ORDER
Y.K. Kapur, Member (J)
1. In this appeal filed by the Revenue the challenge is to the order of the CIT(A) dated 3rd January, 1998 on the ground that the CIT(A) has erred in holding that the bank interest and the claim received by the assessee should have been included under the head “profit and gains of business of profession” while calculating deduction u/s 80-HHC of the IT Act.
2. The brief background of the present litigations is that the assessee filed its return of income declaring its total income which included from the following heads :-
(i) Bank interest – Rs. 1,69,845/-
(ii) Claims Received – Rs. 1,81,971/-
(iii) Miscellaneous Income - Rs. 2,700/- (iv) Interest Received - Rs. 14,907/- -------------- Total Rs. 3,96,423/- --------------
3. Out of the aforesaid items, the AO and the CIT(A) held the amount of Rs 2, 700/- and Rs. 14, 907/- to be not the business income of the assessee as according to the authorities below, there was no nexus between the receipts and the business of the assessee. The assessee has accepted the findings of the authorities below on these two items.
4. Regarding the other two items, i.e., item No. 1 and No. 2, the grievance of the Revenue is that the said claims ought to have been held to be the business income of the assessee. To adjudicate these two items, it would be necessary to refer to relevant facts on the record. :-
(i) As far as the claim for the bank interest is concerned, the case of the assessee before the authorities below was that the assessee has to obtain letter of credit from the hanks for the purposes of the export business.
(ii) According to the assessee, the bank wanted certain margin money which was created in the form of FDRs taken from the bank against which the desired letters of credits were issued.
5. The case of the assessee is that the income from the FDR received from the bank was closely knit with the business of the assessee. Not only this, the record transpired, that the assessee during the year had paid an interest of Rs. 42, 75, 456/- while the receipt of bank interest from the same bank on the aforesaid fixed deposits was Rs. 1, 96, 845/- The assessee, therefore, claimed netting of the interest which was disallowed by the AO though the claim of the assessee was upheld by the CIT(A).
6. At the time of hearing of the appeal before us, the Id. AR for the assessee submitted that the interest received from the bank was nothing, but the business income of the assessee. To substantiate his arguments further, Id. AR submitted that on these FDRs purchased from the bank, they would have given the letter of credit in the absence of which the business could not have been conducted smoothly by the assessee. According to the assessee as the amounts received from the bank in the form of interest was closely connected with the business of the assessee, it was nothing, but the business income of the assessee.
7. To the arguments raised by the Id. AR, Id. DR submitted that the assessee is into the business of exports undoubtedly. The assessee has purchased FDR and which was kept as a collateral security with the bank. According to the Id. DR income generated from the collateral security does not constitute business income unless and until the assessee is engaged in the activity of advancing money and receiving money in the form of interest. As it does not constitute business income the interest earned by the assessee, it was in these circumstances suggested by the Id. DR constitute to be the income from other sources. In support of his contention the Id. DR relied upon the judgement of the apex court in the case of Dr. V. Gopinathan v. CIT 248 ITR 449. The Id. DR drawing strength from the said judgement drew our attention to the following portion of the judgement of the apex court :-
“that the interest that the assessee received from the bank on the fixed deposit was income in his hands and it could stand diminished only if there was a provision in law permitting such diminition. There was no such provisions of law and the interest on the loan taken from the bank did not reduce his income by way of interest on the fixed deposit.”
