TMI Blog2010 (1) TMI 851X X X X Extracts X X X X X X X X Extracts X X X X ..... evan, JJ. S.E. Dastur for the Appellant Ajaykumar Srivastava and S.S. Rana for the Respondent ORDER R.S. Syal, Accountant Member:- 1. The Hon'ble President of the Income-tax Appellate Tribunal has constituted this Special Bench and posted the following question for our consideration and decision:- "Whether, in the facts and circumstances of the case, assessee is entitled for deduction under section 80P(2)(a)(i) on the interest received under section 244A of the Act on the refund of tax." 2. All the grounds raised by the assessee in its appeal involve only one issue, being the denial of deduction under section 80P on the amount of interest on income-tax refund. The factual matrix of the case is that the assessee, a Co-operative Bank, filed its return declaring total income at Rs. Nil claiming deduction under section 80P for the entire amount of gross total income. The return was processed under section 143(1). Subsequently it was noted by the Assessing Officer that the assessee had received interest under section 244A amounting to Rs. 34,33,50,201 which was included in its total income under the head of income from business and deduction was claime ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion under section 80P(2) in respect of income from house property, thereby allowing the finality to attach to the assessment order on that score. The learned CIT(A) did not accept the arguments advanced on behalf of the assessee on the question of deduction under section 80P on the amount of interest on Income-tax refund. The sum and substance of his three-fold finding was as under:- (i) Interest under section 244A did not fall under the head "Profits and gains of business or profession" as the amount of income-tax represented application of profit after they had been earned. In order to constitute business income it was necessary that the investment, which yields interest, must be done in the regular course of business. The interest was, therefore, to be assessed under the head 'Income from other sources'. (ii) The expression used in section 80P(2)(a) is "attributable to". The Hon'ble Supreme Court in the case of India Leather Corpn. (P.) Ltd. v. CIT [1997] 227 ITR 552 has held that in order that an income could be said to be attributable to manufacture or processing of goods, the earning of income must be directly connected with the manufacture or process of goods. As pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al was a substantial question of law and rule of consistency could not bind the Revenue from assailing the correctness of the earlier view in the subsequent proceedings. He relied on the judgment of the Hon'ble Supreme Court in the case of CIT v. Oswal Agro Mills Ltd. [2009] 313 ITR 24 in support of the proposition that rule of consistency was not applicable in respect of substantial question of law. 4.3 We have cogitated the rival submissions in the light of precedents relied upon by both the sides on this preliminary issue. The view canvassed by the ld. AR is that since the Tribunal in assessee's own case for the succeeding year, on the similar facts, had decided the issue in its favour, so now there should be inhibition on the Department to reargue the matter as the principle of consistency comes into play. On the other hand, the ld. DR argued that the rule of res judicata does not apply in the Income-tax matters and each year is a separate and independent unit of assessment. He argued that the Department was entitled to argue the merits of the case since some of the important aspects of the substantial question of law involved in this appeal, were omitted to be raised and c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. Reliance Industries Ltd. [2004] 88 ITD 273 (Mum.)(SB). So when a matter is referred to the Larger Bench, the view earlier taken by the Division Bench ceases to be binding on the Special Bench though it retains the persuasive value. In view of the above discussed legal position we find that the action of the Division Bench in referring the matter for consideration by a Special Bench, is perfectly in order, as it found itself unable to agree with the earlier view taken by another Division Bench of the Tribunal in assessee's own case. This practice of making reference for the constitution of the Larger Bench is not confined only to the Tribunal but is prevalent in the Hon'ble Supreme Court and the Hon'ble High Courts as well. Recent example of making such reference to the Larger Bench by the Hon'ble Supreme Court is in the case of Union of India v. Dharmendra Textiles Processors [2008] 306 ITR 277 when the later Bench doubted the correctness of view expressed by the earlier Bench, on the same issue in Dilip N. Shroff v. Joint CIT [2007] 291 ITR 519 (SC). We, therefore, do not find any infirmity in the action of the DB in making reference for the constitution of the Special Bench w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be entitled to deduction on the whole of the amount of profits and gains of business attributable to the carrying on of the business of banking or providing credit facilities