9911796707
TMI Blog2010 (1) TMI 851X X X X Extracts X X X X X X X X Extracts X X X X ..... al income. The return was processed under section 143(1). Subsequently it was noted by the Assessing Officer that the assessee had received interest under section 244A amounting to Rs. 34,33,50,201 which was included in its total income under the head of income from business and deduction was claimed under section 80P(2)(a)(i). The facts which led to the granting of interest of this magnitude to the assessee are that during the assessment years 1986-87 to 1996-97 the assessee claimed deduction under section 80P(2)(a) with reference to its entire income. Initially the entire tax deducted at source aggregating to Rs. 5,98,02,427 on the interest income was refunded after processing the returns but subsequently these assessments were reopened by way of notice under section 148 and the deduction was denied under section 80P with reference to interest earned from investments made out of statutory reserve funds. A demand aggregating to Rs. 105 crores was raised. The learned CIT(A) upheld the refusal of deduction. However the Tribunal, overturning the view of the learned first appellate authority, came to hold that the assessee was entitled to deduction under section 80P in respect of such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to". The Hon'ble Supreme Court in the case of India Leather Corpn. (P.) Ltd. v. CIT [1997] 227 ITR 552 has held that in order that an income could be said to be attributable to manufacture or processing of goods, the earning of income must be directly connected with the manufacture or process of goods. As payment of income-tax was the application of the profit and hence interest on refund on such income-tax earned would also have connection with the application and not with the earning of income from business or banking. Hence the interest on Income-tax refund was not attributable to the banking business. (iii) The favourable decision of the Tribunal in assessee's own case for assessment year 2001-02 was distinguishable because in that case the issue was about the interest under section 244A arising out of excess deduction of tax at source whereas in the instant year the interest under section 244A did not arise from the excess tax deducted at source. He, therefore, approved the action of the Assessing Officer in not granting deduction under section 80P(2)(a)(i) in respect of interest under section 244A amounting to Rs. 34.43 crores. 4. Preliminary issue - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the rule of res judicata does not apply in the Income-tax matters and each year is a separate and independent unit of assessment. He argued that the Department was entitled to argue the merits of the case since some of the important aspects of the substantial question of law involved in this appeal, were omitted to be raised and considered by the Tribunal in the succeeding year. He also pressed in service the judgment of the Hon'ble Apex Court in Oswal Agro Mills Ltd. 's case (supra) in which it has been held that the 'substantial question of law' cannot be decided on the basis of the 'principle of consistency' and that is why the Superior Court remanded the matter to the High Court for fresh decision on merits. We note that this Special Bench has been constituted solely to decide the issue of the allowability or otherwise of deduction under section 80P on the amount of interest on income-tax refund. The argument about the principle of consistency could have been taken before the Division Bench, which if convinced, could have followed the earlier order. However the DB, after hearing the rival parties at length on the merits of the case, did not agree with the earlier view taken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Dharmendra Textiles Processors [2008] 306 ITR 277 when the later Bench doubted the correctness of view expressed by the earlier Bench, on the same issue in Dilip N. Shroff v. Joint CIT [2007] 291 ITR 519 (SC). We, therefore, do not find any infirmity in the action of the DB in making reference for the constitution of the Special Bench when it found difficult to accept the earlier view taken in assessee's own case. Under these circumstance we are of the considered opinion that the exception to the application of principle of consistency gets attracted and the appeal needs to be decided on merits rather than following the earlier view taken by the Tribunal in its own case. The submission made by the ld. AR on this issue, therefore, being devoid of any merits in the present circumstances, deserves and is hereby rejected. 5. Now we proceed to deal with the issue on merits. After considering the rival submissions and perusing the relevant material on record in the light of precedents cited before us, we find that the dispute in this appeal rotates around the determination of the question as to whether the assessee is entitled to deduction under section 80P on the amount of int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness as used in section 80P. III. Scope of phrase "attributable to" the eligible business. I. Head of Income under which interest on income-tax refund falls:- 7.1 The learned Sr. Counsel for the assessee submitted that the Assessing Officer passed order for assessment years 1986-87 to 1996-97 wrongly denying deduction under section 80P and collected tax of Rs. 105 crores. It was only pursuant to the order passed by the Tribunal in such years that the action of the Assessing Officer was corrected and the assessee became entitled to refund of the amount along with interest. He stated that the assessee was engaged in banking activity which was the only source of its income. The money belonging to the assessee in the nature of banking business was its stock-in-trade. The incorrect recovery effected by the Revenue authorities led to the deprivation of its stock-in-trade and when the same was refunded with interest, then the interest could not have a different character from that of the principal. He emphasized that if the Assessing Officer had not wrongfully recovered the said amount, the same would have been employed in the business of banking resulting into th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was restored and resultantly interest would also partake of the same character as that of the principal amount, being the circulating capital and hence such interest shall fall under the head 'Profits and gains of business or profession'. 