Bombay High Court
Ito vs Smt. Kalavati R. Agarwal on 29 March, 2000
Equivalent citations: (2001)71TTJ(MUMBAI)792
ORDER
S. V. Mehrotra, A.M. This appeal by the revenue is directed against the order of the Commissioner (Appeals)-XXVII, Bombay, dated 28-7-1995, for the assessment year 1994-95.
2. The ground taken reads as follows :
" 1. On the facts and in the circumstances of the case and in law the learned Commissioner (Appeals) erred in directing the assessing officer to treat the interest receipt of Rs. 81,910 as income from business without appreciating the fact that the assessing officer has treated the interest receipt as income from other sources."
3. The assessee carries on export business in the name of M/s Mechano International. From the computation of income filed, the assessing officer found that the assessee had shown profit of Rs. 3,05,395 from the proprietary concern of M/s Mechano International and had claimed deduction under section 80HHC of the said amount. However, this sum included interest of Rs. 81,910 received from various parties, to whom the surplus funds stated to be out of this export business were given on interest. The assessing officer treated this interest as income from other sources and did not consider the same for allowing deduction under section 80HHC on the ground that the interest was earned in India from the parties situated in India only. He further held that for qualifying for deduction under the provisions of section 80HHC, the first and the vital point is that in the exporting business, the income earned should be in foreign currency and transferred to India.
He accordingly added the income of Rs. 81,910 by way of interest in India as income from other sources and thus excluded the same from the purview of profits and gains of business or profession of the assessee. The assessee went in appeal before the first appellate authority and the learned Commissioner (Appeals) allowed the claim of the assessee on the ground that since the interest was earned out of business funds, the same was business income. In this regard, the learned Commissioner (Appeals) referred to the explanation furnished by the assessee before the assessing officer vide her letter dated 29-4-1991. In para 3 of her letter, the assessee had explained that an export development reserve had been created of an amount equal to the relief available under the provisions of the Income Tax Act, 1961, for different assessment years upto assessment year 1989-90. This reserve clearly forms part and parcel of the firms business and represents the amount set aside by the firm for the development and growth of its business. In para 4, it was stated by the assessee that the export profits/reserves were invested in the business and the same was done for the purpose of business and earning a return thereon which would contribute to the business of the company and enable it to carry out its objective of expanding and developing out of its export business. In para 6 of the explanation, it was stated by the assessee that in any case, the funds kept deposited represented part of the companys working capital which is utilised by the company from time to time. In the said explanation, the assessee has further stated that the working capital becomes surplus when the level of order is low and at that point of time, the working capital is kept in deposit and whenever required on account of increase in export orders, the working capital is enhanced by withdrawing the deposits.
4. The learned Departmental Representative argued that the assessee has not brought on record anything to establish that the funds on which the interest was earned were out of the surplus funds of export business. He submitted that there should be a direct nexus between the activity of the assessee and the earning of profit or gain. He further emphasised that the legislative intent is to give this benefit in order to boost the foreign exchange reserves of the country and unless the income is received in foreign exchange, the same cannot qualify for deduction under section 80HHC. In support of his contention, the learned Departmental Representative relied upon the decision of the Gauhati High Court in the case of North East Gases (P) Ltd. v. CIT (1996) 220 ITR 372 (Gau) that the interest income did not come within the scope of profits and gains of business but under the head "income from other sources". Therefore, any income earned from fixed deposit and the interest thereon could not be said to be profits and gains derived from an industrial undertaking. The learned Departmental Representative also relied upon the decision of the Honble Supreme Court in the case of CIT v. Sterling Foods (1999) 9 DTC 218 (SC) : (1999) 237 ITR 579 (SC). In this case, the Honble Supreme Court interpreted the words "derived from" as used in section 80HH and held that profits from sale of import entitlements of an undertaking situated in a backward area are not profits derived from industrial undertaking and thus not eligible for special deduction under section 80HH. The Honble Supreme Court 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. The nexus should be direct and not only incidental. The learned Departmental Representative vehemently relied upon the decision of the Cochin Bench of the Tribunal in the case of Berlia & Co. v. Asstt. CIT (1999) 7 DTC 360 (Coch-Trib) : (1998) 67 ITD 347 (Coch-Trib), for the assessment year 1990-91. In this case, the assessee-firm carried on business of export and claimed relief under section 80HHC after including therein the interest received on bank deposits on the ground that such deposit was made with the surplus funds from business and so the same formed part of income from business and was to be included for the purpose of calculating deduction under section 80HHC. It was held by the Tribunal that the interest accrued on surplus amount available out of the profit from the assessees business which was invested in two years cash certificates of a bank could not be viewed as income from business. There was no direct nexus between the assessees export business and the earning of interest income. Interest accrued on the bank deposits could not be, therefore, treated as income arising from the business or incidental to business. It was further held that the deduction under section 80HHC was allowable only on the profit derived by the assessee from the export of goods or merchandise to make it eligible for relief under section 80HHC.