to its members. Thus it can be observed that the profits and gains which are attributable to the eligible business qualify for deduction under this section. The view point of the learned CIT(A) is that the interest on income-tax refund falls under the head "Income from other sources" and is, therefore, ineligible for deduction under section 80P because it cannot be said to be attributable to the banking business. In order to reach proper conclusion, we need to examine this controversy in following three parts:- I. Head of income under which interest on income-tax refund falls. II. Meaning of expression "profits and gains" of business as used in section 80P. III. Scope of phrase "attributable to" the eligible business. I. Head of Income under which interest on income-tax refund falls:- 7.1 The learned Sr. Counsel for the assessee submitted that the Assessing Officer passed order for assessment years 1986-87 to 1996-97 wrongly denying deduction under section 80P and collected tax of Rs. 105 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the order passed by the Special Bench of the Tribunal in Narang Overseas (P.) Ltd. v. Asstt. CIT [2008] 111 ITD 1 (Mum.)(SB) holding that the interest awarded on a capital receipt was also a capital receipt. Drawing strength from the ratio of these judgments/Tribunal orders, the learned A.R. stated that the refund of income-tax amounted to the restoration of its circulating capital and hence interest thereon would thus come under the head 'Profits and gains of business or profession'. He summed up his submission by stating that the assessee was carrying on banking business, in which money is always a circulating capital. The amount of tax wrongfully collected by the Revenue led to the deprivation of the use of its circulating capital and when the same was refunded, its original business character was restored and resultantly interest would also partake of the same character as that of the principal amount, being the circulating capital and hence such interest shall fall under the head 'Profits and gains of business or profession'. 7.2 In the opposition the learned Departmental Representative reiterated the reasoning given in the impugned order for holding that interest on inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... avancore Tea and Estates Ltd. [1994] 207 ITR 242 (Ker.) and Smt. B. Seshamma v. CIT [1979] 119 ITR 314 (Mad.) holding that the interest on income-tax refund was liable to be assessed as 'Income from other sources'. 7.3 Section 14 falling in Chapter IV provides that all income shall, for the purposes of charge of income-tax and computation of total income, be classified under the existing five heads of income. Each head further contains certain sections. In the present appeal we are concerned only with two heads of income. Chapter IV-D is the head 'Profits and gains of business or profession', which is spread over sections 28 to 44DB and Chapter IV-F is the head 'Income from other sources', which encompasses sections 56 to 59. There are some sections in this Chapter IV-D, which contain special provisions for computing profits and gains from certain specified categories of businesses. It is not the case that the assessee is covered under any of such special provisions. But for that, section 28 contains a list of income which shall be chargeable to tax under this head. This section contains clauses (i) to (vii). Clause (i), which is a general in nature, provides that "the profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 'Profits and gains of business or profession', it is imperative that income should have arisen from business carried on by the assessee and the business refers to a systematic real and some organized activity conducted with a view to earn income. 7.4 Now we have to determine as to whether the interest on income-tax refund can be said to be falling under the head 'Profits and gains of business or profession'. Before we advert to this question it is necessary to consider the nature of income-tax. For that purpose the judgment of the Hon'ble Supreme Court in the case of East India Pharmaceutical Works Ltd. v. CIT [1997] 224 ITR 627 is relevant, in which the question was about the deducibility or otherwise of interest on money borrowed for payment of income-tax. In that case the assessee had an overdraft account with a bank. It claimed that a sum of Rs. 28,488 was allowable expenditure under section 37(1) of the Act as representing the interest which it had to pay on the overdraft account taken for the payment of income-tax. The ITO disallowed the deduction by holding that the payment of income-tax could not be for the purpose of business. It was claimed before the Tribunal that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t directly payable to the Income-tax Department or on loans taken for paying income-tax, cannot be allowed as deduction. It cannot be considered as an expenditure which is incurred for the purpose of business so as to qualify for consideration in computing profits of the business. Thus the payment of income-tax or the interest thereon or in relation to that is a step away from the carrying on of the business on year to year basis. In contrast to that, any indirect tax which is paid in the course of carrying on of the business, is deductible for arriving at the net profit for the relevant year. It, therefore, follows that the payment of income-tax or interest thereon or relating to such tax is an event which takes place after the determination of the profits of the business for the relevant year. Even though there is relation between the earning of profits and payment of income-tax, but that would not make it deductible under the head 'Profits and gains of business or profession'. 