7.2 In the opposition the learned Departmental Representative reiterated the reasoning given in the impugned order for holding that interest on income-tax refund was assessable under the head 'Income from other sources'. He submitted that for an income to fall under the head 'Profks and gains of business or profession', it was necessary that it should arise out of some real, substantial and systematic or organized course of activity. It was argued that the income-tax is levied after the income is earned and not before it. To support his contention that income-tax is liability of personal nature, he relied on the judgment of the Hon'ble jurisdictional High Court in the case of CIT v. Ghatkopar Estate and Finance Corpn. (P.) Ltd. [1989] 177 ITR 222 (Bom.) in which it was held that interest on income-tax-liability was not allowable deduction because it was a liability of personal nature. He also relied on the judgment of the Hon'ble Supreme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... special provisions for computing profits and gains from certain specified categories of businesses. It is not the case that the assessee is covered under any of such special provisions. But for that, section 28 contains a list of income which shall be chargeable to tax under this head. This section contains clauses (i) to (vii). Clause (i), which is a general in nature, provides that "the profits and gains of any business or profession which was carried on by the assessee during the previous year" shall be chargeable to income-tax under the head 'Profits and gains of business or profession'. The other specific clauses of section 28 are not applicable to the present situation. We, therefore, need to determine whether the interest on income-tax refund satisfies the conditions of section 28(i). On dissection of this provision, the following ingredients are noted. There should be 'profits and gains'; such profits and gains should be 'of any business or profession'; such business or profession should be 'carried on by the assessee at any time during the previous year'. Thus the primary condition is that the amount sought to be included under this clause should be from carrying on of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee had an overdraft account with a bank. It claimed that a sum of Rs. 28,488 was allowable expenditure under section 37(1) of the Act as representing the interest which it had to pay on the overdraft account taken for the payment of income-tax. The ITO disallowed the deduction by holding that the payment of income-tax could not be for the purpose of business. It was claimed before the Tribunal that if the tax liability had not been discharged, then the entire business would have crippled and, therefore, interest on such overdraft account be allowed as an expenditure for business purposes. The Tribunal refused to interfere with the view taken by the authorities below. Similar opinion was formed by the Hon'ble High Court by holding that a trader carries on business for the purpose of earning profit and not for the purpose of paying income-tax. No business is ever carried on nor can it be carried on with the object of paying the income-tax. Though the earning of profits and payment of taxes are not isolated and independent activities of a business, it cannot be said that the expenditure incurred or laid out for the purpose of payment of income-tax shall fall within the scope of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vant year. Even though there is relation between the earning of profits and payment of income-tax, but that would not make it deductible under the head 'Profits and gains of business or profession'. 7.5 Coming back to section 28(i) it is noted that only the profits and gains of any business which was carried on by the assessee at any time during the year shall be chargeable to income-tax under the head 'Profits and gains of business or profession'. Thus in order to qualify for an item of income to be classified under this head, it is important that such income must be earned from the business which is carried on by the assessee. Turning to the facts of the instant case it is observed that the income-tax was paid by the assessee in earlier years, which was certainly not "for the purpose of business" and hence not deductible under this head. As the said tax liability was discharged not in the carrying on of the business for the relevant years but after the determination of income, it was an event not taking place in carrying on the business of the assessee. Eventually when the amount of income-tax was refunded along with interest under section 244A that would also, naturally, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sposal of the assessee was its stock in trade and when such stock in trade was wrongly taken away it retained the character of its circulating capital and on the refund of such amount the circulating capital stood restored and for wrongful deprivation of such money, the interest so earned should be considered as falling under the head 'Profits and gains of business or profession'. We are not agreeable with this contention. The criteria to determine the head under which a particular income shall fall is not to ascertain whether or not the circulating capital of the assessee was invested but what the nature and character of income which results from such deployment of circulating capital. If for example the assessee a bank, utilizes its circulating capital in the purchase of a building or land appurtenant thereto, the annual value of such building shall fall under the head 'Income from house property', and not 'Profits and gains of business or profession' for the reason that the nature of income which results from the purchase of building falls under the head of rental income. It is seen that even in the instant case the assessee earned income from house property to the tune of Rs. