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TMI Blog2005 (7) TMI 334X X X X Extracts X X X X X X X X Extracts X X X X ..... ufacture or production of any article or thing. The interest income earned from deposits with the bank is not connected with profits and gains which are derived from hundred per cent export-oriented undertaking or from manufacturing any article or thing. The expression any profits and gains derived by the assessee from a hundred per cent export-oriented undertaking to which this section applies as used in section 10B of the Act has a distinct but narrow meaning and it cannot receive a flexible or wider concept. The assessee is entitled to claim deduction of the amount which it derives as direct profit by export of manufactured goods in its newly established hundred per cent export-oriented undertaking. Any indirect or incidental profit cannot be regarded as profit earned out of the main business activity. The ratio of the decision of the Hon ble Apex Court in the cases of Pandian Chemicals Ltd.[ 2003 (4) TMI 3 - SUPREME COURT] and Cambay Electric Supply Industrial Co. Ltd.[ 1978 (4) TMI 1 - SUPREME COURT] has finally settled this issue. It is clear from the provision itself that deduction of such profits and gains deprived from hundred per cent export oriented undertaking must be u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unal. 3. Before us, the learned counsel for the assessee, Shri J. Balasubramanian, first of all argued that the assessing authority as well as the first appellate authority erred in ignoring the factual evidence and submissions made by the assessee and passing the order or confirming the additions based on misinterpretation of the principles of law. He argued that the first appellate authority failed to appreciate that establishment of letters of credit for import of raw materials and consequential margin money deposit earmarked by the bankers from the overdraft amount from the assessee and the interest earned by the assessee therefrom are essential parts of the business activity. He further argued that the margin money deposit earmarked from the overdraft of the assessee and the interest earned thereon are integral part of the internal generation and working capital of the business and the interest thus earned, being part of the profits and gains derived in the course of business fully qualifies for exemption under section 10B of the Act. He relied on the decision of the Hon'ble Apex Court in the case of CIT v. Govinda Choudhury & Sons [1993] 203 ITR 881 and argued that in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business and exemption under section 10B of the Act to be allowed on this income also. In view of these arguments, he urged the Bench to allow the appeal of the assessee. 4. On the other hand, the learned departmental representative relied on the orders of the lower authorities. 5. We have heard both the sides and considered the case records including the case laws cited before us as well as cited in the orders of the lower authorities. It is a fact that the assessee-company is engaged in the business of manufacture and export of pharmaceuticals. For this, he has obtained the letter of credit for import of raw materials for which margin money was deposited in the bank. On this deposit, the assessee has earned interest from bank and claimed it as business income in its books of account and, accordingly, claimed exemption under section 10B of the Act. First we have to go through the provisions of section 10B of the Act and the relevant portion of section 10B of the Act reads as under: " Special provisions in respect of newly established hundred per cent export-oriented undertakings.- 10B. (1) Subject to the provisions of this section, any profits and gains derived by an a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity. The Assessing Officer as well as the first appellate authority found that section 10B of the Act applies only to an assessee who derived profits and gains from 100 per cent export-oriented undertaking will be eligible to the exemption. The business of the present assessee in the export-oriented undertaking did not include making deposit with banks and the interest earned from the deposits on account of letter of credit for purchase of raw materials has no link with the profits and gains of export business of the assessee and as to how it could be claimed as interest income derived from 100 per cent export-oriented undertaking. 6.1 Now we have to go through the case laws cited by the learned counsel for the assessee. In the case of Bokaro Steel Ltd. relied on by the learned counsel for the assessee, the Hon'ble Supreme Court has decided that issue as to whether a particular transaction is in the nature of income or capital. The assessee-company was set up to produce steel and construction of the plant was not completed. As far as the interest on advances to contractors who constructed the plant is concerned, it was held that the amount is directly connected to and incident ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness is to enter into contracts. In the course of the execution of these contracts, he has also to face disputes with the State Government and he has also to reckon with delays in payment of amounts that are due to him. If the amounts are not paid at the proper time and interest is awarded or paid for such delay, such interest is only an accretion to the assessee's receipts from the contracts. It is obviously attributable and incidental to the business carried on by him. It would not be correct, as the Tribunal has held, to say that this interest is totally de hors the contract business carried on by the assessee. It is well-settled that 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. We find it difficult to comprehend how the interest receipts by the assessee can be treated as receipts which flow to him de hors the business which is carried on by him. In our view, the interest payable to him certainly partakes of the same character as the receipts for the payment of which he was otherwise entitled under the contract and which payment has been delayed as a result ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anufacture and export of pharmaceutical and in the process, he has obtained letter of credit in consequence of margin money deposit for purchase of raw materials and interest is earned on that margin money deposit and the issue is as to whether the interest will qualify for deduction under section 10B of the Act as the profits and gains are derived from 100 per cent export-oriented undertaking. This special provision in respect of newly established hundred per cent export-oriented undertaking was inserted by the Finance Act, 1988 with effect from 1-4-1989. 