High Court Of Gujarat
CIT vs. Gaskets & Radiators Distributors
Section 80HHC
Asst. Year 1986-87
R.S. Garg & M.R. Shah, JJ.
IT Ref. No. 11 of 1999
12th September, 2006
Counsel Appeared
Manish R. Bhatt, for the Applicant : None, for the Respondent
JUDGMENT
M.R. SHAH, J. :
Mr. M.R. Bhatt, learned counsel for the Revenue. None for the assessee though served.
2. The Tribunal, Ahmedabad Bench, ‘A’ has referred the following question to this Court for opinion arising out of ITA No. 4487/Ahd/1992 with respect to asst. yr. 1986-87, at the instance of the Revenue :
“Whether, on the facts and circumstances of the case and in law, the Tribunal was right in allowing the assessee’s claim regarding deduction under s. 80HHC by holding that the receipts such as interest, export incentive, octroi refund and sales in India should form part of the total profits to work out the total turnover and qualifying profit ?”
3. The facts in nutshell are as under : The assessee claimed deduction under s. 80HHC of Rs. 1,13,060 considering the receipts like interest income, export incentive, sales excluding such receipts arrived at a business loss of Rs.2,02,398. The AO was of the opinion that the aforesaid sum was assessable under the head “Other sources” and was not income from business activity and therefore he did not accept the assessee’s plea to include the said amount in the total turnover to be computed under s. 80HHC. Being aggrieved and dissatisfied with the order passed by the CIT(A), the Revenue preferred an appeal before the Tribunal and the Tribunal, concurring with the order passed by the CIT(A), dismissed the appeal. The Tribunal also further allowed the cross-objections submitted by the assessee in the aforesaid appeal and held that the claim of the assessee for deduction under s. 80HHC be reworked. However, at the instance of the Revenue, the aforesaid question is referred to this Court for opinion.
4. The assessee-firm was engaged in exporting engineering goods to Mombasa, Dar-Es. Salaam, Tanzania and Nigeria. Purchases of Rs. 3,35,482 were made for various parts in India and export sales of Rs. 4,21,172 were made. On scrutiny of the P&L a/c of the firm it was noticed by the AO that the assessee-firm had credited the following amount in P&L a/c : The assessee claimed relief under s. 80HHC of the IT Act with respect to the interest received, export incentive, octroi refund, and sales in India. The AO disallowed the claim of the assessee under s. 80HHC of the Act by holding that the aforesaid income cannot be considered as business income. Therefore, the short question, which is required to be considered by this Court is whether the income of interest on deposits, amount of export incentive, octroi refund, and sales in India are forming part of the total profits to work out the total turnover and qualifying profit and the aforesaid receipts are required to be considered for deduction under s. 80HHC of the Act. Shri Manish Bhatt, learned counsel appearing on behalf of the Revenue, has submitted that receipts such as interest, export incentive, octroi refund, etc., cannot be considered to be an income out of business so as to claim deduction under s. 80HHC of the Act. He has relied upon the decision of the Hon’ble Supreme Court in the case of Pandian Chemicals Ltd. vs. CIT (2003) 183 CTR (SC) 99 : (2003) 262 ITR 278 (SC) in support of his submission that the interest earned on deposit cannot be considered to be a ‘business income’.
Relying upon the aforesaid decision, he has submitted that any receipt of amount so as to attract s. 80HH of the IT Act must be understood as something which has a direct or immediate nexus with the assessee’s industrial undertaking. It is submitted that the business of the assessee was exporting engineering goods and therefore income from the interest on deposit cannot be considered to be a business income. Shri Bhatt has also relied upon another decision of the Hon’ble Supreme Court in the case of CIT vs. Sterling Foods (1999) 153 CTR (SC) 439 : (1999) 237 ITR 579 (SC) in support of his above submission and with regard to his submission that export incentive cannot be considered to be ‘business income’. He has also relied upon the decision of the Kerala High Court in the case of G.T.N. Textiles Ltd. vs. Dy. CIT & Anr. (2005) 195 CTR (Ker) 506 : (2005) 279 ITR 72 (Ker) as well as the decision of the Allahabad High Court in the case of CIT vs. Himalaya Cutlery Works (2006) 201 CTR (All) 167 in support of his above submissions. So far as ‘income derived from sales in India’ is concerned, he has relied upon sub-s. (1) of s. 80HHC and has submitted that only in a case where an assessee being an Indian company or a person resident in India who is engaged in the business of export out of India of any goods or merchandise, the provisions of s. 80HHC would be applicable and only that assessee can claim a deduction under s. 80HHC. It is submitted that the assessee-company was not an Indian company and therefore they could not have claimed the deduction under s. 80HHC of the IT Act. The sum and substance of the submissions on behalf of the learned counsel appearing for the Revenue is that any income derived by interest on deposit, the benefit of export incentive, amount received by way of octroi refund cannot be considered to be a business income and that the assessee would not be entitled to deduction of sales in India under s. 80HHC of the Act.
