1. The appeal of the assessee is directed against the order of the C.I.T.(Appeals)-IV, Chennai dated 8.9.2000. The relevant assessment year involved in this appeal is 1997-98.
2. Before us, the assessee has raised 12 grounds in this appeal which are argumentative in nature and each of the grounds will be discussed in this order. The only issue raised before us for consideration in this appeal is as to whether the interest earned by the assessee in consequence of letters of credit for import of raw materials, margin money deposit set apart and earmarked by the Bankers from the overdraft account is essential part of the business activity or not. The briefly stated facts are that the assessee company engaged in the business of manufacture and export of Pharmaceuticals. The assessee claimed its business income as exempt under Section 10B of the I.T. Act, 1961. The assessment was completed under Section 143(3) of the Act by the Assessing Officer. The assessee claimed the interest income earned from margin money deposit with Bankers for obtaining letter of credit for import of raw materials as business income and the assessee claimed deduction on this income also under Section 10B of the Act. The Assessing Officer while framing the assessment, toe-Assessing Officer treated this interest income as income from deposits and accordingly it was taxed under the head 'income from other sources'. Aggrieved, the assessee preferred an appeal before the C.I.T.(Appeals) and the C.I.T.(Appeals) confirmed the action of the Assessing Officer.
Aggrieved, the assessee is in second appeal before the Tribunal.
3. Before us, the learned counsel for the assessee, Shri J.Batesubramnian, first of all argued that the assessing authority as well as the first appellate authority erred in ignoring the factual evidence and submissions made by the assessee and passing the order or confirming the additions based on misinterpretation of the principles of law. He argued that the first appellate authority failed to appreciate that establishment of letters of credit for import of raw materials and consequential margin money deposit earmarked by the bankers from the overdraft amount from the assessee and the interest earned by the assessee there-from are essential parts of the business activity. He further argued that the margin money deposit earmarked from the overdraft of the assessee and the interest earned thereon are integral part of the internal generation and working capital of the business and the interest thus earned being part of the profits and gain derived in the course of business fully qualifies for exemption under Section 10B of the Act He relied on the decision of the Hon'ble Apex Court in the case of CIT v. Govinda Choudhury and Sons, 203 ITA 881 and argued that in this case, the Hon'ble Apex Court has held that it is well settled that the interest can be assessed under 'income from other sources' only if it cannot be brought within one or the other specific heads of charge. He further argued that since the audited accounts of the assessee correctly classified the interest on margin money as part of the income from business in the profit and loss account, then it cannot be ' assessed under 'income from other sources' and consequentially it cannot be separated and excluded from the computation of profits of the business for the purpose of Section 10B of the Act He further argued that there was a direct nexus between the interest income from margin money deposit and the import of raw materials constituting business activity and he relied on the decision of the Hon'ble Supreme Court in the case of Sterling Foods reported in 237 ITR 579 wherein it was held that there must be a nexus between profits and gains and the industrial undertaking for the application of the words "derived from'. He also relied on the decision of the Hon'ble Apex Court in the case of Karnal Co-operative Sugars Mills Ltd. (243 ITR 2) wherein it was held that deposit of money in the above case was directly linked to the purchase of plant and machinery and hence any income earned is incidental to the acquisition of assets for setting up of plant and machinery. Accordingly, it was held that there was no surplus share capital money, which was lying idle, had been deposited in the bank for the purpose of earning interest. He also relied on the case law of the Hon'ble Apex Court in the cases of CIT v. Bokaro Seel Ltd., 236 ITR 315 and Tuticorin Alkali Chemicals and Fertilizers Ltd., 227 ITR 172. Further he relied on the decision of the Hon'ble Apex Court in the case of CIT v. Haribhai Estate Pvt. Ltd., 242 ITR 706 wherein it was held that the interest on fixed deposit, interest on temporary loans etc. were to be considered as business income and not income from other sources and it was held that it is a question of law.
