Isolates (P) Ltd. (2003) 79 TTJ (Coch) 328 : (2003) 83 ITD 310 (Coch)]. The common characteristic between rent, brokerage, commission, etc. is those receipts in the nature of 'dormant receipts' not earned from any business activity arising from utilisation of any appreciable resources like machinery, labour, capital, etc. Therefore applying the principle of ejusdem generis only such receipts, which are not part of the main business activities of the assessee, should be excluded. Merely because the receipt is termed "commission, interest or charges, etc." cannot mean they have to be excluded under Clause (baa). The Bombay High Court in the case of CIT v. Bangalore Clothing Co. has laid down the principle of determining whether the receipt should be excluded under Clause (baa) or not. It is held that if the receipt is part of the operational activity, the same cannot be excluded. The word "operational activity" referred to in this decision does not mean that it should be a manufacturing activity but means main line of business employing resources of the assessee. In fact the Bombay High Court has also concluded that interest earned from moneylending activity cannot be excluded under Clause (baa).
16. He submitted that, therefore, it is essential to examine each receipt to see whether it is a receipt arising from or connected with the business activity or it is a sundry receipt which has no connection whatsoever with the business activity. If the receipt is connected with the business activity then the same cannot be excluded from profits and gains under Expln. (baa). Whether a receipt is connected with business activity is to be decided on the facts of each case. But it may be useful to consider the decisions rendered under Section 80-I, 80E, wherein profits "attributable" to an undertaking was given relief under that section. While Courts have held that "profits attributable to" is wider than "profits derived from", profits attributable to an undertaking should be considered as part of the operational activity of the undertaking and if such receipts can be considered as attributable to an undertaking the same cannot be excluded under Clause (baa). The Supreme Court in the case of Vellore Electric Corporation Ltd. v. CIT has held that for a receipt to be treated as attributable to the undertaking, it need not be earned from the actual conduct of the business but it will be sufficient if the activity from which income is earned has direct and proximate connection with the business activity. The Madras High Court in the case of CIT v. Rane (Madias) Ltd. has held that interest from deposits to TNEB is profit attributable to the undertaking. Other decisions explaining "attributable" are CIT v. Bangalore Distt. Co-operative Central Bank Ltd. (1998) 148 CTR (SC) 226 : (1998) 233 TTR 282 (SC); CIT v. Ahmedabad Electricity Co. Ltd. ; Chief CIT v. Kisan Sahakari Chini Mills Ltd ; CIT v. Oil India Ltd. ; CIT v. Buckau Wolf New India Engineering Works Ltd. ; and CIT v. Seshasayee Paper and Board Ltd. .
17. He further submitted that interest receipts are specifically mentioned in Expln. (baa) and, therefore, the issue is whether all interest receipts have to be excluded under Expln. (baa). Interest earned from margin money deposits for getting credits, L/Cs, guarantee, etc. are intimately connected with the business of the undertaking. The Supreme Court in the case reported as Karnal Co-operative Sugar Mills Ltd. (supra) has held that such interest is nothing but business income connected with the business. Therefore it cannot be said that such interest is not part of the operational activity. Similarly, the Madras High Court in the case of CIT v. Madras Motors Ltd./M.M. Forgings has held that interest from outstanding amounts of the clients would constitute income derived from the undertaking and hence has to be included for Section 80HHC. The Madras High Court in the case of CIT v. N.S.C. Shoes (supra) has held that interest, which is assessed as profits and gains of business, has to be taken for the purpose of Section 80HHC [Mowed in the decisions in the case of CIT v. S.S.C Shoes Ltd. . The Madras High Court in a most recent case for the asst. yr. 1993-94 has held that interest income should be taken into account for computing relief under Section 80HHC. This being the latest decision of the Madras High Court is binding on the lower authorities and therefore this has to be followed. In the case of V. Chinnapandi (supra), the Madras High Court was concerned with interpretation of Expln. (baa) and whether the gross receipts were to be considered or the net receipts. In that case the High Court was not considering what are the various receipts that are to be excluded under Expln. (baa). A decision of the High Court cannot be an authority for an issue which was not before it or was not considered by it, [CIT v. Sun Engineering Works (P) Ltd. . But in the latter case of CIT v. Sharp Industries (supra), specific issue before the High Court was whether interest income can be excluded under Expln. (baa). Thus the decision not only is on the specific issue and is the latest decision of the jurisdictional High Court on the issue. The High Court has not decided on jurisdiction alone but has clearly spelt out that ratio of the decision in N.S.C. Shoes (supra) is to be applied.
