This income tax appeal by the assessee-appellant relates to the assessment year 1998-99.
The assessee-appellant is an exporter of carpets. He was under an obligation to invest some money in fixed deposit with the bank in order to avail credit facility for export. On this fixed deposit he earned interest. He claimed deduction of 90% of the said interest under explanation (baa) to sub-section (4C) of Section 80HHC of the Income Tax Act (in short "the Act"). It was disallowed by the assessing officer. The appeal of the assessee-appellant before the Commissioner Income Tax (Appeals) failed and so was his further appeal to the Income Tax Appellate Tribunal, Agra.
The present appeal has been preferred against the order of the Income Tax Appellate Tribunal dated 28.12.2006 on the short substantial question of law whether the interest of Rs. 10,32,523 earned by the assessee-appellant on fixed deposit receipts pledged with the bank for availing credit facility for the purposes of export is income from business or it would be income from other sources, liable to deduction in terms of explanation (baa) after sub-section (4C) of Section 80HHC of the Act while computing his taxable income under the head "profits and gains of business and profession".
We have heard at length Sri Rahul Agarwal, learned counsel for the assessee-appellant and Sri Manish Goel for the Income Tax Department.
The Government of India in order to encourage export inserted Section 89A of the Income Tax Act w.e.f. 1st June, 1982 for providing tax relief to Indian companies or a resident of India having export turnover exceeding a specified limit. This provision of Section 89A of the Act was replaced by Section 80HHC vide Finance Act, 1983 w.e.f. 1.4.1983. The aforesaid Section 80HHC so inserted, inter alia, provides for deductions in respect of profit from export business as referred to in sub-section (1B) of Section 80HHC in computing the total income of the assessee.
Sub-section (1) of Section 80HHC reads as under:
"Where an assessee, being an Indian company or a person (other than a company) resident in India, is engaged in the business of export out of India of any goods or merchandise to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, [a deduction to the extent of profits, referred to in sub-Section (1B),] derived by the assessee from the export of such goods or merchandise:
It provides that where an assessee, being an Indian company or a person resident in India is engaged in the business of export out of India of any goods or merchandise he shall be allowed deduction to the extent of profits referred to in sub-section (1B) derived by the assessee from the export of such goods or merchandise in computing his total income of the assessee.
In simpler words, the profit derived by the assessee of the above description from the export of goods or merchandise to the extent of percentage specified in sub-section (1B) of Section 80HHC are deductible in computing his total income from export.
In addition to the above, explanation (baa) appearing after sub-section (4C) of Section 80HHC reads as follow:
"(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 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; and
(2) the profits of any branch, office, warehouse or any other establishment of the assessee situate outside India."
Explanation (baa) to sub-section (4C) of Section 80HHC in relation to export business defines "profits of the business" to mean the profits of the business as computed under the head "Profits and gains of business or profession" and as reduced, inter alia, by ninety per cent of any receipt by way of brokerage, commission, interest, rent or any other receipt of similar nature.
A combined reading of Section 28, 80HHC with explanation (baa) aforesaid reveals that in relation to export business profits of the business would be computed (i) after deduction of specified percentage of profit as envisaged under sub-section (18) of Section 80HHC and then by computing it under the head "profits and gains of business and profession" after reducing it, inter alia, by ninety per cent of the receipt of interest.
The aforesaid explanation (baa) do not specify the source of interest so received which is deductible from the profits and gains of business and profession.
The main provision of Section 80HHC(1) is in relation to deductions of the profits to the extent specified under sub-section (1B) of it in computing the total income of assessee derived from the export business whereas the explanation (baa) provides for reduction of the income from business of export so computed under the head "profits and gains of business or profession" by the interest income to the extent specified.
The provision of Section 80HHC(1) and explanation (baa) to sub-section (4C) of it operates in totally two different situations. Section 80HHC provides for exclusion of the percentage of profits in computation of the total income of an assessee from export whereas the explanation (baa) provides for reduction of 90% interest receipt from unspecified sources in computing profits of the business of export under the "head profits and gains of business and profession".
