ORDER
M. M. Cherian, A.M.
1. This is an appeal by the assessee, Berlia & Co. against the order passed by the CIT(A) in respect of the asst. yr. 1990-91.
2. The assessee is a partnership firm carrying on business in the export of sea-food and pepper. The assessee filed the return of income for the asst. yr. 1990-91 admitting a total income of Rs. 36,070 after claiming relief under s. 80HHC of the IT Act. It is not disputed that the assessee is entitled to the deduction of the profits derived from the export of such goods and merchandise to which s. 80HHC applies. In claiming the deduction, the assessee included a sum of Rs. 2,31,596 representing the interest on deposits with Vijaya Bank. The assessee’s claim was that the bank deposit was made with the surplus funds from the business and so interest on the deposit was part of the income from business to be included for the purpose of computing the deduction under s. 80HHC. The AO was of the view that interest on bank deposit was to be considered separately as income under the head ‘other sources’ and that it was also not eligible for the relief under s. 80HHC. Accordingly, he made the computation of the total income including interest of Rs. 2,31,596 as income under the head ‘other sources’. In the first appeal, the CIT(A) confirmed the action of the AO to treat the interest as income from other sources and not as part of the business income. Aggrieved with the order of the CIT(A), the assessee is in second appeal before the Tribunal.
3. Before us, the assessee’s counsel, M. K. Kesavan, submitted that the CIT(A) was not correct in confirming the assessment of the interest on bank deposit as income from other sources without considering the fact that it was the business income that had gone into the bank deposit. The learned counsel stated that it was the practice of the assessee firm to keep in FD account the surplus money which was not immediately needed for business purposes and earn some income and that interest on such deposits was being credited in the business account. Kesavan submitted that the assessee had only one business and that was the export of sea-food and pepper and all the receipts including bank interest formed part of the export income and so the Revenue authorities were not justified in denying the relief under s. 80HHC on the bank interest. It was pointed out that in the earlier years also the assessee was crediting the interest amount in the business income account only and that the AO had also treated the interest as part of the business income without giving a separate treatment as income under the head ‘other sources’. The learned counsel contended that there was no justifiable reason for the AO to make a deviation for this year to hold that interest on fixed deposit was to be separated from the business income to be assessed as income from other sources. He made the further submission that the AO had treated interest of Rs. 2,31,596 as part of the gross receipts from business for the purpose of s. 44AB of the IT Act and also initiated action for the default under s. 271B. The contention of the learned counsel was that after treating the interest amount as part of the gross receipts of the business, the AO was not justified in taking, while computing the income, a contrary view that interest did not form part of the business income. Kesavan then submitted that the first appellate authority was not correct in confirming the computation as income under the head ‘other sources’, relying on the decision of the Kerala High Court in the case of Collis Line (P) Ltd. vs. ITO (1982) 135 ITR 390 (Ker). According to him, the facts in Collis Lime Ltd.’s case (supra) were distinguishable. He submitted that the decision of the Madras High Court in the case of CIT vs. Madras Refineries Ltd. (1997) 228 ITR 354 (Mad) was applicable to the facts of the present case. It was pointed out that in the case of Madras Refineries Ltd. (supra) the Court had held that the Department having treated the bank deposit as part of the capital of the business for the purpose of s. 80J, the interest on the deposit had to be considered as part of the business income. In the course of the hearing, the learned counsel raised an additional ground to the fact that in any case the entire interest income of Rs. 2,31,596 was not sustainable as income from other sources. His claim was that the assessee had paid interest of Rs. 30,230 on the borrowings and so only the net amount was sustainable as income from other sources. In short, the learned counsel submitted that the AO as also the CIT(A) was not justified in denying the relief under s. 80HHC on the entire sum of Rs. 2,31,596.
