ORDER
R.K. Gupta, A.M.
This is an appeal by assessee against the orders of the Commissioner (Administration) under section 263 of the Income Tax Act relevant to assessment year 1995-96. The following grounds have been taken by the assessee in its appeal :
“1. That, on the facts and circumstances of the case and in law the Commissioner (Administration), Delhi III, New Delhi erred in assuming jurisdiction under section 263 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) alleging that order dated 12-3-1998, was erroneous and prejudicial to the interest of revenue .
2. That, on facts and circumstances of the case and in law the Commissioner erred in directing the assessing officer to disallow deduction of Rs. 78,80,125 representing advance excise duty paid and reflected under the head “loans & advances”.
3. That, on the facts and circumstances of the case and in law the Commissioner erred in directing the assessing officer to exclude 90 per cent of the interest income of Rs. 1,02,44,000 for the purpose of computing deduction under section 80HHC of the Act.
4. That, on facts and circumstances of the case and in law the Commissioner erred in directing the assessing officer to exclude the interest of Rs. 1,02,44,000 while computing deduction under sections 80HH and 80-I of the Act.
5. That on facts and circumstances of the case and in law the order passed by Commissioner under section 263 of the Act is bad in law and void ab intio. ”
2. The assessment in this case was completed under section 143(3) on 12-3-1998, on a total income of Rs. 5,39,86,776 after allowing deduction under section 80HHC at Rs. 2,66,30,268; under section 80HH at Rs. 2,85,38,344 and under section 80-I at Rs. 3,56,72,930. Having examined the records of this particular case and the assessment order, it was noticed by the Commissioner (Administration) that order of the assessing officer is erroneous and prejudicial to the interest of the revenue . The proceedings under section 263 were initiated and a show-cause notice was issued to the assessee that why the assessment made be not modified on the following grounds :
“(i) While finalising the assessment, relief was erroneously given of Rs. 78,80,125 representing advance excise duty paid and reflected under the head “loans and advances”. This allowance was proposed to be withdrawn as the same could not be treated as payment against excise duty since the same was an advance standing to the credit of the assessee without any adjustment towards its excise duty liability.
(ii) In the assessment, while computing the deduction under section 80HHC, 90 per cent of the interest income of Rs. 1,02,44,000 earned during the previous year was not deducted from the income of the assessee. This was required to be done in accordance with the provisions of Explanation (baa) to sub-section (4) of section 80HHC.
(iii) While allowing the claim under section 80HH, interest income amounting to Rs. 1,02,44,000 earned during the year and arising from ICDs and bill discounting was not in the nature of income derived from an industrial undertaking and was required to be thus excluded while finalising the computation. This was not done in assessment.
(iv) While allowing the claim under section 80-I interest income amounting to Rs. 1,02,44,000 earned during the year and arising from ICDs and bill discounting was not in the nature of income derived from an industrial undertaking and was required to be thus excluded while finalising the computation. This was not done in assessment.”
3. A written reply was filed by the assessee. On the ground in regard to allowance of claim under section 43B, it was contended that a sum of Rs. 78,80,1125 appearing in the balance sheet under the head “Loans and Advances” with the caption balance with customs/excise department, which consists of balances in PLA (excise) of Rs. 10,109; RG 23-A Part-II of Rs. 63,05,495 and RG-23-C Part-II of Rs. 15,64,516. It was further submitted that the cash payment was made in the treasury to maintain balance sufficient to cover the duty due on the grounds intended to be removed at any time. It was further submitted that similarly the remaining amounts i.e. balance in RG-23-A and RG-23-C accounts represent unutilised Modvat credit available to the assessee on 31-3-1993. It was further submitted that this amount was credited as per Modvat Scheme of the customs/excise rules, as the same was paid on the purchases for the purpose of manufacturing the goods for use in its business. Therefore, they are statutory payments covered under section 43B of the Act. The reliance was also placed on the decision of Delhi Bench of the Tribunal in the case of Modipon Ltd. v. IAC (1995) 52 TTJ (Del-Trib) 477 and in the case of Indian Communication Network (P) Ltd. v. IAC (1994) 49 lTD 56 (Del) (SB). The Commissioner (Administration) did not find favour with the assessee. He was of the view that the amount was shown as loans and advances to the excise department and as per provisions of section 43B, the credit has to be given only on the payment. Therefore, this deduction should not be allowed. Accordingly the assessing officer was directed to disallow the claim of the assessee on this amount by modifying the assessment accordingly.
