TaxTMI 
TaxTMI 
2012 (10) TMI 23
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....led its return of income of Rs.8,44,690/- on 31st October, 1989 and a revised return on 7th March, 1990, declaring an income of Rs.4,46,920/-. The Assessing Officer, by an order dated 21st January, 1991, assessed the total income at Rs.48,05,374/-. The difference arises on account of the determination of the deduction under section 80HHC. 3. Along with his return, the assessee filed a certificate, calculating the deduction under section 80HHC at Rs.3,08,19,854/-. The assessee received Rs.40,20,418/- towards interest in the circumstances we will refer to later and a sum of Rs.4,64,700/- by way of liquidated damages. This Reference is concerned only with the amount received towards interest. The question is whether the amount received towards interest ought to be added to the total turn-over or not. For the purpose of the deduction under section 80HHC, the assessee took the profit from the business at Rs.3,12,17,908/-, which included the interest received. The AO sought the details of the interest. The information revealed that almost the entire interest was received from their sister-concerns. A paltry amount of Rs.1,849/- was received on account of the deposit for a car. The AO t....
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....ods or merchandise to which this section applies, the amount which bears to the profits of the business (as computed under the head "Profits and gains of business or profession") the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee" By an amendment to section 80HHC(1), which came into effect from 1st April, 1989, the second proviso was deleted. 4. We will, as we said, presume for the purpose of this Reference that the second proviso was to be complied with by the assessee. We will also presume that the assessee had complied with the second proviso viz. that an amount equal to the amount of the deduction claimed under section 80HHC(1) was debited to the Profit & Loss Account of the previous year in respect of which the deduction was to be allowed and credited the same to a reserve account. It is important to note that the second proviso further provided that the amount credited to the reserve account was to be utilized for the purpose of the business of the assessee. The question is whether this was done. 5. The applicant, therefore, in order to avail of the benefit of section 80HHC, in accordance with the second....
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....,98,758/- 1989-90 Rs.4,38,37,747/- Rs.39,10,032/- 9. The Commissioner of Income-tax (Appeals) came to a finding of fact that the applicant was neither in the business of money lending nor in the business of regularly investing its moneys as loans and advances to other parties. The CIT (A) found as a fact that interest income earned by the assessee on the loans cannot be termed as business income. The Tribunal upheld this finding observing that there was no element of business of lending money. The Tribunal held that there was no systematic or organized activity like money lending. 10. Firstly, both the appellate authorities have come to a finding of fact. We are unable to hold that these findings are perverse. 11. Further, even assuming that we are entitled to question these findings of fact, we are not inclined to disagree with the authorities. The mere fact that the assessee invested the said amounts with their sister-concerns for five years does not indicate, much less establish, that they were engaged in the business of lending or investing money. We hasten to add that merely because the investments have been made with the sister-concerns would not be decisive of whether ....
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....s contemplated. The authorities accepted these findings but despite the same, upheld the deduction made by the ITO. The Division Bench held that the assessee had, in fact, accumulated and retained the amounts for the purpose of it's future expansion out of profits earned during the year. The Division Bench held as follows:- "Can a company like the assessee - company, which accumulates and retains for the purposes of its future expansion large amounts out of the profits earned during the year, be said to have accumulated these amounts for purposes other than its business? Indeed, any such contention would appear ridiculous when so put. These are what are known in business parlance as "retained profits". Retained profits may be retained for the purpose either of meeting and reducing the present liabilities or for meeting the working capital required in praesenti or for the reduction of loans and borrowings or for a future expansion of the company. Regarded in any of these ways, such retained amounts must be regarded as moneys required for the purpose of the business of the company like the assessee - company." 15. A mere investment of amounts from time to time even over years does....
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....ome from other sources." (B). There was thus a finding of fact that the interest earned was in respect of the deposits which had been kept for the purpose of the business and, therefore, the Division Bench held that interest thereon must be treated as income earned from business and not as income from other sources. In the case before us, the investment with the sister-concerns had no nexus to the assessee's business activities. They were merely invested for the purpose of earning interest. The judgment does not support the extreme proposition that if the source of funds which are invested is from the business activity, the accretion thereto, including by way of interest must be held to be business income. The funds may well have been earned from an assessee's business activities. The same may, however, be invested for purposes entire alien to the assessee's business. It can hardly be suggested then that the interest earned on such investments fall under the head "business income". 17.(A) In Shree Krishna Polyster Limited v. Dy. Commissioner of Income Tax (2005) 274 ITR 21, the question was whether the income received by the assessee on the surplus money from public issue of sha....
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....plus money not acquired from the business activity is invested, the interest thereon cannot be considered to be business income. In other words, the observations are made irrespective of the source of the surplus money to wit irrespective of whether the surplus money is earned on account of the business activity of the assessee or otherwise. 18. This brings us to Mr. Pardiwalla's third submission viz. if the investment is held to be for the purpose of business of the assessee it would follow, at least normally, that accretions thereto, including by way of interest, constitute the assessee's business income. In support of this submission, he relied upon the judgment in CIT v. Indo Swiss Jewels Ltd., and in particular paragraph 6 thereof, which we have extracted above. The judgment, however, does not apply in the facts of this case as it has not been established that the investment with the sisterconcerns was for the purpose of the assessee's business. In addition to what we have said in this regard, it is pertinent to note that the assessee has not even established that one of its business activities was to advance loans to third parties and/or to invest its funds and that it was ....
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....s is attracted where the income does not belong to a category which is specified in any of the other heads elucidated in section 14. Income earned by an assessee, which utilizes its surplus funds in order to earn interest cannot be classified under the head of business income but will fall for classification as income from other sources. ............... 27. Ordinarily, where an assessee invests funds surplus to the business and earns interest, such income does not constitute business income but falls under the head of income from other sources. Merely because an assessee carries on business and the income of the business is invested in deposits, that would not result in an inference that the return on the investments must partake of the character of business income. Every income which is earned by an assessee who carries on business is not business income. Every income which is earned by an assessee who carries on business is not business income. On the contrary, the position in law is that it is only where income earned on account of interest springs out of or emanates from the business activity of the assessee, that this income can be regarded as being of the nature and charact....
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...., it is impossible for this court to come 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." [emphasis supplies] 21. In the present case also, it is impossible for this Court to come to the conclusion that interest received by the assessees bears a direct and proximate relationship with their export activity. As i....
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....ourt in that case. The decision would indicate that the investments made by the assessee were not a mere investment of its surplus funds. The investments made were regarded by the Division Bench as those which resulted in earning income from the running business of the assessee. The interest was utilized for the purpose of business and it was in these circumstances that the Division Bench must be construed to have found the existence of a direct and proximate nexus between the income that was earned and the business activity of the assessee. So construed, the judgment of the Division Bench is confined to the facts as they emerged before the court in that case. The judgment of the Division Bench in Lok Holdings [2009] 308 ITR 356 (Bom) cannot be held to lay down a broad proposition of law that an investment of surplus funds by an assessee who carries on business must necessarily be construed to result in the generation of business income by way of interest received on investment." 23. Mr. Pardiwalla's third submission is also, therefore, rejected. The judgment of this Court in Commissioner of Income-tax v. Swani Spices Mills Pvt. Ltd., is, in fact, an answer to all three submission....