8. After having drawn our attention to the said judgement of the apex court, the Id. DR drew our attention to another judgement of the Kerala High Court in case reported in 253 ITR 553 in the case CIT v. Jose Thomas for the proposition that the income generated from the collateral security does not constitute to business income unless the assessee is engaged in the activity of advancing money and receiving money in the form of interest. Referring to another decision of the Madras High Court in a case reported in 257 ITR 60 in CIT v. Madras Motors/M.M. Forgings, the Id. DR submitted that the interest which was earned by the assessee from the bank deposit for obtaining letter of credit for the purposes of exports would not have a direct nexus with the industrial undertakings of the assessee and would only be the income incidental thereto and such interest has to be ignored from the allowable profits. The Id. DR while advancing his arguments further drew our attention to the order of this Tribunal in ITA No. 2878/Del/96, 1820/Del/96 and 4257/Del/96 in the case of Nahar Industrial Enterprises Ltd. v. DCIT. The Id. Dr submitted that in the order passed in Nahar Industrial Enterprises Ltd. v. DCIT this Tribunal has also considered the issue of netting of interest in the light of the judgement reported in 79 ITD 41 (3rd member) in the case of ACIT v. Gallium Equipment and 77 ITD 123 in the case of Honda Siel Power Products v. DCIT which have been relied upon by the assessee. According to the Id. DR this Tribunal, after considering the aforesaid two judgements relied upon by the assessee that the netting is permissible and after considering the judgement of other High Courts in 237 ITR 539 in case CIT v. Sterling Foods, 113 ITR 64(SC) in case of Camby Electric Supply Co. Ltd. v. CIT 208 ITR 355 (Delhi) incase CIT v. Cement Distributors Ltd. 243 ITR 192 in case Nanji Topau Bhai & Co., 253 ITR 319 (Kerala) in case Abad Enterprises v. CIT and in 253 ITR 396 in case CIT v. Sundaram Industries Ltd. (Madras) and 233 ITR 497 (Mad) pressed into the services by the Revenue in support of the proposition that netting of interest is not permissible in the nature of the business carried on by the assessee, namely, export business. The interest income received by the assessee from FD could not be treated as business income, but only as income from other sources and, thus, not entitled to special deduction u/s 80-HHC in respect of such interest. According to the Id. DR the special Bench of the Tribunal referred to above has agreed with the contention of the Revenue that the income derived by an assessee from interest on FDR is to be treated as income from other sources i.e., income from business. To buttress his arguments further, the Id. DR drew our attention to the following observations of the special Bench which find place at page 6 of the order.
“Keeping the said circular in view and also the decision of the special bench in International Research laboratories Ltd. v. ACIT dated 25.7.94, the aforestated amounts of interest at Rs. 1, 96, 845/- and Rs. 1, 84, 971/- would form a part of the profits of the business of the appellant within the meaning of sub sec.(3) of section 80HHC. Permissible deduction u/s 80HHC would, therefore, come to Rs. 87, 40, 291/- as against Rs. 84, 05, 000/- allowed by the AO. The appellant will be entitled to a relief of Rs. 3, 35, 291.”
9. We have examined decisions and rival contentions of the parties and the legal precedents relied upon and are of the view that the ratio of all the aforesaid judgements leaves no room to doubt that the interest received on the FDR and interest on loan taken from the bank does not reduce income by way of interest on the FD and cannot be treated as the business income of the assessee. In view of this, we feel that the CIT(A) was not justified in directing the AO to treat the receipt of bank interest as income from business and have, therefore, no hesitation in confirming the finding of the AO on this aspect of the matter.
10. The next grievance of the Revenue is to the direction of the CIT(A) to the AO to treat the amount or Rs. 1, 81, 971/- received by the assessee as the business income. The Id. AR submitted during the course of hearing that the said amount of Rs. 1, 81, 971/- represented three heads, namely, Rs. 1, 34, 045/- being the amount received in respect of damage to the stock in trade, a sum of Rs. 25, 776/- being the amount of claim received from foreign suppliers in respect of import of raw material for short supply and thirdly Rs. 22, 150/- being the claim received in respect of loss of goods in transit. According to the Id. AR, all these three amounts which have been received are in the nature of business receipts and, therefore, no fault in the order of the CIT(A) could be found.
11. To the arguments raised by the Id. DR, Id. AR relied upon the order of the AO.
12. We have heard the parties and taken ourselves through the record. A perusal of the record reveals that all these three amounts are received vis-a-vis the business carried on by the assessee and by no stretch of imagination can be said to be the income derived from any other sources. The assessee is in the business of exports. Some damage has been caused to the stock in trade with respect to which a claim of Rs. 1, 34, 045 was received. Another amount of Rs. 25, 776/- has been received on account of import of raw materials for short supply while Rs. 22, 150/- has been received in respect of loss of goods in transit. All these claims have been received our of business carried on by the assessee and we feel that these were rightly considered by the CIT(A) as from the business of the assessee and, therefore, we have no hesitation in confirming the findings of the CIT(A) on this account.
13. In view of the discussion above, the appeal of the Revenue is partly allowed.