3.1 In regard to computation of deduction under section 80HHC it was stated that the interest received was inextricably linked with the carrying on of the business. The interest received in the present case having only abated the interest cost, 90 per cent of the interest received cannot be deducted for the computation of income. The Commissioner (Appeals) was not satisfied with the reply. He considered the Explanatory Memoranda to Finance (No. 2) Bill, 1997 and held that the deduction under section 80HHC will be allowed only after reducing the 90 per cent interest received by assessee and the direction to the assessing officer was given accordingly.
4. In regard to deduction under section 80HH and 80-I, a reply was given that the interest received was set off against the interest paid. The following submissions were made :
“(i) That the assessee is engaged in the manufacture and sale of portable generator sets. The business being seasonal, there are times when funds which are surplus are given towards short-term loans or for bill discounting as it is commercially expedient. Interest earned from them is stated to be aggregating at Rs. 96,50,278. Similarly, the balance interest arose on account of security deposit made with the bank for carrying on of the business.
(ii) The interest income is inextricably linked with and is directly incidental to the carrying on of the business of the industrial undertaking. ”
5. The Commissioner (Administration) did not find favour with the assessee. The following observations were made by the Commissioner (Administration) in his order, which are reproduced here as under :
“This deduction is available only in respect of profits and gains derived from an industrial undertaking. The present section was inserted by Finance (No. 2) Act, 1980, with effect from 1-4-1981, and provides for deduction in respect of profits and gains ‘derived from’ an industrial undertaking. The deduction under old section 80-I was a certain percentage of the profits and gains “attributable to” the business of the priority industry. As pointed out by the Supreme Court in Cambay Electric Supply Industrial Company Ltd. v. CIT (1978) 113 ITR 84 (SC), the expression ‘attributable to’ was of wider import and since the expression of a wider import had been used, it was clear that the legislature intended to cover receipts from sources other than the actual conduct of the business of the priority industry. This expression was certainly wider in import than the expression ‘derived from’. The term ‘derived from’ has a narrower meaning as distinguished from the term ‘attributable to’. This view finds support from the decision of the Hon’ble Supreme Court in the case of M/s Cambay Electric Supply and Industrial Company Ltd. (supra) as also supplemented by the meaning of the term ‘derived’ as explained in the case of CIT v. Raja Khamakhya Narain Singh (1948) 16 ITR 325 (PC). The interest income here does not flow from and is not derived from the industrial undertaking. On the other hand, this part of income is in the nature to be taxed as ‘income from other sources.’
4.3.2. Having regard to the proposition and discussions in the foregoing paragraphs, I hold the view that the amount of interest has to be excluded while computing the deductions under section 80HH, 80-I and 80-IA of the Income Tax Act, 196l.”
5.1. Accordingly the assessing officer was directed to disallow the claim of the assessee by modifying the assessment. Now the assessee is in appeal here before us.
6. The learned counsel fairly admitted that the proceedings under section 263 were initiated correctly, by the Commissioner (Administration) has exceeded his jurisdiction because he has himself decided the issues and the assessing officer was directed to modify the assessment order accordingly. On this point the learned Departmental Representative strongly submitted that the Commissioner was well within his jurisdiction to initiate the proceedings under section 263 and in no manner the jurisdiction was exceeded. After considering the submissions on this point, we are of the view that Commissioner (Administration) was within his jurisdiction to initiate the proceedings under section 263. The facts of the case are such on which the provisions of section 263 can be made applicable. Therefore, they were correctly applied. However, we find weight in the contention of the learned authorised representative that Commissioner (Administration) has himself decided the issue and the assessing officer was directed to modify the assessment order accordingly, We are of the view that the appeal should be disposed of on merit as the Commissioner (Administration) has decided the issue on merit. Accordingly we will decide these issues on merit.
