2012 (10) TMI 23 - HC - Income Tax

Deduction u/s 80HHC - exclusion of interest income while computing the business profits - assessee contesting for inclusion of same on ground that interest need not be from money lending business alone for it to constitute business income and if the source of funds which are invested, is from a business activity, any accretion thereto or in respect thereof, including interest, must be held to be business income - Held that - Mere fact that an assessee carries on business would not result in an inference that the income which is earned by way of interest would fall for classification as business income. Where an assessee invests its surplus funds in order to earn interest and to obviate its funds lying idle, such income would not fall for classification as business income. This is particularly so in a situation where the business of the assessee does not consist in the investment of funds. 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. In applying the provisions of section 80HHC(1), the Legislature has made a specific provision for the deduction of such profits of business as are derived from the export activity. The expression derived from has been construed to require a direct and proximate nexus with the business of export. Absent such a nexus, the income which results from the activity would have to be excluded from reckoning for the purposes of the formula prescribed by section 80HHC. It is impossible for this Court to come to the conclusion that interest received by the assessees bears a direct and proximate relationship with their export activity. order of tribunal excluding interest income for computation of business profits for the purpose of section 80HHC is upheld. Further, merely because the Assessing officer did not re-open the assessment u/s 147 r.w.s. 148, the assessee would not be entitled to contend that they were entitled to the benefit of section 80HHC despite the conclusion of this Court that they are not entitled to the same - Decided in favor of Revenue

Summary

Issues Involved:
1. Whether the interest income of Rs. 40,20,418/- should be excluded while computing profits for the purpose of deduction under section 80HHC of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Nature of Interest Income:
The primary issue was whether the interest income of Rs. 40,20,418/- received by the assessee should be considered as "business income" for the purpose of deduction under section 80HHC. The assessee argued that the interest income should be included in the business profits as it was derived from surplus funds generated from the business activity. However, the Assessing Officer (AO) and the appellate authorities classified the interest income as "income from other sources," not as business income. The Tribunal upheld this classification, noting that the assessee was not engaged in the business of money lending or regular investments.

2. Compliance with Section 80HHC Provisions:
The court presumed that the second proviso to section 80HHC, which was applicable before its amendment on 1st April 1989, was complied with by the assessee. This proviso required the assessee to debit an amount equal to the deduction claimed to the Profit & Loss Account and credit it to a reserve account, to be utilized for business purposes. The court examined whether the reserve created was indeed utilized for the purpose of the assessee's business. The assessee admitted that the reserve was not required for the export business and was instead invested with sister-concerns, earning interest income.

3. Classification of Income:
The court analyzed various precedents to determine the classification of income. It was noted that merely because an assessee carries on business, it does not mean all income received is business income. The court referred to the judgments in CIT v. Hindustan Antibiotics Ltd. and CIT v. Indo Swiss Jewels Ltd., which established that income from surplus funds invested for business purposes could be considered business income. However, in the present case, the investments with sister-concerns were not linked to the assessee's business activities but were made to earn interest, thus classifying the interest as "income from other sources."

4. Direct and Proximate Nexus:
The court emphasized that for income to be classified as business income under section 80HHC, there must be a direct and proximate nexus with the business activity. The judgment in Commissioner of Income-tax v. Swani Spices Mills Pvt. Ltd. was cited, which held that income from surplus funds invested does not constitute business income unless it springs directly from the business activity. In the present case, the interest earned from investments in sister-concerns did not have such a nexus.

5. Partial Deduction Acceptance:
The assessee argued that the partial acceptance of the deduction under section 80HHC by the AO implied compliance with the section's provisions. The court rejected this argument, stating that partial acceptance does not entitle the assessee to the entire benefit if the income is correctly classified under a different head.

Conclusion:
The court concluded that the interest income of Rs. 40,20,418/- should be excluded while computing profits for the purpose of deduction under section 80HHC. The question referred to the court was answered in the affirmative, in favor of the Revenue and against the assessee. The reference was disposed of without any order as to costs.