18. Further, Shri T.N. Seetharaman, the learned senior counsel as amicus curiae argued that this issue has been considered by the Tribunal, Hyderabad "A" Bench in the case of Dy. CIT v. Infotech Enterprises (2006) 100 TTJ (Hyd) 610. He specifically drew our attention to para 6 of the order which reads as under:
6. On a careful consideration of the submissions of the parties, we find much force in the argument of the learned Counsel for the assessee. It is true that the Tribunal's powers are limited to dealing with only that part of the order of the first appellate authority which has been made subject-matter of appeal before it. The AO has nowhere in the assessment order found that there was no nexus between the interest received and the interest paid. The first appellate authority has also not given any adverse finding on this issue. Thus, it is not open for the Revenue to raise a factual issue without any basis or fresh material, for the first time before the Tribunal, that too without filing an additional ground of appeal. Moreover, the Special Bench of the Tribunal in the case of Lalsons Enterprises (supra) has stated that the receipts that are to be excluded from the business profits are those which are included in the profit. It is common knowledge that the term "profit" connotes only net of income minus expenditure. When the net figures go into profit, we do not understand how the gross figure can be taken out. To give an example:
Purchases 50 Sales 100 Interest paid 500 Interest receipts 500 Profit of business 50 Total 600 600 In the case illustrated above, no element of interest enters into the net profit. If the concept of nexus is brought in, then an amount of Rs. 500 (gross) should be reduced from an amount of Rs. 50 (net profit). This creates an anomalous situation. When no element of interest has entered the figure of "profit of business", the question of removing interest does not arise. There is no need for nexus. Thus, in our considered opinion, the law laid down in the case of Lalsons Enterprises (supra) does not call for any nexus between interest received and interest paid in cases where net profit is the criterion. What has to be looked into under Section 80HHG is "business profits" and this is not the same as in Section 80-I where the concept of "derived from an undertaking" is considered. There is no concept of "derived from" under Section 80HHC. All that is to be seen is whether the interest in question is assessed as "business profits" and if so the interest component included in such business profits should be excluded in terms of Expln. (baa) to Section 80HHC and the formula applied. There seems to be confusion on the concept of "profits of business" as contemplated under Section 80HHC and the concept of "income derived from" contemplated under Section 80-I. All that is to be seen under Section 80HHC is whether it is "profit from business" or not and then, if it is so, apply the formula. Looking at the matter from any angle, the order of the first appellate authority has to he upheld, by following the order of the Tribunal in the case of the assessee for the earlier years.
19. On the other hand, the learned Departmental Representative, Shri Shaji P. Jacob, first of all argued that Clause (baa) to Explanation to Section 80HHC was brought on statute book w.e.f. 1st April, 1992 by the Finance (No. 2) Act, 1991, He argued that Notes on Clauses to Finance (No. 2) Bill, 1991 will clarify the position which are given in (1991) 190 ITR (St) 244. Sub-clause (e) seeks to amend Explanation to Section 80HHC particularly sub-item (2). Further he argued that prior to 1st April, 1992, the formula that existed was giving a distorted figure of export profit particularly receipts like interest, commission, etc., which do not have an element of turnover are included in the P&L a/c. The learned Departmental Representative argued that the Memorandum explaining the provisions in Finance (No. 2) Bill, 1991 (190 ITR (St.) 300) very clearly clarifies the position. He argued that the case laws of the Hon'ble jurisdictional High Court in the case of N.S.C. Shoes (supra) pertains to asst. yr. 1986-87 where Clause (baa) to Explanation to Section 80HHC was not on the statute book. Even the case law of S.S.C. Shoes Ltd. (supra) pertains to asst. yr. 1989-90. He further argued that the decision of Tribunal Delhi Special Bench in the case of Lalsons Enterprises (supra) will not apply as the jurisdictional High Court decisions in the case of CIT v. V. Chinnapandi (supra) and K.S. Subbiah Pillai & Co. (India) (P) Ltd. v. CIT (supra) are very much available.
20. As regards the decision of the jurisdictional High Court in the case of CIT v. Madras Motors Ltd./M.M. Forgings Ltd. (supra) cited by the learned Counsel of the assessee, the learned Departmental Representative argued that this case law favours the Department and he took us to p. 68 where the question of interest receipt is considered. The relevant findings are as under:
We agree with this decision, which is binding on us. The aforementioned decision has only been further strengthened by the subsequent decision of the apex Court. We are, therefore, of the clear opinion that the interest which is earned by the assessee from the bank deposits would not have a direct nexus with the industrial undertaking of the assessee and would only be incidental income thereto and, therefore, such interest has to be ignored from the allowable profits under Section 80HH. We answer the reference on this count against the assessee.
It is seen that this issue relates to deduction under Section 80HH. As regards decision of CIT v. Sharp Industries (supra) cited by the learned Counsel of the assessee, the learned Departmental Representative took us through the last two paragraphs of the judgment which read as under:
It is fairly submitted by the learned Counsel for the Revenue that the issue raised in the question is covered against the Revenue by the decision of this Court in CIT v. N.S.C. Shoes , wherein it is held that the interest income is also eligible for deduction provided it is included in the computation of profits and gains of the business.
Applying the ratio laid down by this Court in the decision cited supra, we hold that the Tribunal was right in holding that the claim of the assessee could not be disallowed in a proceeding under Section 154, especially when the interest income was included in the profit of the business. Hence, there is no error in the order of the Tribunal and no substantial question of law arises for consideration for this Court. Hence, the appeal is dismissed. No costs.
He argued that this case law is purely on a debatable issue, whether rectification proceedings under Section 154 can be carried put on debatable issue or not. This case law is not at all applicable to the facts of the present cases.
21. As per Clause (baa) to Explanation to Section 80HHC, 'profits of business' means the profits of the business as computed under the head 'Profits and gains of business or profession' and further as reduced by 90 per cent of any sum referred to in Clauses (iiia), (iiib) and (iiic) of Section 28 or of any receipts by way of brokerage, commission, interest, rent, charges, or any other receipt of a similar nature included in such profits.