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness, it falls under the head 'Profits and gains, of business or profession'. The Hon'ble Supreme Court in the case of Mehsana District Central Co-operative Bank Ltd. v. ITO [2001] 251 ITR522 has held that the locker rent received by the assessee was a part of ordinary banking business as shown by section 6(1)(a) of the Banking (Regulation) Act, 1949 and, therefore, the income derived by the assessee bank from hiring out of safe deposit vaults was income from banking business and deductible under section 80P(2)(a)(i). From these judicial pronouncements it can be discerned that if the income results from the activities specified in the Banking (Regulation) Act, 1949, the same would fall under the head "Profits and gains of business or profession". We have also perused the relevant part of Banking Regulation Act, 1949. The ld. AR could not point out any clause treating the payment of income-tax as part of banking business, which obviously cannot be the case. 7.9 We do not find any substance in the contention of the learned A.R. that return by the Income-tax Department of its circulating capital along with interest would amount to the dropping of interest on such refund under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in East India Housing and Land Development Trust Ltd. v. CIT [1961] 42 ITR 49 and S.G. Mercantile Corpn. (P.) Ltd. v. CIT [1972] 83 ITR 100 held that such income was taxable under the head 'Income from house property' and not 'business income'. Thus it can be seen that once the conditions of section 22 are satisfied, the income has to be classified under that head and other matters, even if having some bearing, go out of consideration. Similarly an income to come with the ambit of Chapter IV-E, it is fundamental that it should be profit or gain arising from the transfer of capital asset. If there is income from the transfer of capital asset, the same is taxable under this head, notwithstanding the fact that the funds for the acquisition of such capital asset were business or non-business. In the like manner for an income to be charged under the head 'Profits and gains of business or profession' under Chapter IV-D it is required that the same should be covered in any of the clauses of section 28, unless it is the case of some special provisions of this Chapter. When the income falls under any of the above four heads exclusively, it is classified accordingly. If however there is inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of Donald Miranda (supra) the firm was carrying on the business and was assessed to income-tax under the provisions of Income-tax Act, 1918. It was dissolved in 1945. In respect of the chargeable accounting period from March 24, 1944 to March 24, 1945, the firm was taxed to excess profit tax under the Excess Profits Tax Act, 1940. In accordance with the provisions of Excess Profit Tax Act, the firm became entitled to refund of portion of excess profit tax. The share of three partners was determined. The assessee claimed that the amount refunded was business profit and hence exempt from tax under section 25(4) of the Act. The no rejected the submission. The Tribunal held that the sum which was refunded was income from business and was therefore exempt from income-tax under section 25(4) of the Act.Tne High Court held that the amount so refunded was income from other sources. When the matter finally came up before the Hon'ble Supreme Court, it was held that the amount of refund would be income from business assessable under section 10 of the Income-tax Act and not income from other sources under section 12. It is relevant to consider that the amount of excess profit tax payabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as deduction against the business income. However when subsequently the refund of the excess tax paid or interest thereon (equal to Rs. 5 in our above example) was received, it was but natural that the business income, that was earlier compressed stood swelled accordingly. However in the present appeal we are considering the provisions of Income-tax Act, 1961 in which payment of income-tax is not deductible under the head 'Profits and gains of business or profession'. Logically the refund of income-tax would also not become liable for taxation under the same head. In that view of the matter the interest on income-tax refund would also form part of income-tax refund which cannot be charged to tax under the head 'Profits and gains of business or profession'. If the amount of Income-tax had been allowable against the business income under the Income-tax Act, 1961, then clearly the refund of tax and interest on such refund should have been chargeable under the head of business income. It is no body's case that the interest on income-tax refund is not chargeable to income-tax. The controversy is centered only on the determination of the head under which such interest shall fall. As the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssion'. Clause (id) of section 56(2) provides that "income by way of interest on securities, if the income is not chargeable to income-tax under the head 'Profits and gains of business or profession' shall be chargeable to income-tax under the head 'Income from other sources'. A bare perusal of this provision indicates that what is referred to in this clause is interest on securities and not other interest. Section 2(28B) defines "interest on securities" to mean,- (i) interest on any security of the Central Government or a State Government; (ii) interest on debentures or other securities for money issued by or on behalf of a local authority or a company or a corporation established by a Central, State or Provincial Act;" 7.15 From the above definition of "interest on securities", we find that the payment of income-tax does not fall in any of the two sub-clauses of section 2(28B). Whereas sub-clause (ii) refers to interest on debentures or other securities issued by or on behalf of a local authority or company etc., sub-clause (i) refers to interest on security of the Central Government or the State Government. On payment of income-tax, no