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TMI Blog2002 (8) TMI 276X X X X Extracts X X X X X X X X Extracts X X X X ..... under s. 80HHC, held that interest income of Rs. 59,544 was liable to be assessed under the head "other sources" and, therefore, does not qualify for deduction. He accordingly assessed the above amount under the head "other sources" and treated it as assessee s taxable income. Deduction under s. 80HHC on the balance income was allowed. 3. The assessee impugned above action of the AO in appeal and claimed that interest received on short-term deposit and on money advanced for a temporary period was "business income" and not income from :other sources" it was emphasised that the assessee was a 100 per cent export unit and interest was earned on loan given temporarily. The interest was part of business income. The assessee had been paying and receiving interest from sister concerns as a reciprocal arrangement and as part of its business. The interest was earned by utilizing surplus funds to minimize burden and to improve profitability of business. It was a measure of business prudency. Therefore, on facts and in the circumstances of the case, the interest has to be treated as a part of business income. 4. The learned Dy. CIT(A) upheld the order of the AO with the following observat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he point involved. The Jaipur Bench of the Tribunal had decided the issue against the assessee in the case of Reliance Trading Corporation vs. ITO (ITA No. 1642/Jp/1993, dt. 25th Sept., 2001). The Delhi Bench of the Tribunal on the other hand, in the case of Asstt. CIT vs. Brij Bhushan Lal Sons (2000) 69 TTJ (Del) 379 had held that interest income earned on deposits was business income for purposes of s. 80HHC of the IT Act. The matter was accordingly referred to the Hon ble President by the Jaipur Bench to constitute a Special Bench. 6. After noticing the divergence of opinion, the Hon ble President referred the question for consideration by the Special Bench. In the above background, the matter was heard by this Special Bench at Jaipur. 7. We have heard Sh. N.C. Dhadda, the learned chartered accountant for the assessee Sh. Dilip Shivpuri and other learned Departmental Representatives for the Revenue. The learned representative of the assessee submitted at the very outset that the changes brought about by the legislature in s. 80HHC w.e.f. 1st April, 1992, were not applicable in this case as assessment year involved was asst. yr. 1990-91. In this connection, our attention wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ports and it has nexus with export business and, therefore, it is "eligible profit of business". The assessee, in this connection, relied upon a direct decision of Hon ble Bombay High Court in the case of CIT vs. Punit Commercial Ltd. (2000) 163 CTR (Bom) 594 : (2000) 245 ITR 550 (Bom) wherein their Lordships observed as under: "Held, that, in the instant case, s. 80HHC(3)(a) of the IT Act, 1961, was applicable as the assessee is a 100 per cent exporter. Hence, the entire business income was deemed to be profit derived from export of goods. Therefore, the interest income could only fall 'under business income.' Sec. 80HHC(3)(a) deals with a 100 per cent exporter. Hence, the entire profits are entitled to deduction. This would include interest income also." 10. The assessee further placed reliance on other two decisions of Bombay High Court in CIT vs. Nagpur Engineering Co. Ltd. (2000) 245 ITR 806 (Bom), the High Court followed is own earlier decision in CIT vs. Paramount Premises (P) Ltd. (1991) 190 ITR 259 (Bom), where interest from deposits pending use or from deposits required for obtaining guarantee for its business was treated as eligible for consideration as business inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p of business and the said case has no application to a case where business was already in existence. It was further submitted that the above case was distinguishable on facts as the present was not a case of investment, but utilization of commercial funds. The assessee had given money to carry on money lending business. It was accordingly, submitted that only principle (circumstance No. (v) mentioned by their Lordship was applicable in this case. The learned counsel once again drew our attention to cl. (3) of the partnership deed to emphasise that partners of the assessee-firm could carry "any other business" from time to time. The above clause distinguished his case from the case of CIT vs. Rajasthan Land Development Corporation. The learned counsel for the assessee in this connection, drew our attention to the decision of Hon ble Gujarat High Court in the case of CIT vs. Motilal Hirabhai Spg. Wvg. Co. Ltd. 1977 CTR (GUj) 674 : (1978) 113 ITR 173 (Guj). It was further submitted that advance of money by the assessee was never treated as an investment in the past. The intention of the assessee was clear that advances were not made as an investment. In support of this, the learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee was buying of rough gem stones and selling them after processing. He drew our attention to Part (III) of the return submitted by the assessee. The nature of business or profession is described as "manufacturer and exporter of emerald and stones". The assessee nowhere claimed that it was carrying on "money-lending