4. On behalf of the Revenue, Kuruvilla, Departmental Representative, supported the order of the CIT(A) and submitted that the immediate source of the interest income for the assessee was the fixed deposit with the bank and not the export business and so the interest income would not qualify as profit derived from the export of goods or merchandise to which s. 80HHC applied. According to him, it was not of much relevance as to whether the bank deposit was made from the surplus funds from the business or not and what was relevant was the source of the interest and that was the long-term deposit made by the assessee with the Vijaya Bank. The learned Departmental Representative also drew our attention to a certificate dt. 6th April, 1990, which the assessee had furnished before the AO to show that interest of Rs. 2,31,596 had actually accrued on Vijaya Cash Certificate. According to him, the assessee had made long-term deposit in Vijaya Cash Certificates and the interest earned on such certificates could not be viewed as part of the business income, much less as part of the profit from the export business to qualify for the relief under s. 80HHC. He made the further submission that in the earlier years interest on fixed deposit was not treated separately as income from other sources only because there was no tax benefit as the question of deduction under s. 80HHC did not arise for those years. He contended that in any case even if there was a wrong computation by the AO in respect of the earlier years, that did not give the assessee the right to claim that for the current year also such wrong computation should be made to make the assessee eligible for a relief which was not otherwise allowable. According to the learned Departmental Representative, the fact that the AO had included the interest amount in the gross receipts for the purpose of s. 44AB/271B did not also make any change in the situation as to whether the assessee could be allowed deduction under s. 80HHC. Kuruvilla clarified the position that though in the assessment order the AO had made the observation that interest was to be included in the gross receipts for the purposes of s. 44AB, as a matter of fact, no penalty was levied under s. 271B. According to Kuruvilla, the CIT(A) was fully justified in applying the ratio of the decision in the case of Collis Lime Ltd.’s case (supra) on the facts of the present case. He also brought to our notice another decision of the Kerala High Court in CIT vs. Cochin Refineries Ltd. (1985) 154 ITR 345 (Ker), and submitted that in that case it was held that the amount of interest receipts formed part of income from other sources and not profits and gains attributable to the business of the assessee as a priority industry. The learned Departmental Representative also stated that the assessee had clarified in the course of the assessment proceedings that no loans had been taken against the fixed deposits with the banks. He also brought to our notice the letter to the above effect sent by the assessee to the AO on 17th December, 1991. It was strongly contended that there was nothing to show that the investments in Vijaya Cash Certificates were in the course of the assessee’s export business or for the purposes of that business and so the assessee was rightly denied the relief under s. 80HHC.
5. The sum of Rs. 2,31,596 accrued as interest on two cash certificates which the assessee had taken from Vijaya Bank. The certificate issued by the bank on 6th April, 1990 gives the details of accrued interest as under :
VCC No. Amount Accrued interest
(Rs.) (Rs.)
124/89 20,00,000 2,05,402
126/89 3,00,000 26,194
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Total 23,00,000 2,31,596
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The fixed deposit account with Vijaya Bank, copy of which was included in the paper-book filed by the Departmental Representative, shows that the cash certificates had been taken for a period of two years on interest at 10 per cent. The question to be considered is whether interest accrued on two year term deposits known as ‘Vijaya Cash Certificates’ could be considered as income from business. We are not inclined to agree with the learned counsel for the assessee that if the interest had been treated as business income in the earlier years, the same treatment should continue for the current year also. Before us it was submitted by the learned Departmental Representative that in the earlier year it made no difference as to whether the interest amount was assessed as business income or as income from other sources and that it was after considering the entire matter afresh that in the current year the AO came to the finding that the interest income was to be separated from the business income. In view of the fact that there is no res judicata in income-tax proceedings and the assessment for each year is separate, we are of the view that it was open to the AO to consider afresh the assessment of interest income in this year and come to a finding after appreciating the facts of the case. The fact that the assessee had been all along crediting the interest amount in the business account or that they were taking credit for the amount in the P&L a/c for the export business, would not necessarily make it business income or for that matter income from the export business. The nomenclature given to an amount in the assessee’s books of accounts is not determinative of the real nature of that income. It is our considered view that the AO was fully justified in considering the nature of the income accrued during the previous year to decide whether it is assessable as business income or as income under the head ‘other sources’.
