High Court Of Rajasthan (Full Bench)
Reliance Trading Corporation vs. ITO
Assessment year 1989-90
Sunil Ambwani, CJ.
Veerendr Singh Siradhana And Prakash Gupta, JJ.
IT Appeal No. 13 Of 2002, 12 Of 2005, 19 & 20 Of 2008
May 1, 2015
Sunil Ambwani, CJ. – This Larger Bench of three Judges has been constituted, to decide the questions of law, referred by a Division Bench on 21st July. 2003, as follows :
“(1) Whether the assessee is entitled for deduction under s. 80HHC on interest income of Rs. 1.76,930 as per law as existing at the relevant assessment year ?
(2) Whether the amendment in s. 80HHC, by way of insertion of sub-s. (4B) excluding interest income for the purpose of deduction under s. 80HHC, will affect the deduction of interest income under s. 80HHC for the period prior to amendment ?
(3) In case the assessee is not earning income in convertible foreign exchange by way of interest on the money advanced, even then, whether the assessee is eligible for deduction under s. 80HHC of the Act ?”
2. For the purpose of deciding the questions of law, referred to above, we are referring to the facts of D.B. IT Appeal No. 13 of 2002.
3. The IT appeal was filed against the order dt. 25th Sept., 2001, passed by the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur in ITA No. 1642/Jp/1993, for asst. yr. 1989-90. [Reliance Trading Corpn. v. ITO  73 TTJ 851 (JP) â Ed.].
4. The return of the income was filed by the assessee-firm declaring the total income at Rs. nil in the status of RF along with audit report under s. 44AB of the IT Act, 1961 (in short ‘the Act’), and report under s. 80HHC(4) of the Act on 27th Oct. 1989, for 15 months. A notice under s. 143(2) of the Act was served, and in compliance thereof, a representative of the firm had attended the proceedings, and produced the books of account, cash-book, ledger, stock register, bank book, journal, purchase vouchers, expenses vouchers and sales bill books. The AO noticed, on examining the books of account, that the assessee-firm had claimed deductions under s. 80HHC of the Act in respect of n.p. of Rs. 23,82,541, which included Rs. 37,215 by import licence premium; Rs. 1,76,930 as interest income; Rs. 2,000 towards disallowance out of telephone expenses; and Rs. 1196 as income-tax added to the total income.
5. On an explanation with regard to deduction under s. 80HHC in respect of interest income amounting to Rs. 1,76,930, as this income did not derive from export of goods or merchandise, the Authorized Representative submitted that it relied upon paras 1.8 and 1.9 of the expert opinion, given on the subject, by Shri O.P. Vaish, advocate, Supreme Court, dt. 11th March, 1989, filed in the case of M/s Gupta Jewel Corpn. Jaipur a sister-concern, for the asst. yr. 1989-90.
6. The AO rejected the deduction and held that the interest income had not been derived by the assessee-firm from export of any goods or merchandise. As per the provisions of s. 80HHC of the Act, the assessee was not entitled to such deduction, and was entitled to deduction only in respect of profits derived by it from export of goods or merchandise. The claim was, thus, disallowed.
7. The CIT(A), Rajasthan-II, Jaipur did not accept the contention of the assessee, that the amounts of which the interest income was earned, represented the appellant’s business income. Since these amounts were not required immediately for the business by the appellant, it made short-term deposits and earned interest on them. It was argued that the income earned by exploiting a commercial asset was chargeable under the head business, and accordingly the deduction under s. 80HHC of the Act, was allowable. The CIT(A) held that the interest earned by the appellant on the deposits made out of the funds not required in its business, were not the profits derived from the export of goods or merchandise. The provisions of sub-s. (3) of s. 80HHC of the Act, could not be applied to the facts and circumstances of the case. The interest income of the appellant was not entitled to any deduction under s. 80HHC, because the basic requirements of the section were not satisfied. The interest income was not even its business income. It was the income which could be charged to tax only under the head “Income from other sources”. In Murli Investment Co. v. CIT  167 ITR 368/31 Taxman 410 (Raj.), it was held that where the assessee had some surplus funds after purchasing a property, and invested the surplus funds instead of keeping them idle, and the money used for making alterations in the property, and for making repayment to the creditors, was withdrawn by the assessee, the Tribunal was justified in holding that the interest earned by the assessee was assessable under ss. 56 and 57 of the Act, as income from other sources, and not his business income.
