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M/s Gokuldas Haridas Kotawala, Kotahwalas Versus CIT & Another and M/s. Jagannath Harinarain, Vijay Chand Lodha Versus The Income Tax Officer & Anr, and Man Mohan Gupta, Vimal Chand Surana HUF, M/s S.K. Gems Versus. The Assistant CIT & Another and CIT Versus Vimal Chand Surana, Vijay Chand Lodha, Sunderdas Sonkia, Kotawalas, Kotawalas, M/s Goyal Fashions Pvt. Ltd., M/s Chordia Gems, Ashish Goyal

2016 (3) TMI 681 - RAJASTHAN HIGH COURT

Entitlement for deduction under section 80HHC - Held that:- Section 80HHC allows deduction in a case where the assessee is primarily an exporter and is engaged in the business of export out of India of any goods or merchandise, and also receives foreign remittance/sale/export proceeds received in India or brought into India by the assessee in convertible foreign exchange. In our view, a deduction is allowable to an exporter of goods and none else.

deduction under section 80HHC on inte .....

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at does not mean character of income changes merely because the assessee has taken such interest in the profit and loss account and projected it as business income, it does not mean that such receipt also enures for deduction under Section 80HHC of the Act.

The assessee are not engaged in the activity of advancing money as a business activity nor loans advanced constitute an incidental activity to the business of exports of the assessee. Irresistible conclusion, therefore, is that the .....

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03, D.B. Income Tax Appeal No.56/2003, D.B. Income Tax Appeal No.57/2003, D.B. Income Tax Appeal No.58/2003, D.B. Income Tax Appeal No.60/2003, D.B. Income Tax Appeal No.70/2003, D.B. Income Tax Appeal No.90/2003, D.B. Income Tax Appeal No.91/2003, D.B. Income Tax Appeal No.93/2003, D.B. Income Tax Appeal No.111/2003, D.B. Income Tax Appeal No.136/2003, D.B. Income Tax Appeal No.89/2004, D.B. Income Tax Appeal No.142/2004, D.B. Income Tax Appeal No.28/2005, D.B. Income Tax Appeal No.57/2005, D.B .....

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sed of, as agreed by counsel for the parties, by this common order. 2. In DBIT Reference No.4/2003, which relates to the assessment year 1989-90, filed at the instance of Revenue before the Income Tax Appellate Tribunal (for short 'ITAT'), as directed by this court under Section 256(2) of the Income Tax Act, referred the following substantial question of law:- Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was entitled to de .....

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between the same parties, the appeal of the assessee before the Tribunal was dismissed though the controversy remaining the same and the Tribunal changed its view. The appeal was admitted on following questions of law:- Whether on the facts and circumstances of the case, the Hon'ble Tribunal was justified in holding that assessee is not entitled for deduction under section 80HHC on interest income of ₹ 2,80,007/- as per law as existing at the relevant assessment year. Whether on the f .....

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umstances of the case the ITAT was justified in law in restricting the claim of interest and not allowing full benefit of deduction u/s. 80HHC of interest income as profit and gains from business. 5. By and large, the questions involved in all these references/appeals, revolve around the above issues. 6. Primarily the Assessees in all these cases are exporters of precious and semi precious stones and jewellery, and are 100% exporters and the goods are being exported after being appraised by the .....

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er Bench of this court, in Reliance Trading Corporation v. ITO (2015) 376 ITR 53 (FB-Raj.), dealt with and answered the questions referred, as under:- Q. No.(1) Whether the assessee is entitled for deduction under section 80 HHC on interest income of ₹ 1,76,930/- as per law as existing at the relevant assessment year? Ans. While applying the direct and proximate nexus test, we are of the view that where the interest earned does not have direct and proximate nexus with the income from the b .....

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f interest income under section 80 HHC for the period prior to amendment? Ans. So far as question No.2 is concerned, on the aforesaid discussion, we are also of the view that the amendment in Section 80HHC, by way of insertion of sub-section (4B), excluding interest income for the purposes of deduction under Section 80HHC of the Act, will also affect the deduction of interest income under Section 80HHC of the Act, for the period prior to the amendment, inasmuch as the applicability of the princi .....

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tion 80 HHC of the Act? Ans. On the question No.3, we hold that the earning of the income convertible from foreign exchange by way of interest, is not necessary so long as the interest is derived from business of export, and has direct and proximate nexus, with the income earned out of the profits retained for the export business. The earning of the income convertible from foreign exchange, is not a test for determining, as to whether deduction is allowable in respect of the income derived from .....

