1. The following point of difference has been referred to me Under Section 255(4) of the Income Tax Act.
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 refer to receipt of net interest? 2. I have heard both the sides and have also perused carefully the orders of the differing Members. The issue referred to me now stands concluded by the order of the Special Bench in the case of Lalsons Enterprises v. DCIT 89 ITD 25 (Delhi) (SB) wherein it has been held that for the purpose of Section 80HHC (4B), it is only 90% of the net interest remaining after allowing set off of the interest paid, that can be reduced from the business profit. The relevant discussion is contained in paragraphs 28 to 48 of the order of the Special Bench.
Respectfully following the same, I agree with the learned Judicial Member and hold that the profits of the business as defined in Explanation (baa) below Section 80HHC(4B) refer to receipt of net interest.
3. I may clarify that there were three issues Under Section 80HHC which were decided by the Special Bench in Lalsons Enterprises (Supra). In respect of the issues other than the principle of netting of the interest paid and received, the matter was referred to a larger Special Bench in the case of B. Sorab-Ji 95 ITD 540 (Mumbai) in the light of the judgment of the Supreme Court in the case of IPCA Laboratory v.DCIT 266 ITR 521, which was rendered subsequent to the order of the Special Bench in the case of Lalsons Enterprises (Supra). On these issues the larger Special Bench in the case of Sorab Ji (Supra) held that Lalsons Enterprises (Supra) was no longer good law. However, the issue relating to netting of the interest for the purpose of Explanation (baa) below Section 80HHC(4B) was not referred to the larger Bench since the judgment of the Supreme Court in the case of EPCA Laboratory did not deal with that question and. therefore, no doubts had been expressed about the correctness of Lalsons Enterprises (Supra) on this question. Therefore, so far as the principle of netting is concerned, Lalsons Enterprises (Supra) continues to be applicable.
4. The matter will now go to the regular Bench for being decided in accordance with the majority.
Decision pronounced in open court on 9.9.2005, at the conclusion of the hearing.
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 net interest? These two appeals by the revenue are Directed against the common order passed by the CIT(A) on 24.11.95 in relation to A.Yrs 1992-993 and 1993-94. As both the appeals are based on identical facts and common grounds of appeal, we are, therefore, proceeding to dispose of these appeals by a consolidated order for the sake of convenience....
2. The common grounds raised in both the appeals projects the grievance of the revenue as under:- 1. On the facts and in the circumstances of the ease the Ld. CIT(A) has erred in directing the AO to treat 10% of the interest income as business income for allowing deduction under Section 80HHC of the I.T. Act. The Ld. CIT(A) has failed to appreciate that the rule of res judicata does not apply to the income-tax proceedings.
2. That the order of the learned CIT(A) is erronous in law and on facts of the case, The same may be set aside and the order of the 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% of miscellaneous income comprising of interest (net) and rent. Similarly for -A.Y.1992-93, the assessee excluded 90% of miscellaneous income which come to Rs. 69,154/- while computing the deduction Under Section 80HHC. For A.Y. 1992-93 nothing was excluded on account of interest received on bank FDB for the reason that the bank interest debited to the profit and loss account 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 FDR, nothing was excluded on account of interest while computing deduction Under Section 80HHC. For A.Y. 1993-94, the assessee earned interest on bank FDRs Rs. 25,43,635 and after amounting to (sic) interest paid for Rs. 4,15,298/- the balance amount of Rs. 21,28,337/- together with rent of Rs. 78,416/- was shown under the head miscellaneous income and 90% of the net misc. income was deducted while computing deduction Under Section 80HHC. The A.O. was not satisfied with the computation of deduction claimed by the assessee Under Section 80HHC in both the assessment years-The A.O. opined that for A.Y. 1992-93, the gross amount rather than net interest on FDRs was liable to be considered for computing deduction Under Section 80HHC. In relation to A.Y. 1993-94, the AO, vide para 3 of the assessment order, noted that the assessee had earned bank interest of Rs. 25.43 lacs as against the payment of interest of Rs. 4.15 lacs to the bank. He found that the activity of earning the interest on deposits with the bank had nothing to do with its business of export. He, therefore, held that the entire amount of interest earned amounting to Rs. 25,43,635/- was income under the head one from other sources." Placing reliance on 189 ITR 370 and 190 ITR 359, the AO came to the conclusion that the assessee was not entitled to get any deduction Under Section 80HHC on the amount of interest earned as well as rent received. Before the first appellate authority, it was contended on behalf of the assessee that the assessee was regularly showing net...of interest in the proceeding years i.e., A.Y. 1989-90 to 1991-92, and the contention of the assessee was being accepted by the department. The learned CIT(A) reversed the action of the AO on the basis of principle of consistency and directed the AO to include net interest income instead of gross interest income while computing relief Under Section 80HHC.4. Before us, the learned DR supported the action of AO and contended that the learned CIT (A) had fallen in error in so directing the AO to include only net interest income rather than gross interest income. It was further submitted that the CIT(A) allowed assessee's claim by following the past history and in this process ignored the legal position altogether.
