TMI Blog2011 (2) TMI 1393X X X X Extracts X X X X X X X X Extracts X X X X ..... or profession of the assessee while working out deduction under section 80HHC of the Income-tax Act, 1961? 2. Whether, the Tribunal is correct in law in ignoring the provisions of sub-sections (1) (3) of section 80HHC while holding that provisions of clause (baa) to the Explanation to section 80HHC are not applicable earlier to asstt. year 1992-93 wherein 'Profits' were substituted for 'whole of income' w.e.f. 01.04.1989? 3. Whether, the order of Ld. Tribunal is perverse in law as it has failed to consider material and relevant facts as discussed by the A.O. and the learned Ist appellate authority? 3. Briefly stated, the facts for adjudication as narrated in the appeal are that the assessee is engaged in the export of handicrafts and other goods and filed its return on 27.12.1991 for the assessment year 1991-92 declaring an income of ₹ 1,25,550/-. The case of the assessee was taken up for scrutiny. The Assessing Officer held that the income accrued/received as interest on the deposits invested with different banks did not form part of profits earned from the business and assessed under the head income from other sources. The Assessing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther [2005] 279 ITR 72 (Ker); Karnataka High Court in Kabadi Enterprises v. Income Tax Officer [2007] 290 ITR 610 (Kar) and Madras High Court in Dollar Apparels v. Income-Tax Officer [2007] 294 ITR 484 (Mad), in favour of the revenue. 7. Distinguishing Isher Dass Mahajan and sons case (supra) on the basis of which the Tribunal had decided the appeal of the assessee, it was contended that there interest earned on fixed deposits was in the nature of business income as would be evident from a perusal of the following observations recorded in that case:- A perusal of the order passed by the Tribunal shows that the assessee had earned interest on the deposit it made with Swami Motors for the purchase of car. Another part of the interest had been earned on deposits with the I.D.B.I. The Tribunal on consideration of the evidence has found that both the deposits were made for purposes which were incidental to the normal business activity of the assessee. Still further, even the interest on FDRs was relatable to the running of business as these were used for availing of the credit facilities from the bank. Nothing has been pointed out to show that these findings of fact recorded by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 00] 245 ITR 806 (Bom) to substantiate his submissions. 10. We have given our thoughtful consideration to the respective submissions made by the learned counsel for the parties and find substantial merit in the submissions made by learned counsel for the revenue. 11. In order to effectively resolve the controversy raised in this appeal, the following facets of the issue require an answer:- (a) Whether interest on fixed deposits earned by the assessee would form part of profits of the business under Section 80HHC of the Act; (b) Effect of insertion of clause (baa) in Explanation to Section 80HHC by Finance (No.2) Act 1991 w.e.f. 1.4.1992. 12. Addressing on the first facet of the issue involved, the purpose of incorporating Section 80HHC of the Act may be noticed. A perusal of the provisions of Section 80HHC of the Act makes it clear that two essential conditions for invoking the provisions are that the assessee must be engaged in the business of export out of India of any goods or merchandise and secondly the deduction is applicable only if sale proceeds of such goods or merchandise exported out of India are receivable by the assessee in convertible foreign exchange. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ard cannot be said to flow directly from the industrial undertaking itself. 14. Section 80HHC(3) of the Act provides for the formula for computing deduction admissible under sub-section (1), where an assessee has both the turnovers i.e., domestic as well as export. It provides that profits derived from export shall be the amount which bears to the profits of the business, the same proportion as the export turnover in respect of such goods bears to the total turnover of the business carried on by the assessee. The formula is: Export profits = Profits of the business x Export turnover Total turnover 15. Whether interest earned on fixed deposits yields profits of the business or not has been subject matter of consideration before various courts. 16. In Ravi Ratna Exports (P) Ltd's case (supra), the Bombay High Court while considering the issue relating to admissibility of deduction under Section 80HHC of the Act where the interest income earned by the assessee from fixed deposits was income from other sources, it was held that it was not to be taken into consideration for computation of special deduction under Section 80HHC of the Act. 17. Similar issue arose befor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on which are now to be reduced to the extent of 90 per cent, if those items are included in sub-clause (1) of that definition. Interest paid and claimed as deduction in the computation of profits and gains for business, cannot be set off against interest received and computed under income from 'other sources'. That apart, in CIT v. A.S. Nizar Ahmed and Co. [2003] 259 ITR 244 (Mad) where the claim of the assessee, which was a firm doing export business, that the interest received on its deposits with the bank should be treated as part of the income from business was negatived by the Assessing