TaxTMI 
TaxTMI 
2005 (9) TMI 243
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....dings. 2. That the order of the learned CIT(A) is erroneous in law and on facts of the case, the same may be set aside and the order of DC(A) may be restored to file." 3. Briefly stated the facts of the case are that the assessee in its return for assessment year 1993-94 claimed deduction under section 80HHC at Rs. 4,94,74,784 against the net profit of Rs. 5,14,49,903. While computing deduction, the assessee excluded 90 per cent of miscellaneous income comprising of interest (net) and rent. Similarly for assessment year 1992-93, the assessee excluded 90 per cent of miscellaneous income which come to Rs. 69,154 while computing the deduction under section 80HHC. For assessment year 1992-93 nothing was excluded on account of interest received on bank FDRs for the reason that the bank interest debited to the profit and loss account amounting to Rs. 3,37,767 was after adjusting the interest received amounting to Rs. 1,89,048. In other words, as the interest paid to bank was more than the interest earned on FDRs, nothing was excluded on account of interest while computing deduction under section 80HHC. For assessment year 1993-94, the assessee earned interest on bank FDRs, amountin....
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....pellate authority and on the basis of his reasoning urged that his order be maintained. It was specifically pointed out by the learned counsel for the assessee that the assessee had rightly shown net interest income while excluding 90 per cent for computing deduction under section 80HHC and there was no point in computing deduction on the basis of gross interest received on FDRs. A further submission was raised that as the case of the assessee was accepted by the revenue on similar lines in earlier years, so there could not be any deviation from the earlier stand of the revenue. The learned counsel further placed reliance on the decision of Honda Siel Powers Products Ltd. v. Dy. CIT [2001] 77 ITD 123 (Delhi) in support of his claim. It was, therefore, submitted that there was no infirmity in CIT(A)'s order calling for interference. 6. We have considered the rival submissions in the light of material placed before us and precedents relied upon. Insofar as the assessment year 1992-93 is concerned, it is seen that the Assessing Officer excluded 90 per cent of the interest received on FDRs while computing the 'profits of the business' as against the action of the assessee in showing....
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.... "profits of the business", nor any deduction of 90 per cent will be allowed. The expression "included in such profits" is clear indicator in this regard. The word "profit", in simple terms, means excess of income over expenditure. The figure of "profit", therefore, represents the difference between all the items taken together shown on income side and all the items taken together shown on the expenditure side. It means that all the credit as well as debit items, whether shown on gross or net basis, from part of the term "profits", inasmuch as it is nothing but representative of all the debit and credit items comprised in it and all the items individually stand included in. If instead of showing interest income separately on the credit side, the assessee opts for showing net interest to the debit side of its profits and loss account, it cannot be said that it has not earned any interest income. The quantum of deduction under section 80HHC, by virtue of the provisions of Explanation (baa), cannot be varied on account of recording of interest income in a particular manner by the assessee in its accounts. 8. That apart, the claim of the assessee of taking net interest for computing....
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....High Court in holding:- (A) That the act of making the deposit and the act of borrowing of such deposit would not be viewed as representing two different transactions. (B) That there was thus, a nexus between the deposit and the borrowing and (C) That the (sic) of mutual dealings could be inferred. 9. It is noted that the Hon'ble Supreme Court, on an appeal filed by the revenue, reversed the above discussion of the Hon'ble High Court in CIT v. Dr. V.P. Gopinathan [2001] 248 ITR 449 (SC) holding "that the interest that the assessee received from the bank on the fixed deposit was income in his hands and it could stand diminished only if there was a provision in law permitting such diminution. There was no such provision of law and the interest on the loan taken from the bank did not reduce its income by way of interest on the fixed deposit." In view of this legal position we are satisfied that the assessee's claim of netting is not valid. 10. Notwithstanding the issue of netting, it is important to bear in mind the language employed by the Legislature in Explanation (baa) below section 80HHC(4B), which talks of "receipts by way of brokerage, commission, interest, rent ....
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....ge used and then to apply that meaning to the facts of the case and in that process if the taxpayer is brought within the net, he is caught, otherwise he has to go free." 12. The Apex Court in still another recent case of CAIT v. Plantation Corpn. of Kerala Ltd. [2001] 247 ITR 155 was dealing with the interpretation of Explanation to provision in the context of Agricultural Income-tax Act. It was noted by it that Explanation is intended to either explain the meaning of certain phrases and expressions contained in a statutory provisions or depending upon its language it might supply or take away something from the contents of the provisions and at times even, by way of abundant caution, to clear any mental cobwebs surrounding the meaning of a statutory provision spun by interpretative process to make the position beyond controversy or doubt. It was held "this Court has always been reiterating that if the intendment is not in the words used it is nowhere else and so long as there is no ambiguity in the statutory language, resort to any interpretative process to unfold the Legislative intent becomes impermissible and the need for interpretation arises only when the words in the sta....