6.1. The learned counsel for the assessee has further submitted on merit that assessing officer was correct in allowing the deduction under sections 80HHC, 80HH and 80-I of the Act, as the claim of the assessee was within the framework of law. Therefore, the order of the Commissioner (Administration) should be set aside. It was further submitted that the payment on account of excise duty have already been made on making the purchases for the purpose of manufacturing the items for use of its business, and the other party, from whom the material was purchased, have already made the payment to the account of excise department as the assessee has made payment on excise account to the party from whom the material was purchased. Therefore, the contention of the Commissioner (Administration) is not correct that these payments are merely loans and advances, therefore, they are hit by the provisions of section 43B. The conditions of provisions of section 43B have already been fulfillled by the assessee as the payments have already been made. Therefore, the deduction has to be allowed in this year only. The assessee has shown credit balance as per Modvat Scheme in the head of “Loans and Advances” towards customs/excise department and they will be adjusted as and when the goods will be removed from the bounded godown of the assessee, This amount is not refundable to the assessee, as it can only be adjusted against the excise chargeable from the third party. Therefore, there is no reason to disallow the deduction under section 80HHC (sic 43B) of the Act. The reliance was placed on the decision in the case of Modipon Ltd. (supra).
6.2. In regard to deduction under sections 80HH and 80-I, it was submitted that these deductions were also wrongly denied, as the claim is allowable as per provisions of law because the assessee is deriving income from an industrial undertaking. The interest shown in the Profit & Loss account is net interest, as the receipts on account of interest were set off against the interest payment. Both the receipts and payments are for the purposes of business, therefore, netting has to be allowed. On this proposition the reliance was placed on the following decisions of various Benches of the Tribunal, High Courts and Supreme Court :
Pink Star v. Dy. CIT (2000) 72 ITD 137 (Mum-Trib), Sham Progetti SPA v. Addl. CIT (1981) 132 ITR 70 (Del), CIT v. Bokaro Steel Ltd. (1999) 236 ITR 315 (SC), and Suhag Traders (P) Ltd. v. Income Tax Officer (1996) 89 Taxman 287 (Del).
7. On the other hand, the learned Departmental Representative strongly objected to the arguments put forward by the learned counsel of the assessee. He further placed strong reliance on the order of the Commissioner (Administration) and reliance was also placed on the following decisions :
(i) CIT v. Amritlal Bhogilal & Co. (1958) 34 ITR 130 (SC);
(ii) Malabar Industrial Co. Ltd. v. CIT (1992) 198 ITR 611 (Ker);
(iii) Venkata Krishna Rice Co. Ltd. v. CIT (1987) 163 ITR 129 (Mad);
(iv) Berlia & Co. v. Asstt. CIT (1998) 67 ITD 347 (Coch-Trib);
(v) South India Shipping Corporation Ltd. v. CIT (1999) 240 ITR 24 (Mad) and
(vi) Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT (1997) 227 ITR 172 (SC).
8. We have heard the rival submissions and considered them carefully. We have also perused the material on record, on which our attention was drawn and the various case laws relied upon by both the parties. After considering the submissions and perusing the material, we are of the view that Commissioner (Administration) has assumed his jurisdiction under section 263 correctly as there is no discussion in the order of the assessing officer in regard to the allowability of deductions under section 43B, 80HHC, 80HH and 80-I of the Income Tax Act. The assessing officer allowed these deductions in a routine manner and without giving any reasoning. Therefore, we are of the view that Commissioner (Administration) was right in assuming the jurisdiction under section 263. Accordingly, we hold that the order of the assessing officer was erroneous as it was prejudicial to the interest of the revenue . The Commissioner (Administration) has given his findings on merit also instead of restoring the matter to the file of the assessing officer. In regard to allowability of the claims, the Commissioner (Administration) himself decided on merit and the assessing officer was directed to modify his order as per the finding given by Commissioner (Administration) in his order. Therefore, we will decide the other grounds of the assessee taken in its appeal against the finding of Commissioner (Administration) on merit.
9. In regard to excise duty shown under the head “Loans & Advances” in the name of excise/customs department, in fact the excise duty paid by assessee on the purchases made for the purpose of manufacturing goods for export or otherwise was credited in Modvat account as per the scheme of the government and shown under the head “Loans & Advances” in the name of excise department. The duty was paid by the assessee from whom the material was purchased, meaning thereby the amount of excise duty was paid by the third party. The same amount was transferred in Modvat account by showing as loans and advances in the name of customs/excise department. This amount will be adjusted as and when the goods will be removed from the bounded godown of the assessee, otherwise this will stand as it is in the shape of loans and advances. Therefore, in our considered view, the amount has already been paid i.e., well within time. Accordingly it cannot be disallowed by holding that amount is outstanding in the shape of loans and advances and the same was not deposited, therefore, the credit cannot be allowed. We have also noted that assessee has not added the excise value in its purchases and the same is shown separately in Modvat account. The expenses incurred on account of excise payment made at the time of material purchased is allowable under section 37. Therefore, also, we are of the view that the disallowances were not proper from this angle also.