5. In the opposition, the learned counsel for the assessee reiterated the submissions as advanced before the so appellate 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% for computing deduction Under Section 80HHC and there was no point in 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. D.C.I.T. (2000) 69 TTJ (Delhi) 97 in support of his claim. It was therefore, submitted that there was no infirmity in CIT (AA's order calling for intereference.
6. We have considered the rival submissions in the light of material placed before us and precedents relied upon. In so far as the assessment year 1992-93 is concerned, it is seen that the AO excluded 90% of the interest received on FDRs while computing the profits of the business as against the action of the assesses in showing nil income on account of interest on the ground that the interest paid to bank was sore than the interest received on FDRs. It thus, means that the AO treated the gross interest income to be falling under the head Business Income", but excluded 90% of the gross interest income from the profits of the business for computing deduction Under Section 80HHC. Now, the point to be decided is as to whether the gross or the net interest income should be considered while computing the deduction Under Section 80HHC of the Act.
7. Section 80HHC(1) provides that the assessee shall be entitled to deduction of the profits derived by the assessee from the export of goods or merchandise to which this section applies. Sub-section (3) clause(a) of this section provides that the profit derived from export shall be the amount which bears to the "profits of the business", the same proportion as the export turn-over bears to the total turn-over.
Explanation (baa) below Sub-section (4B) of Section 80HHC defins "Profits of the business" as under:- (baa) "profits of the business" means the profits of the business as computed under the head "Profits and gains of business or profession" as reduced by:- (1) ninety per cent of any gum referred to in clauses (iiia), (iiib) and (iiic) of Section 28 or of any receipts by way of "brokerage? commission, interest rent charges or any other receipt of a similar nature included in such profits; and (2) the profits of any branch, office, warehouse or any other establishment of the assessee situate outside India;) A bare perusal of this Explanation reveals that out of income under the head? "Business income" 90% of the export incentive as referred to in Section 28(iiia), (iiib) and (iiic) together with 90% of interest etc.
are to be excluded in order to determine the "profits of the business".
