By TIOL News Service

JAIPUR, MAY 22, 2015: THE issue before the Bench is - Whether where the 'interest earned' does not have any direct and proximate nexus with the 'income from the business of export', such interest cannot be deducted as income from export u/s 80HHC(3)(a). YES is the answer.

Facts of the case

The assessee firm had filed the return declaring total income at Rs. NIL in the status of R.F. along with audit report u/s 44AB and report u/s 80HHC(4) for 15 months. Subsequently, a u/s 143(2) was served, and in compliance thereof, a representative of the assessee attended the proceedings, and produced the books of accounts, cash-book, ledger, stock register, bank book, journal, purchase vouchers, expenses vouchers and sales bill books. The AO noticed, on examining the books of accounts, that the assessee had claimed deductions u/s 80HHC 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. On an explanation with regard to deduction u/s 80HHC in respect of interest income amounting to Rs.1,76,930/-, the representative of assessee submitted that it relied upon the expert opinion, given on the subject, by Shri O.P. Vaish, Advocate, Supreme Court, filed in the case of M/s Gupta Jewel Corpn. Jaipur, a sister concern, for the A.Y 1989-90. The AO however, rejected the deduction and held that the interest income had not been derived by the assessee from export of any goods or merchandise. The AO was of the opinion that as per the provisions of Section 80HHC, the assessee couls claim entitlement to such deduction only in respect of profits derived by it from export of goods or merchandise.

On appeal, the CIT(A) held that the interest earned by the assessee 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 CIT(A) confirmed the assessment made by AO and further held that the interest income was not even its business income. On further appeal, the Tribunal upheld the order of CIT(A) by observing that 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 could not 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. Accordingly, the Tribunal held that the CIT(A) was right in holding that the income form interest was the assessee's income assessable under the head 'income from other sources' and not eligible for deduction u/s 80HHC.

The counsel for assessee submitted that since the assessee was a 100% export firm, it would be entitled to the benefit of deduction u/s 80HHC on the income of interest earned on the surplus funds. The assessee would be entitled for the benefit of deduction u/s 80HHC, even on the income of interest, which was incidental to the business. The counsel also submitted that Section 80HHHC(1) provides that where an assessee, being an Indian company or a person 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 the 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 turn over, specified in the said section, such goods bears to the total export turn over of the assessee. The counsel further submitted that provisions of Section 80HHC, were amended by the Finance Act, 1992, w.e.f 1st Apr, 1992, and since the matter was concerned with the assessment of the A.Y 1989-90, the provisions of Section 80HHC before its amendment by the Finance Act, 1992 w.e.f. 01.04.1992, would be applicable. It was thus submitted that the amendment in Section 80HHC by way of insertion of sub-section (4B), excluding interest income for the purpose of deduction u/s 80HHC, would not affect the deductions of interest income, for the period prior to the amendment. The counsel again submitted that where the assessee had earned income in convertible foreign exchange so long as it was a 100% exporter, by way of interest on the money advanced, the income of the assesse was liable for deduction u/s 80HHC.

Having heard the parties, the High Court held that,

++ it is seen that in the case of Commissioner of Income Tax vs. Shri Ram Honda Power Equip, relied on by the counsel for revenue, 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 Section 80HHC. Thus, it is found that that in CIT vs. Shri Ram Honda Power Equip, the questions framed in the present appeal 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 u/s 80HHC, prior to amendment w.e.f 1st Apr, 1992. The deductions u/s 80HHC was admissible in respect of business incomes, which did not have an element of turnover. The CBDT Circular No.564, dated 05.07.1990, was issued to clear the doubts that clause (baa) of the Explanation to Section 80HHC, was introduced w.e.f 1st Apr, 1992. The rationale for this change was explained in CBDT's Circular No.621, dated 19.12.1991. There is distinction between the words "attributable to" and "derived from". In sub-section (3) of Section 80HHC, the words used in clause (a), are "profits derived from such export shall be the amount which bears to the profits of the business". In case of Cambay Electric Supply Industrial Co. Ltd. Vs. The Commissioner of Income Tax, Gujarat-II, Ahmedabad, it was held that: "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". In sub-section (3) of Section 80HHC, the words used are, "derived from". In the view of this court, the words "derived from", are of restricted meaning, and are not as wide as are "attributable to". The 'stand-alone' provision of Section 80HHC 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-section (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 u/s 28 to 44 of the Act. Dehors Section 80HHC, 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;

++ it is seen that in case of Commissioner Income-Tax Vs. Punit Commercial Ltd., the assessee was a 100% 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. The Supreme Court had also confirmed 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'. 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 Vs. Peerless General Finance And Investment Co. Ltd., 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. It is further seen that in the case of Commissioner of Income-Tax Vs. Shri Ram Honda Power Equip, the Delhi High Court held that the word "interest" in clause (baa) of the Explanation to Section 80HHC, is indicative of net interest i.e. gross interest as reduced by expenditure incurred by the assessee in earning such interest. While applying the direct and proximate nexus test, this court is 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 u/s 80HHC(3)(a), and has to be given the same treatment for tax, as "income from other sources" u/s 56;

++ so far as amendment to Section 80HHC is concerned, this court is of the view that the amendment u/s 80HHC, by way of insertion of sub-section (4B), excluding interest income for the purposes of deduction u/s 80HHC, will also affect the deduction of interest income u/s 80HHC 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 Apr, 1992. Further, this court holds 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. Thus, all the questions framed, are decided in favour of the Revenue and against the assessee.

(See 2015-TIOL-1317-HC-RAJ-IT-LB)