Thus, the income from the business of export after excluding the percentage as provided under Sub-section (1 B) has to be on computation under the head "profits and gains of business and profession" as provided under Section 28 to 44 of the Act is reduced by the specified percentage of interest in accordance with explanation (baa) to sub-section (4C) of Section 80HHC of the Act.
A Division Bench of the Allahabad High Court in Income Tax Reference No.75 of 1993 Smt. Jamila Bano Vs. Commissioner of Income Tax, Allahabad decided on 30th August, 1996, while considering the question whether on the facts and in the circumstances of the case, the Tribunal was justified in rejecting the assessee's claim under Section 80HHC of the Income Tax Act on interest on FDRs opined that in order to determine the nature of such income it is essential to establish the connection of the business with the investment in the FDRs as to whether the FDRs were required to be made as a business necessity or for properly carrying out the business of export of goods or whether the investment could reasonably be treated as part of business of export and then only any conclusion can be drawn with regard the nature of the interest income thereon.
In Commissioner of Income Tax Vs. Producin P. Ltd. (2007)290 ITR 598 (Kar.) the issue was about the nature of income of interest which the assessee earned in short term deposit kept in the bank. The assessee was an Indian exporter and had received advance from foreign customers which he invested in short term fixed deposit. The interest received on this deposit was claimed by the assessee as business income and accordingly a deduction was claimed under Section 80HHC of the Act. The assessing officer disallowed the claim but it was accepted by the Tribunal. The High Court upholding the order of the Tribunal held that the amount so deposited in the bank and the interest income derived from it had a close link with the business activity of the assessee and, therefore, the interest on deposits was assessable as business income.
A Division Bench of Telengana and Andhra Pradesh High Court in Commissioner of Income Tax Vs. Indo Aquatics Ltd. (2014) 369 ITR 589 (T & AP) in a similar situation as in the case at hand, held that obtaining letters of credit for export business is an essential business activity as the deposit of amounts for that purpose is a condition precedent for export. If such deposits yield interest it is attributable to or could be said to be derived from the business activity of export. Therefore, the interest earned on bank deposits kept for obtaining letters of credit was deductible from the total income of the assessee.
The ratio of the above decisions clearly favours the assessee-appellant. The view expressed therein is that any interest earned on deposits with bank, if such deposits are necessitated for the export business would yield business income.
The department on the other hand contends that the interest income so earned is not an income derived from the export business though it may be in some sense attributable as income from business. The emphasis is that the word used under Section 80HHC of the Act is 'derived' and the use of the said word is very important for determining the nature of the interest income.
No doubt the above provision uses the word 'derived' and as pointed out it has a narrower meaning in comparison to the expression income attributable to business.
In this connection, a decision of the Supreme Court in Commissioner of Income Tax Vs. Sterling Foods (1999) 237 ITR 579 (SC) was cited to establish the meaning of the word "derived from" but that may not be relevant and material for our case, inasmuch as pointed out earlier Section 80HHC(1) of the Act is in context with exclusion of profit of the assessee from the business of export of goods and merchandise in the computation of total income. We are not grappling with any controversy regarding deduction or exclusion of the profit derived from the export of goods and merchandise rather with the deduction of income of interest earned on FDRs kept in the bank for obtaining letters of credit for export business.
Sri Manish Goel in order canvass that the interest income is not business income which could be deducted under expatiation (baa) to sub-section (4C) of Section 80HHC has not only placed reliance upon a Division Bench judgment of the Delhi High Court in Commissioner of Income Tax Vs. Shri Ram Honda Power Equip. (2007) 289 ITR 475 (Del.) but two other judgments of the Delhi High Court which had followed it and the decision of the Kerala High Court which was followed with approval in Shri Ram Honda (supra) by the Delhi High Court.