22. The learned Departmental Representative further argued that even the receipts of the nature of brokerage, commission, interest, rent, charges or any other receipt of a similar nature are included in such profits and incidental to export profits, the same should be excluded or reduced to the extent of 90 per cent from the profits of the business. In view of this, he urged the Bench to follow the decision of the jurisdictional High Court in the case of CIT v. V. Chinnapandi (supra) and K.S. Subbiah Pillai & Co. (India) (P) Ltd. v. CIT (supra). He argued that the correct law is laid down in these two decisions of the Hon'ble jurisdictional High Court.
23. Now the question arises if any receipt in the nature of commission, brokerage, interest, rent, charges, etc., is assessed as business profit, whether it is to be excluded in terms of Clause (baa) to Explanation to Section 80HHC in computing the deduction under Section 80HHC. Whether the net receipt or gross receipt is to be excluded.
24. We have gone through Clause (baa) to Explanation to Section 80HHC, which was inserted by the Finance (No. 2) Act, 1991 w.e.f. 1st April, 1992. In this clause, 'profits of business' has been defined as profits of the business as computed under the head 'Profits and gains of the business or profession' and subsequently as reduced by 90 per cent of any receipt in the nature of brokerage, commission, interest, rent, charges, etc., which are included in such receipts.
25. The Notes on Clause in the Finance (No. 2) Bill, 1991 reads as under:
Sub-item (2) of item (ii) of Sub-clause (e) seeks to define the expression 'profits of the business'. Under the proposed definition, profits of the business will be determined by deducting from the profits as computed under the head 'Profits and gains of business or profession' the following,--
(a) 90 per cent of receipts by way of brokerage, commission, interest, rent, etc., included in the profits; and
(b) profits of any foreign branch, office, warehouse, etc. Item (iii) of Sub-clause (e) seeks to omit Clause (bb) of the Explanation relating to definition of 'total turnover'. This amendment is consequential to the amendment proposed under Sub-clause (e)(ii)(1) relating to new definition of this expression.
The Memorandum explaining provisions in the Finance (No. 2) Bill, 1991 reads as under:
...The existing formula may also give a distorted figure of export profits when receipts like interest, commission, etc., which do not have an element of turnover are included in the P&L a/c.
It is, therefore, proposed to clarify that "profits of the business" for the purpose of Section 80HHC will not include receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature. As some expenditure might be incurred in earning these incomes, which in the generality of cases is part of common expenses, it is proposed to provide ad hoc 10 per cent deduction from such incomes to account for these expenses.
It is also proposed to clarify that "profits of the business" for the purpose of Section 80HHC will not include profits of any branch, warehouse, etc., situated overseas.
These amendments will take effect from 1st April, 1992, and will, accordingly, apply in relation to asst. yr. 1992-93 and subsequent assessment years.
26. It is seen from the proposed amendment which went to clarify that 'profit of business for the purpose of Section 80HHC will not include receipts in the nature of brokerage, commission, interest, rent, charges, etc. As some expenditure might be incurred in earning these incomes, which in the generality of cases is part of common expenses, so it is proposed to provide ad hoc 10 per cent of these income to account for these expenses.
27. The Hon'ble Bombay High Court in the case of CIT v. Bangalore Clothing Co. (supra) has dealt with Expln. (baa) as introduced w.e.f. 1st April, 1992 and has held as under:
...We do not find any merit in the argument advanced on behalf of the Department. In this case, we are concerned with profits from the business of exports of goods manufactured by the assessee. Therefore, the export profits were required to be computed in the ratio of export turnover to total turnover as contemplated by the above formula. Explanation (baa) was introduced into the Act by the Finance (No. 2) Act, 1991, w.e.f, 1st April, 1992. Under the Circular of the CBDT bearing No. 621, dt. 19th Dec., 1991 [see (1992) 101 CTR (St) 1 : (1992) 195 ITR (St) 154], it has been stated that the above formula gave a distorted figure of export profits when receipts like interest, commission, etc., which do not have an element of turnover are included by the assessee in the P&L a/c. Therefore, Expln. (baa) came to be introduced. Under that Explanation profits of the business, for the purposes of Section 80HHC, does not include receipts which do not have an element of turnover like rent, commission, interest, etc. However, as some expenditure might be incurred in earning such incomes an ad hoc 10 per cent deduction from such incomes is provided to account for those expenses. However, learned Counsel for the Department cannot invoke Expln. (baa) in every matter involving receipts by way of brokerage, commission, interest, rent, labour chares, etc. These items of income have got to be seen in the context of the business activity of the assessee. To give an example, in the case of a manufacturing company which undertakes exports, receipt of interest or commission may not be operational income because they do not have the element of turnover and consequently Expln. (baa) will apply. However, that will not be the case if the assessee is carrying on the business of financing because in the case of financing, the interest income which accrues to the assessee, will have the element of turnover and in such a case, receipts like interest, will not attract Expln. (baa). The point which we would like to make, therefore, is that in every matter the AO will have to ascertain whether receipt of interest, commission, labour charges, etc., were a part of operational income. We cannot lay down any standard test for deciding what would constitute operational income. Broadly, the Department will have to consider the memorandum and articles of association of the company, the nature of the business, the nature of the activity and such other tests. The Department will also have to ascertain as to what is the dominant business of the company and whether receipts like interest, commission, etc., accrue as a part of the main business activity or whether they accrue out of incidental business. In