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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 ..... e business of manufacture and export of pharmaceuticals. The assessee claimed its business income as exempt under section 10B of the Income-tax Act, 1961. The assessment was completed under section 143(3) of the Act by the Assessing Officer. The assessee claimed the interest income earned from margin money deposit with Bankers for obtaining letter of credit for import of raw materials as business income and the assessee claimed deduction on this income also under section 10B of the Act. The Assessing Officer while framing the assessment, treated this interest income as income from deposits and, accordingly, it was taxed under the head 'Income from other sources'. Aggrieved, the assessee preferred an appeal before the CIT (Appeals) and the CIT (Appeals) confirmed the action of the Assessing Officer. Aggrieved, the assessee is in second appeal before the Tribunal. 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 misinterpretat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g idle, had been deposited in the bank for the purpose of earning interest. He also relied on the case law of the Hon'ble Apex Court in the cases of CIT v. Bokaro Steel Ltd [1999] 236 ITR 315 and Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 227 ITR 172. Further he relied on the decision of the Hon'ble Apex Court in the case of CIT v. Haribhai Estate (P.) Ltd [2000] 242 ITR 706 wherein it was held that the interest on fixed deposit, interest on temporary loans, etc., were to be considered as business income and not income from other sources and it was held that it is a question of law. Finally, he argued that the interest on margin money deposit which was set apart from the overdraft account of the assessee is inextricably linked to the assessee's business and this income is derived from the business and it should be treated as income from 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 cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t and Regulation) Act, 1951 (65 of 1951), and the rules made under that Act; (ii) 'relevant assessment years' means the ten consecutive assessment years referred to in sub-section (3); (iii) 'manufacture' includes any- (a) process, or (b) assembling, or (c) recording of programmes on any disc, tape, perforated media or other information storage device; (iv) 'produce', in relation to any article or thing referred to in clause (1) of sub-section (2) includes production of computer programmes." In this case, though the assessee engaged in the business of manufacture and export of pharmaceutical, it has obtained letter of credit for import of raw material and for that it has deposited margin money with the bank and on that margin money it has earned interest and claimed it as business income being a part of business activity. 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 maki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... up of the plant and machinery. In this view of the matter the ratio laid down by this court in Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 227 ITR 172, will not be attracted. The more appropriate decision in the factual situation in the present case is in CIT v. Bokaro Steel Ltd. [1999] 236 ITR 315 (SC). The appeal is dismissed: 6.3 The Hon'ble Supreme Court in the case of Govinda Choudhury & Sons has decided the issue of interest income as under: "This brings us to a consideration of the second question. The sum of Rs. 2,77,692 was received by the assessee as interest on the amounts which were determined to be payable by the assessee in respect of certain contracts executed by the assessee and in regard to the payments under which there was a dispute between the two parties. The assessee is a contractor. His business 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ermed as income from other sources as this is on account of execution of Government contracts and the dispute was regarding the payments under contracts. Further it was held that the interest can be assessed as income from other sources only when it does not fall under any other heads of income and the interest partakes the character of payment on which the arbitration is awarded. Even in the case of Haribhai Estate (P.) Ltd., the Hon'ble Apex Court has referred the question of law, as to whether the interest on fixed deposits, interest on temporary loans, arrears of sales deposit were to be considered as business income and not income from other sources. We have observed that the facts of these cases are distinguishable from the facts of the present case in hand. In the present case, the assessee is engaged in the manufacture 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under: "(2) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in law in treating the interest income from bank deposits as business income of the assessee for the purpose of section 80J of the Income-tax Act, 1961." Following the decision of the Kerala High Court in CIT v. Cochin Refineries Ltd. [1982] 135 ITR 278, it was answered the above question as under: "At the outset itself we might state that we answer question No.2 against the assessee and in favour of the revenue in view of the decision of this Court in regard to the same assessee in respect of the assessment year 1970-71, when the same question was referred to this court in ITR Nos. 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 profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the deposit in favour of the Electricity Board, the income derived from the deposit with the Electricity Board could not be said to have been derived from the industrial undertaking. The immediate source of interest was the deposit itself. In other words, the immediate and effective source of the interest was the deposit and not the industrial undertaking. The fact that the amount was assessable as business income would not be sufficient to hold that the interest income was derived from the actual conduct of the business of the industrial undertaking. Hence, the interest could not be treated as income derived from an industrial undertaking. 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 inquir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the raw naphtha would justify the finding that the said products are not 'derived from refining of the crude petroleum'. The refining of crude petroleum produces various products at different stages. Raw naphtha is one such stage. The further refining, or cracking, of raw naphtha results in the said products. The source of the said products is crude petroleum. The said products must therefore, be held to have been derived from crude petroleum." We do not think that the source of the import entitlements can be said to be the industrial undertaking of the assessee. The source of the 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 considerat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax and computation of total income be classified under the following heads of income: (a) Salaries. (b) (....) (c) Income from house property. (d) Profits and gains of business or profession. (e) Capital gains. (f) Income from other sources. Where an item of income falls specifically under one head, it has to be charged under that head and not other. Whatever be the nature of the activity or the nature of the income, the income of an assessee is to be classified and computed under the specific heads enumerated in 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 ch ..... X X X X Extracts X X X X X X X X Extracts X X X X
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