debenture or any ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section will not dilute the finding which is to the effect of the inclusion of interest on income-tax refund under the head 'Income from other sources'. The question of allowing deduction under section 80HHC in those orders is only secondary. Further the judgments in Smt. B. Seshamma's case (supra) and Travancore Tea and Estates Ltd.'s case (supra) holding interest on income-tax refund as coming under the head 'Income from other sources' are not in the context of section 80HHC. We, therefore, approve the view taken by various Benches of the Tribunal holding that interest on income-tax refund falls under the head 'Income from other sources' and, with respect, differ with the orders holding contrary view. 7.17 The learned first appellate authority has given a finding that there is a difference between the interest on income-tax refund resulting from the excess deduction of tax at source and the excess collection of tax by way of assessment. We are not convinced with this finding, because in both the cases it is only the payment of income-tax, be it at the call of the Revenue or the voluntary payment by the assessee pursuant to assessment. There is no qualitative difference b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted. He stated that only the income from the banking activity of the assessee would entitle it to deduction under section 80P. He relied on the recent judgment of the Rajasthan High Court in the case of CIT v. Sirohi S.B.V. Bank Ltd. [2009] 221 CTR (Raj.) 395 in which it was held that interest on loan extended to employees was not in the capacity of the banker but from an employer to employees. Interest earned by the assessee on various loans extended to its employees on provident fund and house building loans were held to be not eligible for deduction under section 80P(2)(a)(i). He submitted that similar view was also taken in Bihar Rajya Sahkari Bhoomi Vikas Co-operative Bank Ltd. v. CIT [2009] 313 ITR 247 (Pat.). 8.3 When the attention of the ld. DR was drawn towards the language of section 80P(2) granting deduction on the 'profits and gains' of business attributable to banking business and further this expression stands specifically included in the definition of 'income' under section 2(24), he came out with the argument that clause (viia) of section 2(24) specifically deals with the profits and gains of any business of banking and hence there was no need to go by claus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... banking. 8.5 It is further worth noticing that what is deductible under section 80P is the amount 'profits and gains' of business attributable to carrying on the business of banking. The employment of the expression 'profits and gains of business' is to be seen in contradiction to the expression 'income' chargeable under the head 'Profits and gains of business or profession'. The later expression is used in several sections of the Act including 56, 71, 72, 80E, 80HHC (baa), 139, 145, 184, 185, etc. The scope of income under this expression is strictly confined to items, which fall under Chapter IV-D. If there is some income which, albeit, has some nexus with the business but is not covered under section 28 to 44DB, that shall go out of reckoning for the purposes of that section. On the other hand, the expression "profits and gains of business" is wider in scope and encompasses not only the income chargeable under the head 'Profits and gains of business or profession' but also other incomes which have some relation with the business, though not directly from the carrying on of the business. So when the Legislature has chosen to employ the later expression in section 80P, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... species. Thus it is explicitly clear that 'gain' is wider term and includes items other than 'profits' also. Coming back to the context, we find that the employment of expression 'profits and gains' in section 80P(2) demonstrates the intention of the Legislature that the benefit of deduction is not confined to the income arising directly from the banking business (as covered by 'profits'), which falls under the head 'Profits and gains of business or profession', but also includes other items of income (as covered by 'gains'), which have some relation with the business of banking even though they do not fall under the head of business income. The instances of such income which fall within the territory of 'gains' may be anything which have some relation but do not directly emanate from the carrying on of the business of banking. The Hon'ble Supreme Court in Cocanada Radhaswami Bank Ltd.'s case (supra) has held that the interest on securities even if separately classifiable under a different head, shall not cease to be a part of the income from business. Our view is fortified by the judgment of the Hon'ble Rajasthan High Court in the case of CIT v. Hycron India Ltd. [2009] 308 ITR 25 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y cooperative society were includible in the total income de hors clause (viia) of section 2(24). In the absence of specific clause (viia) in the pre-insertion era, but from the using of the expression 'profits and gains' in section 80P(2) it is clearly indicated that the profits and gains of business of banking by the co-operative societies were very much includible in the total income even prior to the insertion of clause (viia). Here it is important to note that simultaneous with the insertion of clause (viia) to 2(24) by the Finance Act, 2006 with effect from 1-4-2007, the Legislature also inserted sub-section (4) of section 80P to provide that the provisions of section 80P shall not apply in relation to any co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank. When we view the insertion of clause (viia) to section 2(24) in juxtaposition to sub-section (4) of section 80P with effect from 1-4-2007 it becomes abundantly clear that the scope of the benefit of deduction under section 80P has been curtailed and restricted only to primary agricultural credit societies and primary co-operative agricultural ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84. He