the case of CIT v. K.K. Doshi & Co. , the assessee had received Rs. 19.60 lakhs as service charges. It was held that the service charges of Rs. 19.60 lakhs did not have the element of turnover because the charges were received for a seasonal activity which was not an integral part of the manufacturing activity. Therefore, the test to be applied in all such matters is, whether interest, service charges, commission accrue out of the main business activity of the company and whether they were operational income. The case of CIT v. K.K. Doshi & Co. (supra) shows that service charges of Rs. 19.60 lakhs did not represent operational income and, therefore, came within Expln. (baa). However, we find that the Department just looks at the nomenclature of the receipt and if it finds that the nomenclature is rent, interest, commission then without any further inquiry into the nature of business, the Department invokes Expln. (baa) which is not the purpose and the object of that Explanation. In the present case, the receipt in question is labour charges. However, this nomenclature may not be accurate. In the present case, the assessee is a manufacturer and exporter of garments. In the present case, the Tribunal has recorded a finding of fact which is not challenged, namely, that there was no difference between the activities relating to export business carried on by the assessee and the processes carried on for manufacturing garments for others under job work contracts. The Tribunal has further found, on the facts, that the activity of labour job involved use of machinery, labour and material which were also forming part of the activity of manufacturing garments for its own sales. The Tribunal further found that there was no difference between manufacturing of garments for the assessee's own sales and manufacturing of garments for others on labour job basis. These are findings of fact. They have not been challenged in the memo of appeal. The memo of appeal proceeds only on the basis that because the receipt is by way of labour charges, Expln. (baa) stood attracted. As stated above, each case will have to be examined by the AO. As stated above, in each case of receipt of labour charges, rent, interest, commission, etc., the AO will have to ascertain whether the element of turnover existed. In the present case, the Tribunal has found, on the facts, that there was an element of job work turnover and; therefore, the Tribunal concluded on the facts of this case that the receipt of labour charges was not in the nature of brokerage, commission, rent, interest or charges as mentioned in Expln. (baa) to Section 80HHC. Further, the assessee received Rs. 66,35,083 as processing charges. This can be seen from the P&L a/c. The company is engaged in manufacture and sale of garments, both domestically and by way of exports. The processing charges earned was by using the entire undertaking of the company which also manufactured garments for domestic sales and export sales and which processing charges were earned by incurring expenditure for the factory like wages, electricity charges, etc., debited in the P&L a/c. That, the income of Rs. 66,35,083 was only an income from business and the expenditure for earning this income is included in several items of expenditure debited in the P&L a/c. In these circumstances, we do not wish to interfere with the finding of fact recorded by the Tribunal. As stated above, if the receipt of labour charges (job work charges), interest, commission, etc., accrues by way of operating income then it falls outside Expln. (baa). In the present case, the receipt accrued from manufacturing activity. The Tribunal has found that job processing activity was linked to the manufacturing activity of the assessee. In the circumstances, on the facts, the judgments cited by the Department do not apply to this case. Lastly, we may point out that, in this case, there is no challenge to the findings of facts recorded by the Tribunal in relation to the processing activity forming part of the manufacturing activity of the assessee.
28. The Hon'ble High Court has clearly held that these items of income have got to be seen in the context of the business activity of the assessee. The High Court has given an example, i.e., in the case of a manufacturing company which undertakes export, receipts of interest or commission may not be operational income because they do not have element of turnover and consequently Expln. (baa) will apply. However, the High Court has excluded the case of financing by holding that it will not be the case if the assessee is carrying on the business of financing because the interest income which accrues to the assessee will have the element of turnover and in such a case, receipts like interest, will not attract Expln. (baa). Further the Hon'ble High Court has held that in every matter the AO will have to ascertain whether the receipt of interest, commission, labour charges, etc., were part of operational income. The Hon'ble Court refused to lay any standard test to determine what would constitute operational income. It is seen that the Hon'ble Bombay High Court has nowhere stated that every receipt in the nature of interest, brokerage, commission, rent, charges, etc., will be part of operational income and Expln. (baa) will not apply.
29. As regards the case law of the Hon'ble jurisdictional High Court in the case of N.S.C. Shoes (supra) and S.S.C. Shoes Ltd. (supra), these two cases are prior to the amendment of Section 80HHC w.e.f. 1st April, 1992 where Expln. (baa) was brought on statute book by the Finance (No. 2) Act, 1991. Even in the case of Madras Motors Ltd. (supra), the jurisdictional High Court has gone into the nature of interest income and given a finding after holding discussion as under:
Interest receipts:
The interest receipts are also of two descriptions. Firstly interest received on account of deposit made by the assessee-company with the banks for obtaining letters of credit and, secondly, interest earned by the assessee-company on the deposit of margin money for letters of credit.
Mrs. Chitra Venkataraman, learned senior standing counsel for the Department, very heavily criticized the deduction granted to the assessee-company on account of this interest receipts. She points out that the words used in Section 80HH are:
Where the gross total income of an assessee includes any profits and gains derived from the industrial undertaking ... to which this section applies there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to twenty per cent thereof.