8. The Income-tax Appellate Tribunal, Jaipur Bench, Jaipur (in short, ‘the Tribunal’), dismissed the appeal with the findings as follows :
“After careful consideration of the above situation and position as well as the entire connected matters and precedents relied upon by both the parties, we find that there is no dispute to the fact that the surplus funds have emerged with the appellant out of export business carried on by him and that the said business of export is its regular business. The appellant invested only those funds in making advance/deposits which were not immediately required by him in the regular business of export carried by it and not that the investment was made for the purpose of doing business of money lending. No such material has been placed before us from which it could be inferred that the appellant had any intention to do the business of money lending with the set purpose of earning profit therefrom. It cannot, therefore, be said that advances made by the appellant to various parties were the result of its activities carried on continuously in an organised manner with a set purpose and with a view to earn profits. The only purpose of making the transaction was to invest the funds when they were not needed in the regular business of export for a short period. Such transactions cannot be said to be of money lending business. Accordingly, the making of advances was not even a business activity and income arising therefrom was. therefore, not an income from business or profession but an income from other source. No error is, therefore, found in the conclusion arrived at by the CIT(A) in holding that the income from interest was the appellant’s income assessable under the head income from other sources and not eligible for deduction under s. 80HHC of the IT Act 1961. The grounds 1.1 to 1.3 raised by the appellant stand rejected.”
9. Learned counsel appearing for the assessee submits that the assessee is a 100 per cent export firm. The assessee is entitled to the benefit of deduction under s. 80HHC on the income of interest earned on the surplus funds. He is entitled for the benefit of deduction under s. 80HHC, even on the income of interest, which is incidental to the business. Sub-s. (1) of s. 80HHC of the Act, provides that where an assessee, being an Indian company or a person (other than a company) is resident of India, and is engaged in the business of export out of India of any goods or merchandise, to which the section applies, there shall in accordance with and subject to the provisions of the section, the benefit of deduction be allowed in computing the total income of the assessee. The total profits of the export business of the assessee in the same proportion as the amount of export turnover, specified in the said section, such goods bears to the total export turnover of the assessee. The provisions of s. 80HHC of the Act. were amended by the Finance Act, 1992, w.e.f. 1st April, 1992.
10. In this case, we are concerned with the assessment of the asst. yr. 1989-90, and thus, the provisions of s. 80HHC of the Act. before its amendment by the Finance Act, 1992 w.e.f. 1st April, 1992, will be applicable.
11. It is submitted that sub-s. (3) of s. 80HHC of the Act further provides that for the purposes of sub-s. (a), where the export out of India is of goods or merchandise manufactured or processed by the assessee, the profits derived from such 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. Sub-section 3(b), provides that where the export out of India is of trading goods, the profits derived from such export shall be the export turnover in respect of such trading goods as reduced by the direct costs and indirect costs attributable to such export, and sub-section (c), provides that where the export out of India is of goods or merchandise manufactured (or processed) by the assessee and of trading goods, the profits derived from such export shall: (i) in respect of goods or merchandise manufactured (or processed) by the assessee, be the amount which bears to the adjusted profits of the business, the same proportion as the adjusted export turnover in respect of such goods bears to the adjusted total turnover of the business carried on by the assessee; and (ii) in respect of trading goods, be the export turnover in respect of such trading goods as reduced by the direct and indirect costs attributable to export of such trading goods.