In so far as 90% of interest income etc. is concerned, it has been specifically mentioned in the Explanation that the interest income so included in such profits" has to be considered for this purpose. It Beans that if interest income falls under the head "business income" only then its 90% is to be deducted for arriving at the figure of "profits of the business". If, on the other hand, interest income falls under the head "income from other sources", then neither it will be included in the "profits of the business", nor any deduction of 90% 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", in as much 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 80 HHC, 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 profits of the business for deduction Under Section 80 HHC is primarily based on the principle of netting. First of all, it is important to note as to what is the netting principle? If two transactions are is extrieably related to each ether and the expenses have been incurred to earn a particular income, only then those expenses are to be deducted from that particular income so as to arrive at a net income from that transaction. For example, if a person is plying a truck, then the net income from the truck would be the difference freight receipts and the expenses necessary to earn freight, such as cost of diesel, repairs and maintenance truck etc. It shows that netting is done where the expenses contribute to the earning of income, as the accrual of income is not possible without incurring such expenses. As in the above example if diesel is not put into truck, it cannot run and consequently cannot earn freight income. It shows that both the expenses and incomes, in order to netted, should be related in such a manner that income is not possible without expenses. The relation between the income and expenses should not only be direct but the income should be the result of the expenses. When the facts of the present case are tested on the touch stone of the necessary ingredients of netting, it is seen that nothing has been brought out to demonstrate that the funds were borrowed from bank for the purposes of purchasing the FDRs. It is noted that the Jodhpur Bench of the Tribunal in ACIT v.Sharda Gums and Chemicals Industrial Area (Jodhpur) (2001) 76 ITD 282 (Jodhpur) has decided the issue of netting of bank interest for the purposes of deduction Under Section 80 HHC in favour of the assesseee The decision of the Tribunal inter alia is based on the judgment of the Hon'ble Kerala High Court in the case of CIT v. Dr. V.P. Gopinathan wherein the assessee received as interest on his fixed deposits in the bank and had also paid interest on loans taken by him on the security of the same fixed deposits and claimed that the real income from this source of interest would be the difference between two sums. It was laid down by the Hon'ble, Kerela Court that the assessee was to be assessed on the interest received as reduced by the amount of interest paid on loan taken on security of such deposits.
The action of the Tribunal was upheld by the Hon'ble 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 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 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 charges or any other receipt of a similar nature included in such profits." It thus, shows that the Explanation is providing for reducing 90% of 'Receipts' of interest and rent etc.
which are included in the "business income". There is a palpable distinction between the word "receipt" and "income". Whereas the former represents the amount actually received, the latter refers to the amount received on account of income minus expenses incurred. It is, no doubt, true that the payment of interest to bank is a business expenditure and the receipt of interest from bank on FDRs is a business income and the net business income is the difference between the two amounts, amongst others. But it cannot be held that the "receipt" included in the "income" ceases to be receipt merely because expenses booked under one head are more than the income under that head- When the assessee has received interest from bank on FDRs to the tune of Rs. 1.89 lacs., it cannot be said that it has not received such interest in FDRs merely because of the fact that the interest paid account of user of credit facilities by it was more then that. Only on this count, the receipt of interest would not shed its character of receipt. In these circumstances can it be said that there is no receipt of interest by the assessee despite the fact that it has actually been received? The answer to this question, in our considered view has to be given in negative because of the use of the word "receipts" in Explanation (baa)' When the Legislature in its wisdom did not qualify the word "receipts" with the pre-fix "net", it would not be prudent to import it in the language of the explanation. Income-tax Act, being a fiscal statute has to be interpreted strictly and the interpretation of the provisions has to be done on the "basis of the plain language used in it, and in this process it is not open to read the words in the Act, which have not been so used.
11. Recently, the highest Court of India in Vikrant Tyres Ltd. v. ITO (2001) 247 ITR 821 (SC), on the interpretation of the provisions, has laid down as under:- In this process Courts must adhere to the words of the statue and the so called equitable construction of these words of the statute is not permissible. The task of the Court is to construe the provisions of taxing enactments according to the ordinary and natural meaning of the language used and natural meaning of the language used and then to apply that meaning to the facts of the case and in that process if the tax payer is brought within the net, he is caught, otherwise he has to go free.
12. The apex court in still another recent case of C.I.T. v. Plantation Corporation of Kerala Ltd. (2001) 247 ITR 155(SC) was dealing with the interprevation 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 statuary provision spun by interpretaine process to make the position beyond controverers or doubt. It was held "this Court has always been reiterating that if the intendment is not in the words used it is no where else and so long as there is no ambiguity in the statutory language, resort to any interpretative process to unfold the Legistlative intent becomes impermissible and the need for interpretation arises only when the words in the statute are on their own terms ambivalent and do not manifest the intention of the Legislature." 13. In the light of this legal (sic) where we are also dealing with the interpretation of an Explanation in which in turn gives meaning to the term "profits of the business", we are of the considered opinion that we are bound by the stipulation of Explanation (baa) below Section 80HHC(4B) which refers to "receipt of interest" and not to, "net income of interest" and as such, cannot expert the word "net" in it so to add new dimension to the provision.