Learned Counsel invites our attention that the emphasised words would suggest that the deductible income must have been 'derived' from the industrial undertaking. Learned Counsel claims that the words 'derived from the industrial undertaking' would suggest that the said income must be solely relatable to the industrial undertaking and the interest earned by the assessee on its deposits though for getting letters of credit from its banks cannot be held to be the profits and gains derived from the industrial undertaking and would obviously be income from other sources.
Learned Counsel buttresses her contention on the basis of the decision reported in CIT v. Sterling Foods . In that case, the apex Court while negating the claim of the assessee has held that there must be for the application of the words "derived from", a direct nexus between the profits and gains and the industrial undertaking. Learned Counsel further pointed out that the apex Court in that case also considered the decision reported in Cambay Electric Supply Industrial Co. Ltd. v. CIT 1978 CTR (SC) 50 : (1978) 113 TTR 84 (SC) where it was held that the expression "attributable to" was used when the legislature intended to cover receipts from sources other than the actual conduct of the business.
In Cambay Electric Supply Industrial Co. Ltd.'s case (supra), the apex Court was considering two conflicting decisions of the High Court in the case of the same assessee. While the earlier decision of the High Court was that to obtain the benefit of Section 80HHC the assessee had to establish that the profits and gains were derived from its industrial undertaking and it was just not sufficient that the commercial connection was established between the profits earned and the industrial undertaking. It was held by the Division Bench further that (p. 582 of 237 ITR):
The industrial undertaking itself had to be the source of the profit. The business of the industrial undertaking had directly to yield that profit.
The High Court subsequently had taken a contrary view basing itself on the amendment to Section 28. Realising this contrary stand taken by the High Court, the apex Court has set aside the subsequent contrary judgment. The apex Court then went on to find in para 11 in the following words (page 584 of 237 ITR):
The use of words 'derived from' in item 11-AA(2) suggests that the original source of the product has to be found. Thus, as a matter of plain English, when it is said that one word is derived from another, often in another language, what is meant is that the source of that word is another word, often in another language. As an illustration, the word 'democracy' is derived from the Greek word 'demos' the people, and most dictionaries will so state. That is the ordinary meaning of the words 'derived from' and there is no reason to depart from that ordinary meaning here.
The apex Court further observed in para 12 as follows (page 584 of 237 ITR):
There must be, for the application of the words 'derived from', a direct nexus between the profits and gains and the industrial undertaking.
As regards the facts of the case concerned, the apex Court held in that case that the nexus was not direct but only incidental. There the apex Court was considering the case of an assessee who was engaged in processing prawns and other seafood which it exported and in that it also earned some import entitlements granted by the Central Government under the Export Promotion Scheme. Such import entitlements could be used by the assessee itself or could also be sold to others. The assessee had sold the import entitlements which it had earned to others and the total income for the assessment included the sale proceeds of such import entitlements in respect of which relief was granted under Section 80HH of the IT Act. The High Court had held in favour of the assessee. However, the Supreme Court found that such sale of the import entitlement could not be said to be an income directly attributable to the industrial undertaking. The Supreme Court observed (p. 584):
The industrial undertaking exports processed sea food. By reason of such export, the Export Promotion Scheme applies. Thereunder, the assessee is entitled to import entitlements, which it can sell. The sale consideration therefrom, cannot, in our view, be held to constitute a profit and gain derived from the assessee's industrial undertaking.
Learned Counsel, therefore, very vehemently argued that the letters of credit had to be opened if the assessee wanted that facility and the assessee had deposited certain amount as margin money and the assessee was earning interest thereupon. Learned Counsel pointed out that for any other business, the said letters of credit could have been opened and for opening such letters of credit the assessee had to deposit the margin money with its bankers and it would earn interest thereupon. Merely because the letters of credit were for the business of forgings, it could not be said that the interest earned was directly attributable to the industrial undertaking of the assessee. Learned Counsel contends that such interest would be only incidental to the assessee's business activity of manufacture of forgings and export thereof.
Learned Counsel also invited our attention to the Division Bench decision of this Court reported in CIT v. Pandian Chemicals Ltd. . In that case, the assessee had made deposits with the Tamil Nadu Electricity Board and was earning interest thereupon. It was no doubt true that for getting power connection, every industrial undertaking had to make the deposits with the Electricity Board. However, it was held by the Division Bench that the interest derived from such deposit could not be said to have been derived from industrial undertaking. The Court further held that the immediate and effective source of the interest was the deposit and not the industrial undertaking. Relying upon a number of other decisions, the Court observed as follows (p. 504):
...the word 'derived' is not a term of art and its use in the definition indeed demands an enquiry into the genealogy of the product, but the enquiry should stop as soon as the effective source is discovered and the profit or gain can be said to have been 'derived' from an activity carried on by a person, if the said activity is the immediate and effective source of the said profit or gain ... there must be a direct nexus between the activity and the earning of the profit or gain and the income, profit or gain cannot be said to have been derived from an activity merely by reason of the fact that the said activity may have helped to earn the said income or profit in an indirect or remote manner.