5. The learned counsel for the assessee, on the other hand, supported the order of the learned Commissioner (Appeals). He argued that the surplus funds available out of export profits were ploughed back in the business and the interest was earned out of temporary advances to various parties. The learned counsel stated that the export packing credit facilities made available to the assessee at concessional rate on account of her export business was utilised for advancing the money to various parties and accordingly the interest paid is less than the interest received. The learned counsel for the assessee relied on the decision of the Calcutta Bench of the Tribunal in the case of Anand & Co. v. Asstt. CIT (1995) 54 lTD 82 (Cal-Trib). In this case, for the assessment year 1988-89, deposit was made for the purpose of obtaining credit facilities from the bank and furnishing security therefor which was part of the business activities of the assessee. In the course of business, it becomes necessary for any assessee to take loan from the bank and for this purpose it has to offer some security. In the instant case, the security had been in the shape of fixed deposits. The activity of making the fixed deposits could, therefore, be viewed as a business activity or as an integral part of the business. The interest arising therefrom, in this view of the matter, was, therefore, to be taxed only under the head "business". For this finding, the Tribunal relied upon the decision of the Honble Calcutta High Court in the case of CIT v. Tirupati Woollen Mills Ltd. (1992) 193 ITR 252 (Cal) in which it was held that where the company utilised its commercial assets which were lying in the form of surplus cash, for earning interest, the interest arises from the utilisation of commercial assets only and would, therefore, be business income. The learned counsel for the assessee further relied upon the decision of the Honble Madras High Court in the case of CIT v. Madras Refineries Ltd. (1997) 228 ITR 354 (Mad). In this case, interest was earned on long-term deposits with banks. The deposit of money was out of the surplus money of the business which was not immediately required for business purposes. The deposit so made by the assessee in the bank was accepted by the department as capital employed and included in the capital base for the purpose of relief under section 80J of the Income Tax Act, The court held that any income earned by the capital employed would automatically become business income of the assessee and it could not be treated as income earned from other sources. The learned counsel for the assessee also relied upon the decision of the Honble Calcutta High Court in the case of CIT v. Tirupati Woollen Mills Ltd. (supra), wherein the assessee earned income from fixed deposits and other deposits which was sought to be assessed as income from other sources. The Tribunal found that the assessee had utilised its commercial assets which were lying in the form of surplus cash, for earning interest. Such earning, according to the Tribunal, arising from utilisation of commercial assets would be business income. On a reference, the Honble Calcutta High Court held that the funds utilised in making fixed deposits with banks were business funds lying temporarily surplus with the assessee and was, therefore, assessable as business income of the assessee.
