Judgment:
1. These two appeals by the revenue are directed against the common order passed by the CIT(A) on 24-11-1995 in relation to assessment years 1992-93 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 project the grievance of the revenue as under :- 1. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in directing the Assessing Officer to treat 10 per cent of the interest income as business income for allowing deduction under Section 80HHC of the Income-tax 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 erroneous in law and on facts of the case, the same may be set aside and the order of DC(A) may be restored to file.
3. Briefly stated the facts of the case are that the assessee in its return for assessment year 1993-94 claimed deduction under Section 80HHC at Rs. 4,94,74,784 against the net profit of Rs. 5,14,49,903.
While computing deduction, the assessee excluded 90 per cent of miscellaneous income comprising of interest (net) and rent. Similarly for assessment year 1992-93, the assessee excluded 90 per cent of miscellaneous income which come to Rs. 69,154 while computing the deduction under Section 80HHC. For assessment year 1992-93 nothing was excluded on account of interest received on bank FDRs for the reason that the bank interest debited to the profit and loss account amounting to Rs. 3,37,767 was after adjusting the interest received amounting to Rs. 1,89,048. In other words, as the interest paid to bank was more than the interest earned on FDRs, nothing was excluded on account of interest while computing deduction under Section 80HHC. For assessment year 1993-94, the assessee earned interest on bank FDRs, amounting to Rs. 25,43,635 and after deducting 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 per cent of the net miscellaneous income was deducted while computing deduction under Section 80HHC. The Assessing Officer was not satisfied with the computation of deduction claimed by the assessee under Section 80HHC in both the assessment years. The Assessing Officer opined that for assessment year 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 assessment year 1993-94, the Assessing Officer vide para 3 of the assessment order, noted that the assessee had earned bank interest of Rs. 25.43 lakhs as against the payment of interest of Rs. 4.15 lakhs 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 Rs. 25,43,635 was income under the head "Income from other sources". Placing reliance on 189 ITR 370 and 190 ITR 359, the Assessing Officer-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 preceding years, i.e., assessment years 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 Assessing Officer on the basis of 'principle of consistency' and directed the Assessing Officer 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 Assessing Officer and contended that the learned CIT(A) had fallen in error in so directing the Assessing Officer 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 first 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 per cent for computing deduction under Section 80HHC and there was no point in computing deduction on the basis of gross interest received on FDRs. A further submission was raised that as the case of the assessee was accepted by the revenue on similar lines in earlier years, so there could not be any deviation from the earlier stand of the revenue. The learned Counsel further placed reliance on the decision of Honda Siel Powers Products Ltd. v. Dy. CIT[2001] 77 ITD 123 (Delhi) in support of his claim. It was, therefore, submitted that there was no infirmity in CIT(A)'s order calling for interference.
6. We have considered the rival submissions in the light of material placed before us and precedents relied upon. Insofar as the assessment year 1992-93 is concerned, it is seen that the Assessing Officer excluded 90 per cent of the interest received on FDRs while computing the 'profits of the business' as against the action of the assessee in showing nil income on account of interest on the ground that the interest paid to bank was more than the interest received on FDRs. It thus, means that the Assessing Officer treated the gross interest income to be falling under the head "Business income", but excluded 90 per cent 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 profit derived from export shall be the amount which bears to the "profits of the business", the same proportion as the export turnover bears to the total turnover.
Explanation (baa) below Sub-section (4B) of Section 80HHC defines "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 sum 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; [Emphasis supplied] A bare perusal of this Explanation reveals that out of income under the head "Business income", 90 per cent of the export incentive as referred to in Section 28(iiia), (iiib) and (iiic) together with 90 per cent of interest, etc. are to be excluded in order to determine the "profits of the business". Insofar as 90 per cent 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 means that if interest income falls under the head "Business income" only then its 90 per cent 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 per cent will be allowed. The expression "included in such profits" is clear indicator in this regard. The word "profit", in simple terms, means excess of income over expenditure. The figure of "profit", therefore, represents the difference between all the items taken together shown on income side and all the items taken together shown on the expenditure side. It means that all the credit as well as debit items, whether shown on gross or net basis, from part of the term "profits", inasmuch as it is nothing but representative of all the debit and credit items comprised in it and all the items individually stand included in. If instead of showing interest income separately on the credit side, the assessee opts for showing net interest to the debit side of its profits and loss account, it cannot be said that it has not earned any interest income. The quantum of deduction under Section 80HHC, by virtue of the provisions of Explanation(baa), cannot be varied on account of recording of interest income in a particular manner by the assessee in its accounts.