We agree with this decision, which is binding on us. The aforementioned decision has only been further strengthened by the subsequent decision of the apex Court. We are, therefore, of the clear opinion that the interest which is earned by the assessee from the bank deposits would not have a direct nexus with the industrial undertaking of the assessee and would only be incidental income thereto and, therefore, such interest has to be ignored from the allowable profits under Section 80HH. We answer the reference on this count against the assessee.
Let us now consider the interest earned by the assessee on belated payments. There can be no doubt that this interest would, however, be directly relatable to the business of the assessee of forgings. If the purchasers of the forgings did not make the payments for the forgings and then agree to pay the interest on delayed payments, the said interest would have direct nexus with the business of forgings. The true test would be whether such interest would be available to the assessee otherwise also. The answer to the question would be certainly in the negative. The interest being directly relatable only to the amounts receivable by the assessee during the course of its business on account of sale of forgings, this interest would have to be included as profits and gains derived from the business of the assessee. We hold that this part of the interest would be entitled to be covered by Section 80HH of the Act."
No doubt, this case of the Hon'ble Madras High Court pertains to Section 80HH, but the High Court has clearly laid down the principle.
30. In the present case in hand, we are concerned with the deduction under Section 80HHC on account of export of goods manufactured by the assessee and how the income in the nature of interest, brokerage, commission, rent, charges, etc. are to be dealt with. Under Section 80HHC, exporters are allowed while computing total income the deduction of entire profit from the export. The export profit is computed on the basis of formula which reads as under:
Export turnover Export profits = Business profits x ________________ Total turnover In this case, we are concerned with Section 80HHC(1) and Section 80HHC(3) as it stood at the relevant time along with Expln. (baa) to Section 80HHC. The relevant Expln. (baa) to Section 80HHC reads as under:
(baa) "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--
(1) ninety per cent of any sum referred to in Clauses (iiia), (iiib) and (iiic) of Section 28 or of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits; and (2) the profits of any branch, office, warehouse or any other establishment of the assessee situate outside India;
31. The learned Counsel of the assessee has relied on the decision in CIT v. Bokaro Steel Ltd. (supra). The Hon'ble apex Court has dealt with this issue entirely on different principle and held as under:
In case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of the fixed assets created as a result of such expenditure. By the same reasoning if the assessee receives any amounts which are inextricably linked with the process of setting up its plant and machinery, such receipts will go to reduce the cost of its assets. These are receipts of a capital nature and cannot be taxed as income.
Further, in the decision cited by the Id, counsel of the assessee in the case of CIT v. Karnal Co-operative Sugar Mills Ltd. (supra), the apex Court held that the assessee had deposited money to open a letter of credit for the purchase of machinery required for setting up its plant in terms of assessee's agreement with the supplier. It was on the money so deposited that some interest had been earned. This was, therefore, not a case where any surplus share capital money which was lying idle had been deposited in the bank for the purpose of earning interest. The deposit of money in the present case was directly linked with the purchase of plant and machinery. Hence, any income earned on such deposit was incidental to the acquisition of assets for the setting up of the plant and machinery. The interest was a capital receipt, which would go to reduce the cost of asset.
32. Even the learned Counsel, Shri K. Ravi argued that the jurisdictional High Court in the case of CIT v. Chinnapandi (supra) has relied on Rani Pallwal v. CIT (supra), wherein the claim of the assessee was to reduce the interest paid of Rs. 4,12,982 from the interest received of Rs. 6.33 lakhs and on the balance 90 per cent has to be applied. We have gone through the decision of Rani Paliwal (supra) of the Punjab & Haryana High Court, the High Court has held as under:
This issue relates to the inclusion of interest as part of the assessee's "business income" for working out the deduction claimed under Section 80HHC of the Act. The total interest received by the assessee during the relevant assessment year was Rs. 6,33,454 and the total interest paid by the assessee was Rs. 4,12,982. The AO was of the view that 90 per cent of the gross amount of interest of Rs. 6,33,454 was liable to be deducted from the profits of the business for the purpose of the deduction. He, therefore, reduced the quantum of deduction under Section 80HHC of the Act accordingly. The CIT(A), however, took a different view in appeal and allowed 90 per cent of the amount of interest to be deducted after deducting a sum of Rs. 4,12,982 which had been paid by the assessee as interest during the assessment year. The Tribunal again affirmed the view of the AO holding that 90 per cent of the interest that was deductible for the claim under Section 80HHC of the Act was from the gross interest received by the assessee and that the amount of interest paid by the assessee could not be deducted therefrom. A plain reading of Clause (baa) of Explanation to Section 80HHC of the Act makes this aspect quite clear and we are of the view that the Tribunal was right in disallowing the claim of the assessee in this regard.
In the above decision, the Hon'ble High Court has given a plain meaning of Clause (baa) to Explanation to Section 80HHC of the Act, which means, Clause (baa) is very clear that 90 per cent of the interest that was deductible for the claim under Section 80HHC was from the gross interest received by the assessee and the amount of interest paid by the assessee could not be deducted therefrom. Therefore, the reliance placed by the learned Counsel of the assessee on the Punjab & Haryana High Court decision is misplaced.
