TMI Blog2012 (10) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... profession. Such income would fall for classification as income from other sources. In applying the provisions of section 80HHC(1), the Legislature has made a specific provision for the deduction of such profits of business as are derived from the export activity. The expression “derived from” has been construed to require a direct and proximate nexus with the business of export. Absent such a nexus, the income which results from the activity would have to be excluded from reckoning for the purposes of the formula prescribed by section 80HHC. It is impossible for this Court to come to the conclusion that interest received by the assessees bears a direct and proximate relationship with their export activity. order of tribunal excluding interest income for computation of business profits for the purpose of section 80HHC is upheld. Further, merely because the Assessing officer did not re-open the assessment u/s 147 r.w.s. 148, the assessee would not be entitled to contend that they were entitled to the benefit of section 80HHC despite the conclusion of this Court that they are not entitled to the same - Decided in favor of Revenue - ITR NO.63 OF 1996 - - - Dated:- 18-9-2012 - S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the prescribed formula :- Profit derived from exports. = Export Turnover X Business profit Turnover This Reference concerns only the business profit variable. The AO took the business profit to be Rs. 2,72,07,602. The assessee, however, contended that to this figure ought to be added the interest derived as aforesaid of a sum of Rs. 40,20,418/-. 3. We will presume that section 80HHC, as it stood prior to 1st April, 1989 amendment, is applicable. Section 80HHC then read as under :- Declaration in respect of profits retained for export business. 80HHC (1) Where an assessee, being an Indian company or a person (other than a company) resident in India, is engaged in the business of export out of India of any goods or merchandise to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction equal to the aggregate of - (a) four per cent of the net foreign exchange realisation; and (b) fifty per cent of so much of the profits derived by the assessee from the export of such goods or merchandise as exceeds the amount referred to in clause (a); Provid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xtra capital was created because the reserve was not required for the purpose of the applicant's export business. In view of the various authorities cited before us, it is of vital importance to note that the assessee contended, as recorded, inter-alia, in paragraph 2 of the order of the Tribunal that the extra funds available because of the reserve not being required for the purpose of the assessee's export business was invested elsewhere viz. with the sister-concerns and the applicant earned interest income on such investment. 6. Mr. Pardiwalla, the learned senior counsel appearing on behalf of the applicant firstly contended that interest need not be from money lending business alone for it to constitute business income. Secondly, he submitted that if the source of funds which are invested, is from a business activity, any accretion thereto or in respect thereof, including interest, must be held to be business income. Thirdly, he submitted that if the investment is held to be for the purpose of the business of the assessee, it would normally follow that accretions thereto, including by way of interest, constitute the assessee's business income. 7. The first submission really ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may well be cases where assessees carrying on the business of investments, invest in their group companies or sister-concerns. If it is part of a business decision taken in respect of the business of investments or lending, any returns even from group companies or sister-concerns, may well constitute the assessee's business income and not chargeable to tax under the head income from other sources . 12. However, in the present case, there is nothing to indicate that the said investments were pursuant to or in furtherance of any such business activity or decision of the assessee. There is nothing to indicate that the assessee carried on such business and invested only in it's sister-concerns. In fact, the case pleaded before the Tribunal was to the contrary. As we indicated earlier, the case before the Tribunal as recorded in paragraph 2 of the order was as follows : (iv) Extra capital was created because of this reserve. Since such capital was not required for the purposes of the appellant's export business, it was invested elsewhere and the appellant earned interest income on such investment. Thus, on the assessee's own admission, there is no factual basis for Mr. Pardiwal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any consistent business activity. It is always possible that an assessee regularly invests it's excess capital only for the purpose of ensuring that the money earns interest without being involved in the business of lending or investing money. 16.(A) The judgment of this Court in CIT v. Indo Swiss Jewels Ltd. (2006) 284 ITR 289 is of no assistance to the assessee either. In that case the Tribunal, contrary to the AO, accepted the assessee's explanation for the investment from which the interest in question had been earned. It was found that the amounts had been invested to enable the assessee to import machinery for which orders had already been placed. The surplus funds available with the assessee were kept apart for the same. As the order for the machinery was placed outside India, the money had been kept ready for payment upon the shipments arriving. To ensure that the moneys did not lie idle, they were invested in inter-corporate deposits which carried 18% interest, whereas the rate of interest for deposits with banks was only 11%. The Division Bench held : 6. Though the Assessing Officer did not accept the explanation of the assessee, the appellate authority in the facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sable under the head income from other sources . The Tribunal