submitted that the learned CIT(A) was not correct in interpreting the judgment of the Hon'ble Supreme Court in the case of India Leather Corpn. (P.) Ltd. (supra) as laying down that the interest on income-tax refund was not attributable to the banking business. He contended that the Tribunal in assessee's own case has taken view in its favour in the immediately succeeding assessment year on the reasoning that the interest on income-tax refund was profits and gains attributable to the banking business. He stated that even if it was held that the interest on income-tax refund did not fall under the head 'Profits and gains of business or profession', still the interest on income-tax refund shall qualify for deduction under section 80P on the ground that the phrase 'attributable to' has been used in sub-section (2) of section 80P which has much wider scope than the phrase "derived from". He stated that any income having relation with the banking business, whether directly or indirectly would call for inclusion in the amount eligible for deduction. He relied on the order passed by Mumbai Bench of the Tribunal in Abhyudaya Co-operativ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n other words, the income should directly spring from such source and the relation between the source and the income should be that of the first degree and not incidental or remote. However, the other phrase 'attributable to' has a wider range and brings within its fold not only the items of income having direct nexus but also the items of income having some commercial or casual (causal) connection with the source. However it is essential that the income and source should not be alien to each other. In the case of CIT v. Sterling Foods [1999] 237 ITR 579 (SC) it has been held that the sale consideration of import entitlements would not constitute profits and gains 'derived from' the assessee's industrial undertaking for the purposes of computing deduction under section 80HH, as the source of import entitlements was the export promotion scheme of the Central Government and not the industrial undertaking. In this case the section before the Hon'ble Supreme court was 80HH in which the phrase "derived from" has been used. It is in this context that the Hon'ble Supreme Court held that the profit from sale of import entitlement was not derived from the industrial undertaking. The case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arge arising from the sale or old machinery and buildings cannot be regarded as profits and gains derived from the conduct of the business of generation and distribution of electricity. In this connection, it may be pointed out that whenever the Legislature wanted to give a restricted meaning in the manner suggested by the learned Solicitor-General, it has used the expression "derived from", as, for instance, in section 80J. In our view, since the expression of wider import, namely, "attributable to", has been used, the legislature intended to cover receipts from sources other than the actual conduct of the business of generation and distribution of electricity." [Emphasis supplied] 9.5 On going through the ratio of the afore noted judgment of the Hon'ble Summit (Supreme) Court it is manifest that the expression "attributable to" is of wider amplitude and covers "receipts from sources other than the actual conduct of the business". Thus it is not necessary that an income must be the result of actual conduct of the business so as to be characterized as attributable to the business. If there is some commercial connection of the income with the business, the same would be held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Hon'ble Supreme Court was the 'manufacture or processing of goods' and not the 'business of export' as such. In order to avoid the payment of additional tax, it was necessary for the purpose of under section 104(4) that the assessee should have at least 51 per cent of its income from 'manufacture or processing of goods'. As the income from manufacture or processing in that case was only 10 per cent, it was under those circumstances that the court held as not satisfying the bench mark condition of 51 per cent from the 'manufacture or processing of goods'. Undoubtedly the source from which eligible income was to be considered as 'attributable to' was the 'manufacturing and processing' and not the whole business as such. Obviously there was no relation between profit from sale of imported chemicals and the manufacturing and processing of goods in excess of 10 per cent of total income. Neither there was direct nor some casual (causal) connection between the profit from sale of imported goods and the manufacture or processing of the goods. In the absence of any relation worth the name between the two, the Hon'ble Supreme Court held that the income was not attributable to manufactur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsequently the amount was refunded along with interest. The direct nexus of interest on income-tax refund is with the payment of income-tax but when we try to trace the relation between Income-tax and the income on which it was paid, it comes to light that the same was for the business of banking. Thus there exists a commercial and casual (causal) connection between the interest on income-tax refund and the banking business. It is still further imperative to note that the amount of income-tax collected by the authorities was for the denial of deduction under section 80P and not on any other count not related to any activity other than the banking activity. With the restoration of deduction under section 80P, which has commercial connection with the business of banking, the interest on income-tax refund can be rightly said to have casual (causal) connection with such banking activity. Before concluding on the above issue, we need to emphasize that in the present case, the assessee did no other activity except the one specified in section 80P(2)(a)(i) of the Act. But for the action of the revenue in bringing to tax the interest income, the assessee would have not paid Income-tax, whi ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