14. As regards the further contention of the assessee that it had followed same method of showing net interest for the purposes of deduction Under Section 80HHC, as was being followed and accepted by the revenue in earlier years and, therefore, it should not be changed Row, we are of the considered opinion that there is so estoppel against the provisions of the Act.
15. It is true that the rule of consistency is one of the well recognised canons of law. No doubt, the earlier order on the issue should be respected and followed, but if that order was not based on the correct legal position or the matter was not dealt with deeply, it did not mean that the earlier view cannot be deviated from in the future proceedings. It is settled position of law by catena of decisions of the Hon'ble Summit Court and various High Courts that the res judicata is not binding in the income-tax makers. The Hon'ble Supreme Court in ITO v. Murlidhar Bhagwan Das held that the decision of the ITO given in a particular year did Dot operate as res judicata in the matter of assessment of subsequent years. Later on the apex court in M.M. Ipoh and others v. CIT (1986) 67 ITR 106 (SC) laid down that the assessment and the facts found were conclusive only in the year of assessment. These findings of a year may be good and cogent evidence in subsequent year, but they were not binding and conclusive. The same view was reiterated in CIT v. Brij Lal Lohia and Mahabir Prasad Khemka . In the light of this legal position, we are of the considered opinion that if a correct view was not taken earlier by the department, it did not give licence to the assessee to clais similar treatment in the subsequent years as well.
Hence, we do not find any force in this contention of the assessee.
Under these circumstances, we are satisfied that the CIT (A) proceeded to overturn AO'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.
11. Now coming to A.Y. 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 AO.treating the same to be falling under the head "Income from other sources". The AO noted that the assessee earned interest of Rs. 25.43 lacs from the bank on FDRs, whereas the interest paid to the bank was only 4.15 lacs. The AO 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 falling under the head "Income from other sources" and computed deduction by including intention Under Section 80HHC. The learned CIT(A) reversed the action of the AO on the same reasoning as in A.Y. 1992-93. Before us, it was contended by the learned DR, that the AO had rightly treated interest earned on FDRs under the head "Income from other sources" for the reason that the assessee had invested only surplus funds in the bank deposits which was evident from the fact that as against the interest payment to bank amounting ho Rs. 4.15 lacs, the assessee had learned bank interest of Rs. 25.43 lacs. Placing relianee on the decision of the apex Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT , the learned DR contended that the interest earned on FDR was assessee's income falling under the head "Income from other sources". It was further submitted by him that as it was not the business of the assesses to lend money and, therefore, the interest earned on FDRs was rightly placed by the AO under the head "Income from other sources". On a specific query raised from Bench as regards the fact that the AO while computing the total income, had not shown interest income under the separate head "Income from other sources", the learned DR submitted that the AO had specifically dealt with the issue at page 2 para 3 wherein he clearly held... this income to be taxable under the head "Income from other sources". It was also pointed out that though, the AO had computed gross total income without making any segregation as regards the various heads of incomes but while computing deduction Under Section 80HHC, he has specifically excluded interest income by mentioning the same from "other sources". A further submission was advanced by the learned DR that the computation of deduction Under Section 80HHC was to be considered in isolation, only the items falling under the head "profit and gains of business or profession" as per Explanation (baa) below Section 80HHC (4B) could be considered for the purposes of deduction Under Section 80HHC. As the interest earned on FDRs had no connection with the export business, the learned DR pleaded, while placing reliance on the decision of apex Court in the case of CIT v. Sterling Foods 273 ITR 579 (SC), that only the income in relation to export business could be included. Since the interest income from FDRs had no immediate connection with the export business third DR urged that same could not fall under the head "business income". In his final sumbmission, it was stated that as the interest earned on FDR was not falling under the head "business income", the AO had rightly excluded the entire amount of interest while computing deduction Under Section 80HHC.12. On the other hand, the learned counsel for the assessee supported the action of CIT(A). A further plea was raised that as the AO in A.Y.1993-94 has not seperately 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.
