2010 (4) TMI 751 - HC - Income Tax

Business income Vs. Other sources - Deduction u/s 80HHC - The activity of discounting local sale bills or of advancing loans to sister concerns was held to be only an additional activity, which commences after the activity related to the business of export has ended - Merely because an assessee carries on business and the income of the business is invested in deposits, that would not result in an inference that the return on the investments must partake of the character of business income - Where the assessee engages in an independent line of business, interest earned on deposits cannot be regarded as falling under the head of profits and gains of business or profession - Such income would fall for classification as income from other sources Regarding deduction u/s 80HHC - In the present case, the contention of the assessee both before the Assessing Officer and in appeal was that it carries on the business of the export of seeds, spices and similar goods - If the assessee has no export orders and if there is still a balance, the assessee used its funds to discount the purchase bills of private parties for short periods of time of three to five weeks - Income received by way of discounting charges and interest on intercorporate deposits would not fall under the head of profits and gains of business or profession but would fall under the head of income from other sources - Having no direct and proximate nexus with the export activity such income has to be wholly kept out of the reckoning for computing the deduction under section 80HHC - The appeal is disposed of

Issues Involved:
1. Classification of income from discounting charges and interest on intercorporate deposits.
2. Determination of deduction under clause (baa) of the Explanation below sub-section (4B) of section 80HHC.

Issue-wise Detailed Analysis:

1. Classification of Income from Discounting Charges and Interest on Intercorporate Deposits
The primary issue before the court was whether the income of Rs. 31,49,942 received by the assessee from discounting charges and interest on intercorporate deposits should be treated as income from business or income from other sources.

Background:
- The assessee was engaged in the export of spices, seeds, and other goods, and also in cleaning, fumigation, and warehousing.
- During the year under consideration, the assessee received Rs. 31.49 lakhs as discounting charges and interest on intercorporate deposits.
- The Assessing Officer classified this income as income from other sources, stating that the assessee was not engaged in financing or money-lending and that these activities were additional to the business of export.

Tribunal's View:
- The Tribunal affirmed the view of the Commissioner (Appeals) and held that the income had a direct nexus with the export activity, thus qualifying as business income.

Court's Analysis:
- The court referred to various judgments to determine the classification of such income. It emphasized that income earned by investing surplus funds does not constitute business income unless it springs directly from the business activity.
- The court cited the Supreme Court's decision in Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT, which held that interest earned on short-term deposits is taxable as income from other sources if the business has not commenced.
- Similarly, in CIT v. Bokaro Steel Ltd., the Supreme Court distinguished between income earned from investment of surplus funds and income directly linked to the business activity.
- The court also referred to decisions from other High Courts, which consistently held that interest earned on surplus funds should be classified as income from other sources unless there is a direct and proximate nexus with the business activity.

Conclusion:
- The court concluded that the income from discounting charges and interest on intercorporate deposits did not have a direct and proximate relationship with the export activity and thus should be classified as income from other sources.
- However, the court granted the assessee an opportunity to substantiate its alternative claim that the discounting of local sale bills constituted an independent line of business.

2. Determination of Deduction Under Clause (baa) of the Explanation Below Sub-section (4B) of Section 80HHC
The second issue was whether the Tribunal was correct in directing that 90% of the net interest and bill discounting charges, after allowing a set-off of interest paid, should be taken into account while determining the deduction under section 80HHC.

Background:
- The Tribunal had directed that 90% of the net interest and bill discounting charges should be considered for the deduction under section 80HHC.

Court's Analysis:
- Both counsel for the Revenue and the assessee agreed that this issue was covered against the assessee by the court's earlier judgment in CIT v. Asian Star Co. Ltd., which held that such income should not be included in the business profits for the purposes of section 80HHC.

Conclusion:
- The court answered the second question in favor of the Revenue, stating that the Tribunal's direction was incorrect.

Separate Judgments:
There were no separate judgments delivered by different judges in this case. The judgment was delivered collectively by the court.

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