Bombay H.C : interest on inter-corporate deposits earned out of surplus funds by the assessee, is income from the business for the purpose of computing deduction under section 80HHC

High Court Of Bombay

CIT, Bangalore vs. Sociedade de Fomento Industrial Ltd.

Assessment Year : 1992-93

Section : 80HHC

S.B. Deshmukh And F.M. Reis, JJ.

Tax Appeal No. 20 Of 2003

December 23, 2010

JUDGMENT

F. M. Reis, J. – The above Appeal challenges the judgment and order dated 30-12-2002 passed by the learned Income-tax Appellate Tribunal, (ITAT), Panaji Bench, Panaji in ITA No. 25/PN/97.

2. The Assessee filed the return of income on 31-12-1993 declaring an income of Rs. 58,93,970 after set off of brought forward unabsorded investment allowance of Rs. 67,91,613. The return was processed under section 143(1)(a) of the Income-tax Act, 1961 on 12-1-1994, without making adjustments to the income returned. The case was taken up for scrutiny by issuing notice under section 143(2) of the Income-tax. After scrutiny, the assessment was completed whereby inter alia the interest income declared by the assessee as income from the business was assessed as income from other sources under section 56(2) of the said Act. Similarly, the Assessing Officer included miscellaneous income, dispatch income and insurance claim in the total turnover for the purpose of computing the allowable deductions under section 80HHC of the said Act. Aggrieved by the said order of the Assessing Officer, the Respondent filed an appeal before the CIT(A). The CIT(A) by order dated 3-10-1996 allowed the said appeal and inter alia directed the Assessing Officer to assess the interest from the Banks of Rs. 9,92,199 as income from the business and to delete the aforesaid sum totalling Rs. 6,66,216 from the computation of total turnover.

3.Aggrieved by the said order of the CIT (A), the Appellant filed an Appeal before the Income-tax Appellate Tribunal (ITAT). By order dated 30-12-2002, the ITAT dismissed the Department’s Appeal holding that the interest income earned by the Assessee is earned from the business activity and hence income earned thereof is to be taxed as business income. The ITAT further held that for the reasons recorded in the Revenue Appeal for the assessment year 1992-93 that the amount in the nature referred to in Explanation (baa) of section 80HHC should have been excluded. The Appeal filed by the Appellant came to be dismissed. The above Appeal challenging the order passed by the ITAT came to be admitted on the following substantial question of law :

“(A) Whether on the facts and circumstances of the case the interest of Rs. 9,92,199 received from Bank and interest of Rs. 90,31,279 received from inter-corporate deposits earned out of surplus funds by the assessee, is income from the business for the purpose of computing deduction under section 80HHC ?”

4. The learned Counsel appearing for the Appellant has submitted that the authorities below have erroneously considered the interest received from the Banks and interest received from inter-corporate deposits earned out of surplus funds by the Respondent as income from the business for the purpose of deduction under section 80HHC. She further took us through the provisions of Income-tax Act and pointed out that the Appellate authorities have totally misconstrued the provisions of the Act and as such had come to an erroneous conclusion while passing the impugned orders. She further pointed out that the interest income cannot be considered to be business income as it has no relation with the export activities of Respondent. She further submitted that the interest income from the fixed deposits cannot be included in the business profit of the Respondent as it has no co-relation at all with regard to their business activities. In support of her submission, she relied upon the judgment of this Court in the case of CIT v. Ravi Ratna Exports (P.) Ltd. [2000] 246 ITR 443 1.

5. On the other hand, learned Counsel appearing for the Respondent has supported the impugned orders. He submitted that the facts in the case of Ravi Ratna Exports (P.) Ltd. (supra) are different to the facts of the present case. He further submitted that there was a finding of the fact therein to the effect that the assessee therein had no evidence to show that the monies on which the interest was earned were advanced in the course of the assessee’s business. On the other hand, it was his contention that in the present case the findings of the fact is that though the main object of the Respondent is to extract iron ore and export the same, the assessee’s company is not barred from carrying on activity like the present one. It has been further held therein that in such a situation it cannot be said that the assessee has not carried out the business of placing various deposits and earning interest from the same activity in the course of the business of the assessee. He has further submitted that while disposing the appeal preferred by the Respondent, the CIT(A) held that the activity of earning interest on short term deposit was a business activity of the Respondent. Learned Counsel has relied upon the judgment of this Court in the case of Alfa Laval India Ltd. v. Dy. CIT [2003] 133 Taxman 740.

6. Having heard the learned Counsel for the Appellant and the Respondent and on perusal of records, we find that the CIT (A) has held at para 14.8 that though the main object of the company is to extract iron ore and export the same, yet the assessee company is not barred from carrying on activity like the present one. In such a situation, it cannot be said that the assessee has not carried on business of placing various deposits and earning interest from the same. The activity carried on can be definitely held as business activity and hence any income earned thereof is to be taxed as business income only. This shows that the authorities below on the basis of the evidence on record have held that the activity carried out by the Respondent was a part of their business activity. This conclusion of the fact cannot be interfered by this Court in an appeal under section 260A of the Income-tax Act. In any event, the learned Counsel appearing for the Appellant has failed to advance any submission to the effect that the said findings of the fact are contrary from the evidence on record or that the same are in any way perverse. The Apex Court in the case of M. Janardhana Rao v. Jt. CIT [2005] 142 Taxman 722 has held at para 10 thus :

“10. Some of the provisions of section 260A are in pari materia with various sub-sections of section 100 CPC. The provisions are sections 260-A(1), 260-A(2)(c), 260-A(3), 260-A(4) of the Act corresponding to sections 100(1), 100(3), 100(4) and 100(5) CPC”.