12. Referring to the definition of ‘business’ under s. 2(15), the head of income under s. 14, profits and gains of business or profession under s. 28, and income from other sources under s. 56, it is submitted that the interest income is the income from the business includible for the purpose of s. 80HHC of the Act. Reliance has been placed on CIT v. Punit Commercial Ltd.  245 ITR 550/ 116 Taxman 191(Bom.); CIT v. Nagpur Engg. Co. Ltd.  245 ITR 806 (Bom.); CIT v. Paramount Premises (P.) Ltd.  190 ITR 259 (Bom.), against which the special leave petition was dismissed by the Supreme Court  244 ITR 54 (St); CIT v. Tamil Nadu Dairy Development Corpn. Ltd.  216 ITR 535/ 87 Taxman 1 (Mad.); CIT v. Govinda Choudhury & Sons  203 ITR 881/ 74 Taxman 331 (SC); CIT v. Crescent Films (P.) Ltd.  248 ITR 670/118 Taxman 214 (Mad.); CIT v. Sociedade De Fomento Industrial Ltd.  335 ITR 472/199 Taxman 45/9 taxmann.com 113 (Bom.) and CIT v. J.J. Exports Ltd.  324 ITR 329 (Cal.) in which it was held that where the assessee is a 100 per cent exporter, the entire business income under s. 80HHC(3)(a), is deemed to be profits derived from the export of goods, and therefore, the interest income could only fall under the head “Business income”.
13. In Punit Commercial Ltd. (supra), it was held that the interest income could only fall under “Business income”. Sec. 80HHC3(a), deals with a 100 per cent exporter, whereas s. 80HHC3(b), deals with composite business. In the latter case local sales are included, hence, the entire profits are entitled to deduction, and will include interest income also.
14. In Nagpur Engg.Co. Ltd. (supra), the Bombay High Court held that the Tribunal was justified in directing the AO to treat the interest income from fixed deposits, as eligible profits of the business while computing the deduction under s. 80HHC and s. 80-I of the Act.
15. In Paramount Premises (P.) Ltd. (supra), a Division Bench of the Bombay High Court held, that the assessee received deposits in installments from prospective purchasers while the work of construction was in progress. If the purchasers failed to make deposits by stipulated dates, they had to pay interest. The authorized capital of the assessee was small but the amounts received as deposits were large. Idle amounts were deposited with the bank or given on temporary loans until such time as they were required for construction, and thus, the interest was earned on these amounts. There is nothing in the judgment, which may relate to the deductions under s. 80HHC of the Act.
16. In Tamil Nadu Dairy Development Corpn. Ltd. (supra), the matter did not relate to deduction of the profits under s. 80HHC. The judgment has been cited, to refer to the term “business”, which was held to be a word of very wide connotation, and by no means determinate in its scope and has to be considered with reference to each particular kind of activity and occupation of the person concerned.
17. In Govinda Choudhury & Sons (supra), the reliance has been placed on the term “Business income”, or “income from other sources”. The assessee was executing Government contracts in the settlement of disputes with the State Government with regard to payments under the contracts and referred to arbitration. During the accounting period, the respondent received a certain amount under the awards of the arbitrators including interest for delay in payment of the amounts. It was held by the Supreme Court that the interest can be assessed under the head “Income from other sources” only if it cannot be brought within one or the other of the specific heads of charge. The Supreme Court overturned the decision in Govinda Choudhary & Sons v. CIT  109 ITR 497 (Ori.).
18. In Crescent Films (P.) Ltd. (supra), a Division Bench of the Madras High Court held that in any business, credit is an indispensable part and advances of a temporary nature with or without interest are a common incident of business. It is not necessary that every business should register itself under the Money Lenders Act and make a claim in relation to any advance made by it only in the capacity of a person carrying on money lending business. The money lending in the case had become irrecoverable by reason of the picture failing at the box office and the producer being unable to repay his debts, and the money was treated to be a trading loss.
19. In Sociedade De Fomento Industrial Ltd. (supra), a Division Bench of the Bombay High Court held that, though the main object of the assessee was to extract iron ore and export the same, the assessee was not barred from keeping the money in the bank and intercorporate deposits for earning interest. The activity carried on could be definitely held business activity and hence, any income earned therefrom was to be taxed as business income only. The interest income had to be taken into account for the purposes of s. 80HHC.