13. Having heard the rival submissions and perused the relevant material on record, it is noticed that the AO 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 80 HHC, against the assessee's claim of including net interest income of Rs. 21.28 lacs in the "profits of the business" for the purposes of deduction Under Section 80 HHC. The claim of the assessee is that the interest earned en FDRs is "business income" and hence, net interest income is liable to be considered in the "profits of the business", whereas the AO has held it to be Income from other sources". It has been noted by us in one of the proceeding paragraphs that if the interest income is held to be falling under the head Income from other sources" then it is not to be included in the "profits of the business" and in the converse case it will be included and further deduction of 90% will be allowed. Now we have to decide the question as to under which head of income would interest income fall.
14. The Kerala High Court in the case of Collis Line Pvt. Ltd. v. ITO (1932) 135 ITR 390 has laid down that when the assessee was engaged in the main business of shipping, the money which was lying idle and was invested in bank, the interest thereon should be assessed as "Income from other sources". To similar effect is the decision of the Hon'ble Madras High Court in the case of South India Shipping Corporation Ltd. v. CIT (1999) 240 ITR 24 (Madras) where it was laid down as under:- As noticed earlier, the income is required to be brought under one or the other heads, having regard to the manner in which it has been earned, or received) the interest received on bank deposits cannot be treated as profits or gains received from carrying on business and once it is not capable of being treated as business income) it has necessarily to be treated as income received from other sources) and taxed accordingly.Murli Investment Company v. CIT (1987) 167 ITR 369 has laid down that the activity indulged in by the assessee did not constitute money lending business since the assessee merely invested its funds when they were not required for the time being and, therefore, the interest earned by the assessee has held to be assessable as "Income from other sources" and not as business income.
15. Admitedly, the assessee is engaged in the business of export and no part of its activity relates to the money lending business. When some surplus money lying idle is invested by a businessman in the bank, not as a business but as investment of surplus funds, the interest so earned is not received in the course of business so as to make it part of "business income." It would be his 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 (sic) crores that interest of Rs. 25.43 lacs 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 80 HHC in view of Explanation (baa).
17. The Hon'ble Kerala High Court in the case of Nanji Topan Bhai and Company v. ACIT has laid down that when the assessee was carrying on export business, the interest received by the assessee from the fixed deposits would not be treated as business income but income from other sources. It was, therefore, laid down that the assessee was not entitled to deduction Under Section 80 HHC in respect of such interest. Similarly in CIT v. Ravi Ratna Exports Pvt. Ltd. (Bombay) it was held that since the AO had recorded a finding of fact that the interest income from fixed deposits was "Income from other sources", therefore, it could not be taken into account for purposes of computation of deduction Under Section 8O HHC.To similar effect is the decision of Bombay Bight Court in the case of CIT v. S.G. Jhaveri Consultancy Ltd., in which it was laid down that the business profits in the formula did not include receipts by way of brokerage, commission or interest etc. as they did Rot have any nexus with the sale of profits from export activity. These items were, therefore, held to be not includible for computing profits of the business Under Section 80 HHC.18. Now, we will deal with the contention of the assessee's counsel that since the AO had not specifically computed any income falling under the head "Income from other sources" while computing the total income of the assessee, therefore, it cannot be deducted from business income while computing deduction Under Section 80 HHC. After going through the assessment order, it is noted that the AO has given a categorical finding in para 3 page 2 that the interest income of Rs. 25,43,635/- was nothing but income from other sources. At the time of computing the total income of the assessee, the AO at page 4 proceeded with the figure of net profits as per profit and loss account and after making certain adjustments computed the total income. He has not bifurcated the total income under any seperate heads being either "business income" or "Income from other sources." Thereafter, he computed deduction Under Section 80 HHC as under:-Business income, as worked out above 5,16,39,180/-Income from other sources 26,22,096/-Less: 90% of incentives under 4,90,17,084/-clause (iiia),(iiib) (iiic) of 2,07,64,006/-Section 28.
