2015 (5) TMI 689 - HC - Income Tax

Court denies deduction claim under section 80 HHC for interest income. Retroactive impact on prior deductions.

M/s. Reliance Trading Corporation, Kirti Chand Dhadda, M/s Pawan Enterprises, Shri Vallabh Das Khandelwal Versus The ITO, Ward No. 2 (3), Jaipur And Another

The court held that interest income of Rs. 1,76,930/- did not qualify for deduction under section 80 HHC as it lacked a direct nexus to export activities. ... Entitled for deduction under section 80 HHC on interest income - Held that:- It is the settled proposition in interpretation of the statutes, that while ascertaining the true scope of a provision in a statute, attention must necessarily be paid not only to the text, but also the context. In Commissioner of Income-Tax Vs. Shri Ram Honda Power Equip(2007 (1) TMI 86 - HIGH COURT, DELHI), the Delhi High Court held that the word 'interest' in clause (baa) of the Explanation to Section 80HHC of the Act, is indicative of net interest i.e. gross interest as reduced by expenditure incurred by the assessee in earning such interest.While applying the direct and proximate nexus test, we are of the view that where the interest earned does not have direct and proximate nexus, with the income from the business of export, the interest cannot be deducted as income from export under Section 80HHC (3)(a) of the Act, and has to be given the same treatment for tax, as 'income from other sources' under Section 56 of the Act. - Decided in favour of revenue. Affect of amendment in section 80 HHC, by way of insertion of sub-section (4B) excluding interest income for the purpose of deduction under section 80 HHC on the deduction of interest income under section 80 HHC for the period prior to amendment - Held that:- The amendment in Section 80HHC, by way of insertion of sub-section (4B), excluding interest income for the purposes of deduction under Section 80HHC of the Act, will also affect the deduction of interest income under Section 80HHC of the Act, for the period prior to the amendment, inasmuch as the applicability of the principle of direct and proximate nexus to the business income, will apply both, to the provisions of the Act prior to, and after the amendment, which came into effect by the Finance Act, 1992, with effect from 01.04.1992. - Decided in favour of the Revenue. Eligibility for deduction under section 80 HHC assessee is not earning income in convertible foreign exchange by way of an interest on the money advanced - Held that:- The earning of the income convertible from foreign exchange by way of interest, is not necessary so long as the interest is derived from business of export, and has direct and proximate nexus, with the income earned out of the profits retained for the export business. The earning of the income convertible from foreign exchange, is not a test for determining, as to whether deduction is allowable in respect of the income derived from the profits retained for export business. - Decided against the assessee. Issues Involved:1. Entitlement for deduction under section 80 HHC on interest income.2. Effect of amendment in section 80 HHC by insertion of sub-section (4B) on prior periods.3. Eligibility for deduction under section 80 HHC without earning income in convertible foreign exchange.Detailed Analysis:Issue 1: Entitlement for Deduction under Section 80 HHC on Interest Income- The court examined whether the assessee is entitled to deduction under section 80 HHC on interest income of Rs. 1,76,930/- for the relevant assessment year.- The assessee claimed this deduction, arguing that the interest income was part of the business income derived from export activities.- The Assessing Officer (AO) and Commissioner of Income Tax (Appeals) rejected this claim, stating that the interest income did not derive from the export of goods or merchandise, and thus, could not be considered under section 80 HHC.- The Income Tax Appellate Tribunal (ITAT) upheld this view, confirming that the interest income was assessable under 'income from other sources' and not as business income.- The court referred to various precedents, including Commissioner Income-Tax Vs. Punit Commercial Ltd., Commissioner of Income-Tax Vs. Nagpur Engineering Co. Ltd., and Commissioner of Income-Tax Vs. Paramount Premises (P.) Ltd., which discussed the classification of interest income.- The court concluded that interest income, without a direct and proximate nexus to the export business, cannot be deducted as income from export under section 80 HHC and should be treated as 'income from other sources.'Issue 2: Effect of Amendment in Section 80 HHC by Insertion of Sub-section (4B) on Prior Periods- The court addressed whether the amendment in section 80 HHC by inserting sub-section (4B), which excludes interest income for deduction purposes, affects deductions for periods before the amendment.- The court considered the principle of direct and proximate nexus to business income, which applies both before and after the amendment.- It was argued that the amendment should not retroactively affect deductions claimed under the previous law.- The court referenced Commissioner of Income-Tax Vs. Sharda Gum And Chemicals and Alfa Laval India Ltd. Vs. Deputy Commissioner of Income-Tax, which discussed the treatment of interest income in relation to business profits.- The court decided that the amendment impacts the deduction of interest income for periods prior to the amendment, aligning with the principle of direct and proximate nexus.- Thus, the court ruled in favor of the Revenue, stating that the amendment applies to prior periods as well.Issue 3: Eligibility for Deduction under Section 80 HHC without Earning Income in Convertible Foreign Exchange- The court examined if the assessee is eligible for deduction under section 80 HHC even if the income is not earned in convertible foreign exchange.- The assessee argued that as a 100% exporter, the interest income should be eligible for deduction under section 80 HHC.- The court referred to P.R. Prabhakar Vs. Commissioner of Income-Tax and International Research Park Laboratories Ltd. Vs. Asst. CIT, which discussed the inclusion of profits relatable to exports.- The court emphasized that the interest income must have a direct and proximate nexus with the export business to qualify for deduction.- The court ruled that earning income in convertible foreign exchange is not necessary for deduction eligibility, provided the interest income is derived from export business and has a direct and proximate nexus.- Therefore, the court decided in favor of the Revenue, stating that the interest income must be directly related to the export business to be eligible for deduction under section 80 HHC.Conclusion:- The court concluded that the interest income does not qualify for deduction under section 80 HHC as it lacks a direct and proximate nexus to the export business.- The amendment in section 80 HHC by inserting sub-section (4B) affects deductions for periods prior to the amendment.- Earning income in convertible foreign exchange is not mandatory for deduction eligibility, but the interest income must be directly related to the export business.- The reference was answered in favor of the Revenue and against the assessee.