6. In the case of Collis Line Ltd. (supra) decided by the Kerala High Court, a shipping company deposited in the bank account the money that was lying idle. On finding that it was safer and wiser to put it in a bank, the High Court upheld the finding of the Tribunal that interest earned on the deposit could not be said to be received in the course of the business so as to make it part of the profits and gains of the assessee’s business. The assessment under the head ‘Income from other sources’ in that case was upheld. The learned counsel for the assessee wanted to distinguish that case by pointing out that the money was lying idle and it was felt by that company that it was safer and wiser to put it in the bank, whereas in the present case it was not the assessee’s intention to invest the money in the cash certificate as a wise or safe deposit. We do not think that the fact that it was the money lying idle and not immediately required for other purpose that was put in the bank, was the reason why the interest accruing on the deposit became assessable as income under the head ‘other sources’. The decision of the High Court as appearing on p. 393 in Collis Line Ltd.’s (supra) case is as under :
“The assessee is not a banking company. Money was not deposited by it by way of moneylending as a business. That was not its object. The interest arose from amounts deposited in bank otherwise than by way of business. The amount was deposited because money was lying idle and it was safer and wiser to put it in the bank. The interest thereby earned was incidental to the main purpose of the deposit, which was safe keeping and not earning profits. Such income is rightly found to be income from other sources.
In the present case the surplus amount available out of the profit from the assessee’s business was invested in two year Cash Certificates of Vijaya Bank. Interest accrued on such investments cannot be viewed as income from business. There is no direct nexus between the assessee’s export business and the earning of the interest income. Interest accrued on the bank deposits could not be, therefore, treated as income arising from the business or incidental to the business. On the facts of the case, we find that the CIT(A) has rightly applied the ratio of the decision in Collis Line Ltd.’s case (supra) to the facts of the present case in upholding the assessment of the interest income under the head ‘other sources’.
7. The learned Departmental Representative has brought to our notice another decision of the Kerala High Court in the case of Cochin Refineries Ltd. (supra) to contend that interest on bank deposit was not assessable as income from business. In that case Cochin Refineries Ltd. claimed deduction under s. 80-I in respect of interest on amounts deposited in banks and financial institutions for short periods for the purpose of repayment of loans on due dates. The amounts were so deposited as the loans were then not due for repayment. The High Court held that the amounts received as interest were receipts from other sources and not profits and gains attributable to the business of the assessee as a priority industry. In that case it was held as under :
“Profits and gains are well understood to mean only the business income, and not any other income. So long as the company has no business of lending money, and so long as the admitted case of the company is that the income derived is only on account of the peculiar situation arising from the time schedule for repayment of the loans, it cannot be stated that the income yielded by the deposits or investments was received in the course of the company’s business so as to be treated as a business profit.”
8. The learned counsel for the assessee has referred to the fact that in this case the AO had treated the interest amount of Rs. 2,31,596 as part of the gross receipts from business for the purpose of s. 44AB of the IT Act and also initiated action under s. 271B on the assessee. It was contended that after treating the interest amount as part of the gross receipts of the business, the AO was not correct in turning round to hold that interest was assessable not as business income but as income from other sources. Kesavan also placed reliance on the decision of the Madras High Court in the case of Madras Refineries Ltd. (supra) to contend that once interest on the bank deposit was treated as business receipt for the purpose of s. 44AB, it was assessable as business income only. In the case of Madras Refineries Ltd. the deposit made by the assessee in the bank was treated as part of the capital of the new industrial undertaking for working out the relief under s. 80J. The High Court held that any income earned by the capital employed would automatically become the business income of the assessee and it is not to be treated as income from other sources. In the present case it is true that a notice was issued by the AO under s. 271B of the IT Act on 24th December, 1991, calling for the assessee’s explanation as to why their accounts had not been audited in accordance with the provisions of s. 44AB. In reply the assessee wrote to the AO on 16th January, 1992 that in the turnover of the business he had wrongly included certain receipts. Interest of Rs. 2,31,596 on the bank deposit was one of the items which the assessee had claimed as not includible in the turnover or gross receipts of the business for the purpose of s. 44AB. Though a notice under s. 271B had been issued by the AO, it appears that the proceedings had not been pursued. It is not the assessee’s case that penalty had been levied under s. 271B rejecting their claim that interest on bank deposit was not includible in the turnover/gross receipt of the business. It may be that on the basis of the assessee’s reply dt. 16th January, 1992, the AO accepted the plea that interest was not to be included as part of the business turnover or receipts. In any case merely because a notice was issued under s. 271B it would not be correct to contend that the AO had treated the interest as part of the business receipt and so he could not later assess the same as income from other sources. In view of the fact that the proceedings under s. 271B had not been pursued after the assessee had clarified the position through the letter dt. 16th January, 1992, we find that on the facts of this case, the ratio of the decision of the Madras High Court in the case of Madras Refineries Ltd. cited above is not applicable.