found that the assessee was engaged in the business of manufacture of synthetic yarn and that money lending had never been it's business activity. The Division Bench held that merely because an assessee carries on business, it does not mean that all income received by him is business income since he may have income that may be classified under different heads as set out in section 14. It was held that the facts established that the interest earned from the investment did not spring or emanate from the business activity of the assessee . The Division Bench held:- The interest income in respect of the surplus money not required for business immediately and deposited in banks as idle money, in our opinion, would be assessable as income from other sources in the facts and circumstances of the present case. This observation, in fact, militates against Mr. Pardiwalla's submission. In the case before us also, it is not the assessee's case that the surplus money was required for business immediately. In any event, the facts do not establish the same. This Court, therefore, dismissed the assessee's appeal holding that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere made to and the investments were made in their sister-concerns. The assessee has not established that in view of the market situation or for any stated/disclosed commercial reasons, it found it convenient and profitable to carry on these activities only with and/or through the sister-concerns. Thus, the factual basis for the submission being absent, we are not inclined to accept the same. 19. Mr. Pardiwalla's reliance upon the judgment of this Court in Commissioner of Income Tax v. Lok Holdings (2009) 308 ITR 356 is not well founded either. In that case, the assessee, a firm involved in the business of developing properties, received moneys in advance from its customers who had purchased flats in the properties developed by them. The surplus amount which could not immediately be utilized in the business were temporarily invested with banks and other concerns. The deposits, with accrued interest, were deducted from the work-in-progress till the conclusion of the project. The AO assessed this interest income as income from other sources . The Commissioner of Income-tax (Appeals) deleted the same and the Tribunal upheld the order of the CIT (Appeals). The Division Bench dismiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent line of reasoning which emerges from the decision of several High Courts adverted to earlier is that the mere fact that an assessee carries on business would not result in an inference that the income which is earned by way of interest would fall for classification as business income. Where an assessee invests its surplus funds in order to earn interest and to obviate its funds lying idle, such income would not fall for classification as business income. This is particularly so in a situation where the business of the assessee does not consist in the investment of funds. Where the assessee engages in an independent line of business, interest earned on deposits cannot be regarded as falling under the head of profits and gains of business or profession. Such income would fall for classification as income from other sources. In applying the provisions of section 80HHC(1), the Legislature has made a specific provision for the deduction of such profits of business as are derived from the export activity. The expression derived from has been construed to require a direct and proximate nexus with the business of export. Absent such a nexus, the income which results from the activity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich were utilized were those which were surplus to the assessee's business. At the cost of repetition, in the present case also, the assessee's business does not consist in the investment of funds. The facts of this case do not pursuade us to depart from the normal rule that where an assessee invests funds surplus to the business and earns interest, such interest does not constitute business income but falls under the head of income from other sources . Paragraph 27 of the judgment, in fact, militates against Mr. Pardiwalla's other submissions also. 22. In Commissioner of Income-tax v. Swani Spices Mills Pvt. Ltd. the Division Bench dealt with the judgment in CIT v. Lok Housing in paragraphs 25 and 26. It was held that the judgment was based on the peculiar facts and circumstances of that case and cannot be held to lay down a broad proposition of law that an investment of surplus funds by an assessee who carries on business must necessarily be construed to result in the generation of business income by way of interest received on investment. The Division Bench held: 25. In CIT v. Lok Holdings [2009] 308 ITR 356 (Bom), the assessee was engaged in construction business and ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at by granting the benefit under section 80HHC, even in part, the Assessing Officer accepted that the assessee had complied with the provisions thereof including utilizing the amount credited to the reserve account for the purposes of the business of the assessee in accordance with the second proviso thereto. According to him, had the Assessing Officer not accepted this case, he would have denied the assessee the entire benefit under section 80HHC. 25. The submission cannot be accepted in view of what we have held. We will assume that if an assessee does not utilize the amount credited to a reserve account for the purpose of its business, the Assessing Officer is bound to reject the entire claim for deduction made thereunder. If the view that we have taken is correct, the Assessing Officer having granted the deduction in part, rightly or wrongly, cannot enure to the assessee's benefit. Thus, merely because the Assessing officer did not re-open the assessment under section 147 read with section 148, the assessee would not be entitled to contend that they were entitled to the benefit of section 80HHC despite the conclusion of this Court that they are not entitled to the same. 26. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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