10. In case of Modipon Ltd. v. IAC (supra) the Delhi Bench has decided the similar issue in favour of assessee. The facts in that case also were similar to the case here before us. The excise duty paid was shown as advance by way of deposit in personal ledger account and the deduction as per provisions of section 43B was not allowed. The amount involved was related to excisable item lying in godown of excise department and towards payment of excise duty thereon (bounded warehouse). The assessee paid some amount in advance by way of deposit in its personal ledger account, which is debited as and when the goods are cleared. The issue there was as to whether the assessee is entitled to claim such payment under section 43B. The revenue ‘s case was that assessee is entitled only to those payments which were actually adjusted on clearance of goods; whereas the assessee’s case was that having actually paid the amount to the excise department under prescribed scheme/rules, the assessee washes its hands off and is in no way entitled to any refund. It was submitted that the amount is paid under a scheme evolved under the relevant excise laws to facilitate payment of excise duty and removal of goods. The reliance was also placed in the case of Raj & San Deep Ltd. v. Assistant CIT in ITA No. 1853 (Ch)/93. After considering the material and submissions of the assessee, the Tribunal decided the issue in favour of assessee and the findings are given in para 17.2 of the order, which are reproduced here as under :
“We have heard the learned representatives and have seen the relevant record. The issue is resolved in the order of Chandigarh Bench of the Tribunal in the case of Raj & San Deep Ltd. v. Assistant CIT, ITA No. 1853 (Chd)/92; assessment year 1989-90, date of order 18-2-1993, wherein on a set of same facts and under similar circumstances, it has been held that such excise duty, as is deposited as per rule 173G of the Central Excise Rules, 1944, whether paid in advance or otherwise, retained the character of excise duty and, therefore, covered by the provisions of section 43B, The Tribunal accordingly held that excise duty which is deposited in the account current, by way of advance excise duty and is actually paid in the treasury qualifies for deduction under section 43B. The facts and circumstances being the same, respectfully following order of the Chandigarh Bench of the Tribunal (supra), we reverse the findings of the authorities below and allow the assessee’s claim at Rs. 8,93,967. We may also fruitfully refer to the observations of the Special Bench (Del) in the case of ITO v. Food Specialities (supra) and Indian Communication Network (P) Ltd. v. Inspecting Assistant Commissioner (1994) 49 ITD 56 (Del-Trib)(SB). ”
11. The facts in the present case are identical and the ratio of the decision in the case of Modipon Ltd. (supra) is squarely applicable on the facts of the present case. Therefore, respectfully following the decision (supra), and the reasoning given by us, we allow this ground of the assessee by holding that the payments on account of excise duty qualifies for deduction under section 43B.
12. Next ground is in regard to disallowance under section 80HHC. The Commissioner (Administration) considered the Explanatory Memoranda to Finance (No. 2) Bill, 1991, which spells out the reason for the exclusion of the amount for the purpose of section 80HHC. The Explanatory Memoranda reads as under :
“Receipts like interest, commission etc. which do not have an element of turnover are included in the Profit & Loss account. It is, therefore, proposed to clarify that profits of the business for the purpose of section 80HHC will not include receipts by way of brokerage, commission, interest, rent charges or any other receipts or a similar nature. As some expenditure might be incurred in earning the incomes which is the generality of cases in part of common expenses, it is proposed to provide ad hoc 10 per cent deduction from such incomes to account for such expenses.
12.1. In view of this Memoranda of Finance (No. 2) Bill, 1991, the Commissioner was of the view that interest earned by the assessee should not be considered for the purpose of deduction under section 80HHC. Accordingly, the interest would not form part of total turnover. While holding so the Commissioner has further observed that even if the same is taxable under the head “Profit and Gains of business or profession”.