7. Hence, the question of fact arrived at by the authorities below cannot be interfered with in the present appeal under section 260A of the said Act as no perversity has been shown by the Appellant to the said findings.

8. The judgment of this Court in the case of Ravi Ratna Exports (P.) Ltd. (supra) is not applicable to the facts of the present case as the authorities therein had come to the conclusion that monies on which the interest was earned was not in the course of the assessee’s business. This is not the case in the present case. In the judgment relied upon by the learned Counsel appearing for the Respondent in the case of Alfa Laval India Ltd. (supra), the Division Bench of this Court has held at paras 15, 16 and 17 thus :

“15. Before us, Mr. Inamdar, learned Counsel for the assessee submitted that for computation of deduction under section 80-HHC what is relevant is the profits of the business as computed under the head ‘profits & gains of business or profession. In the present case, the interest from customers, sales tax set off, claims, refunds, etc. under the caption ‘other income’ have been assessed under the head ‘profits & gains of business or profession’. Once these income are treated as part of business income and computed under the head ‘profits & gains of business or profession’, the same cannot be excluded from the business profits while computing deduction under section 80-HHC of the Act. Relying upon the decision of this Court in the case of (CIT v. Bangalore Clothing Co.) 260 ITR 371  (Bom.), Mr. Inamdar submitted that the amounts in question being part of operational income, the same could not be excluded for the purposes of deduction under section 80-HHC of the Act.

16. Mr. Desai, learned Counsel for the Revenue on the other hand submitted that the income shown under the caption ‘other income’ had no nexus with the business of the assessee. He submitted that there is nothing on record to show that the income from portfolio management shown under caption ‘other income’ was related to the business of the assessee. He relied upon the decisions of this Court in the case of Sudarshan Chemicals ( supra), S.G. Jhaveri Consultancy Ltd. (supra) and the decision of this Court in the case of (CIT v. K.K. Doshi & Co.) 245 ITR 849 (Bom.) and submitted that the amounts in question were not part of the operational income and hence not includible for computing deduction under section 80-HHC of the Income-tax Act.

17. In our opinion, the submissions made on behalf of the assessee deserves to be accepted. In the present case, the Assessing Officer has computed the income by way of interest from the customers, sales tax set off, claims, refunds, etc. under the head ‘profits & grains of business or profession’. To put it differently, the Assessing Officer has not assessed the interest income from customers, sales tax set off, etc. under the head ‘income from other sources’ or under any other head. Having assessed these income under the head ‘profits and gains of business or profession’, it was not open to the Assessing Officer to treat these income as if assessed under the head ‘income from other sources’, so as to exclude the same from the business profits while computing the deduction under section 80-HHC of the I.T. Act. Perusal of the assessment order clearly shows that the amounts in question have not been assessed under the head ‘Income from other sources’, but, the same have been assessed under the head ‘profits & gains of business or profession’. Under section 80-HHC(3) relevant to assessment year 1989-90, the deduction was to be computed with reference to the profits of the business as computed under the head ‘profits & gains of business or profession’. In the present case, the interest income from customers and sales tax set off have been computed and assessed under the head ‘profits & gains of business or profession’ as part of the operational income and not under the head ‘income from other sources’. Therefore, the said income could not be deducted from the business profits while computing the deduction under section 80-HHC of the I.T. Act. The decisions relied upon by the Tribunal have been distinguished in the case of Bangalore Clothing Co. (supra). In the case of Bangalore Clothing Co. (supra), it is held that the Assessing Officer must ascertain the nature of receipt in each case independently. Interest income may or may not be out of business activity. If it is not part of operational business income, then, the Assessing Officer would have been justified in excluding the same for the purpose of deduction under section 80-HHC of the Act. However, in the present case, the Assessing Officer has accepted that the interest income received from customers as well as sales tax set off are assessable under the head ‘profits & gains of business or profession’. Therefore, having accepted that the said income as part of the business profit, the same could not be excluded from business profits while calculating deduction under section 80-HHC of the Act.”

9. The said judgment of the Division Bench of this Court was challenged before the Hon’ble Apex Court and the Appeal came to be dismissed by order CIT v. Alfa Laval (India) Ltd. [2007] 295 ITR 4511 (SC). In the present case, the authorities below have held that the income from the interest received by the Respondent is a part of the business profit and as such in view of the said judgment in the case of Alfa Laval India Ltd. ( supra ), the same cannot be excluded from the business profit while calculating the deduction under section 80HHC of the said Act. As such there is no infirmity committed by the CIT (A) while passing the impugned judgment. The substantial question of law is answered accordingly.

10. In view of the above, there is no merit in the above appeal and as such the same stands dismissed with no order as to costs.

[Citation : 335 ITR 472]

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