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Assessee all throughout has been that out of the export receipts/income, the surplus funds which were lying idle, were advanced in the market and that has yielded interest and such interest having direct nexus with Exports being income from business enures for deduction u/s 80HHC of the Act but the claim of the Revenue throughout has been that though it may constitute a separate business, but had no nexus with the export of precious and semi precious stones, and whatever the interest was earned .....

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ala High Court in Ravindranathan Nair (K.) v. Deputy CIT (Assessment)(2003) 262 ITR 669, Southern Cashew Exporters v. Deputy CIT (2003)183 CTR (Ker) 175, and other authorities. He further contended that this court, in the case of CIT v. Rajasthan Land Development Corporation (supra), laid down five tests and according to him, all the five tests go against the claim of the Assessees and thus, contended that the claim of Revenue deserves to be upheld. 9. Per contra, learned counsel for the Assesse .....

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interest out of realisation of sale receipts from Exports, which constituted business income and once there is a finding of fact recorded by the Tribunal that the Assessees were carrying on the business of money lending, such a finding of fact recorded by the Tribunal being a fact finding authority, cannot be said to be perverse. They further contended that once there is a joint business of export of goods and merchandise, business income constituted earning by way of interest, the claim of the .....

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matic, regular books of account are being maintained and such transactions are duly recorded in the same books of account, constitute business income and once it has been held that it was business income, deduction under sec. 80HHC ought to be allowed. 11. Mr. M.L. Barod, learned counsel, also contended that in DBIT Appeal No.28/2005 issue is the same, but also emerges is that the assessee earned interest and simultaneously paid interest as well and only net interest earned is required to be con .....

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filed, the tax effect being less than ₹ 4 lac, the appeal at the instance of Revenue was not maintainable and deserves to be dismissed. 12. Mr. Vivek Singhal, learned counsel, contended that the Allahabad High Court in the case of CIT Agra v. M/s. Divya Jewellers (P) Ltd. (2014) 368 ITR 671, has held that earning by way of interest being proximate to the business activity of an exporter, it ought to be taken as in the nature of income from business. He also relied upon the judgment rendere .....

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hwar Prasad Bagla v. CIT, (1973) 87 ITR 421 Patnaik & Co. Ltd. v. CIT, (1986) 161 ITR 365 CIT v. Nagarjuna Steel Ltd., (1988) 171 ITR 663 (A.P. High Court) Keshavji Ravji & Co. v. CIT, (1990) 183 ITR 1. Thiru Arooran Sugars Ltd. v. CIT, (1997) 227 ITR 432. K. Ravindranathan Nair v. CIT, (2001) 247 ITR 178. 13. We have heard the learned counsel for the parties, considered the material on record including the Larger Bench judgment of this court, as also other judgments relied upon by the c .....

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inguish the facts in the instant matters vis-a-vis the arguments advanced before the Larger Bench. 15. In our view, Section 80HHC allows deduction in a case where the assessee is primarily an exporter and is engaged in the business of export out of India of any goods or merchandise, and also receives foreign remittance/sale/export proceeds received in India or brought into India by the assessee in convertible foreign exchange. In our view, a deduction is allowable to an exporter of goods and non .....

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assessee's income from business entitled to deduction under Section 80HHC, and it further held that the assessee is entitled to deduction only in respect of profit derived by it from export of goods and merchandise and receipts of sale proceeds in convertible foreign exchange. The ITAT has also come to the conclusion that the intention of the assessee was only to earn interest income, source of which is the advances and not that it is out of business of exports. It was further held that the .....

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disallowing deduction under Section 80HHC in respect of income received by way of interest, held that an assessee is entitled to deduction under Section 80HHC on the profits derived from export of goods or merchandise out of India and sale proceeds of which are to be received in convertible foreign exchange, and in the instant case the income is by way of export of jewellery and the interest being not received in convertible foreign exchange on export of goods (jewellery), such activity of advan .....

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interest and payment of interest are two different activities and we also concur with the same view. 18. In our view, though in one or two cases it has been held that interest received is in the nature of business income but ultimately a short question is as to whether where merely because interest has been held to be business income whether deduction under Section 80HHC is allowable or not? 19. In our view, no effort has been made by the assessees that the immediate source of receipt of interes .....

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es from whom interest was received continued to remain the same. Neither any correspondence with any of the parties to whom loans are advanced, was produced so as to prove the purpose or intention of doing business. 20. In our view, and rightly so, intention of the assessees is well set that it only wants to earn interest from those funds which are lying idle with it or which can be spared as surplus in the business for earning income from the said source and a businessman will not keep funds id .....

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rom different sources falling under the specified heads, have to be computed for the purpose of taxation in the manner provided. To find out whether the activity in the case of an assessee constitute its business of money lending, we refer to the term 'business' defined under section 2(13) of the Income-tax Act, 1961. The definition reads as under :- business includes any trade, commerce or manufacture of any adventure or concern in the nature of trade, commerce or manufacture. 22. This .....