6. We have gone through the rival submissions of the parties and the case law cited before us. Income for the purposes of charge of income-tax and computation of total income has been classified under section 14 of the Income Tax Act in five heads of income, viz., Salaries, Income from house property, Profits and gains of business or profession, Capital gains and Income from other sources. Earlier, there was one more head of income, which was Interest on securities which has been omitted with effect from 1-4-1989, by the Finance, Act, 1988, and the same is now assessable under the head "income from other sources". In the case of United Commercial Bank Ltd. v. CIT (1957) 32 ITR 688 (SC), the Honble Supreme Court held that even if the securities are held as trading assets in the course of business such as by a banker or a dealer in securities, the interest must be charged under the specific head and computed in accordance with the provisions of section 18 and not under section 28 as business profits. In the case of H. G. Kothari v. CIT (1951) 20 ITR 579 (Mad), it was held that income which is specifically made chargeable under a distinct head cannot be brought to charge under a different head in lieu of or in addition to being charged under its specific head. Clause (id) of sub-section (2) of section 56 of the Income Tax Act, lays down that income by way of interest on securities, if the income is not chargeable to income-tax under the head Profits and gains of business or profession shall be chargeable to income-tax under the head Income from other sources. Thus, interest income is now chargeable under the head Income from other sources unless the same is out of the organised business activity of an assessee so as to bring the same within the purview of profits and gains of business or profession. In the present case, it is stated by the learned counsel for the assessee that the amount was advanced to various parties. These amounts were not secured by way of any security. In the case of Madhya Pradesh State Industries Corporation Ltd. v. CIT (1968) 69 ITR 824 (MP), the shares of the assessee-company, which was incorporated in 1961 as a Government private limited company for taking over and running certain concerns of the Government of Madhya Pradesh, were held by the Government of Madhya Pradesh, the Madhya Pradesh Electricity Board and the Director of Industries, Madhya Pradesh Government. For the assessment year 1962-63, the assessee did not carry on any business, nor was there any production. The share moneys received by the company not being immediately required, were deposited in call-deposits in certain banks. During the year, the assessee received interest on the deposits. It was held that deposit of share capital in a bank cannot be said to be an act of money-lending and, hence, the interest income was properly assessable as "Income from other sources" under section 56 of the Income Tax Act, 1961, and not as "Business income" under section 28 of the Act. In the case of Traco Cable Co. Ltd. v. CIT (1969) 72 ITR 503 (Ker), it was held by the Honble Kerala High Court that the share capital money received by the company and deposited in bank as the same was not immediately required for any business and on which interest was earned from the bank was assessable as income from other sources and not as income from business. The deposit of the share capital by the company was not a business carried on by the company. Hence, this activity of depositing idle money could not be said to be a business activity of the assessee. The assessee has also relied upon the decision of the Tribunal, Mumbai Bench B, dated 6-1-1998, in the case of M/s Harkisondas Goculdas & Co. v. Asstt. CIT in ITA Nos. 5570 to 5572/Bom/of 1991. In this case, there was a clear-cut finding that the assessee was carrying on the money-lending business and, therefore, the interest income earned by the assessee was held to be business income. The present case is regarding investment of surplus funds available with the assessee being advanced to various parties. In the case of CIT v. Rajasthan Land Development Corporation (1995) 211 ITR 597 (Raj), it has been held by the Honble Rajasthan High Court as under :
"........... From the various decisions and on the interpretation of various provisions of the Income Tax Act, we are of the opinion that the following principles emerge:
(i) interest on fixed deposits and other deposits before the commencement of the business is income from other sources,
(ii) income from interest on deposits of surplus money during the construction period is also to be considered/treated as income from other sources,
(iii) interest income in respect of surplus money, not required for business and deposited in bank or person, as idle money, for safe keeping, would be assessable as income from other sources. If the income from interest is from a fund which has been brought as surplus capital, it would be assessable as income from other sources,
(iv) in respect of investment of surplus funds there is divergence of opinion between different High Courts and this court in the case of Murli Investments Co. v. CIT (1987) 167 ITR 368 (Raj) held that if the surplus funds are invested instead of keeping them idle, the income by way of interest should be treated as income from other sources,
(v) if the surplus funds emerge out of business carried on by the assessee which is regularly carried on by the assessee and then with the intention to carry on the business of lending of money or money-lending, the loan is advanced, the income therefrom would be income from business. The intention has to be gathered with reference to all the activities of advancing money which should be permitted by the objects of the company and also by the resolution of the board of directors to carry on the business of money-lending or lending of money."