33. Further, the Hon'ble jurisdictional High Court in the case of CIT vs. A.S. Nizar Ahmed and Co. (supra) has clearly held as under:
That view of the Tribunal cannot be sustained. The CIT has rightly pointed out that the deposits kept by the assessee in the bank in a large sum of over Rs. 130 lakhs were to the assessee's own advantage, inasmuch as they provided a return at the rate of 10 per cent. That was in the nature of an additional source of income to the assessee which was not in any way linked to the business that it was carrying on. The credit facilities enjoyed by the assessee from the bank had been extended to it by charging interest at a rate lower than the one which the assessee was receiving on its deposits. The assessee, therefore, had found it advantageous to borrow money from the bank and have those borrowed funds used in the business. The interest income that the assessee received on its own funds kept in deposit with the bank, therefore, did not have any direct link with the business that was being carried on with the funds made available to the assessee by the bank by way of loans on which the assessee was required to pay less interest.
The fact of this case would go to show that though the assessee wanted the interest income to be treated as business income, the AO as also the CIT had found, in our opinion rightly, that the claim could not be sustained. The true character of the income not being business income, the fact that the assessee had claimed it to be business income will not make it so.
34. Regarding the argument of the learned Counsel of the assessee, Shri K. Ravi, regarding the concept of mutuality and right to set off, we see no reason in this argument, as there is no concept of mutuality in the interest earned by the assessee on fixed deposit made with the bank and the claim made for deduction under Section 80HHC, especially after the introduction of Clause (baa) to Explanation to Section 80HHC w.e.f. 1st April, 1992. The learned Counsel of the assessee has further relied on Section 171 of the Contract Act regarding Banker's lien. The relevant portion of Section 171 of the Contract Act states as under:
General items of bankers: Bankers, factors, wharfingers, attorneys of a High Court and policy brokers may, in the absence of a contract to the contrary, retain as a security for a general balance of account any goods bailed to them, but no other persons have a right to retain as a security for such balance goods bailed to them, unless there is an express contract to that effect.
We do not understand how the provision of Section 171 of the Contract Act regarding Banker's lien will make the assessee's claim of interest income as business income. No doubt, the fixed deposit is maintained with the bank and to this proposition, the Hon'ble jurisdictional High Court has answered in the case of CIT v. A.S. Nizai Ahmed & Co. (supra).
35. The Hon'ble jurisdictional High Court in the case of Chinnapandi (supra) has very categorically and clearly held as under:
The above two judgments support the case of the Revenue. The appellant in the present case had received interest of Rs. 2,65,019 and hence the receipt of interest is alone relevant and the same is to be taken into consideration for the purpose of deduction for the claim under Section 80HHC of the Act. No expenditure or any other deduction is permissible from the receipt of interest income. Section 80HHC stipulates a deduction in respect of export profits. Instead of enjoining the AO to compute such export profits from out of the consolidated amount of the assessee, which may involve income by way of interest, rent, commission, etc., the legislature has provided a simple procedure under which 90 per cent of the receipts such as interest, rent, commission, brokerage, etc., shall be excluded as profits not attributable to exports. The intention is, therefore, clear that there should be no attempt to deduct any expenditure from the receipts, however related such expenditure may be to the receipts. It is in this view of the matter that the expression 'receipt by way of has been used in the section and not 'income' of that nature.
In view of the above, we are of the view that 90 per cent of the interest that is deductible for the claim under Section 80HHC of the Act is from the gross interest received by the assessee and that the amount of interest paid by the assessee should not be deducted therefrom and, hence, we answer the above question in favour of the Revenue and against the assessee and allow the tax case filed by the Revenue.
36. The argument of the learned Counsel of the assessee, Shri R. Vijayaraghavan, is that Expln. (baa) provides for exclusion of 90 per cent of the receipts like brokerage, commission, etc. from the business profits. This would show that the legislature wanted to exclude only such receipts where the expenditure for earning the same is not more than 10 per cent of the receipts. For this, the words "brokerage, commission .... any other receipts of similar nature" would show that the principle of ejusdem generis is to be applied and only such receipts, which have an underlying common characteristics, should be excluded for the purpose of Expln. (baa) to Section 80HHC of the Act. He argued that the common characteristics between rent, brokerage, commission etc., are those receipts in the nature of 'dormant receipts' not earned from any business activity arising from utilisation of any appreciable resources like machinery, labour, capital, etc. Accordingly he argued that applying the principle of ejusdem generis only such receipts, which are not part of the main business activities should be excluded and merely because the receipt is termed "interest, commission or charges, etc.," cannot mean that they have to be excluded under the provisions of Expln. (baa) to Section 80HHC. He argued that whether the receipt is connected with the business undertaking and inextricably linked with the business, the same will not be excluded to the extent of 90 per cent under Clause (baa) to Explanation to Section 80HHC of the Act and this will be considered as business income. The answer to the argument of the learned Counsel of the assessee lies in the decision of the jurisdictional High Court in the case of CIT v. A.S. Nizar Ahmed & Co. (supra). The Hon'ble High Court in this case has clearly held that the true character of income is interest income and not business income, the fact that the assessee had claimed it to be business income will not make it so and this will be treated as income from other sources. Even the Bombay High Court in the case of Bangalore Clothing Co. (supra) very clearly stated about the applicability of Expln. (baa) in the following words at page 379 of 260 ITR:
These items of income have got to be seen in the context of the business activity of the assessee. To give an example, in the case of a manufacturing company which undertakes exports, receipt of interest or commission may not be operational income because they do not have the element of turnover and consequently Expln. (baa) will apply.