6.6 Now, we go through the case laws discussed by the authorities below in their orders. In the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84, the Hon'ble Apex Court has examined the expression "attributable to" and "derived from" in detail and finally held as under: '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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 71 and 72 of 1977. This Court said there [the decision in CIT v. Cochin Refineries Ltd. [1982] 135 ITR 278]: The derivation of the income must be directly connected with the business in the sense that the income is generated by the business. It would not be sufficient if it is generated by the exploitation of business asset. In the case before us, the income by way of interest from the deposits is no doubt an income derived by investing surplus cash of the assessee generated as profits of the industrial undertaking. But, it is not money derived from the business activity of the industrial undertaking but by the business activity of deposit of the business asset in banks. Within the meaning of the term 'derived from' it will not be possible to hold that the income so generated is the income falling within section 80J.'" 6.8 The Hon'ble Madras High Court in the case of CIT v. Pandian Chemicals Ltd. [1998] 233 ITR 497 has also discussed the meaning of expression "derived from" which is reproduced as it is: 'Profits or gains eligible for deduction under section 80HH of the Income-tax Act, 1961, must be derived from the actual conduct of the bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndertaking. Hence, the interest could not be treated as income derived from an industrial undertaking for purposes of relief under section 80HH.' This view has been upheld by the Hon'ble Supreme Court in the case of Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278 wherein it is held as under: "The word 'derived' has been construed as far back in 1948 by the Privy Council in CIT v. Raja Bahadur Kamakhaya Narayan Singh [1948] 16 ITR 325 when it said: The word derived is not a term of art. Its use in the definition indeed demands an inquiry into the genealogy of the product. But the enquiry should stop as soon as the effective source is discovered. In the genealogical tree of the interest land indeed appears in the second degree, but the immediate and effective source is rent, which has suffered the accident of non-payment. And rent is not land within the meaning of the definition.' This definition was approved and reiterated in 1955 by a Constitution Bench of this Court in the decision of Mrs. Bacha F. Guzdar v. CIT [1955] 27 ITR 1 at page 7. It is clear, therefore, that the word "derived from' in section 80HH of the Income-tax Act, 1961, must ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... import entitlements can, in the circumstances, only be said to be the Export Promotion Scheme of the Central Government whereunder the export entitlements become available. There must be, for the application of the words "derived from", a direct nexus between the profits and gains and the industrial undertaking. In the instant case, the nexus is not direct but only incidental. The industrial undertaking exports processed sea food. By reason of such export, the Export Promotion Scheme applies. Thereunder, the assessee is entitled to import entitlements, which it can sell. The sale consideration therefrom cannot, in our view, be held to constitute a profit and gain derived from the assessee's industrial undertaking." 6.10 The expression 'derived from' has been elaborated in Commissioner of Taxation v. Kirk [1900] A.C. 588 which is given in Stroud's Judicial Dictionary, Fourth Edition and the same is reproduced as it is: "(3) Income was derived from lands of the Crown, held under lease or licence" - section 15(iii), New South Wales Land and Income Tax Assessment Act, 1895, if either of the processes whereby the ultimate money income was mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 14. Even if such income arose in the course of business, if the same falls clearly under some other head or satisfies the test of any specific, head, and such income has to be classified and computed only under such head. The several heads of income are mentioned in section 14 and dealt with separately in sections 15 to 59 of the Act. A particular variety of income must be assignable to one or the other of these sections. If the income under consideration is taxable under any particular section, say, section 22 or 28, then it cannot be taxed under section 5 of the Act vice versa. Similarly, 'interest on securities' which is specifically made chargeable to tax under section 18 of the Act up to the assessment year 1988-89 as a distinct head, falls under that section and cannot be brought under section 28, whether the securities are held as trading assets or capital assets. The fact that income falling under a specific head may indirectly be covered by any other head will not make it taxable under the latter head. 8. Now, coming to the proposition that this interest is earned on deposits with the bank and there is no nexus to show that the profits and gains are derive ..... X X X X Extracts X X X X X X X X Extracts X X X X
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