Officer, as also by the Commissioner, but was upheld by the Tribunal, on a reference, this court while answering the question in favour of the Revenue, held as follows (at page 246): The interest paid by the assessee to the bank was, no doubt, an item of expenditure in the computation of its business income. That, however, would not justify taking the income that the assessee received by way of interest on the deposits that it had with the bank, as part of its business income when in reality it was not. The deposit made with the bank was for the convenience and benefit of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in clause (a) of sub-section (4A), the word profits was substituted for income . The ambit and scope of the amendment was explained by the Central Board of Direct Taxes (CBDT) vide its circular No. 559 dated 4th May, 1990: (1990) 184 ITR (st.) 110. Sub-clause (I) of Clause 10.7 relevant for the purposes of present appeal reads thus:- 10.7 Amendments of section 80HHC to rationalise the provisions of the section and to remove certain anomalies.- Section 80HHC of the Income-tax Act, after its amendment by the Finance Act, 1988, provides for 100% deduction in respect of the export profits. The Amending Act, 1989, has made certain amendments to this section, which are discussed below:- (i) Under the old provisions of sub-section (1) of the section, where the assessee was engaged in the business of export of any goods or merchandise, he was allowed, in computing his total income, a deduction of the whole of the income derived by the assessee from such exports. Similarly, in subsection (1A), which allows deduction in the case of supporting manufacturers, and sub-section (4A), which requires the supporting manufacturer to furnish, with his return of income, the report of a cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... insertion in the following terms:- 32.10 The existing formula often gives a distorted figure of export profits when receipts like interest, commission, etc., which do not have an element of turnover are included in the profit and loss account. 32.11 It has, therefore, been clarified that profits of the business for the purpose of section 80HHC will not include receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature. As some expenditure might be incurred in earning these incomes, which in the generality of cases is part of common expenses, ad hoc 10 per cent deduction from such incomes is provided to account for these expenses. 25. The scope of the said provision had been explained by Bombay High Court in Bangalore Clothing Co's case (supra) as follows:- Under that Explanation, profits of the business , for the purposes of Section 80HHC does not include receipts which do not have an element of turnover like rent, commission, interest, etc. However, as some expenditure might be incurred in earning such incomes an ad hoc 10 per cent deduction from such incomes is provided for, to account for those expenses. In ev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anation. In the computation of deduction under section 80HHC all four variables had to be taken into account. All four variables were required to be given weightage. The substitution of section 80HHC(3) secures profits derived from the exports of eligible goods. Therefore, if all the four variables are kept in mind, it becomes clear that every receipt is not income and every income would not necessarily include element of export turnover. This aspect needs to be kept in mind while interpreting clause (baa) to the said Explanation. The said clause stated that 90 per cent of incentive profits or receipts by way of brokerage, commission, interest, rent, charges or any other receipt of like nature included in business profits, had to be deducted from business profits computed in terms of Sections 28 to 44D of the Income-tax Act. In other words, receipts constituting independent income having no nexus with exports were required to be reduced from business profits under clause (baa). A bare reading of clause (baa) (1) indicates that receipts by way of brokerage, commission, interest, rent, charges, etc. formed part of gross total income being business profits. But for the purposes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id decision. The finding of fact recorded in Isher Dass Mahajan case (supra) was that the interest income on deposit which had been earned by the assessee was income from business and was, therefore, admissible for computation of deduction under Section 80HHC of the Act. The issue was not where interest income formed part of income from other sources. 30. Referring to the judgments relied upon by the learned counsel for the assessee, suffice it to notice that the factual situation therein was different as these related to interest on fixed deposits which were made for business activities, which is not the situation here. 31. Admittedly, the assessee had received interest on fixed deposits which were not for the purposes of business and, therefore, the income arising therefrom fell under the head income from other sources . Neither the judgment in Isher Dass Mahajan and sons case (supra) nor clause (baa) in Explanation to Section 80HHC of the Act has any bearing on the decision of the present case. Accordingly, the interest on fixed deposit received by the assessee shall not form part of business profits on which deduction under Section 80HHC of the Act would be admissible. T ..... X X X X Extracts X X X X X X X X Extracts X X X X
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