2,82,53,078/-Add 90 of incentives, as above 2,07,64,006/-Allowable deduction Under Section 80 HHC. 4,90,17,084/------------------------------------------------------------------ From this working, it is clear that he has deducted Rs. 26,22,096/- from the business income by specifically mentioning it as "Income from other sources". It thus, shows that he was very much conscious of assessing the interest income under the head "Income from other sources' The contention of the assessee that the AO had treated this interest income also as business income and, therefore, it was not deductible at this time of computing deduction Under Section 80 HHC, is devoid of merits for the reason that it is not each and every income falling under the head "business income" which qualifies for deduction Under Section 80 HHC. It is clear that this deduction has to be allowed only in respect of the profits from export business.
19. Section 80 HHC(3)(a) stipulates the manner in which profits derived from such export are to be worked out. A formula has been prescribed which is applicable in case of export out of India of goods manufactured etc. by the assessee. This formula is as under:-Profits of the business x Export turn over Total turn over "Profits of the business" in turn are defined in Explanation (baa) to Section 80HHC. As the (sic) under section Under Section HHC is allowed only on account of the profits from exports? the reference to the income under the "business income" in Explanation (baa) is to the income falling under this head on account of exports only. No other income, even if falling under the head "business income" can be considered while allowing deduction on account of export profits Under Section 80 HHC taking a simple case where the assessee, in addition to export of goods is also engaged in the money lending business. The interest income earned from such money lending business, would no doubt fall under the head "business income" but that cannot be included in the "business income" while computing the "profits of the business" in terms of Explanation (baa) for the purposes of Section 80 HHC. It therefore, follows that only the "business income" in relation to export business is to be considered for computing deduction Under Section 80 HHC. Coming to the facts of the present case, it is seen that the AO 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 assesssee. 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 80 HHC 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 AO 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, the AO cannot be precluded from determining the quantum of deduction Under Section 80HHC by excluding the interest income.
21. In the light of the position discussed above, we are of the considered opinion that the interest income earned on FDRs was taxable under the head "Income from other sources" and the AO was justified in excluding the same from the 'profits of the business' while computing deduction Under Section 80HHC. As such, the action of the OD this issue is reversed and the appeal is allowed.
22. In the result, the appeals for both the assessment years are allowed.
23. After going through the proposed order and having discussion with my learned Brother, it is not possible for me to agree with the following conclusions arrived at by him in ITA No. 739/Del/96 for asstt. year 1992-93:- (1) That the word 'receipts' appearing in clause of Explanation below sub Section 4B of Section 80HHC means gross receipts and not the met receipts.
(2) That interest on deposits with he bank received by assessee cannot be netted against the interest paid by it on its borrowings in as much as interest received is not inextricably linked with the interest paid. Accordingly, I proceed to express my reasons for dissent.
24. Before expressing my reasons, it would be useful to refer to the brief facts of the case as gathered from the orders of AO and CIT(A).
The assessee was engaged in the business of export and, therefore, was entitled to deduction Under Section 80HHC. The assessee had claimed such deduction at Rs. 2,45,03,993/-. In the course of asstt.
proceedings, it was found by AO that assessee had earned interest on FDRs with bank amounting to Rs. 1,89,048/-but the same was not reflected in the profit and loss account. In the P & L account, the assessee had shown expenditure on account of interest paid to bank at Rs. 3,37,768/-. However, in the audit report, it was mentioned that the sum of Rs. 3,37,768/- was arrived at after adjusting the interest received by the assessee on FDRs. The AO while computing the profits of business as per clause (baa) of the said Explanation, reduced the sum equal to 90% of the interest received of Rs. 1,89,048/- from the business profits and then computed the eligible deduction Under Section 80HC. This action of AO 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 AO. The CIT(A) was view that he activities of bank loan and deposit with inter-linked in as much as borrowed funds had been utilised purchase the FDRs. Hence, the net amount of receipt or payment should be considered. Since in the asstt. 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.