7.5 Coming back to section 28(i) it is noted that only the profits and gains of any business which was carried on by the assessee at any time during the year shall be chargeable to income-tax under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the payment of income-tax is discharge of statutory liability. There is not and cannot be any intention of the assessee to earn income by paying the income-tax. Thus when the statutory liability is created on the assessee with the passing of the assessment order, such liability is to be discharged by making the payment thereof. It cannot be said that the assessee paid income-tax with the intention of earning income from the interest which shall become due if the assessment order is modified or overturned to his advantage. Thus it is apparent that there cannot be an intention to earn income from the payment of income-tax. 7.8 The learned Counsel for the assessee has overemphasized on the point that in the case of a banking business the money available at the disposal of the assessee was its stock in trade and when such stock in trade was wrongly taken away it retained the character of its circulating capital and on the refund of such amount the circulating capital stood restored and for wrongful deprivation of such money, the interest so earned should be considered as falling under the head 'Profits and gains of business or profession'. We are not agreeable with this conte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditions of the section. The Hon'ble Summit (Supreme) Court in the case of CIT v. Karnataka State Cooperative Apex Bank [2001] 251 ITR 194 has held to this extent by laying down that "the placement of such funds being imperative for the purpose of carrying on the banking business, the income derived therefrom would be income from assessee's business. There is nothing in the phraseology of that provision which makes it applicable only to income derived from working or circulating capital". From this judgment it can be noticed that the deployment of circulating capital or non-circulating capital is not a relevant factor in determining the head under which the income shall fall. It is, in fact, the nature and character of income. When income results for carrying on of business, it falls under the head 'Profits and gains, of business or profession'. The Hon'ble Supreme Court in the case of Mehsana District Central Co-operative Bank Ltd. v. ITO [2001] 251 ITR522 has held that the locker rent received by the assessee was a part of ordinary banking business as shown by section 6(1)(a) of the Banking (Regulation) Act, 1949 and, therefore, the income derived by the assessee bank from hiring ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee clauses of section 15, such as, it should be due from an employer or former employer. Once the conditions of this section are satisfied, the matter ends and the amount becomes chargeable to tax under this head. Similarly an income to fall under the head 'Income from house property', it is vital that the same should be the annual value of property consisting of any building of land appurtenant thereto, of which the assessee is owner. Thus the conditions of section 22 should be fulfilled. When such conditions are satisfied, there remains no need to examine any thing further. In a case where the assessee, a builder let out his property for sometime pending sale, the dispute arose about the head under which such rental income shall fall. The Hon'ble Supreme Court in East India Housing and Land Development Trust Ltd. v. CIT [1961] 42 ITR 49 and S.G. Mercantile Corpn. (P.) Ltd. v. CIT [1972] 83 ITR 100 held that such income was taxable under the head 'Income from house property' and not 'business income'. Thus it can be seen that once the conditions of section 22 are satisfied, the income has to be classified under that head and other matters, even if having some bearing, go out of co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness or profession'. The learned Counsel for the assessee heavily banked upon the judgments in Donald Miranda's case (supra) and R.B. Jodhamal Kuthiala 's case (supra) holding that the interest on income-tax refund shall draw its colour from the nature of payment and since the tax when paid was deductible expenditure under the business head and accordingly the refund of such tax with interest shall also fall under the head of business income and not the miscellaneous head of income. It is beyond doubt that in the case of R.B. Jodhamal Kuthiala (supra) it has been held that the interest on refund of tax shall fall under