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TMI Blog2010 (4) TMI 751X X X X Extracts X X X X X X X X Extracts X X X X ..... count 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 - Income-tax Appeal No. 1019 of 2007 - - - Dated:- 19-4-2010 - CHANDRACHUD D. Y. DR., DEVADHAR J. P. JJ Suresh Kumar for the Appellant. Atul K. Jasani with P.C. Tripathi for the Repondent. JUDGMENT The judgment of the court was delivered by Dr. D. Y. Chandrachud J.- This appeal by the Revenue under section 260A of the Income-tax Act, 1961 has been admitted on the following substantial questions of law : "(a) Whether on the facts and circumstances of the case, the Appellate Tribunal was justified in holding that the various incomes received during the relevant year that is of Rs. 31,49,942 should be treated as income from business, and not income from other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee discounts purchase bills of private parties for periods between 3 and 5 weeks against which the assessee receives interest at rates between 20 to 22 per cent. as against the nominal interest charged by a bank on bill discounting. These receipts of interest are credited to the interest account to reduce deficits on account of interest payment. 4. The Assessing Officer came to the conclusion that the assessee is engaged in the business of export and not in financing or money-lending., 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. On this view, the Assessing Officer came to the conclusion that the income realized from discounting local sale bills constituted income from surplus funds and not from the business of export. The claim of the assessee that this income would be taxable under the head of profits and gains of business was held not to be acceptable. In appeal, the Commissioner (Appeals) held that an identical issue had arisen before him in the appeal of the assessee for the assessment year 1996-97 and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uted under the head "Profits and gains of business or profession" as reduced by : (1) ninety per cent. of any sum referred to in clauses (iiia), (iiib), (iiic), (iiid) and (iiie) of section 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. 8. Consequently, in view of clause (baa) of the Explanation, profits of the business have to be computed under the head "Profits and gains of business or profession" in accordance with the provisions of sections 28 to 44D of the Income-tax Act, 1961. These profits are then liable to be reduced in accordance with the provisions of sub-clauses (1) and (2) as noted above. The underlying rationale for sub-clauses (1) and (2) is that items which are unrelated to export turnover such as export incentives or receipts such as brokerage, commission, interest, rent, charges or other receipts of a similar nature are liable to be excluded even though they form part of the profits and gains of business or profession. These are the salient aspe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee does not engage in the business of financing or of money-lending ; (iii) The interest that was realized on surplus funds utilized for earning interest cannot be regarded as business income and can only fall for classification as income from other sources ; (iv) The income earned by way of discounting of local sale bills and on intercorporate deposits has absolutely no nexus with the export activity of the assessee and constitutes income which is generated by the utilization of surplus funds for earning interest. 12. On the other hand, it has been submitted on behalf of the assessee that: (i) Any income arising out of a temporary exploitation of the assets of business would constitute business income ; (ii) The surplus cash available with the assessee constitutes a business asset and the temporary exploitation of that asset in bill discounting or in short-term deposits or, for that matter, in intercorporate deposits would constitute business income ; (iii) The consistent view of this court is that where the assessee invests its surplus funds not for the purposes of earning interest as such but so as not to keep the money idle, the income which is generated from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmitted that it had not yet commenced business and, in any event, the income was derived from funds borrowed for setting up its factory and should be adjusted against the interest payable on borrowed funds. The Supreme Court held that neither of these two factors would affect the taxability of the income earned by the company. Under the Act, the total income of the assessee was chargeable to tax under section 4. The total income had to be computed in accordance with the provisions of the Act and section 14 lays down, for the purpose of computation, classification in of income under several heads. The Supreme Court held that it was a basic proposition that an assessee could have different sources of income each of which would be chargeable to income-tax. The profits and gains of business or profession was one head but if the assessee had not commenced business, there was no question of income being assessed under that head. None the less, the income received by the assessee could be classifiable under other heads shown in section 14. If an assessee, as in that case keeps its surplus funds in short-term deposits in order to earn interest, such interest, held that the Supreme Court, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowed in the subsequent judgments of the Supreme Court in CIT v. Karnataka Power Corporation [2001] 247 ITR 268 and Bongaigaon Refinary and Petrochemicals Ltd. v. CIT [2001] 251 ITR 329. In Bongaigaon, the issue before the Supreme Court was whether the Tribunal was justified in holding that the items of income derived by the assessee during the formation period for the main business did not constitute taxable income but were liable to be adjusted against the project costs. The Supreme Court explained its earlier decision in Tuticorin to be a case where the question related to interest earned by a company during its formative period by investments. In other words, the decision did not apply where the receipts were directly connected with or were incidental to the work of construction as explained in Bokaro Steel. The Supreme Court answered the issue which was raised before it by holding that on items excluding interest the question would have to be answered in favour of the assessee. In other words, the interest income which was received by the assessee during the course of its formative period would constitute taxable income. 