TMI Blog2005 (9) TMI 243X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... intained. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pression "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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wing 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 (C) That the (sic) of mutual dealings could be inferred. 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 [2001] 248 ITR 449 (SC) 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, show ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... axpayer 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 Corpn. of Kerala Ltd. [2001] 247 ITR 155 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." ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is 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 tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cluded 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 [2000] 243 ITR 192 has laid down that when the assessee was carrying on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 28. ------------ Profit from export business 2,82,53,078 Add: 90% of incentives, as above 2,07,64,006 ------------ Allowable deduction under 4,90,17,084 section 80HHC ------------ 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 applicab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luding 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. Per Shri K.C. Singhal, Judicial Member .- 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 (bad) 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. Accordingly, I proceed to express my reaso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... okerage, 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 outsideIndia;" 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 cast-may be. Therefore, what is included in the profits is the net receipt and not t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raj 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 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 subsection (3). Thus, if the profits of business include certain receipts which have corresponding costs, or if the profits include certain credits and the busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss of constructing its factory and installation of plant during that period, it had given interest bearing advances to the contractors so t hat 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, 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 Chall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertain 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, 1 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. In respect of the issues other than the principle of netting of the interest paid and received, the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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