13. We have seen the facts of the case and the case laws relied upon by both the parties. The thrust of the argument put forth by the learned counsel are that net interest has to be considered because the assessee paid interest to the bank and other institutions for the purpose of business and earned interest on surplus amount lying with the assessee by investing the same in short-term deposit in banks or advancing to the third parties. As the business of assessee being seasonal business because the assessee deals in generators, which are used by consumers in the peak hours of the summer season when electricity normally is not available to the full extent, Therefore, the assessee’s business is a seasonal business and in off period the funds available with the assessee becomes surplus and to avoid the idleness of the funds, they were invested for short period in the shape of Fixed deposit receipts or in shape of advancing to third parties. It was further argued that supposing the assessee returned the money to the bankers, in that case the assessee’s burden on account of interest payment will become lesser and other profits from business will automatically increased. In that case the department has to allow the deduction of the profits which are more by decreasing the interest payment. As the assessee could not repay the amount to its investors, i.e., bankers or other institutions, because the limit cannot be renewed in a routine manner. There are so many formalities which have to be completed for obtaining loans from banks and other institutions. Therefore, the assessee invests surplus funds for short periods. Accordingly the idle money was utilised and some earnings were earned, which are purely for the purpose of business. Therefore, they have to be considered as income under the head “Profits and Gains of business or profession”.
14. The learned Departmental Representative placed heavy reliance in the case of South India Shipping Corporation Ltd. v. CIT (supra). This decision was rendered by the Madras High Court by following the decision of the Supreme Court in the case of Tuticorin Alkali Chemicals, & Fertilizers Ltd. v. CIT (supra). In the case of Tuticorin Alkali (supra) the interest income was held as income from other sources. Following the decision of Supreme Court, the Madras High Court held that interest earned from bank deposits is to be taxed under the head “Income from other sources”. The cases which were relied upon by the counsel of the assessee were not considered because of the Supreme Court has held that the interest earned from bank deposits will be treated as income from other sources.
15. We have perused the case law in the case of South India Shipping Corporation Ltd. and Tuticorin Alkali (supra) and found that the ratio of these decisions are not applicable on the facts of the present case. In the case of Tuticorin Alkali (supra) the facts were that assessee earned interest on short-term bank deposits before the start of the business. Here in the present case the business has already started and only surplus funds were deposited in short-term Fixed deposit receipts. We further noted that other case laws relied upon from the side of assessee, which were in favour of assessee could not be considered because of the decision of the Hon’ble Supreme Court. The case laws relied upon by the counsel of the petitioner are briefly adverted here as under :
16. In the case of CIT v. Tamil Nadu Dairy Development Corporation Ltd. (1995) 216 ITR 535 (Mad), a Division Bench of the same court dealt with a case where the assessee had derived income from short-term deposits and had claimed that such income be treated as business income. The judgment of the Apex Court in the case of CIT v. Calcutta National Bank Ltd. (1959) 37 ITR 171 (SC) was followed, wherein it was held that the income so derived constitutes business income.
17. In the case of CIT v. Modi Refineries Ltd. (1997) 223 ITR 354 (Mad), the court has held that if the deposit made by the assessee in the bank was capital employed as that would become part of the capital of new industrial undertaking, and, therefore, any income earned by the capital employed would automatically become the business income of the assessee, and it could not be treated as income earned from other sources. The court further held that the interest on bank deposits had to be assessed under the head “business income”. While delivering the judgment the Madras High Court has referred the decision of the Andhra Pradesh High Court in the case of CIT v. Andhra Pradesh Industrial Infrastructure Corporation Ltd. (1989) 175 ITR 361 (AP) and the decision of the Delhi High Court in the case of Sham Progetti SPA v. Addl. CIT (supra). These decisions, where it was held that interest received on short-term bank deposits by an assessee carrying on business and having business income are not to be treated as income from other sources, were not considered because of the decision of the Apex Court in the case of Tuticorin Alkalis (supra). In the case of Tuticorin Alkali the Apex Court has held that interest income received before start of business will be treated as income from other sources. However, the Madras High Court in last observed : “We, however, make it clear that though the assessee may not be entitled to have interest paid by it on overdraft to the bank, deducted from the interest received by it on the short-term fixed deposits, the assessee is entitled to deduction of the same from its business income”. The last observations of the Hon’ble High Court clearly shows that they decided the issue by following the decision of Apex Court in the case of Tuticorin Alkali (supra). We have seen that there were so many judgments which were delivered by the various High Courts, where on the similar facts it was held that interest income earned on short-term deposits in bank will be treated as income from business.