the head of business income and not the residual head. But it is important to note the background of facts in which it was so held. In the case of Donald Miranda (supra) the firm was carrying on the business and was assessed to income-tax under the provisions of Income-tax Act, 1918. It was dissolved in 1945. In respect of the chargeable accounting period from March 24, 1944 to March 24, 1945, the firm was taxed to excess profit tax under the Excess Profits Tax Act, 1940. In accordance with the provisions of Excess Profit Tax Act, the firm became entitled to refund o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... colour from such refund, would also fall under the same head. It is simple and plain that when a particular deduction is claimed in excess, the reversal of such deduction shall lead to the enhancement of the same income. For example, if there is a business income of Rs. 100 after the claim for deduction on account of salaries of Rs. 25 and subsequently it comes to the notice that the correct salary payable was to the tune of Rs. 20 only, the refund of Rs. 5 will augment the business income to Rs. 105. The income, if any, under other heads will remain unaltered with this receipt of the refund of Rs. 5. Applying the same analogy to the above two judgments, we find that when the assessee paid tax (equal to Rs. 25 in our above example), the same was allowed as deduction against the business income. However when subsequently the refund of the excess tax paid or interest thereon (equal to Rs. 5 in our above example) was received, it was but natural that the business income, that was earlier compressed stood swelled accordingly. However in the present appeal we are considering the provisions of Income-tax Act, 1961 in which payment of income-tax is not deductible under the head 'Profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st on such income shall be chargeable to tax under the Act and not become agricultural income simply on the ground that the exempt income was used for the purchase of FDRs. For any receipt to become agricultural income, it need to satisfy the conditions as laid down in section 2(1A). It is only if such conditions are satisfied that the income will be considered so and not because of the reason of having some nexus with the agricultural income. 7.14 The learned Departmental Representative has also placed on record an argument, through written submissions, that the interest income specifically falls under section 56(2)(id) of the Act and hence there is no question of considering such income under the head 'Profits and gains of business or profession'. Clause (id) of section 56(2) provides that "income by way of interest on securities, if the income is not chargeable to income-tax under the head 'Profits and gains of business or profession' shall be chargeable to income-tax under the head 'Income from other sources'. A bare perusal of this provision indicates that what is referred to in this clause is interest on securities and not other interest. Section 2(28B) defines "interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on income-tax refund falls under the head 'Income from other sources'. It is not true, as contended by the learned A.R., that the Tribunal orders holding the interest on income-tax refund dropping under the miscellaneous head of income, rendered in the context of section 80HHC, were not applicable in the context of section 80P. It is true that there is a difference in the phraseology of these two sections. But in these orders the Benches have given finding, firstly, about the head of income under which interest on income-tax refund shall fall and only then they have considered the question of the allowability or otherwise of deduction under section 80HHC on such interest. The rendering of these orders in the context of a different section will not dilute the finding which is to the effect of the inclusion of interest on income-tax refund under the head 'Income from other sources'. The question of allowing deduction under section 80HHC in those orders is only secondary. Further the judgments in Smt. B. Seshamma's case (supra) and Travancore Tea and Estates Ltd.'s case (supra) holding interest on income-tax refund as coming under the head 'Income from other sources' are not in the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he shares purchased would be business income even though it was assessable under the head "Income from other sources". The learned Counsel stated that the tax was in relation to the business of banking and when the said amount was refunded with interest, the interest so received constituted profits and gains of the business of banking. He contended that such interest will qualify for deduction under section 80P even if it does not come within the ambit of the head 'Income from other sources'. 