20. On question No. 2, it is submitted on behalf of the assessee that the amendment in s. 80HHC by way of insertion of sub-section (4B), excluding interest income for the purpose of deduction under s. 80HHC, will not affect the deductions of interest income, claimed under s. 80HHC, for the period prior to the amendment. He has relied on CIT v. Sharda Gum & Chemicals  288 ITR 116/ 172 Taxman 347 (Raj.) and Alfa Laval India Ltd. v. Dy. CIT  266 ITR 418/ 133 Taxman 740 (Bom.)
21. In Sharda Gum & Chemicals (supra), this Court held that where export of goods and merchandise is not the exclusive business of the assessee, but he has some other business also, sub-s. (3) leaves no room for doubt that where an assessee is engaged in more than one business and is not exclusively engaged in the business of export, his income from such exclusive business of export out of India of goods and merchandise is not to be separately computed, but is to be carved out in proportion from his total business income computed in accordance with the provisions of the Act. The AO had fallen into an error by delving into something which was not germane for the purpose of arriving at the income from the business or profession as computed under the head “Profits and gains of business” under the provisions of the Act. In the year 1989-90, s. 80HHC provided that where the business carried on by the assessee does not consist exclusively of the export out of India of the goods or merchandise to which the section applies, the amount which bears to the profits of the business as computed under the head “Profits and gains of business or profession”, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee, shall be profit derived from the export of goods or merchandise out of India. In computing such profit of business, no exclusion has to be made of any income which is to be assessed under the head “Profits and gains of business or profession”.
22. In Alfa Laval India Ltd. (supra), the Bombay High Court held that the interest from customers and sales-tax set off received by the assessee being assessed as part of the business profits under the head “Profits and gains of business of profession”, the same could not be excluded while calculating deduction under s. 80HHC.
23. On question No. 3, it was submitted that where the assessee has earned income in convertible foreign exchange so long as he is a 100 per cent exporter, by way of interest on the money advanced, the income of the assessee is liable for deduction under s. 80HHC of the Act. Relying on P.R. Prabhakar v. CIT  284 ITR 548/154 Taxman 503 (SC), it is submitted that profit not derived from the export, is not necessary. It should be relatable to exports. In this judgment, the Supreme Court relied on the judgment of the Special Bench of the Tribunal, Delhi Bench in International Research Park Laboratories Ltd. v. Asstt. CIT  50 ITD 37 wherein interpreting the CBDT Circular, it was held as follows:
“Now, we come to whether the commission received could form part of export profits. Here again, we are unable to see it differently. It is no doubt true that this commission is not turnover but it is a profit relatable to exports. Coming back to s. 80HHC(1) if the assessee is an exclusive exporter without having any local sales, then the profit on commission is admittedly includible as profit of the business computed under the head ‘Profits and gains of business or profession’ and the whole of it would be eligible for exemption under cl. (a) of sub-s. (3) of s. 80HHC. When such commission could be regarded as profit derived from export for the purpose of cl. (a), how can the same be excluded for the purpose of cl. (b) unless it amounted to discrimination. The interpretation of cls. (a) and (b) must be harmonious and not discriminatory, cutting against each other. What is sauce for the goose is also sauce for the gander. Secondly, we have just mentioned that this profit is profit derived from export and export is the basis or the foundation or the nexus. The argument of Shri B.B. Ahuja and all his effort to show to us that it has no reference to the export is, therefore, unacceptable to us. In our opinion, the argument advanced by Shri Ahuja overlooks the fact that the commission would not have come to the assessee had he not been engaged in the export business. He sought to justify his argument by referring to subsequent amendments made from 1st April, 1992. whereunder as we have pointed out above by adding cl. (baa) to the Explanation at the end of sub-s. (4A) w.e.f. 1st April, 1992. 90 per cent of this commission, etc., is not to be regarded as profits derived from export business and this amendment as explained in the Memorandum of Bill was only to clarify the position.”