7. Identical question came to be considered by the Hon’ble Supreme Court in Pandian Chemicals Ltd. vs. CIT (supra) and the question, which was posed for consideration before the apex Court was whether the interest on deposits with Tamil Nadu Electricity Board should be treated as income derived by the industrial undertaking for the purpose of s. 80HH or not, and the Hon’ble Supreme Court has observed that s. 80HH of the IT Act grants deduction in respect of profits and gains “derived from” an industrial undertaking and the words “derived from” in s. 80HH of IT Act, 1961 must be understood as something which has a direct or immediate nexus with the assessee’s industrial undertaking. The Supreme Court held that interest derived by the industrial undertaking of the assessee on deposits made with the Electricity Board for the supply of electricity for running the industrial undertaking could not be said to flow directly from the industrial undertaking itself and was not profits or gains derived by the undertaking for the purpose of the said deduction under s. 80HH. In G.T.N. Textiles Ltd. vs. Dy. CIT & Anr. (supra), the Kerala High Court held that interest on bank deposits was not profit derived from export of goods. The Kerala High Court has further held that the interest earned by the assessee on fixed deposits, commission received on sale of machinery, etc., were not business income and consequently the assessee was not entitled to computation of eligible deduction under s. 80HHC of the Act by including those receipts under business income. Therefore, considering the aforesaid two decisions, we must hold that the Tribunal as well as the CIT(A), both committed an error in treating the interest on deposits as ‘business income’ and granting the assessee the deduction under s. 80HHC of the Act.
8. In CIT vs. Sterling Foods (supra), the assessee was engaged in processing prawns and other sea food, which it exported, and it also earned some import entitlements granted by the Central Government under an Export Promotion Scheme. The assessee claimed the deduction of such receipt under s. 80HH of the IT Act by contending that the said income of import entitlements be treated as a business income. The Supreme Court held as under : “…..The source of import entitlements could not be said to be the industrial undertaking of the assessee. The source of the import entitlements could only be said to be the Export Promotion Scheme of the Central Government whereunder the export entitlements became available. There must be, for the application of the words “derived from”, a direct nexus between the profits and gains and the industrial undertaking. In the instant case, the nexus was not direct but only incidental. The industrial undertaking exported processed sea foods. By reason of such export, the Export Promotion Scheme applied. Thereunder, the assessee was entitled to import entitlements, which it could sell. The sale consideration therefrom could not be held to constitute a profit and gain derived from the assessee’s industrial undertaking. The receipts from the sale of import entitlements could not be included in the income of the assessee for the purpose of computing the relief under s. 80HH of the IT Act, 1961.” In CIT vs. Himalaya Cutlery Works (supra), the question before the Allahabad High Court was whether the incentives received by the assessee are part of export turnover and therefore entitled to relief under s. 80HHC or not, and the Allahabad High Court has held that, amount received as duty drawback, cash incentive and on transfer of import licence do not form part of export turnover and, therefore, not entitled to relief under s. 80HHC. Considering the aforesaid two decisions, one of the apex Court and another of Allahabad High Court, we hold that the Tribunal as well as the CIT (A) has committed an error in holding export incentive and octroi refund as business income and eligible for deduction under s. 80HHC of the IT Act.
9. So far as the amount received by the assessee for sales in India, and the claim of the assessee for that amount under s. 80HHC of the IT Act is concerned, it is required to be noted that for claiming deduction under s. 80HHC of the IT Act only an assessee being an Indian company or a person resident in India can claim the benefit/deduction under s. 80HHC. Admittedly, the assessee, in the present case, is not an ‘Indian company’. Under the circumstances, for the sales in India by the assessee and the income earned by the assessee for sales in India, the assessee would not be entitled to deduction under s. 80HHC of the Act. Under the circumstances, the Tribunal committed an error in holding that the income from sales in India by the assessee are forming part of the total profits to work out the total turnover and qualifying profit. Therefore the assessee would not be entitled to the deduction under s. 80HHC of the IT Act for the income earned by it by sales in India. Thus, considering the aforesaid decisions and s. 80HHC of the IT Act, the Tribunal as well as the CIT(A) both have committed an error in treating the income of interest on deposits, export incentive, octroi refund and sales in India to be part of the total profits to work out total turnover and qualifying profit and treating the same as business income, and the Tribunal was not right in allowing the assessee’s claim regarding rebate under s. 80HHC of the Act by holding that the receipts such as interest on deposits, export incentive, octroi refund, and sales in India would form part of the total profits and to work out the total turnover and qualifying profits. For the reasons aforesaid, the reference is answered in favour of the Revenue and against the assessee. The reference is accordingly disposed of.
[Citation : 296 ITR 440]