8.2 Sounding a contra note, the ld. DR emphasized that the since the interest on income-tax refund does not fall under the business head of income, so the question of allowing any deduction under section 80P thereon is ousted. He stated that only the income from the banking activity of the assessee would entitle it to deduction under section 80P. He relied on the recent judgment of the Rajasthan High Court in the case of CIT v. Sirohi S.B.V. Bank Ltd. [2009] 221 CTR (Raj.) 395 in which it was held that interest on loan extended to employees was not in the capacity of the banker but from an employer to employees. Interest earned by the assessee on various loans extended to its employees on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... members but also doing other activities which are permissible as per the Banking Regulation Act. Such activities may include income arising from investment of funds in Government securities and also income from providing safe deposit vaults etc. All the activities mentioned in the Banking Regulation Act, which a bank is entitled to carry on, fall within the realm of the expression 'carrying on the business of banking'. Coming back to the point in question it is seen that the benefit of deduction under section 80P is thus eligible not only in respect of profits and gains from providing credit facilities to its members but on a much wider scale in respect of profits and gains from the business of banking. 8.5 It is further worth noticing that what is deductible under section 80P is the amount 'profits and gains' of business attributable to carrying on the business of banking. The employment of the expression 'profits and gains of business' is to be seen in contradiction to the expression 'income' chargeable under the head 'Profits and gains of business or profession'. The later expression is used in several sections of the Act including 56, 71, 72, 80E, 80HHC (baa), 139, 145, 184 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on or occupation; emoluments." The term "gain" has been defined in the same legal dictionary as under:- "Gain means acquisition. It is not limited to pecuniary gain or commercial profits." 8.7 From the meaning of these two separate terms, which make one composite phrase 'profits and gains' as used in section 80P, it is noted that the term 'profit' is that which accrues from the thing and which flows out of the trade or occupation, but the term 'gain' is of wider import than the word profit. "Gain" is a general term including pecuniary and non-pecuniary benefits but "profit" is specific. In other words the term 'gain' is genus of which the term 'profit' is its species. Thus it is explicitly clear that 'gain' is wider term and includes items other than 'profits' also. Coming back to the context, we find that the employment of expression 'profits and gains' in section 80P(2) demonstrates the intention of the Legislature that the benefit of deduction is not confined to the income arising directly from the banking business (as covered by 'profits'), which falls under the head 'Profits and gains of business or profession', but also includes other items of income (as covered b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal income in the period anterior to such insertion. Obviously it is not the case for the reason that deduction under section 80P is available with effect from 1-4-1968 and prior to that section 81, providing similar benefit, was there on the statute which was deleted by the Finance (No. 2) Act, 1967. It, therefore, shows that the benefit of deduction in respect of income of cooperative societies is not a new provision but is coming over decades. The question of granting deduction under a particular section presupposes the otherwise inclusion of such income in the gross total income. It, therefore, transpires that the profits and gains of banking business carried on by cooperative society were includible in the total income de hors clause (viia) of section 2(24). In the absence of specific clause (viia) in the pre-insertion era, but from the using of the expression 'profits and gains' in section 80P(2) it is clearly indicated that the profits and gains of business of banking by the co-operative societies were very much includible in the total income even prior to the insertion of clause (viia). Here it is important to note that simultaneous with the insertion of clause (viia) to 2( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t interest on refund of income-tax would be covered within the expression "profits and gains of business" notwithstanding the fact that it falls under the head 'Income from other sources'. III. Scope of Phrase 'Attributable to' Eligible Business:- 9.1 The learned Sr. Counsel for the assessee submitted that the learned first appellate authority erred in holding that the interest on income-tax refund was not attributable to the banking business. He stated that the phrase "attributable to" has a wider connotation than the phrase "derived from". For this submission he relied on the judgment of the Hon'ble Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84. He submitted that the learned CIT(A) was not correct in interpreting the judgment of the Hon'ble Supreme Court in the case of India Leather Corpn. (P.) Ltd. (supra) as laying down that the interest on income-tax refund was not attributable to the banking business. He contended that the Tribunal in assessee's own case has taken view in its favour in the immediately succeeding assessment