8. That apart, the claim of the assessee of taking net interest for computing profits of the business for deduction under Section 80HHC 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 inextricably related to each other 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 between the freight receipts and the expenses necessary to earn freight, such as cost of diesel, repairs and maintenance of 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 touchstone 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 Asstt. CIT v. Sharda Gums & Chemicals, Industrial Area [2001] 76 ITD 282 has decided the issue of netting of bank interest for the purposes of deduction under Section 80HHC in favour of the assessee. 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 Kerala High 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 percent of 'Receipts' of interest and rent, etc., which are included in the "business income". There is a palpable distinction between the words "receipt" and "income". Where 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 lakhs, it cannot be said that it has not received such interest on FDRs merely because of the fact that the interest paid on account of user of credit facilities by it was more than 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 : 115 Taxman 202. on the interpretation of the provisions, has laid down as under:- In this process Courts must adhere to the words of the statute 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 then to apply that meaning to the facts of the case and in that process if the taxpayer is brought within the net, he is caught, otherwise he has to go free.
12. The Apex Court in still another recent case of CAIT v. Plantation Corporation of Kerala Ltd. [2001] 247 ITR 155 : 114 Taxman 103. was dealing with the interpretation of Explanation to provision in the context of Agricultural Income-tax Act. It was noted by it that Explanation is intended to either explain the meaning of certain phrases and expressions contained in a statutory provisions or depending upon its language it might supply or take away something from the contents of the provisions and at times even, by way of abundant caution, to clear any mental cobwebs surrounding the meaning of a statutory provision spun by interpretative process to make the position beyond controversy or doubt. It was held "this Court has always been reiterating that if the intendment is not in the words used it is nowhere else and so long as there is no ambiguity in the statutory language, resort to any interpretative process to unfold the Legislative intent becomes impermissible and the need for interpretation arises only when the words in the statute are on their own terms ambivalent and do not manifest the intention of the Legislature." 13. In the light of this legal position where we are also dealing with the interpretation of an Explanation, 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 import 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 now, we are of the considered opinion that there is no 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 matters. The Hon'ble Supreme Court in ITO v. Murlidhar Bhagwan Das held that the decision of the ITO given in a particular year did not operate as res judicata in the matter of assessment of subsequent years. Later on, the Apex Court in M.M. Ipoh v. CIT 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 & 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 claim 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 Assessing Officer's action in assessment year 1992-93 on this issue without appreciating the correct legal position in this regard. As such, the appeal of the revenue for assessment year 1992-93 is allowed.
16. Now coming to assessment year 1993-94, the point which falls for our adjudication is that whether the deduction under Section 80HHC was rightly disallowed on the entire interest earned on FDRs by the Assessing Officer, treating the same to be falling under the head "Income from other sources". The Assessing Officer noted that the assessee earned interest of Rs. 25.43 lakhs from the bank on FDRs, whereas the interest paid to the bank was only Rs. 4.15 lakhs. The Assessing Officer had held that the earning of interest on deposits with the bank had no relation with assessee's business of export, and as such, it was (sic) falling under the head "Income from other sources" and computed deduction under Section 80HHC by excluding entire interest. The learned CIT(A) reversed the action of the Assessing Officer on the same reasoning as in assessment year 1992-93. Before us, it was contended by the learned DR, that the Assessing Officer had 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 to Rs. 4.15 lakhs, the assessee had earned bank interest of Rs. 25.43 lakhs. Placing reliance on the decision of the Apex Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT the learned DR contended that the interest earned on FDRs 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 assessee to lend money and, therefore, the interest earned on FDRs was rightly placed by the Assessing Officer under the head "Income from other sources". On a specific query raised from Bench as regards the fact that the Assessing Officer, while computing the total income, had not shown interest income under the separate head "Income from other sources", the learned DR submitted that the Assessing Officer had specifically dealt with the issue at page 2 para 3 wherein he clearly held that this income to be taxable under the head "Income from other sources". It was also pointed out that though, the Assessing Officer 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, and 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 [2005] 273 ITR 579, 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, the ld. DR urged that the same could not fall under the head "Business income". In this final submission, it was stated that as the interest earned on FDR was not falling under the head "Business income", the Assessing Officer had rightly excluded the entire amount of interest while computing deduction under Section 80HHC.17. On the other hand, the learned Counsel for the assessee supported the action of CIT(A). A further plea was raised that as the Assessing Officer in assessment year 1993-94 has not separately included interest on FDRs under the head "Income from other sources" while computing total income, so there was no point in treating the said income under that head for computing deduction under Section 80HHC. In the final analysis, the learned Counsel supported the action of the first appellate authority on this issue.
