TaxTMI 
TaxTMI 
2010 (4) TMI 751
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.... 80HHC ?" 2. Counsel appearing for the Revenue and counsel for the assessee are agreed in stating before the court that the second question stands covered against the assessee and in favour of the Revenue by the judgment of this court dated March 18/19, 2010 in CIT v. Asian Star Co. Ltd. [2010] 326 ITR 56 (Income Tax Appeal No. 200 of 2009). Hence, the second question of law is answered in favour of the Revenue and against the assessee. That leaves open for adjudication the first question formulated. 3. The issue before the court arises in relation to the assessment year 1997-98. The assessee carried on the business of the export of spices, seeds and other goods. The assessee also carries on the business of cleaning and fumigation of seeds, spices and other goods and a warehousing business, for which separate books of account are maintained. During the course of the year under consideration the total turnover of the assessee was Rs. 3.62 crores, of which the export sales constituted Rs. 3.45 crores. The assessee claimed a deduction under section 80HHC. During the year, the assessee received an amount of Rs. 31.49 lakhs as discounting charges and interest on intercorporate dep....
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....ssee had established a nexus between the income and the money utilized, which constitute business funds generated from the export activity carried on by the assessee. The Tribunal held that the income had a direct nexus with export activity. Consequently, the interest income could not, according to the Tribunal, be treated as income from other sources. The Tribunal also held that the Assessing Officer had on the basis of the same facts and circumstances changed the opinion which he had taken for the earlier years. On this basis, the income was held to be eligible for deduction under section 80HHC. 6. Section 80HHC provides that where an assessee, being an Indian company or a person other than a company resident in India, engages in the business of export out of India of any goods or merchandise to which the section applies, there shall, in accordance with and subject to the provisions of the section, be allowed, in computing the total income of the assessee, a deduction to the extent of profits, referred to in sub-section (IB), derived by the assessee from the export of such goods or merchandise. The salient aspect of sub-section (1) of section 80HHC is that the deduction is ava....
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....cal sale bills and on intercorporate deposits constituted income which would fall under the head "Profits and gains of business or profession" or, whether it would constitute income from other sources. The contention of the assessee is that these receipts constitute business income, which had a direct nexus with its export activity whereas on the other hand the contention of the Revenue is that these receipts would fall for classification as income from other sources. 10. The total income of an assessee which is chargeable to tax under section 4 has to be computed in accordance with the provisions of the Act. Section 14 provides that all income shall, for the purposes of the charge of income-tax and computation of total income, be classified under the following heads of income : (i) Salaries ; (ii) Income from house property ; (iii) Profits and gains of business or profession ; (iv) Capital gains ; and (v) Income from other sources. The head of interest on securities has been omitted with effect from April 1, 1989. Section 28 defines income which is chargeable to income-tax under the head "Profits and gains of business or profession". Section 56 stipulates that income of every k....
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....orin Alkali Chemicals and Fertilizers Ltd. v. CIT [1997] 227 ITR 172 (SC) the assessee was incorporated in 1971 for manufacture of heavy chemicals. The trial production of its factories commenced in June 1982. The assessee had obtained term loans from financial institutions for setting up its factories. A part of its borrowed funds which were not immediately required by the assessee, were invested in short- term deposits with banks. For the assessment year 1982-83, the assessee disclosed a sum of Rs. 2.92 lakhs earned on account of interest as income from other sources. Subsequently, the assessee filed a revised return by which it claimed that the interest together with other pre-production expenses were liable to be capitalized and that consequently the interest income of Rs. 2.92 lakhs would reduce the pre-production expenses which would ultimately be capitalized. For the assessment year 1983-84, the assessee received interest income of Rs. 1.80 lakhs and in its return it claimed that this amount would reduce the pre-production expenses and would have to be capitalized. This contention of the assessee was rejected by the Assessing Officer and, in appeal, by the Commissioner (Appe....
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....e was at liberty to use its interest income in any manner as it chose. Tax is attracted at the point when the income is earned and the taxability of income is not dependent upon its destination or manner of its utilization. 15. In CIT v. Bokaro Steel Ltd. [1999] 236 ITR 315 (SC), the assessee during the course of the assessment years under consideration was in the process of completing the work of construction of its factory and plant. The company had not started any business and during the period, it received the following income : (i) income received from contractors towards hire charges for quarters ; (ii) interest received for advance payments made to contractors ; (iii) income towards hire charges received from contractors against the letting of plant and machinery ; (iv) royalty received from the contractors towards excavation of material, and (v) income from interest for the supply of, locomotives to Hindustan Steel. The Supreme Court, while distinguishing the earlier judgment in Tuticorin held that while interest earned by investing borrowed capital in short-term deposits is an independent source of income not connected with the construction activities or ....
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....laimed that the interest received was of the same nature as other trading receipts. The Supreme Court held in that case that the interest could be assessed under the head "Income from other sources" only if it cannot be brought within one or the other of the specific heads of charge. On the facts before the court, it was held that the interest payable to the assessee was of the same character as the receipts for the payment of which he was entitled under the contract. The interest could not be separated from the other amounts granted to the assessee. 18. In CIT v. Karnal Co-operative Sugar Mills Ltd. [2000] 243 ITR 2 (SC), the assessee had deposited money in order to open a letter of credit for the purchase of machinery required for the setting up of a plant. Interest was earned on the money so deposited. The Supreme Court held that the deposit of money in that case was directly linked with the purchase of plant and machinery. Consequently that was 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 income earned on such deposits was held to be incidental to the acquisition of assets for th....