24. The Supreme Court agreed with the law laid down by the Tribunal, as the Revenue did not prefer any appeal against it.
25. Learned counsel appearing for the assessee has also referred to the judgment of the Supreme Court in CIT v. K. Ravindranathan Nair  295 ITR 228/165 Taxman 282, in which it was held that in arriving at the profit earned from export of self-manufactured goods and trading goods, the profits and losses in both trades have to be taken into consideration. If after the adjustment, there was a positive profit, the assessee will be entitled to the deduction under s. 80HHC(1), and if there was a loss, the assessee will not be entitled to any deduction. It was held that the processing charges, which are part of gross total income, form an item of independent income like rent, commission, brokerage etc., and therefore, 90 percent of the processing charges has also to be reduced from the gross total income to arrive at the business profits, and therefore, it has also to be included in the total turnover in the formula for arriving at the business profits in terms of cl. (baa) of the Explanation to s. 80HHC(3). While arriving at the export profits under s. 80HHC(3), as it stood in the asst. yr. 1993-94, the processing charges are to be included in the total turnover.
26. Mr. R.B. Mathur, learned counsel appearing for the IT Department, has referred to the cases relating to the deductions on export profits under s. 80HHC. and has relied on direct and proximate test, in submitting that where the interest has no direct or proximate nexus with the business of export, such interest will not be excluded under sub-s. (3) of s. 80HHC of the Act. He has relied on Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT  227 ITR 172/93 Taxman 502 (SC); CIT v. Swani Spice Mills (P.) Ltd.  332 ITR 288/201 Taxman 81 (Mag.)/12 taxmann.com 432 (Bom).; Liberty India v. CIT  317 ITR 218/183 Taxman 349 (SC); Pandian Chemicals Ltd. v. CIT  262 ITR 278/129 Taxman 539 (SC); and Cambay Electric Supply Industrial Co. Ltd. v. CIT  113 ITR 84 (SC).
27. In Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra), the Supreme Court held, while discussing the classification of income under ss. 4, 14, 56 and 57 of the Act, that interest income is always of revenue nature unless received by way of damages or compensation. Where interest is earned by assessee on investment of share capital, it can be assessed separately under the head “income from other sources”. The income attracts tax as soon as it accrues.
28. In Swani Spice Mills (P.) Ltd. (supra), the Bombay High Court, after discussing several judgments, held in para 20, that the income of an assessee which is chargeable to tax under s. 4, is required for the purposes of computation to be classified under various heads of income specified in s. 14. Sec. 56, which deals with income from other sources is attracted where the income does not belong to a category which is specified in any of the other heads elucidated in s. 14. The income earned by an assessee, which utilizes its surplus funds in order to earn interest cannot be classified under the head of business income, but will fall for classification as income from other sources.
29. In CIT v. Shri Ram Honda Power Equip  289 ITR 475/158 Taxman 474 (Delhi) it was held that the interest income kept by the assessee for availing of credit facilities from bank, does not qualify the business income, and, therefore, will go to reduce the deductible amount for the purposes of s. 80HHC. Reliance was placed on the judgments in K. Ravindranathan Nair (supra) Punit Commercial Ltd. (supra) and the judgments of the Kerala High Court in Abad Enterprises v. CIT  253 ITR 319/120 Taxman 503, CIT v. Jose Thomas  253 ITR 553/121 Taxman 210 (Ker.) and CIT v. Abad Fisheries  258 ITR 641/125 Taxman 616 (Ker.) as well as Urban Stanislaus Co. v. CIT  263 ITR 10/130 Taxman 244 (Ker.).
30. In Liberty India (supra), the Supreme Court, dealing with the deduction on Duty Entitlement Passbook Scheme (DEPB), held that there is a distinction between profit linked tax incentives and investment linked tax incentives. Sections 80-I, 80-IA and 80-IB have a common scheme. The incentives in the form of deductions are linked to profits and not to investment. DEPB is an incentive. Source of duty drawback receipt lies in s. 75 of the Customs Act and s. 37 of the Central Excise Act. The remission of duty is on account of the statutory/policy provisions of these Acts. The profits derived by way of such incentives do not fall within the expression “profits derived from industrial undertaking”. The trade discounts, rebate, duty drawback, and such similar items are deducted in determining the costs of purchase. The duty drawback, rebate etc. should not be treated as adjustment (credited) to cost of purchase or manufacture of goods. They should be treated as separate items of revenue or income and accounted for accordingly.