Finally, he argued that the interest on margin money deposit which was set apart from the overdraft account of the assessee is inextricably linked to the assessee's business and this income is derived from the business and it should be treated as income from business and exemption under Section 10B of the Act to be allowed on this income also. In view of these arguments, he urged the Bench to allow the appeal of the assessee.
4. On the other hand, the learned Departmental Representative relied on the orders of the lower authorities.
5. We have heard both the sides and considered the case records including the case laws cited before us as well as cited in the orders of the lower authorities. It is a fact that the assessee company is engaged in the business of manufacture and export of Pharmaceuticals.
For this, he has obtained the letter of credit for import of raw materials for which margin money was deposited in the bank. On this deposit, the assessee has earned interest from bank and claimed it as business income in its books of account and accordingly claimed exemption under Section 10B of the Act. First we have to go through the provisions of Section 10B of the Act and the relevant portion of Section 10B of the Act reads as under: "Special provisions in respect of newly established hundred per cent export oriented undertakings.
10B.(1) Subject to the provisions of this section, any profits and gains derived by an assesses from a hundred per cent export-oriented undertaking (hereafter in this section referred to as the undertaking) to which this section applies shall not be included in the total income of the assesses.
(2) This section applies to any undertaking which fulfils all the following conditions, namely:- (ia) in relation to an undertaking which begins to manufacture or is produce any article or thing on or after the 1st day of April, 1994, its exports of such articles and things are not less than seventy-five per cent of the total sales thereof during the previous year; (ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence: Provided that this condition shall not apply in respect of any undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assesses of the business of any such industrial undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section; (iii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose.
(i) "hundred per cent export-oriented undertaking" means as undertaking which has been approved as a hundred per cent export-oriented undertaking by the Board appointed in this behalf by the Central Government in exercise of the powers conferred by Section 14 of the Industries (Development and Regulation) Act, 1951 (65 of 1951)', and the rules made under that Act; (ii) "relevant assessment years" means the ten consecutive assessment years referred to in Sub-section (3); (c) recording of programmes on any disc, tape, perforated media or other information storage device; (iv) "produce", in relation to any article or thing referred to in Clause (i) of Sub-section (2) includes production of computer programmes." In this case, though the assessee engaged in the business of manufacture and export of pharmaceutical, it has obtained letter of credit for import of raw material and for that it has deposited margin money with the bank and on 15 that margin money it has earned interest and claimed it as business income being a part of business activity. The Assessing Officer as well as the first appellate authority found that Section 10B of the Act applies only to an assessee who derived profit and gains from 100% export oriented undertaking will be eligible to the exemption. The business of the present assessee in the export oriented undertaking did not include making deposit with banks and the interest earned from the deposits on account of letter of credit for purchase of raw materials has no link with the profits and gains of export business of the assessee and as to how it could be claimed as interest income derived from 100 per cent export oriented undertaking.