17. In CIT v. Govinda Choudhury and Sons [1993] 203 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against the Revenue. In a civil appeal arising out of the judgment of the Kerala High Court, the Supreme Court set aside the judgment of the High Court and held that it was not in dispute that the appeal must succeed in view of its judgment in Tuticorin. 20. These judgments of the Supreme Court establish that the income of an assessee which is chargeable to tax under section 4 is required for the purposes of computation to be classified under various heads of income specified in section 14. Section 56 which deals with income from other sources is attracted where the income does not belong to a category which is specified in any of the other heads elucidated in section 14. Income earned by an assessee, which utilizes its surplus funds in order to earn interest cannot be classified under the head of business income but will fall for classification as income from other sources 21. In Tuticorin [1997] 227 ITR 172, the Supreme Court formulated the principle by holding that in the usual course interest received by the assessee from bank deposits and loans would be taxable as income under the head "Income from other sources" under section 56. The rationale for this is that where t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erative Sugar Mills Ltd. [2000] 243 ITR 2 (SC) the assessee had received interest payments on moneys which were deposited for the opening of a letter of credit for the purchase of machinery. In this background, the court emphasized that this was not a case where surplus share capital money which was lying idle was deposited with the bank for earning interest. The facts in Autokast [2001] 248 ITR 110 were held by the Supreme Court to fall in the same category as Tuticorin [1997] 227 ITR 172, that being a case where the assessee had kept the moneys borrowed from a financial institution for the purchase of plant and machinery in short-term bank deposits and had used them in bill discounting until payment was made for the plant and machinery. 22. In this background, it would be appropriate now to consider some of the judgments of this court, which have a bearing on the question. In CIT v. Paramount Premises P. Ltd. [1991] 190 ITR 259 (Bom), the assessee was engaged in the construction of buildings and had received : (i) deposits in instalments from prospective purchasers while the work of construction was in progress and the purchasers were liable to pay interest for non-paymen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lassified. In the facts of that case, the Division Bench held that the short-term investment of surplus money generated from a public issue did not spring or emanate from the business activity of the assessee. These funds, the court held, did not constitute funds acquired in the course of the business activity and the interest earned from short-term deposits could not be treated as business income. 24. The subsequent decision of a Division Bench in CIT v. Indo Swiss Jewels Ltd. [2006] 284 ITR 389 (Bom), involves a case where the assessee who was engaged in the business of manufacturing industrial jewels had earned interest income through the investment of its funds in intercorporate deposits. The judgment of the Division Bench notes that the appellate authority in that case was satisfied that the funds were kept by the assessee for short-terms for payment of imported machinery and that as a matter of fact all the deposits were utilized for the payment of machinery. The Division Bench explained that it was clear on the facts that the intercorporate deposits were set up for payment of imported machinery and were in fact utilized for that purpose. It was in these facts that the ju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . So construed, the judgment of the Division Bench is confined to the facts as they emerged before the court in that case. The judgment of the Division Bench in Lok Holdings [2009] 308 ITR 356 (Bom) cannot be held to lay down a broad proposition of law that an investment of surplus funds by an assessee who carries on business must necessarily be construed to result in the generation of business income by way of interest received on investment. 27. Ordinarily, where an assessee invests funds surplus to the business and earns interest, such income does not constitute business income but falls under the head of income from other sources. 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. Every income which is earned by an assessee who carries on business is not business income. On the contrary, the position in law is that it is only where income earned on account of interest springs out of or emanates from the business activity of the assessee, that this income can be regarded as being of the nature and chara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 ITR 475 that where surplus funds are parked with a bank and interest is earned thereon, it can only be categorized as income from other sources. Such a receipt merits separate treatment under section 56, which is outside the ring of profits and gains of business or profession. Hence, the view of the Delhi High Court is that such a receipt would be out of the reckoning for the purposes of section 80HHC. A similar view has been taken by the Delhi High Court in CIT v. Goldtex Furnishing Industries [2008] 174 Taxman 187 and CIT v. Cosmos International [2009] 318 ITR 314 ; 177 Taxman 363. 32. In Kashmir Arts v. CIT [2008] 166 Taxman 237 the Delhi High Court held that the interest earned by an assessee who is an exporter on FDRs kept with a bank as margin money as a condition for availing of credit facilities could not be termed as business income but income from other sources. Such income could not be included in the profits and gains of business in terms of the Explanation (baa)(1) to sub-section (4A) of section 80HHC. 33. For completing the narration this line of authority on section 80HHC, it would be necessary to refer to the judgment of a Division Bench of this court in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 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.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. The funds required for the business were, according to the assessee, provided either by its directors/share-holders or borrowed from banks or private parties. The export bills of the assessee, against the fulfilment of export orders are sent for collection to banks and the assessee receives the discounted value of the sale proceeds. According to the assessee, the moneys which are so received are utilized for the repayment of its loans. 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 pa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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