18. Having heard the rival submissions and perused the relevant material on record, it is noticed that the Assessing Officer in the present assessment year held the entire interest income earned from bank FDRs to be falling under the head "Income from other sources" and, hence, ineligible for deduction under Section 80HHC, against the assessee's claim of including net interest income of Rs. 21.28 lakhs in the "profits of the business" for the purposes of deduction under Section 80HHC. The claim of the assessee is that the interest earned on FDRs is "business income" and hence, net interest income is liable to be considered in the "profits of the business", whereas the Assessing Officer has held it to be "income from other sources". It has been noted by us in one of the preceding 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 per cent will be allowed. Now we have to decide the question as to under which head of income would interest income fall.Collis Line (P.) Ltd. v. ITO . 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 . 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 Co. v. CIT [1987] 167 ITR 368 : 31 Taxman 410. 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 was held to be assessable as "Income from other sources" and not as "business income".
20. Admittedly, 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 thus shows that interest of Rs. 25.43 lakhs earned on the FDRs by the assessee was its income falling under the head "Income from other sources". Hence, we are satisfied that the interest earned by the assessee on the FDRs was rightly taken by the Assessing Officer as "Income from other sources". Once an item of income does not fall under Chapter IV-D, i.e., "business income", the same cannot be included in the profits of the business for computing deduction under Section 80HHC in view of Explanation (baa).
21. The Hon'ble Kerala High Court in the case of Nanji Topanbhai & Co.
v. Asstt. CIT . 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 80HHC in respect of such interest. Similarly in CIT v. Ravi Ratan Exports (P.) Ltd. it was held that since the Assessing Officer 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 80HHC.To similar effect is the decision of Bombay High 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 not 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 80HHC.22. Now, we will deal with the contention of the assessee's counsel that since the Assessing Officer 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 80HHC. After going through the assessment order, it is noted that the Assessing Officer 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 Assessing Officer 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 separate heads being either "Business income" or "Income from other sources." Thereafter, he computed deduction under Section 80HHC as under :-Less: Deduction under Section 80HHC Rs.Business income, as worked out above 5,16,39,180Less : Income from 'other sources' 26,22,0964,90,17,084Less : 90% of incentive under clauses 2,07,64,006(iiia), (iiib), (iiic) of Section 28.Profit from export business 2,82,53,078Add: 90% of incentives, as above 2,07,64,006Allowable deduction under Section 80HHC 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 Assessing Officer had treated this interest income also a business income and, therefore, it was not deductible at the time of computing deduction under Section 80HHC, 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 80HHC. It is clear that this deduction has to be allowed only in respect of the profits from export business.
23. Section 80HHC(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", in turn are defined in Explanation(baa) to Section 80HHC. As the direction works under Section 80HHC 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 80HHC. 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 80HHC. It, therefore, follows that only the "business income" in relation to export business is to be considered for computing deduction under Section 80HHC. Coming to the facts of the present case, it is seen that the Assessing Officer held interest income to be falling under the head "Income from other sources" because it was earned by investing surplus funds in FDRs which had no link with the export business of the assessee. Even if he computed gross total income without specifically dividing it under different heads of income, but at the same time recorded a categorical finding in his order to the effect that the interest income fell under the head "Income from other sources" and also while computing deduction under Section 80HHC specifically deducted interest income by showing it as "Income from other sources", it cannot come in the way of his action in not allowing deduction under Section 80HHC on interest income. So long as there is some positive finding of the Assessing Officer in the assessment order to the effect that the interest income falls under the head "Income from other sources", which is based on correct appreciation of the facts, the Assessing Officer cannot be precluded from determining the quantum of deduction under Section 80HHC by excluding the interest income.
24. 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 Assessing Officer was justified in excluding the same from the 'profits of the business' while computing deduction under Section 80HHC. As such, the action of the CIT(A) on this issue is reversed and the appeal is allowed.
25. In the result, the appeals for both the assessment years are allowed.
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 assessment year 1992-93 :- (1) That the word 'receipts' appearing in Clause (baa) of Explanation below Sub-section (4B) of Section 80HHC means gross receipts and not the net receipts.
(2) That interest on deposits with the bank received by assessee cannot be netted against the interest paid by it on its borrowings inasmuch as interest received is not inextricably linked with the interest paid.
27. Before expressing my reasons, it would be useful to refer to the brief facts of the case as gathered from the orders of Assessing Officer 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 assessment proceedings, it was found by Assessing Officer 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 profit and loss 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 Assessing Officer while computing the profits of business as per Clause (baa) of the said Explanation, reduced the sum equal to 90 per cent of the interest received of Rs. 1,89,048 from the business profits and then computed the eligible deduction under Section 80HHC. This action of Assessing Officer was disputed before the CIT(A). The CIT(A) found that assessee had been showing the net interest in the past years also and such system had been accepted by the Assessing Officer. The CIT(A) was also of the view that the activities of bank loan and deposit with banks were inter-linked inasmuch as borrowed funds had been utilised to purchase the FDRs. Hence, the net amount of receipt or payment should be considered. Since in the assessment year 1992-93, the payment of interest was much more than the interest received, it was held by the CIT(A) that there was no question of any reduction on this account from the business income. Aggrieved by the said order, the revenue is in appeal before the Tribunal.