6.1. Now we have to go through the case laws cited by the learned Counsel for the assessee. In the case Bokaro Steel Ltd. (supra) relied on by the learned Counsel for the assessee, the Hon'ble Supreme Court has decided that issue as to whether a particular transaction is in the nature of income or capital. The assessee company was set up to produce steel and construction of the plant was not completed. As far as the interest on advances to contractors who constructed the plant is concerned, it was held that the amount is directly connected to and incidental to the construction of plant by the assessee. The Hon'ble Apex Court has held as under ( relevant head note): "In case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before he commencement of production on such borrowed money can be capitalized and added to the cost of the fixed assets created as a result of such expenditure. By the same reasoning if the assessed receives any amounts which are inextricably linked with the process of setting up its plant and machinery, such receipts will go to reduce the cost of its assets. These are receipts of a capital nature and cannot be taxed as income." 6.2. The Hon'ble Apex Court in the case of Karnal Co-operative Sugar Mills Ltd.(supra) which was relied on by the learned Counsel for the assessee, while dismissing the revenue's appeal held as under: "In the present case, the assessee had deposited money to pen a letter of credit for the purchase of the machinery required for setting up its plant in terms of the assessee's agreement with the supplier. It was on the money so deposited that some interest has been earned. This is, therefore, not a case where any surplus share capital money which is lying idle has been deposited in the bank for the purpose of earning, interest. The deposit of money in the present case is directly linked with the purchase of plant and machinery. Hence, any income earned on such deposit is incidental to the acquisition of assets for the setting up of the plant and machinery. In this view of the matter the ratio laid down by this court in Tuticorin Alkali Chemicals and Fertilizers Limited v. CIT , will not be attracted. The more appropriate decision in the factual situation in the present case is in CIT v. Bokaro Steel Ltd. . The appeal is dismissed." 6.3. The Hon'ble Supreme Court in the case of Govinds Choudhury And Sons (supra) has decided the issue of interest income as under: "This brings us to a consideration of the second question. The sum of Rs. 2,77,692 was received by the assesses as interest on the amounts which were determined to be payable by the assessee in respect of certain contracts executed by the assessee and in regard to the payments under which there was a dispute between the two parties. The assessee is a contractor. His business is to enter into contracts. In the course of the execution of these contracts, he has also to face disputes with the State Government and he has also to reckon with delays in payment of amounts that are due to him. If the amounts are not paid at the proper time and interest is awarded or paid for such delay, such interest is only an accretion to the assessee's receipts from the contracts. It is obviously attributable and incidental to the business carried on by him. It would not be correct, as the Tribunal has held, to say that this interest is totally de hors the contract business carried on by the assessee. It is well-settled that interest can 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. We find it difficult to comprehend how the interest receipts by the assessee can be treated as receipts which flow to him de hors the business which is carried on by him. In our view, the interest payable to him certainly partakes of the same character as the receipts for the payment of which he was otherwise entitled under the contract and which payment has been delayed as a result of certain disputes between the parties. It cannot be separated from the other amounts granted to the assessee under the awards and treated as "income from other sources". The second question is, therefore, answered in favour of the assessee and against the revenue." 6.4. Further, the case law relied on by the assessee's counsel in the case of Haribhai Estate Pvt. Ltd. (supra), the Hon'ble Apex Court has decided the issue as under (head note): "Held, that the question whether interest on fixed deposit, interest on temporary bans and interest on arrears of sales deposit were to be considered as business income and not income from other sources was a question of law to be referred to the High Court." 6.5. It is seen from the decision in the case of Bokaro Steel Ltd. (supra) that money was borrowed to start a new company and in the process, construction of plant was started and the interest earned before the commencement of production of such borrowed money was held to be in the nature of capital and cannot be termed as income. Further, in the case of Kamal Co-operative Sugar Mills Ltd. (supra), the assessee has deposited the money to obtain a letter of credit for the purchase of machinery required for setting up its plant in terms of the assessee's agreement with the supplier and the Hon'ble Apex Court has held that the interest was a capital receipt which would go to reduce the cost of asset. Further, in the case of Govinda Choudhury And Sons (supra), the Hon'ble Apex Court has held that the interest received on arbitration award cannot be termed as income from other sources as! this is on account of execution of Government contracts and the dispute was regarding the payments under contracts. Further it was held that the interest can be assessed as income from other sources only when it does not fall under any other heads of income and the Interest: partakes the character of payment on which the arbitration is awarded.
Even in the case of Haribhai Estate Pvt Ltd. (supra), the Hon'ble Apex Court has referred the question of law, as to whether the interest on fixed deposits, interest on temporary loans, arrears of sales deposit were to be considered as business income and not income from other sources. We have observed that the facts of these cases are distinguishable from the facts of the present case in hand. In the present case, the assessee is engaged in the manufacture and export of Pharmaceuticals and in the process, he has obtained letter of credit in consequence of margin money deposit for purchase of raw materials and interest is earned on that margin money deposit and the issue is as to whether the interest will qualify for deduction under Section 10B of the Act as the profits and gains are derived from 100 per cent export oriented undertaking. This special provision in respect of newly established hundred per cent export oriented undertaking was inserted by the Finance Act, 1988 with effect from 1.4.1989.