31. In Cambay Electric Supply Industrial Co. Ltd. (supra), it was held that s. 80E provides for deduction in respect of profits and gains from specified industries in the case of certain companies, providing for certain special deduction to be made in computing the total income in the case of specified industries, over and above the other general deductions contemplated by the Act. Such deductions must be attributable to the profits and gains of the business. In para 8, the Supreme Court held as follows :
“8. As regards the aspect emerging from the expression ‘attributable to occurring in the phrase ‘profits and gains attributable to the business of the specified industry (here generation and distribution of electricity) on which the learned Solicitor General relied, it will be pertinent to observe that the Legislature has deliberately used the expression ‘attributable to’ and not the expression ‘derived from’. It cannot be disputed that the expression ‘attributable to’ is certainly wider in import than the expression ‘derived from’. Had the expression ‘derived from’ been used it could have with some force been contended that a balancing charge arising from the sale of old machinery and buildings cannot be regarded as profits and gains derived from the conduct of the business or generation and distribution of electricity. In this connection it may be pointed out that whenever the legislature wanted to give a restricted meaning in the manner suggested by the learned Solicitor General it has used the expression ‘derived from’, as for instance in section 80J. In our view since the expression of wider import, namely, ‘attributable to’ has been used, the legislature intended to cover receipts from sources other than the actual conduct of the business of generation and distribution of electricity.”
32. Mr. Anuroop Singhi, learned counsel appearing for the Department, submits, relying on CIT v. Rajasthan Land Development Corpn.  211 ITR 597 (Raj.), Murli Investment Co. (suprs), CIT v. Avon Apparels [D.B. IT Appeal No. 41 of 1999, dated 11-7-2002], Shri Ram Honda Power Equip (supra), CIT v. Meea & Ceiko Pumps (P.) Ltd. [ITAT No. 298 of 2003, dated 27-11-2014], CIT v. Greatways (P.) Ltd.  171 Taxman 316 (Punj. & Har.), that where surplus funds ‘are parked with the . bank and interest is earned thereon, it can be only categorized as income from other sources. This receipt merits separate treatment under s. 56 of the Act, which is outside the ring of profits and gains from business and profession. Such income which could only be earned under s. 56. goes entirely out of the reckoning for the purposes of s. 80HHC.
33. We have considered the submissions at the Bar, and find that in Shri Ram Honda Power Equip. (supra), the question Nos. 1 and 3 were addressed and answered in favour of the Revenue. The discussion in this judgment, is close to the question raised, and has received careful consideration, with reference to the object and purpose of providing deductions under s. 80HHC, prior to amendment w.e.f. 1st April, 1992. The deductions under s. 80HHC was admissible in respect of business incomes, which did not have an element of turnover. The CBDT Circular No. 564, dt. 5th July, 1990 [(1990) 85 CTR (St) 53],was issued to clear the doubts that cl. (baa) of the Explanation to s. 80HHC of the Act, was introduced w.e.f. 1st April, 1992. The rationale for this change was explained in CBDTs Circular No. 621, dt. 19th Dec, 1991 [(1992) 101 CTR (St) 1].The profit earned by the assessee during the relevant assessment period from the commission was also treated to be profit, derived from export since it would not have come to the assessee had he not been engaged in the export business. The decision was approved in P.R Prabhakar (supra).
34. There is distinction between the words “attributable to” and “derived from”. In sub-s. (3) of s. 80HHC of the Act, the words used in cl. (a), are profits derived from such export shall be the amount which bears to the profits of the business”.