business". He further argued that there was no material on record to support claim of the assessee that it carried the business of money-lending. The learned Departmental Representative drew our attention to the definition of "money lend" as per. The Rajasthan Money Lenders Act. In this connection, the learned Departmental Representative placed strong reliance on decision of Hon ble Rajasthan High Court in the case of CIT vs. Rajasthan Land Development Corporation. Their Lordships has laid down five circumstances/ situations to determine whether the interest income could be assessed as "business" or income from "other sources". Their Lordships have laid down the following principles: "The following principles are applicable in assessing interest income under the provisions of the IT Act, 1961: (i) interest on fixed deposits and other deposits before the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred to decision of Bombay Bench in the case of Nirja Birla vs. Asstt. CIT (1998) 61 TTJ (Bom) 346 : (1998) 66 ITD 148 (Bom) and read at p. 163 of the report. He also referred to decision of the Supreme Court in CIT vs. Sutlej Cotton Mills Supply Agency Ltd. 1975 CTR (SC) 228 : (1975) 100 ITR 706 (SC) where it is observed that when shares are purchased with borrowed funds, it is normally indicative of intention to trade. No borrowed funds are shown to have been utilized in making advances in this case. No inference that interest was earned as part of business, could be drawn from facts and circumstances of the case. The learned Departmental Representative further argued that even if interest was business income, it was not "income derived from export". The deduction under the statutory provisions was to be allowed only on "profits derived from export". The test of sub-s. (1) to s. 80HHC was not satisfied. Formula for computation under s. 80HHC(3) will come into play only if conditions of above sub-s. (1) are satisfied. The learned Departmental Representative relied upon decision of Privy Council in the case of CIT vs. Raja Bahadur Kamakhaya Narayan Singh Ors. (1948) 16 ITR 325 (P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that amendment made by Finance Act, (No. 2) Act, 1991, under s. 80HHC was not declaratory or retrospective. It was prospective only. This was clear from Circular No. 621 issued by CBDT on 19th Dec., 1991, referred to earlier. The learned counsel further argued that sub-s. (3) of s. 80HHC is a substantive provision and could not be retrospectively applied through the introduction of an Explanation. In this connection, the learned counsel drew our attention to the case of CIT vs. S.R. Patton (1991) 92 CTR (Ker) 197 : (1992) 193 ITR 49 (Ker). The learned counsel further argued that while deciding the case, their Lordships of Bombay High Court did not take into account circular and explanatory notes explaining the statutory provisions. The learned counsel drew our attention to the decision of the Special Bench of Tribunal in the case of Pearl Polymers Ltd. vs. Dy. CIT, wherein the learned Members have held that the above provision was prospective and not clarificatory in nature. 19. The assessee further emphasized that money was not kept by the assessee with others for safe custody. It was given to earn interest. The assessee was not governed by Money Lenders Act. The provisions o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the total turnover of the business carried on by the assessee.' [The other sub-sections of s. 80HHC are not being produced as they are not relevant for discussion]. 21. For the asst. yr. 1991-92, a change was introduced in sub-s. (3) of s. 80HHC by combining the effect of both cls. (a) and (b), but that change is not material for our purposes. 22. A major change was brought about in s. 80HHC w.e.f. 1st April, 1992, through the addition of cl. (baa) in the Explanation to the section and addition of sub-s. (4A) by the Finance (No. 2) Act, 1991, providing meaning to expression profits and gains as under: "(baa) profits of the business means the profits of the business as computed under the head Profits and gains of business or profession as reduced by: (1) ninety per cent of any sum referred to in cl. (iiia), (iiib) and (iiic) of s. 28 or of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits; and (2) the profits of any branch, office, warehouse or any other establishment of the assessee situate outside India." 23. After carefully consideration of the submissions of both the part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pretation upon the said phrase, that interpretation will be binding upon the Revenue". 27. The aforesaid decisions of the Constitutional Bench thus puts an end to all doubts regarding binding nature of circulars issued by the Board. In fact, this is first judgment of five Hon ble Judges giving precedent to the circulars over interpretation given by the Court. It will not be unreasonable to infer that officers functioning under the Board should not be permitted to argue against the circulars of the Board. Circulars are binding on all officers or authorities functioning under the income-tax. Therefore, when the relevant circular says that the amendments are to take effect from 1st April, 1992, and shall apply from asst. yr. 1992-93 onward, it is not open to the Revenue authorities to contend and apply these amendments in earlier assessment years. This would be contrary to the decision of the Hon ble Supreme Court referred to above. 