6.6. Now, we go though the case laws discussed by the authorities below in their orders. In the case of Cambay Electric Supply Industrial Co.
v. CIT, 113 ITR 84, the Hon'ble Apex Court has examined the expression "attributable to" and "derived from" in detail and finally held as under: "As regards the aspect emerging from the expression "attributable to occurring in the phrase "profits and gains attributable to the business of" the specified industry (here generation and distribution of electricity), on which the learned Solicitor-General relied, it will be pertinent to observe that the legislature has deliberately used the expression, "attributable to" and not the expression "derived from". 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 general 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 803. In our view, since the expression of wider import, namely, "attributable to", has been used, the legislature intended to cover receipts from sources other than the actual conduct of the business of generation and distribution of electricity.
For the aforesaid reasons and particularly on the true construction of the provision itself, we are of the view that both the Tribunal and the High Court were right in taking the view that the item of Rs. 7,55,807 was required to be taken into account while computing the deduction of 8% contemplated by Section 80E(1) of the Act. The revenue's appeal, therefore, fails and is dismissed." 6.7. The Hon'ble Kerala High Court in the case of CIT v. Cochin Refineries Ltd., 142 ITR 441, the Hon'ble High Court has considered the question No. 2 which reads as under: "(2) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in law in. treating the interest income from bank deposits as business income of the assesses for the purpose of Section 80J of the Income-tax Act, 1961?" Following the decision of the Kerala High Court reported in 135 ITR 278, it was answered the above question as under: At the outset itself we might state that we answer question No. 2 against the assessee and in favour of the Revenue in view of the decision of this court in regard to the same assessee in respect of the assessment year 1970-71, when the same question was referred to this court in I.T.Rs. Nos. 71 and 72 of 1977. This court said there (the decision is - CIT v. Cochin "The derivation of the income must be directly connected with the business in the sense that the income is generated by the business, It would not be sufficient if it is generated by the exploitation of business asset. In the case before us, the income by way of interest from the deposits is no doubt an income derived by investing surplus cash of the assessee generated as profits of the industrial undertaking. But, it is not money derived from the business activity of the industrial undertaking but by the business activity of deposit of the business asset in banks. Within the meaning of the term 'derived from' it will not be possible to hold that the income so generated is the income falling within Section 80J." 6.8. The Hon'ble Madras High Court in the case of CIT v. Pandian Chemicals Ltd., 233 ITR 497 has also discussed the meaning of expression "derived from" which is reproduced as it is: "Profits or gains eligible for deduction under Section 80HH of the Income-tax Act, 1961, must be derived from the actual conduct of the business. The expression, "derived from" should be given a restricted meaning and whenever the Legislature wants to give a wider expression, the Legislature employs the expression, "attributable to" and the use of the expression, "derived from" indicates that the profit , or gain should be derived from the conduct of the business. There is no justification to give the expression, "derived from" a wider meaning \ to cover every receipt connected with the industrial undertaking. It is not all business receipts that would qualify for the deduction and the Legislature has apparently not intended to give the benefit of deduction to all business income. If the intention of the Legislature was to grant relief to all business income, it could have used the expression, "profits and gains of industrial undertaking''. The fact that the Legislature has used the expression "profits and gains derived from the industrial undertaking" has some significance and it connotes that the immediate and effective source of income eligible for grant of relief under section 80 HH must be the industrial undertaking itself, and not any other source. The mandate of law is that unless the source of the profit is the undertaking, the assessee is not eligible to claim deduction under section 80HH. Mere commercial connection between the income and the industrial undertaking would not be sufficient.