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....rin [1997] 227 ITR 172 (SC) and Bokaro Steel [1999] 236 ITR 315 (SC) the court must be mindful of the circumstance that the principal issue which arose before the Supreme Court was whether the interest which was generated from the investment of funds was taxable or whether it formed a part of the capital expenditure of the assessee. In Tuticorin., this issue was answered by the Supreme Court by holding that since the assessee was yet to commence business, there was no occasion for it to be assessed under the head "Profits and gains of business". At the same time, the income which was generated by the assessee would fall for classification under one of the other heads elucidated in section 14 and whether the assessee had kept its surplus funds in short-term deposits in order to earn interest, such interest would be chargeable under section 56. The subsequent judgment in Bokaro Steel [1999] 236 ITR 315 (SC) dealt with a situation where the receipts that were realized by the assessee were directly linked with the setting up of the capital structure of the assessee and were to be viewed as capital receipts which reduced the cost of construction. While holding thus, in the facts of the ....
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.... land taken on lease for the work of construction. A Division Bench of this court held that there was a finding of fact that the entire interest "sprang from the business activity of the assessee and does not arise out of any independent activity". Hence, the interest income was regarded as the business income of the assessee and the finding of the Tribunal was confirmed. The decision in Paramount Premises [1991] 190 ITR 259 (Bom) deals with a situation where primarily, the purchasers of premises which were in the process of construction had paid interest towards delayed payment of the purchase price. The payment of such interest would be of the same nature and character as the consideration payable by the purchasers for the sale of premises. These deposits in turn were invested by the assessee and the assessee had also placed an additional deposit for obtaining a bank guarantee for land taken on lease for construction. Construction was the business of the assessee. The Division Bench essentially confirmed a finding of fact of the Tribunal that the interest which was earned by the assessee arose out of the business activity of the assessee and was not earned on an independent activ....
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....pose and the factual utilisation of the funds for the business would provide the direct and proximate nexus with the business activity and a short-term deposit in the facts of that case was held not to detract from the business purpose so as to constitute an independent source. 25. In CIT v. Lok Holdings [2009] 308 ITR 356 (Bom), the assessee was engaged in construction business and had received moneys from purchasers of flats, which were deposited with a bank. The interest income on the money deposited with the bank was treated as income from other sources by the Assessing Officer. The Commissioner (Appeals) deleted the addition made by the Assessing Officer and the Tribunal confirmed that decision. The Division Bench held that the income in that case admittedly arose out of a running business. The interest was earned out of the moneys which accrued from the business of the assessee and was utilized for the purpose of business. The judgment in Tuticorin was distinguished on the ground that in that case the assessee had not commenced business and it was in that context that the Supreme Court had held that a company which had not commenced business could not have business income.....
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.... of the Madras High Court in South India Shipping Corporation Ltd. v. CIT [1999] 240 ITR 24, held in the case of an assessee who carried on shipping business, that interest received on short-term deposits could not be regarded as business income but would fall for classification as income from other sources. The Madras High Court held that the fact that a person carries on business does not lead to the inference that all income received by such a person is business income. The same assessee may have income which has require to be classified as under more than one head and it is the manner in which the income is derived which is relevant and not merely the fact that the person is engaged in a business or profession. The same view has been taken by the Rajasthan High Court in Murli Investment Company v. CIT [1987] 167 ITR 368 ; 31 Taxman 410 and in CIT v. Rajasthan Land Development Corporation [1995] 211 ITR 597. 30. In K. Ravindranathan Nair v. Deputy CIT (Asstt.) [2003] 262 ITR 669 (Ker) ; 129 Taxman 811, an assessee who was engaged in export claimed relief under section 80HHC. The Assessing Officer treated the interest received on short-term deposits with banks as income from o....
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....head of profits and gains of business or profession. The Division Bench held that as a result such income could not be included in the business profits for the purposes of the formula under section 80HHC. 34. In Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278 ; 129 Taxman 539 the Supreme Court construed the ambit of the expression "derived from" in section 80HH. The assessee had earned interest on a deposit placed with the Electricity Board for the supply of electricity. The contention of the assessee was that this should be treated as income derived from the industrial undertaking under section 80HH because, without electric supply, the undertaking could not be run. The Supreme Court held that the expression "derived from" should be "understood as something which has direct or immediate nexus" with the industrial undertaking. Though electricity may be required for the purposes of the industrial undertaking, the deposit required for its supply is a step removed from the business of the industrial undertaking. The derivation of profits on the deposit made with the Electricity Board "cannot be said to flow directly from the industrial undertaking itself" (pages 280, 281 of 262 IT....
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.... to the conclusion that the interest which has been received by the assessee bears a direct and proximate relationship with the export activity. Evidently, the explanation of the assessee is sufficient to indicate that the funds which are utilized for discounting local sale bills of private parties are those which are surplus to the business. These surplus funds of the assessee are utilized for discounting bills on which the assessee received discounting charges. The same would hold true in so far as intercorporate deposits are concerned. Income received by way of discounting charges and interest on intercorporate deposits would not fall under the head of profits and gains of business or profession but would fall under the head of income from other sources. Having no direct and proximate nexus with the export activity such income has to be wholly kept out of the reckoning for computing the deduction under section 80HHC. 37. However, during the course of the hearing, counsel appearing on behalf of the assessee urged before the court in the alternative that the assessee must be regarded as carrying on an independent line of business activity consisting of the discounting of local ....