The business of the assessee is exclusively of export out of India and only those incomes can come within the purview of the term "Business" vis-a-vis the assessee which arise from the business of export. The learned counsel for the assessee submitted that the interest from the advances has been earned out of surplus funds made available, out of export profits. He emphasised that by exploitation of this commercial asset in the form of surplus funds, income has been earned. The surplus funds, at best, represented the asset of the assessee and not a commercial asset as used in commercial sense. If a commercial asset is not capable of being used as such, then its being let out to others does not result in an income which is in the nature of business. The commercial asset implies some fixed asset and not current asset in the form of cash, debtors, etc. The decision of the Cochin Bench of the Tribunal in the case of Berlia & Co. v. Asst. CIT (supra) relied upon by the learned Departmental Representative is good law on the question in hand. In this case it has been held that if there is no direct nexus between the assessees business and earning of interest income, the interest income cannot be treated as income arising from business or incidental to business. In para 10 of the order, the Tribunal observed as under :
" 10. Before concluding, we may make it clear that the main issue in this appeal is whether the assessee is eligible for the relief under section 80HHC on the interest accrued on Vijaya Cash Certificates. Section 80HHC as applicable for the assessment year 1990-91 providing for deduction in respect of the profits retained for export business reads as under :
"Section 80HHC : (1) Where an assessee, being an Indian company or a person (other than a company) resident in India, is engaged in the business of export out of India of any goods or merchandise 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 of the profits derived by the assessee from the export of such goods or merchandise. "
It can be seen from the above that the deduction is allowable only on the profits derived by the assessee from the export of such goods or merchandise. Can it be said that interest accrued to the assessee on the cash certificate with the bank is profit derived by the assessee from the export of goods or merchandise to qualify for the relief under section 80HHC ? In this connection, we may refer to the decision of the Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT (1978) 113 ITR 84 (SC) to understand the meaning of the expression derived from as appearing in sub-section (1) of section 80HHC the Supreme Court in that case observed on p 93 as under :
"It cannot be disputed that the expression attributable to is certainly wider in import than the expression derived from. Had the expression derived from been used, it could have with some force been contended that a balancing charge arising from the sale of old machinery and buildings cannot be regarded as profits and gains derived from the conduct of the business of generation and distribution of electricity. In this connection, it may be pointed out that whenever the Legislature wanted to give a restricted meaning in the manner suggested by the learned Solicitor-General, it has used the expression derived from as, for instance in section 80J. "
In the case of Sterling Foods v. CIT (1984) 150 ITR 292 (Karn), the Karnataka High Court made the following observation in regard to the meaning of the expression derived from :
"The expression derived from has a definite but narrow meaning and it cannot receive a flexible or wider concept. If a word or expression has received judicial interpretation by the highest court or the Tribunal and thereafter it is found to have been used in legislative enactments, it must be presumed that the legislature must have used that word or expression with the same meaning as judicially determined unless the context apparently requires any other meaning."
The Kerala High Court had also the occasion to consider the meaning of the expression "derived from" in the case of Cochin Co. v. CIT (1978) 114 ITR 822 (Ker). In that case the court observed as under :
"Profit or gain can be said to have been derived from an activity carried on by a person only if the activity is the immediate and effective source of the profit or gain. There must be a direct nexus between the activity and the earning of the profit or gain. Income, profit or gain cannot be said to have been derived from an activity merely by reason of the fact that the activity may have helped to earn the income or profit in an indirect or remote manner. The profit earned by the assessee by the sale of the import entitlements could not be regarded as profits or gains derived from the export of goods.
In the light of the judicial pronouncements noted above, it cannot be said that interest earned by the assessee by invest in the surplus funds on long-term deposits in Vijaya Cash Certificates qualified as profit derived from the export of goods or merchandise to make it eligible for the deduction under section 80HHC."
The decision of the Calcutta Bench of the Tribunal in the case of Anand & Co. v. Asstt. CIT (supra), relied on by the learned counsel for the assessee, is not of much assistance to the assessee inasmuch as the assessee had made fixed deposits as security for obtaining cash credit limit for doing export business. In that case, there was a direct nexus between the earning of interest on account of carrying on of export business. For obtaining the cash credit limit, the assessee had to offer some tangible security to the bank and then only it could conduct business. The case law relied on by the department, viz., the Honble Gauhati High Court decision in the case of North East Gases (P) Ltd. v. CIT (supra) and the Honble Supreme Court decision in the case of CIT v. Sterling Foods (supra), though under section 80HH, are of assistance to the department because in both section 80HH and section 80HHC, the words used are derived from. Hence, unless there is a direct nexus between the export activity of the assessee and earning of income, the income cannot be said to be under the head profits and gains of business or profession if the business is exclusively of export, as in the present case. Though the assessee has not brought on record any material to establish that the interest was earned out of the surplus funds available with her, still we are of the opinion that even assuming that the surplus funds were temporarily invested for earning interest, the same cannot be said to be out of the business activity of the assessee and will thus be taxable under the head Income from other sources and not as income from business.
7. The learned counsel for the assessee wanted a set off for the interest paid out of the interest received, but since we have held that interest received has to be taxed under the head Income from other sources and interest paid (SC) of packing credit advances, as stated by the learned counsel for the assessee, the said set off cannot be allowed.
8. For the foregoing reasons, we set aside the order of the learned Commissioner (Appeals) and restore that of the assessing officer.
9. In the result, the appeal is allowed.