25. 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 80HC 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) ninety per cent of any sum referred to in clauses (iiia), (iiib) and (iiic) of Section 28 or any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits; and (2) the profits of any branch, office, warehouse or any other establishment of the assessee situate outside India; The perusal of this clause shows that the profits of business are first to be computed under the head "Profits and gains of the business or profession". Such profits are then to be reduced by 90% of any sum specified in three clauses of Section 28 or of any other receipts by way of brokerage, commission, interest, rent, charges or any other receipt of similar nature which are included such profits. Thus the bare reading of such provisions clearly shows that the receipts to be deducted are controlled by the words "included in the profits". It is a sound principle of accountancy that the profits represents the difference between the receipts and the expenses of a business. Once the gross receipts and gross expenses are transferred to Profit and Loss account, they loose their character and what remains is the net difference in the form of profits or losses, as the case may be.
Therefore, what is included in the profits is the net receipt and not the gross receipts. The word "receipts' cannot be considered in isolation but has to be construed in the context in which it is used.
The legislature has made it clear beyond doubt that receipts to be deducted should be that which is included in the profits. It is a settled rule of interpretation that provisions of a statute should be construed harmoniously and reasonably so that the object of the enactment is achieved and not in the manner which defeats the object.
If so read, then, in my considered opinion, the only conclusion would be that it is the net receipt which should be deducted and not the gross receipt.
26. If the gross receipts are held to be deductible then in my opinion, it would produce the absurd result. For example, take the case of an assessee who carries on the business of part as well as business of procuring orders for others on commission basis through sub agents. For this purpose, let me assume that such assessee receives the gross commission of Rs. 1 lac but in turn spends Rs. 80,000/- as commission to sub agents. Thus, it is only the net sum of Rs. 20,000/- which is earned on account of commission basis. In addition, he also earns business profits of Rs. 1 lac from export business. Thus the total business profits would come to Rs. 1,20,000/-. If 90% 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/- If 90% of Rs. l lac), even though eligible export profits would otherwise have been Rs. 1 lac 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 legistlature. On the contrary, if 90% 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 lac. Therefore, in my view, the deduction of 90% of net receipt would be in consonance with the intention of the legislature.
27. The view which is expressed by me is also fortified by the various decisions of the Tribunal that is in the case of (sic) Chhota Lal, 68 ITD 395 (Mumbai), Khemji Hansraj, 69 ITD 322 (Cal), Pink Star, 72 ITD 137 (Mumbai). It would be useful to refer the relevant observations of the Tribunal in the case of Pink Star (supra) at page 141 of the reports as under: From the meaning of the terms profits of the business given in clause (baa) of the Explanation to Section 80HHC, it is clear that profit of the business first has to be computed under the head Profits and gains of business or profession. Having done so, the profit so determined has to be reduced by the sums specified in sub-section (1) and (2). It is obvious that when profit is determined under the head 'Profits and gains of business or profession', what are included in it are the net receipts of the various components that go to make the profit under that head. The object of reducing the profits by the sums specified in sub-sections (1) and (2) is to determine the actual profit earned by the assessee on the manufacture/processing and selling of goods, from which, in turn, export profit will be carved out as per clause (a) of sub-section (3). Thus if the profits of business include certain receipts which have corresponding costs, or if the profits include certain credits and the business also has debits of the same nature, if these are not netted out against each other, the profits of business will present a distorted picture and may lead to injustice while implementing an incentive provision.
It is, therefore, held that while computing the profits of business as per clause (baa) of the Explanation below sub Section 4B of Section 80HHC, it is 90% of the net receipts which are to be deducted from the profits as computed under the head "Profits and gains of the business or profession' and not the gross receipts.
28. Having held that it is the 90% of the net receipt which is to be deducted, the next question is whether the interest paid (sic) adjusted against the interest receipt for the purpose of inputing profits of business Under Section 80HHC. The finding of my learned brother is that for the purpose of netting the interest (sic) must be inextricably linked with the earning of the interest. Reliance has been placed by him on the decision of the Hon'ble Supreme Court in the case of Gopinathan, 248 ITR 449. In my view, such finding is unwarranted and the reliance placed on the case law is misplaced.
29. To appreciate the controversy, it would be useful to refer to certain details of the Hon'ble Supreme Court in the case of Tuticorin Alkalies Chemicals and Fertilizers Ltd., 227 ITR 172. 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 the apex court by 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 placement of business.