28. As far as the first finding is concerned, the controversy relates to the interpretation of Clause (baa) of the Explanation below Sub-section (4B) of Section 80HHC which defines "profits of business".
For the benefit of this order, the said clause is reproduced as under : "'profits of business' means the profits of the business as computed under the head 'profits and gains of business or profession' as reduced by: (1) ninety per cent of any sum referred to in Clauses (iiia), (iiib) and (iiid) 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 business or profession". Such profits are then to be reduced by 90 per cent 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 in 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 represent 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.
29. 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 export 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 lakh 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 lakh from export business. Thus, the total business profits would come to Rs. 1,20,000. If 90 per cent of the gross receipts are allowed to be deducted then the profits of business eligible for deduction under Section 80HHC, would come to Rs. 30,000 only (Rs. 1,20,000 - 90% of Rs. 1 lakh), even though eligible export profits would otherwise have been Rs. 1 lakh if commission business had not been carried on by the assessee. In my considered opinion, the intention of the Legislature is not to take away the incentive which otherwise assessee is entitled to. Therefore, such an absurd result cannot be attributed to the intention of the Legislature. On the contrary, if 90 per cent of the net receipts is deducted then the eligible export profits would come to Rs. 1,02,000 (Rs. 1,20,000 - 90% of Rs. 20,000) which does not disturb the eligible export profits of Rs. 1 lakh. Therefore, in my view, the deduction of 90 per cent of net receipt would be in consonance with the intention of the Legislature.
30. The view which is expressed by me is also fortified by the various decisions of the Tribunal, that is, in the case of Kantilal Chhotalal v. Dy. CIT[1999] 68 ITD 395 (Mum.), Khimjee Hunsraj v. Dy. CIT [1999] 69 ITD 322 (Cal.), Pink Star v. Dy. CIT[2000] 72 ITD 137 (Mum.). It would be useful to refer the relevant observations of the Tribunal in the case of Pink Star (supra) 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-sections (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 provisions." (p. 141) 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 per cent 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.
31. Having held that it is the 90 per cent of the net receipt which is to be deducted, the next question is whether the interest paid was to be adjusted against the interest receipt for the purpose of computing profits of business under Section 80HHC. The finding of my learned Brother is that for the purpose of netting the interest paid 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 CIT v. Dr. V.P. Gopinathan finding is unwarranted and the reliance placed on the case law is misplaced.
32. To appreciate the controversy, it would be useful to refer to certain details of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd.(supra). 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 commencement of business.
33. The other decision of the Supreme Court is in the case of CIT v.Bokaro Steel Ltd. [1999] 102 Taxman 94. In that case, the assessee was in the process of constructing its factory and installation of plant during 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 receipts 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 activities 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.
34. Further, referring to the decision of the Supreme Court in the case of Challapalli Sugars Ltd. v. CIT , their Lordships observed as follows : 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 the assessee 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.
35. The combined reading of both the paras quoted above clearly shows 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.
36. 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 Assessing Officer, while computing business profits under Section 80HHC, deducted 90 per cent of Rs. 1,97,500 which was agitated by the assessee in appeals. The Tribunal after discussing the various Supreme Court judgments allowed, the netting of such interest inasmuch as interest paid for interest received were linked with the business activity of the assessee.CIT v. Dr.
V.P. Gopinathan . 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 inasmuch 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 covered by the later decision of the Hon'ble Supreme Court in the case of Bokaro Steel Ltd. (supra). Consequently, it has to be held that the aforesaid decision of the Supreme Court in the case of Dr. V.P. Gopinathan (supra) is quite distinguishable.
38. 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 profit and loss account and the Assessing Officer 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 inasmuch as interest income has been held to be income from other sources, and consequently, such income was bound to be excluded from the business income. It is on this basis I have agreed with the finding of my learned Brother for assessment year 1993-94.
39. In the result, appeal of the revenue for assessment year 1992-93 is hereby dismissed while the appeal for assessment year 1993-94 stands allowed.
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 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. Dy. CIT [2004] 89 ITD 25 (Delhi), 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' case (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. Sorabji v. ITO [2005] 95 ITD 540 (Mum.), in the light of the judgment of the Supreme Court in case of IPCA Laboratory Ltd. v. Dy. CIT . 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 B. Sorabji (supra) held that Lalsons Enterprises' case (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 IPCA Laboratories Ltd. (supra) did not deal with that question and, therefore, no doubts had been expressed about the correctness of Lalsons Enterprises' case (supra) on this question. Therefore, so far as the principle of netting is concerned, Lalsons Enterprises' case (supra) continues to be applicable.
4. The matter will now go to the regular Bench for being decided in accordance with the majority.