year on the reasoning that the interest on income-tax refund was profits and gains attributable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot such interest income is attributable to business of banking. At the very outset, it is relevant to note that under Chapter VI-A-C, being deductions in respect of certain incomes, contains sections 80HH to 80RRB. In some of the sections, such as 80HH, 80HHA, 80HHB, 80HHE etc, the Legislature has employed the phrase 'derived from'. At the same time in certain other sections, including section 80P, the phrase "attributable to" has been used. Ordinarily the phrase "derived from" has a restricted meaning. In order to be covered within the ambit of this phrase there should be a direct nexus between the two ends preceded and succeeded by this phrase. In other words, the income should directly spring from such source and the relation between the source and the income should be that of the first degree and not incidental or remote. However, the other phrase 'attributable to' has a wider range and brings within its fold not only the items of income having direct nexus but also the items of income having some commercial or casual (causal) connection with the source. However it is essential that the income and source should not be alien to each other. In the case of CIT v. Sterling Foods [1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "As regards the aspect emerging from the expression "attributable to" occurring in the phrase "profits and gains attributable to the business of the specified industry (here generation and distribution of electricity) on which the learned Solicitor-General relied, it will be pertinent to observe that the Legislature has deliberately used the expression "attributable to" and not the expression "derived from". It cannot be disputed that the expression "attributable to" is certainly wider in import than the expression "derived from". Had the expression "derived from" been used, it could have with some force been contended that a balancing charge arising from the sale or old machinery and buildings cannot be regarded as profits and gains derived from the conduct of the business of generation and distribution of electricity. In this connection, it may be pointed out that whenever the Legislature wanted to give a restricted meaning in the manner suggested by the learned Solicitor-General, it has used the expression "derived from", as, for instance, in section 80J. In our view, since the expression of wider import, namely, "attributable to", has been used, the legislature intended to co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Explanation to section 104(4). It, therefore, held that the income from sale of chemicals was not attributable to the business of manufacture or processing and the levy of additional tax was justified. On the perusal of the facts of this case it can be easily noticed that the assessee had less than 10 per cent of income from the goods manufactured by it. The remaining 90 per cent was from trading of goods. The question for consideration before the Hon'ble Supreme Court was whether or not the income from sale of chemicals was attributable to the business of manufacture or processing. Thus the source which was under consideration of the Hon'ble Supreme Court was the 'manufacture or processing of goods' and not the 'business of export' as such. In order to avoid the payment of additional tax, it was necessary for the purpose of under section 104(4) that the assessee should have at least 51 per cent of its income from 'manufacture or processing of goods'. As the income from manufacture or processing in that case was only 10 per cent, it was under those circumstances that the court held as not satisfying the bench mark condition of 51 per cent from the 'manufacture or processing of go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h was not allowed by the assessing authority and the demand was created. When finally the order of the assessing authority was finally set aside, the assessee became entitled to the refund of income-tax due to the grant of deduction under section 80P from the business of banking. It is not as if the funds of the banking business were used for any other non-business purpose or some other non-banking activity. Rather the amount of income-tax, on which interest was granted, was utilized to satisfy the demand raised in relation to the banking business. It is but for the banking business that the income-tax was originally paid and subsequently the amount was refunded along with interest. The direct nexus of interest on income-tax refund is with the payment of income-tax but when we try to trace the relation between Income-tax and the income on which it was paid, it comes to light that the same was for the business of banking. Thus there exists a commercial and casual (causal) connection between the interest on income-tax refund and the banking business. It is still further imperative to note that the amount of income-tax collected by the authorities was for the denial of deduction under ..... X X X X Extracts X X X X X X X X Extracts X X X X
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