28. It was vehemently contended on behalf of the Revenue that decision of Hon ble High Court on the above issue is more elaborate than contrary decision of Hon ble Punjab Haryana High Court. This argument has only stated to be rejected. As a subordin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... puted under the head "profit and gains of business" in the ratio of export turnover with the total turnover. The item of business income derived by the assessee engaged in the business of exports, which do not directly relate to export business could not be taken out or reduced from such profits and gains of business for purposes of working the deduction allowable under s. 80HHC." 31. From the above discussion, it is clear that in the asst. yr. 1990-91, the assessee was to show that it was engaged in the business of export out of India of any goods or merchandise to which s. 80HHC was applicable to qualify for the deduction, which was to be computed as provided in s. 80HHC(3) of the Act. What was to be taken into account was profits and gains of business in the same proportion which export turnover bore to the total turnover. It was not necessary that every receipt, to qualify for the deduction must be derived from export of goods or merchandise". It should be part of profit and gains of business. 32. In the present case, the Revenue authorities have held that interest is income from other sources and not from business . It is Revenue s stand that the assessee did not carry ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to whom it has been advanced during the relevant assessment years. No resolution or other authority has been brought on record from which it could be said that the assessee was engaged in the business of advancing the loans." 36. It was thus treated to be case where business of advancement of loan could not be carried by the association as per its memorandum. In order to appreciate above observations, we are to bear in mind the following observations of Lord Sterndale, M.R. in the case of IRC vs. Korean Syndicate Ltd. (1921) 12 Tax Cases 181, 202 (CA): "If you once get the individual and the company spending exactly on the same basis, then there would be no difference between them at all. But the fact that the limited company comes into existence in a different way is a matter to be considered. An individual comes into existence for many purposes, or perhaps sometimes for none, whereas a limited company comes into existence for some particular purpose and if it comes into existence for the particular purpose of carrying out a transaction by getting possession of concessions and turning them to account, then that is a matter to be considered when you come to decide whether doin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee, a public limited company had stopped running its textile mill and started earning interest on advances and deposits. The assessee had been showing income of interest under the head "other sources" in the past. Even in the disputed assessment year, interest income was shown under the head "other sources". However, subsequently, the company claimed that interest was liable to be assessed as "business income" as money was being advanced and deposited for earning interest in an organized manner. Their Lordships of Gujarat High Court, after considering cls. 25 and 26 of the article of association of company agreed with the view taken by the Tribunal in assessing interest income under the head "business". The Court further observed as under: "The Tribunal then considered the activity of the assessee and it found that it advanced monies to various parties with a view to achieving the object with which it was formed and that there was a systematic activity of advancing monies to various parties from time to time. The Tribunal was obvious referring to the material produced before it by the assessee which shows not only how the board of directors dealt with the question of advances ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r would satisfy the test of business if its volume is taken into account. Last year, the above referred to two parties had advanced loans to the assessee and there were closing credit balances of Rs. 4,14,051 and Rs. 2,36,382 in accounts of Jaipur Trading Company and M/s S.K. Gems, respectively. Last year, interest was paid and allowed as a deduction and treated as a business transaction. This year, interest is received on account of credit given. The interest earned like interest paid is an act of business prudency. This earning of interest cannot be looked into in isolation and taken as a source of income. It is part and parcel of the main business and interest earned is an incidental receipt generated in the manner business of export is carried with gaps of time. The payment and receipt of interest are two sides of the same coin. They cannot be looked at differently and given different treatment for purposes of taxation. We are, therefore, of view that as expenditure of interest has been treated part of business, the receipt has also to be held "business receipt". Having held that interest is business receipt, there is no need to examine whether it would fall under the residuary ..... X X X X Extracts X X X X X X X X Extracts X X X X
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