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ble test. An isolated transaction may also be a business. 23. It is, therefore, essential to advert to definition of the word 'purpose' and also to the word 'intention' as no provision has been brought to our notice from which the intent and purport to carry on the business of money lending could be inferred. In Black's Law Dictionary, Sixth Edition, the words 'purpose' and 'intention' have been defined as under :- Purpose : That which one sets before him to a .....

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ntemplates any result, as not unlikely to follow from a deliberate act of his own, may be said to intend that result, whether he desires or not. It is, therefore, the design, resolve or determination with which a person acts. It is all to be kept in mind that 'intent' and 'motive' are two different things and should not be confused. Motive is what prompts a person to act. Intent refers only to the state of mind with which the act is done or omitted. 24. In our view, merely becaus .....

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deduction under Section 80HHC. Derivation of income must be directly connected with the business in the sense that the income is generated from business. It would not be sufficient if it is generated by exploitation of business asset. In the instant matters, the income by way of interest on the deposits/advances is no doubt an income derived by investing surplus cash of the assessee generated as profits of exports, but it is not the money derived from the business activity on export as an expor .....

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arning of interest by an assessee on sums advanced does not come within the purview of business income, or as profits from business. 26. This court in the case of CIT v. Rajasthan Land Development Corporation (supra) had, while answering the reference in favour of the Revenue and against the assessee, laid down following principles:- (i) interest on fixed deposits and other deposits before the commencement of the business is income from other sources, (ii) income from interest on deposits of sur .....

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nce of opinion between different High Courts and this court in the case of Murli Investments Co. held that if the surplus funds are invested instead of keeping them idle, the income by way of interest should be treated as income from other sources, (v) if the surplus funds emerge out of business carried on by the assessee which is regularly carried on by the assessee and then with the intention to carry on the business of lending of money or money-lending the loan is advanced, the income therefr .....

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) may to a certain extent support the contention of the assessees, but then it is a case of a Limited Company and not an individual or a partnership firm, as in the instant cases. Even otherwise, it does not support the contention of the counsel for the assessees. 28. In the present set of facts, the principle in paras (iii) and (iv) does not support the case of the assessees, but rather goes against the assessees as admittedly it is interest income in respect of surplus money, it was held that .....

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ase, the company was investing its surplus funds and was deriving interest thereon, instead of keeping that idle. Such transactions could not be said to constitute money-lending business. The Tribunal further held that after purchasing the property, the assessee-company had approximately ₹ 20,000 as surplus with it. It was invested by it instead of keeping it idle. When the money was needed for making alterations to the property and for making repayment to the creditors, it was withdrawn b .....

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any authority taking a contrary view nor was he able to show any error in the order of the learned Tribunal. 30. This court, again in the case of CIT v. M/s Avon Apparels [D.B. ITA No.41/1999 dated 11.7.2002, (Rajasthan High Court)], held that the income of the assessee earned on account of interest on surplus funds in India, the assessee is not entitled for deduction on that income under Section 80HHC of the Act, 1961 . 31. The Larger Bench of this court has taken into consideration the judgmen .....

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Ltd. v. CIT (1997) 227 ITR 172, Cambay Electric Supply Industrial Co. Ltd. v. CIT (1978) 113 ITR 84, CIT v. Sterling Foods (1999) 237 ITR 579, Pandian Chemicals Ltd. v. CIT (2003) 262 ITR 278, and has come to the conclusion that deduction under Section 80HHC is not allowable, and in our view, the judgment of Shri Ram Honda Power Equip (supra), so also Rajasthan Land Development Corporation (Supra), Murli Investment Company (supra) and Avon Apparels (Supra), apply to the facts of the instant case .....

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or our consideration inasmuch as the following questions were admitted in D.B. ITA No.28/2005 :- i) Whether on the facts and circumstances of the case, the ITAT was right and justified in treating the interest income of ₹ 9,67,366/- as business income of the assessee? ii) Whether on the facts and circumstances of the case, the ITAT was right and justified in allowing the deduction under Section 80HHC of the Act of 61 on the interest income of ₹ 9,67,336/- and in holding that there is .....

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also order of the Tribunal, and before all the three authorities the only question was claim of deduction on interest under Section 80HHC and even before the said authorities this issue was never raised nor was there any ground in appeal before ITAT, which has been raised now in the instant appeal at this stage. 32.2 Even otherwise, once substantial questions have been answered by the Larger Bench of this court, quoted in para 7 of this judgment in identical circumstances, the issue remains no m .....

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