37. As far as netting is concerned, the Hon'ble jurisdictional High Court in the case of K.S. Subbiah Pillai & Co. (India) (P) Ltd v. CIT (supra) has very categorically held that if receipt is in the nature of brokerage, commission, interest, rent, charges, etc., netting is not possible. The Hon'ble High Court has held as under:
The clause does not refer to net interest. It refers, inter alia, to the interest included in the profits and gains of the business or profession.
Regarding the first question there is considerable confusion. The AO, according to counsel for the Revenue, has not deducted the amount of interest assessed under the head "Income from other sources". The appellate order proceeds on the basis that there has in fact been such deduction and that such deduction could be made from the profits even though the interest received is not assessed under the head 'Profits and gains of business or profession'. That view of the CIT has been affirmed by the Tribunal.
Clause (baa) under the Explanation to Section 80HHC defines profits of the business as contemplated under the head "Profits and gains of business or profession.
The deductions to be made are from the amount of profit so computed and not from the amount computed under any other head of income of that assessee. The reference to 'such profits' in Sub-clause (1) of Clause (baa) can only be to the profits of the business computed under the head "Profits and gains of business or profession". Addition of prefix "the" to "profits" in Clause (baa), while referring to the profits and gains of business or profession makes it clear that it is only the amounts already included in that computation which are now to be reduced to the extent of 90 per cent, if those items are included in Sub-clause (1) of that definition.
Interest paid and claimed as deduction in the computation of profits and gains for business, cannot be set off against interest received and computed under income from 'other sources'. What has been said about interest is equally applicable to rent and commission included in the computation under the head 'Profits and gains of business or profession'."
The Hon'ble High Court in this case has very categorically in the last line stated that what has been stated about interest is equally applicable to rent and commission included in the computation under the head "Profits and gains of business or profession", which means, the High Court has clarified that even if it is considered as business income, netting is not permissible and 90 per cent is to be excluded while computing deduction under Section 80HHC under Clause (baa) to Explanation of this provision.
38. In view of the above discussion, arguments of the learned Counsel of the assessees, the learned Departmental Representative and the case laws relied on by both the sides on the Hon'ble apex Court as well as jurisdictional High Court and various other High Courts, we are of the view that according to the newly inserted Clause (baa) to Explanation to Section 80HHC, the expression 'profits of the business' for the purposes of computation of deduction under Section 80HHC means profits of the business as computed under the head "Profits and gains of business or profession" as reduced by 90 per cent of any receipt by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profit. In view of the decision of the Hon'ble jurisdictional High Court in the case of Chinnapandi cited supra, the legislature has provided a simple procedure under which 90 per cent of the receipts like interest, rent, brokerage, commission, etc. shall be excluded as profits not attributable to exports while computing deduction in respect of export profits. The intention of the legislature is very clear that no further deduction of any expenditure from the receipt whether such expenditure is related to that receipt will be allowed. In Clause (baa), the expression "receipt by way of means the gross receipt and here the word "income" has not been used by the legislature. Accordingly, 90 per cent of the gross receipts of such nature will be excluded while computing the export profit for the purpose of computation of deduction from the profits of the business and this Clause (baa) does not speak about netting of the receipt of the types mentioned therein. Clause (baa) to Explanation to Section 80HHC speaks about profits of the business but does not include receipts which do not have any element of turnover like rent, interest, commission, etc. But some expenditure might be incurred in earning such incomes and an ad hoc 10 per cent deduction from such incomes is provided to account for those expenses. Accordingly, even if the receipts in the nature of interest, commission, etc. are considered as business income, 90 per cent has to be excluded while computing deduction under Clause (baa) to Explanation to Section 80HHC and this 90 per cent will be excluded out of the gross receipts while computing export profit for the purpose of deduction under this provision in view of the above discussion.
39. In view of the above, we shall now proceed to decide each of the appeals filed by the assessee and the Revenue.
ITA Nos. 856/2000 and 1290/2001:
40. In these appeals, the Revenue has contended that 90 per cent has to be excluded out of the gross interest and not from net interest. As discussed above, there is no dispute regarding interest income as income from other sources and this has not been claimed as business income. This issue is covered by the Hon'ble jurisdictional High Court decision in the case of K.S. Subbiah Pillai & Co. (India) (P) Ltd. (supra) and as discussed above, netting is not permissible.
41. In the result, these appeals of the Revenue are allowed.
ITA Nos. 1147/2001, 274/2003, 2344, 2345/2003 and 35/2003
42. From the orders of the lower authorities, it is not clear whether the interest income is business income or income from other sources. Hence, this issue is set aside to the file of the AO for fresh adjudication whether the interest is business profit or income from other sources and accordingly, the AO will exclude 90 per cent if the interest is held as business profit under Clause (baa) to Explanation to Section 80HHC and if this interest is held as income from other sources, 100 per cent will be excluded. In view of this, these appeals by the assessee as well as the Revenue are set aside to the file of the AO.
43. In the result, these appeals of the assessee and the Revenue are treated as allowed for statistical purposes.