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....hat the CIT(A) proceeded to overturn Assessing Officer's action in assessment year 1992-93 on this issue without appreciating the correct legal position in this regard. As such, the appeal of the revenue for assessment year 1992-93 is allowed. 16. Now coming to assessment year 1993-94, the point which falls for our adjudication is that whether the deduction under section 80HHC was rightly disallowed on the entire interest earned on FDRs by the Assessing Officer, treating the same to be falling under the head "Income from other sources". The Assessing Officer noted that the assessee earned interest of Rs. 25.43 lakhs from the bank on FDRs, whereas the interest paid to the bank was only Rs. 4.15 lakhs. The Assessing Officer had held that the earning of interest on deposits with the bank had no relation with assessee's business of export, and as such, it was (sic) falling under the head "Income from other sources" and computed deduction under section 80HHC by excluding entire interest. The learned CIT(A) reversed the action of the Assessing Officer on the same reasoning as in assessment year 1992-93. Before us, it was contended by the learned DR, that the Assessing Officer had righ....
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....ned on FDR was not falling under the head "Business income", the Assessing Officer had rightly excluded the entire amount of interest while computing deduction under section 80HHC. 17. On the other hand, the learned counsel for the assessee supported the action of CIT(A). A further plea was raised that as the Assessing Officer in assessment year 1993-94 has not separately included interest on FDRs under the head "Income from other sources" while computing total income, so there was no point in treating the said income under that head for computing deduction under section 80HHC. In the final analysis, the learned counsel supported the action of the first appellate authority on this issue. 18. Having heard the rival submissions and perused the relevant material on record, it is noticed that the Assessing Officer in the present assessment year held the entire interest income earned from bank FDRs to be falling under the head "Income from other sources" and, hence, ineligible for deduction under section 80HHC, against the assessee's claim of including net interest income of Rs. 21.28 lakhs in the "profits of the business" for the purposes of deduction under section 80HHC. The cla....
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.... income falling under the head "Income from other sources". If instead of investing surplus money in the bank, some property is purchased and given on rent, the rental income earned therefrom would not assume the character of "business income". The fact that the assessee was having surplus funds, out of which FDRs were purchased, was admitted by it in the written submissions made before the CIT(A), as recorded by the latter in his order at page 3. This aspect is further corroborated from the fact that as against the nil liability to the bank as at the year, the amount invested in the FDRs was to the tune of Rs. 2 crores. It thus shows that interest of Rs. 25.43 lakhs earned on the FDRs by the assessee was its income falling under the head "Income from other sources". Hence, we are satisfied that the interest earned by the assessee on the FDRs was rightly taken by the Assessing Officer as "Income from other sources". Once an item of income does not fall under Chapter IV-D, i.e., "business income", the same cannot be included in the profits of the business for computing deduction under section 80HHC in view of Explanation (baa). 21. The Hon'ble Kerala High Court in the case of Nan....
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....p; ------------ 4,90,17,084 Less: 90% of incentive under clauses 2,07,64,006 (iiia), (iiib), (iiic) of section 28. ------------ Profit from export business 2,82,53,078 Add: 90% of incentives, as above 2,07,64,006 ------------ Allowable deduction under 4,90,17,084 section 80HHC &nb....
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....(baa) for the purposes of section 80HHC. It, therefore, follows that only the "business income" in relation to export business is to be considered for computing deduction under section 80HHC. Coming to the facts of the present case, it is seen that the Assessing Officer held interest income to be falling under the head "Income from other sources" because it was earned by investing surplus funds in FDRs which had no link with the export business of the assessee. Even if he computed gross total income without specifically dividing it under different heads of income, but at the same time recorded a categorical finding in his order to the effect that the interest income fell under the head "Income from other sources" and also while computing deduction under section 80HHC specifically deducted interest income by showing it as "Income from other sources", it cannot come in the way of his action in not allowing deduction under section 80HHC on interest income. So long as there is some positive finding of the Assessing Officer in the assessment order to the effect that the interest income falls under the head "Income from other sources", which is based on correct appreciation of the facts,....