9. In the above circumstances, we find that the AO has rightly treated the interest accrued on the Vijaya Cash Certificates as income under the head ‘other sources’ and so the upholding of the assessment by the CIT(A) was in order.
10. Before concluding, we may make it clear that the main issue in this appeal is whether the assessee is eligible for the relief under s. 80HHC on the interest accrued on Vijaya Cash Certificates. Sec. 80HHC as applicable for the asst. yr. 1990-91 providing for deduction in respect of the profits retained for export business reads as under :
“Sec. 80HHC. – (1) 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 of the profits derived by the assessee from the export of such goods or merchandise.”
It can be seen from the above that the deduction is allowable only on the profits derived by the assessee from the export of such goods or merchandise. Can it be said that interest accrued to the assessee on the cash certificate with the bank is profit derived by the assessee from the export of goods or merchandise to qualify for the relief under s. 80HHC ? In this connection, we may refer to the decision of the Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. vs. CIT (1978) 113 ITR 84 (SC) to understand the meaning of the expression ‘derived from’ as appearing in sub-s. (1) of s. 80HHC, the Supreme Court in that case observed as under :
“It cannot be disputed that the expression “attributable to” is certainly wider in import than the expression “derived from”. Had the expression “derived from” been used, it could have with some force been contended that a balancing charge arising from the sale of 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 s. 80J.”
In the case of Sterling Foods vs. CIT (1984) 150 ITR 292 (Kar), the Karnataka High Court made the following observation in regard to the meaning of the expression ‘derived from’ :
“The expression “derived from” has a definite but narrow meaning and it cannot receive a flexible or wider concept. If a word or expression has received judicial interpretation by the highest Court or the Tribunal and thereafter it is found to have been used in legislative enactments, it must be presumed that the legislature must have used that word or expression with the same meaning as judicially determined unless the context apparently requires any other meaning.”
The Kerala High Court had also the occasion to consider the meaning of the expression “derived from” in the case of Cochin Co. vs. CIT (1978) 114 ITR 822 (Ker). In that case the Court observed as under :
“Profit or gain can be said to have been derived from an activity carried on by a person only if the activity is the immediate and effective source of the profit or gain. There must be a direct nexus between the activity and the earning of the profit or gain. Income, profit or gain cannot be said to have been derived from an activity merely by reason of the fact that the activity may have helped to earn the income or profit in an indirect or remote manner. The profit earned by the assessee by the sale of the import entitlements could not be regarded as profits or gains derived from the export of goods.”
In the light of the judicial pronouncements noted above, it cannot be said that interest earned by the assessee by investing the surplus funds on long-term deposits in Vijaya Cash Certificates qualified as profit derived from the export of goods or merchandise to make it eligible for the deduction under s. 80HHC.
11. We also find it necessary to deal with the alternative claim of the learned counsel for the assessee that as the assessee had paid interest of Rs. 30,230 on the borrowings only the net amount after adjusting the interest payment could be in any case treated as income under the head ‘other sources’. The contention raised before us by Kesavan was that when the interest income was to be excluded in working out the relief under s. 80HHC, only the net amount after adjusting the interest payment alone could be taken into account. We find that in computing the income under the head ‘other sources’, s. 57(iii) provides for deduction of any expenditure laid out and expended wholly and exclusively for the purpose of making or earning such income. There is nothing to show that interest of Rs. 30,230 was paid on borrowings which had been utilised for the purpose of making the investment in Vijaya Cash Certificates. From the details furnished earlier it can be seen that the assessee made the deposit of Rs. 20 lakhs and Rs. 3 lakhs in two certificates with the surplus funds available with it. No evidence has been furnished to show that the liability towards interest arose on any funds borrowed for the purpose of investment in the cash certificates. The paper-book filed before us by the Departmental Representative contains a copy of the assessee’s letter dt. 17th December, 1991, in which the clarification was given as under:
“No loans have been taken during the year 1989-90. We also submit that no loans have been taken in respect of the fixed deposit of Rs. 25 lakhs outstanding as on 31st March, 1989.”
In the circumstances of this case, we hold that the interest payment of Rs. 30,230 is not adjustable against the interest earned on the deposit with the bank. The result is that the entire sum of Rs. 2,31,596 was rightly excluded in working out the deduction under s. 80HHC.
12. In the result, this appeal by the assessee is dismissed.