30. The other decision of the Supreme Court is in the case of Bokaro Steels, 102 Taxman 94. In that case, the assessee was in the process of constructing its factory and installation of (sic) that period, it had given interest bearing advances to the contractors so that the contractors did not have to raise funds from outside agencies. The question was whether such interest reciepts could be chargeable to tax or could be capitalised without paying any tax. The Hon'ble Supreme Court distinguishing its earlier decision in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (Supra) held as under: However, while interest earned by investing borrowed capital in short term deposits is an independent source of income not connected with the construction activitied or business activities of the assessee, the same cannot be said in the present case whether the utilisation of various assets of the company and the payments received for such utilisation are directly linked with the activity of setting up the steel plant of the assessee. These receipts are inextricably linked with the setting up of the capital structure of the assessee-company. They must, therefore, be viewed as capital receipts going to reduce the cost of construction.
31. Further, referring to the decision of the Supreme Court in the case of Challapali Sugars Ltd. v. CIT , their Lordships 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 the commencement of production on such borrowed money can be capitalised and added to the cost of the fixed assets created as a result of such expenditure. By the same reasoning if he assessee receives any amounts which are (sic) linked with the process of setting (sic) plant and machinery, such receipts will go to (sic) the cost of its assets. These are receipt of a capital nature and cannot be taxed as income.
The combined reading of both the paras quoted above cleared show that inextricably linked has been referred to the business activities carried on by the assessee and not the activity of interest paid and interest received. It may be usefully noted that in the above case money was not borrowed for advancing loans but was borrowed for the purpose of business. The Court has specifically observed that utilisation 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.
33. Similar view has been taken by the Tribunal Mumbai Bench in the case of Pink Star (supra). 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 AO, while computing business profits Under Section 80HHC, deducted 90% of Rs. 1.97,500/- which was agitated by the assessee in appeals. The Tribunal after discussing the various Supreme Court judgements netting of such interest in as much as interest paid on. Interest received ware linked with the business activity of 34. The decision of Hon'ble Supreme Court in the case of (sic) 248 ITR 449 relied on by my learned Brother is quite distinguishable. In that case, the assessee had certain fixed deposits with the bank on which he earned interest of Rs. 1,17,444/-. On the security of the amount so deposited, the assessee took loan from the bank and paid in respect of the loan, interest of Rs. 90,410/-. The interest paid was claimed as deduction against the interest income. Such claim was rejected by the lower authorities. Finally, the Supreme Court decided the issue against the assessee in as much as the interest paid on loan could not be considered as an expenditure for earning of the income Under Section 57(iii). At this stage, it is to be noted that there is difference in the criteria for claiming deduction Under Section 57 and the criteria for claiming deduction Under Section 36 or 37 of 1961 Act. In the case of the former, the expenditure must be incurred for earning of income and, therefore, there must be direct link with interest bearing loan and its utilisation for earning of the income. But in the case of latter, it is sufficient if the money borrowed is utilised for the purpose of business irrespective of any earning. The Supreme Court was concerned with the deduction Under Section 57 where the borrowed funds were not utilised for earning of bank interest but we are concerned, with a case where the interest paid and interest received are directly linked with business activity carried on by the assessee and, therefore, it would be governed by the later decision of the Hon'ble Supreme Court in the case of Bokaro Steels (supra). Consequently, it has to be held that the aforesaid decision of the Supreme Court in the case of Gopinathan(supra) is quite distinguishable.
35. In view of the above discussion, it is held that interest paid and interest received is to be netted for the purpose of computing business profits Under Section 80HHC if such payment and receipt are directly linked with the business activity of the assessee. In the present case, there is no dispute of the fact that interest received was part of the business income as is apparent from the fact that the interest paid and interest received forms part of the P&L account and the AO himself has proceeded on that footing. Therefore, it follows that the interest received and interest paid were directly linked with the business 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 in as much 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 asstt. year 1993-94.
In the result, appeal of the revenue for asstt. year 1992-94 as hereby dismissed while the appeal for asstt. year 1993-94 stands allowed.