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....ion under section 80HHC. This action of Assessing Officer was disputed before the CIT(A). The CIT(A) found that assessee had been showing the net interest in the past years also and such system had been accepted by the Assessing Officer. The CIT(A) was also of the view that the activities of bank loan and deposit with banks were inter-linked inasmuch as borrowed funds had been utilised to purchase the FDRs. Hence, the net amount of receipt or payment should be considered. Since in the assessment year 1992-93, the payment of interest was much more than the interest received, it was held by the CIT(A) that there was no question of any reduction on this account from the business income. Aggrieved by the said order, the revenue is in appeal before the Tribunal. 28. As far as the first finding is concerned, the controversy relates to the interpretation of clause (baa) of the Explanation below sub-section (4B) of section 80HHC which defines "profits of business". For the benefit of this order, the said clause is reproduced as under: "'profits of business' means the profits of the business as computed under the head 'profits and gains of business or profession' as reduced by: (1)....
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....net sum of Rs. 20,000 which is earned on account of commission basis. In addition, he also earns business profits of Rs. 1 lakh from export business. Thus, the total business profits would come to Rs. 1,20,000. If 90 per cent of the gross receipts are allowed to be deducted then the profits of business eligible for deduction under section 80HHC, would come to Rs. 30,000 only (Rs. 1,20,000 - 90% of Rs. 1 lakh), even though eligible export profits would otherwise have been Rs. 1 lakh if commission business had not been carried on by the assessee. In my considered opinion, the intention of the Legislature is not to take away the incentive which otherwise assessee is entitled to. Therefore, such an absurd result cannot be attributed to the intention of the Legislature. On the contrary, if 90 per cent of the net receipts is deducted then the eligible export profits would come to Rs. 1,02,000 (Rs. 1,20,000 - 90% of Rs. 20,000) which does not disturb the eligible export profits of Rs. 1 lakh. Therefore, in my view, the deduction of 90 per cent of net receipt would be in consonance with the intention of the Legislature. 30. The view which is expressed by me is also fortified by the vari....
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....2001] 248 ITR 449. In my view, such finding is unwarranted and the reliance placed on the case law is misplaced. 32. To appreciate the controversy, it would be useful to refer to certain details of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. In that case, the money was borrowed on interest for the purpose of business but the business had not commenced in the year under consideration since it was in the process of setting up of the business. Hence, the money so borrowed was deposited with the banks on which interest was earned. The interest received was held to be revenue receipt chargeable to tax under the head 'Income from other sources' since it was inter-connected with the business activity. An alternate plea was raised to the effect that if the interest is taxable then it should be set off against the interest payable on borrowings. This plea was rejected by theApex Courtby holding that any income from a non-business source could not be set off against the liability to pay interest on funds borrowed for the purpose of business, i.e., purchase of plant and machinery even before the commencement of business. 33. The other decision ....
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....tilisation of the assets of the company (borrowed funds) and the amount received for such utilisation were directly connected with the activity of setting up the steel plant and, therefore, such receipts as well as the payments were to be capitalized which has the effect of netting of such interest. So the legal inference is that if the interest received and interest paid are directly linked with the same activity of the assessee then netting of the same has to be allowed. 36. Similar view has been taken by the Tribunal Mumbai Bench in the case of Pink Star. In that case, the assessee paid interest of Rs. 36,21,595 to the banks while the interest income from the bank was shown at Rs. 1,97,500. So the net amount of interest paid was shown at Rs. 34,24,095. The Assessing Officer, while computing business profits under section 80HHC, deducted 90 per cent of Rs. 1,97,500 which was agitated by the assessee in appeals. The Tribunal after discussing the various Supreme Court judgments allowed, the netting of such interest inasmuch as interest paid for interest received were linked with the business activity of the assessee. 37. The decision of Hon'ble Supreme Court in the case of CI....
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....ness activity and, therefore, the CIT(A) was justified in allowing such netting. Since the interest paid was more than the interest received, the question of any deduction from the business profits under the aforesaid clause (baa) did not arise. It is also to be noted that the facts in the subsequent year are different inasmuch as interest income has been held to be income from other sources, and consequently, such income was bound to be excluded from the business income. It is on this basis I have agreed with the finding of my learned Brother for assessment year 1993-94. 39. In the result, appeal of the revenue for assessment year 1992-93 is hereby dismissed while the appeal for assessment year 1993-94 stands allowed. REFERENCE UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961 Since there was difference of opinion on the only issue raised in the captioned appeal, the following question is referred to the Hon'ble President of the Tribunal under section 255(4) of the Income-tax Act, 1961: "Whether in law and on the facts and in the circumstances of the present case, the profits of the business, as defined in Explanation (baa) below section 80HHC(4B) refer to receipt of ne....