In the above Shri Ram Honda case before the Delhi High Court the controversy was more or less with regard to interpretation of Section 80HHC sub-section (1) read with sub-section (3) and explanation (baa) aforesaid. The Delhi High Court tracing out the history of Section 80HHC went on to consider the nature of the receipt by way of interest on deposits made with the bank either of the surplus fund available with the assessee or as a compulsion for the purposes of obtaining letters of credit essential for export business in the light of large number of decisions by classifying them into two categories; the first category being that of non Section 80HHC decisions and the other of Section 80HHC decisions.
In the first category of decisions (non Section 80HHC decisions) apart from various other decisions a judgment of the Supreme Court in Tuticorin Alkali Chemicals and Fertilizers Ltd. Vs. Commissioner of Income Tax (1997) 227 ITR 172 (SC) was referred wherein it was held that interest earned on deposits made with bank even for business purposes cannot be treated as business income but income from other sources. However, the nexus theory was reiterated.
In the category of Section 80HHC decisions, a reference was made to the Madras High Court in K.S. Subbiah Pillai and Co. (India) Pvt. Ltd. Vs. Commissioner of Income Tax wherein it was held that if an assessee engaged in a business of export invests surplus fund in a fixed deposit and earns interest thereon such income cannot be treated as business income as it does not bear any direct nexus with the export business.
In line with the above decision three decisions of the Kerala High Court in Urban Stanislaus Co. Vs. Commissioner of Income (2003) 263 ITR 10 (Ker); Southern Cashew Exporters Vs. Deputy CIT (2003) 130 Taxman 203 (Ker) and K. Ravindranathan Nair Vs. Deputy CIT (Assessment) (2003) 262 ITR 669 (Ker) were cited wherein it was held that the assessee can claim deduction in respect of profit derived from export of the goods only when it is established that the income is solely related to the export. The interest from short term deposit was not held to be the direct result of any export and was not accepted for deduction in computing the income of the assessee.
The Delhi High Court in Shri Ram Honda (supra) followed the above decisions with approval for the reason that against all the above three decisions special leave petitions before the Supreme Court were dismissed and the judgments of the Kerala High Court stood affirmed.
A Constitution Bench of the Supreme Court in Kunhayammed and others Vs. State of Kerala and another (2000) 6 SCC 359 considered the effect of doctrine of merger viz-a-viz dismissal of special leave petition and held that the Supreme Court cannot and does not reverse or modify the decree or order appealed against while deciding petition for special leave to appeal. The order which is impugned before the Supreme Court by means of special leave petition can only be reversed or modified after leave to appeal is granted and the Court exercises appellate jurisdiction over it. Thus, if the order which is impugned by means of the special leave petition cannot be reversed or modified unless the leave is granted, obviously such an order cannot be affirmed with the dismissal of special leave petition.
In view of the ratio of the Supreme Court as laid down above, the dismissal of special leave petitions against the three decisions of the Kerala High Court referred to above would not amount to affirming or according approval to the law laid down therein by the High Court. Thus, the view of the Delhi High Court on the point, on the basis of the decisions of the Kerala High Court treating them to have been affirmed by the Supreme Court is not proper and sound.
It is a matter of judicial proprietary that where there are different opinions of the concurrent Benches of the other High Courts, the Court of concurrent jurisdiction seized of the matter is free to formulate its independent opinion following the law which appears it to be more logical and legally sound with reasoning appealing to its conscience rather than following the decision which may have been followed by some other Court more particularly when the controversy involved can be settled on a different reasoning as well.
In the case at hand, as discussed above, there is hardly any relevancy regarding the nature of the interest income earned by the assessee-appellant. Notwithstanding its nature, as the specified percentage of the said interest is deductible from the "profits of business" computed under the head "profits and gains of business and profession" as provided under the explanation (baa) to sub-section (4C) of Section 80HHC of the Act, the interest income as specified is deductible.
Accordingly, the substantial question raised in this appeal is answered holding that the interest income earned by the assessee of the description specified is deductible from the income of the assessee under the head "profits and gains of business and profession" and this would be in addition to the deduction permissible under Section 80HHC(1) in respect of computing the total income in relation to the export business.
The order dated 28.12.2006 of the Income Tax Appellate Tribunal stands modified accordingly.
The appeal succeeds and is allowed to the above extent.