35. In Cambay Electric Supply Industrial Co. Ltd. (supra), it was held as follows; “In our view, since the expression of wider import, namely ‘attributable to’, has been used, the legislature intended to cover receipts from sources other than the actual conduct of the business of generation and distribution of electricity”.
36. The Supreme Court in Vellore Electric Corpn. Ltd. v. CIT  227 ITR 557/93 Taxman 401, held in the context of s. 80-I, which uses the words “profits and gains attributable to any priority industry”, answering the question in affirmative, that the income earned by way of interest on the investment in securities of the amounts appropriated to the contingencies reserve, which was mandatorily required to be maintained by it in terms of the Electricity (Supply) Act, 1948. It was held that the condition statutorily incorporated is incidental to the carrying on of the business of generation and distribution of electricity by the assessee.
37. In sub-s. (3) of s. 80HHC of the Act, the words used are, “derived from”. In our view, the words “derived from”, are of restricted meaning. and are not as wide as are “attributable to”. The ‘stand alone’ provision of s. 80HHC of the Act has to be construed on its own wordings. A distinction sought to be made in respect of the definition of ‘profits of the business” under sub-s. (baa) of the Explanation, to mean the profits of the business as computed under the head “Profits and gains of business or, profession”, which incorporates the entire procedure for computing the business income under s. 28 to 44 of the Act. De hor s. 80HHC of the Act. the consistent approach is that where the statutory provision talks of “income derived from” the business activity in question, the nexus theory should be applied in order to determine whether a particular item of income is business income or not.
38. In Punit Commercial Ltd. (supra), the assessee was a 100 per cent exporter. The AO had proceeded on the footing that the interest income was business income, and that it was not income from exports, and in these circumstances, the High Court held that since the entire business activity of the assessee is only of exports, the entire business income is deemed to be profit derived from export of goods. Both the judgments of the Kerala High Court in K. Ravindranathan Nair (supra), and Southern Cashew Exporters v. Dy. CIT  130 Taxman 203 (Ker.), were affirmed by the Supreme Court, confirming the findings of the Kerala High Court, that interest earned on fixed deposits for the purposes of availing of credit facilities from the bank does not have an immediate nexus with the export business, and therefore, has to necessarily be treated as income from other sources and not as business income.
39. It is the settled proposition in interpretation of the statutes, that while ascertaining the true scope of a provision in a statute, attention must necessarily be paid not only to the text, but also the context. In Reserve Bank of India v.. Peerless General Finance & Investment Co. Ltd.  61 Comp. Cas. 663 (SC) it was observed that interpretation must depend on the text and the context. Where the plain literal interpretation of a statutory provision produces a manifestly unjust result, which could not have been intended, the Court must avoid such interpretations.
40. In Shri Ram Honda Power Equip. (supra), the Delhi High Court held that the word “interest” in cl. (baa) of the Explanation to s. 80HHC of the Act, is indicative of net interest i.e. gross interest as reduced by expenditure incurred by the assessee in earning such interest.
41. 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 business of export, the interest cannot be deducted as income from export under s. 80HHC(3)(a) of the Act, and has to be given the same treatment for tax, as “income from other sources” under s. 56 of the Act.
42. The question No. 1 is, thus, answered in favour of the Revenue, and against the assessee.
43. So far as question No. 2 is concerned, on the aforesaid discussion, we are also of the view that the amendment in s. 80HHC, by way of insertion of sub-s. (4B), excluding interest income for the purposes of deduction under’ s. 80HHC of the Act, will also affect the deduction of interest income under s. 80HHC of the Act. for the period prior to the amendment, inasmuch as the applicability of the principle of direct and proximate nexus to the business income, will apply both, to the provisions of the Act prior to, and after the amendment, which came into effect by the Finance Act, 1992, w.e.f. 1st April, 1992. The question No. 2, is thus decided in favour of the Revenue and against the assessee.
44. 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 the profits retained for export business. The question No. 3, is also decided in favour of the Revenue and against the assessee.
45. The reference is answered in the aforesaid terms.
46. A copy of the order be placed in all the connected files.
[Citation : 376 ITR 53]