Held, that the assessee had claimed that the interest on deposits made with the Tamil Nadu Electricity Board had to be taken into account for purposes of Section 80HH. Though the assessee had to necessarily make the deposit with the Electricity Board for running the Industry and the power supply would not be made without the deposit in favour of the Electricity Board, the income derived from the deposit with the Electricity Board could not be said to have been derived from the industrial undertaking. The immediate source of interest was the deposit itself. In other words, the immediate and effective source of the interest was the deposit and not the industrial undertaking. The fact that the amount was assessable as business income would not be sufficient to hold that the interest income was derived from the actual conduct of the business of the industrial undertaking. Hence, the interest could not be treated as income, derived from an industrial. : Hence, the interest could not be treated as income derived from an industrial undertaking for purposes of relief under Section 80HH." This view has been upheld by the Hon'ble Supreme Court in' the case of Pandian Chemicals Ltd. v. CIT, "The word "arived" has been construed as far back in 1948 by the Privy Council in CIT v. Raja Bahadur Kamakhaya Narayan Singh (1948) 16 ITR 325 when it said (page 328): "The word derived is not a term of art. Its use in the definition indeed demands an enquiry into the genealogy of the product. But the enquiry should stop as soon as the effective source is discovered In the genealogical tree of the interest land indeed appears in the second degree, but the immediate and effective source is rent, which has suffered the accident of non-payment. And rent is not land within the meaning of the definition." This definition was approved and reiterated in 1955 by a Constitution Bench of this court in the decision of Mrs. Bacha F. Guzdar v. CIT . It is clear, therefore, that the word "derived from" in Section 80HH of the Income-tax Act, 1961, must be understood as something which has direct or immediate nexus with the appellant's industrial undertaking. Although 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 Electricity Board cannot be said to flow directly from the industrial undertaking itself." 6.9. Further, the Hon'ble Apex Court in the case of CIT v. Sterling Foods, deliberating the Section 80HH of the Act, has defined the expression "derived from" as under: "10. The dictionaries state that the word 'derive' is usually followed by the, word 'from', and it means: get or trace from a source, arise from, originate in show the origin or formation of.
11. The use of the words-'derived from 'in item 11-AA(2) suggests that the original source of the product has to be found. Thus, as a matter of plain English, when it is said that one word is derived from another, often in another language, what is meant is that the source of that word is another word, often in another language. As an illustration, the word 'democracy' is derived from the Greek word 'demos' the people, and most dictionaries will so state. That is the ordinary meaning of the words 'derived from' and there is no reason to depart from that ordinary meaning here.
12. Crude petroleum is refined to produce raw naphtha. Raw naphtha is further refined, or cracked to produce the said products. This is not controverted. It seems to us to make no difference that the appellants buy the raw naphtha from others. The question is to be judged regardless of this, and the question is whether the intervention of the raw naphtha would justify the finding that the said products are not 'derived from refining of crude petroleum'.
The refining of crude petroleum produces various products at different stages. Raw naphtha is one such stage. The further refining, or cracking, of raw naphtha results in the said products.
The source of the said products is crude petroleum. The said products must therefore, be held to have been derived from crude petroleum." We do not think that the source of the import entitlements can be said to be the industrial undertaking of the assessee. The source of the import entitlements can, in the circumstances, only be said to be the Export Promotion Scheme of the Central Government whereunder the export entitlements become available, There must be, for the application of the words "derived from", a direct nexus between the profits and gains and the industrial undertaking. In the instant case, the nexus is not direct but only incidental. The industrial undertaking exports processed sea food. By reason of such export, the Export Promotion Scheme 'applies. Thereunder, the assessee is entitled to : import entitlements, which it can sell. The sale consideration therefrom cannot, in our view, be held to constitute a profit and gain derived from the assessee's industrial undertaking." 6.10. The expression 'derived from' has been elaborated in Commissioners of Taxation v. Kirk (1900) which is given in Stroud's Judicial Dictionary, Fourth Edition and the same is reproduced as it is: "(3) Income was "derived from lands of the Crown, held under lease or licence" (Section 15(iii), New South Wales Land and Income Tax Assessment Act 1895, if either of the processes whereby the ultimate money income was made derived from the lands, e.g. the extraction of ore from the soil (Commissioners of Taxation v. Kirk (1900) A.C. 588, overruling Re Tindal 18 (N.S. W.O LR 378). In Kirk's case, the P.C. said their Lordships "attach no special meaning to the word 'derived', which they treat as synonymous with 'ARISING or accruing."' On the other hand, the cases of "CARRY ON" or "EXERCISE" a business were distinguished." Further, In Prem's Judicial Dictionary, Vol.1, the meaning of expression "derived there from" elaborated as under: "Whatever doubts one might have had as to the meaning to be given to the words 'derived therefrom or which may reasonably be deemed to have been derived therefrom' if they had to be. construed in isolation, in the context of the section and read in conjunction with words to the resident and 'therefrom', there cannot be any doubt that they have reference to the business of the resident and not that of the non-resident. Mazagaon Dock Ltd. v. I.T. 7 E.P.T. Commr. 1958 S.C. 861 (865)." 7. In the context of expression 'derived from' or 'attributable to', the nature of the income is important and the nature of income has to be decided on the facts of each case. In this case, the assessee has earned the interest on margin money deposit made on letter of credit for purchase of raw materials. Actually, this income of interest has earned from deposits of margin money with the bank. The question is as to what is the real character of the income and not what the parties call it. Here, the element of source of income is deposit in the bank and the assessee derived interest income therefrom. If we go by the scheme of acts,, the income and heads of income are provided in Section 14 of the Act and all income for the purposes of charge of income tax and computation of total income be classified under the following heads of income: Where an item of income falls specifically under one head, it has to be charged under that head and not other. Whatever be the nature of the activity or the nature of the income, the income of an assessee is to be classified and computed under the specific heads enumerated in Section 14. Even if such income arose in the course of business, if the same falls clearly under some other head or satisfies the test of any specific head, and such income has to be classified and computed only under such head. The several heads of income are mentioned in Section 14 and dealt with separately in Sections 15 to 59 of the Act A particular variety of income must be assignable to one or the other of these sections. If the income under consideration is taxable under any particular section, say, Section 22 or 28, then it cannot be taxed under Section 56 of the Act Vice versa. Similarly, 'interest on securities' which is specifically made chargeable to tax under Section 18 of the Act upto the assessment year 1988-89 as a distinct head, falls under that section and cannot be brought under Section 28, whether the securities are held as trading assets or capital assets.
The fact that income falling under a specific head may indirectly be covered by any other head will not make it taxable under the latter head.
8. Now, coming to the proposition that this interest is earned on deposits with the bank and there is no nexus to show that the profits and gains are derived from hundred percent oriented undertaking to which this section applies that the deposits has nothing to do with the manufacture or production of any article or tiling. The interest income earned from deposits with the bank is not connected with profits and gains which are derived from hundred percent oriented undertaking or from manufacturing any article or thing. The expression "any profits and gains' derived by the assessee from a hundred percent export-oriented undertaking to which this section applies as used in Section 10B of the Act has a distinct but narrow meaning and it cannot receive a flexible or wider concept. The assessee is entitled to claim deduction of the amount which it derives as direct profit by export of manufactured goods in its newly established hundred percent export oriented undertaking. Any indirect or incidental profit cannot be regarded as proof earned out of the main business activity. The ratio of the decisions of the Hon'ble Apex Court in the case of Pandian Chemicals (supra) and Cambay Electric Supply Industrial Co. Ltd. (supra) has finally settled this issue. It is clear from the provision itself that deduction of such profit and gains derived from hundred percent oriented undertaking must be understood as something which direct and inextricably linked to the assessee's industrial undertaking But in this case, the interest is earned on margin money deposited for letter of credit for import of raw materials which has no connection with the profits and gains derived from hundred percent oriented undertaking. Respectfully following the decisions of the Hon'ble Apex Court in the cases of Pandian Chemicals(supra), Sterling foods(supra), Cambay Electric Supply Industrial Co. Ltd. etc., we confirm the orders of the lower authorities.