18. Now we would like to go through the findings of the Apex Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra). The facts of this case are as under :
The assessee was a company incorporated on 3-12-1971, for the purpose of, inter alia, manufacturing heavy Chemicals, such as Amonia Chloride and sodaash. The trial production of the factory of the company commenced on 30-6-1982. For the purpose of setting-up the factory the company had taken term loan from various banks and financial institutions. That of the borrowed funds, which were not immediately required by the company, was kept invested in short-term deposits with banks. Such investments were specifically permitted by the Memorandum and Articles of Association of the company. The company had also deposited certain sums with the Tamil Nadu Electricity Board. It has also given interest bearing loans to its employees to purchase vehicles upto the assessment year 1980-81. Interest earned by the company from various loans given by company and also from the bank deposits, was shown as income and was taxed accordingly. For the accounting year ending 30-6-1981, i.e., assessment year 1982-83 the assessee received a total amount of interest of Rs. 2,92,440. In its return of income filed in June, 1982, the company disclosed the said sum as income from other sources. It had also disclosed business loss of Rs. 3,21,802. After setting off the interest income against business loss, the company claimed the benefit of carry forward of the net loss of Rs. 29,360. Later on realising its mistake, on 26-12-1984, it filed a revised return showing business loss of Rs. 3,21,802. It claimed that according to the accepted accountancy practice interest and finance charges along with other pre-production expenses had to be capitalised and that, therefore, interest income of Rs. 2,92,440 should go to reduce the pre-production expenses, including interest and finance charges. During the previous year relevant to assessment year 1983-84, the assessee had received interest income of Rs. 1,08,336. The assessee filed its return, in which it claimed that interest of Rs. 1,08,336 should go to reduce the pre-production expenses, including interest and finance charges which would ultimately be capitalised. The Income Tax Officer rejected the assessee’s claim that the interest income was not exigible to tax. The view of the Income Tax Officer was upheld by the Commissioner (Appeals). The appeal of the assessee was also dismissed by the Tribunal. In view of the conflicting decisions of the Madras High Court and the Andhra Pradesh High Court, the Tribunal referred the question regarding taxability of income directly to the Hon’ble Supreme Court and the Supreme Court has held as under :
“Held, that the company had surplus funds in its hands, In order to earn income out of the surplus funds, it had invested the amount for the purpose of earning interest. The interest thus earned was clearly of revenue nature and would have to be taxed accordingly. The accountants might have taken some other view but accountancy practice was not necessarily good law. This was not a case of diversion of income by overriding title. The assessee was entirely at liberty to deal with the interest amount as it liked. The application of the income for payment of interest could not affect its taxability in anyway. The company could not claim any relief under section 70 or section 71 since its business had not started and there could not be any computation of business income or loss incurred by the assessee in the relevant accounting years. In such a situation, the expenditure incurred by the assessee for the purpose of setting-up its business could not be allowed as deduction, nor could it be adjusted against any other income under any other head. Similarly any income from a non business source could not be set off against the liability to pay interest on funds borrowed for the purpose of purchase of plant and machinery even before commencement of the business of the assessee.”
19. We noted here that in the case of Tuticorin Alkali (supra), the interest income was held as income from other sources because it was earned before commencement of the business and it was invested for the purpose of earning interest. There was no inextricably link with the process of setting-up of its plant and machinery which can reduce the cost of its assets. As the Apex Court found that the amount was invested for the purpose of earning interest, therefore, it was a revenue receipt. Accordingly it was held that this income was income from other sources.
20. However, the facts in the present case are different. Here the link of the investment was inextricably in nature because the assessee was paying interest on its borrowings, which were for the purpose of business and the business of the assessee is a seasonal one and accordingly for few months funds were surplus and those funds were invested for a short period, so that the idle money could be utilised and the burden of the payment of interest could be lessened. Therefore, the assessee reduced the interest payment from interest income and net of both the items were taken into Profit & Loss account. Therefore, it is clear that the amounts received by the assessee were inextricably linked with the process of business. Therefore, it should be treated as business income. The Commissioner also mentioned in his order that 90 per cent of the interest earned has to be excluded as per the Explanatory Memoranda to Finance (No. 2) Bill, 1991, even if the same is taxable under the head ‘Profit and gains of business or profession”. In last line of para 4.2.4 at p. 7, the Commissioner has mentioned that it may be clarified that interest, as in this case, may be intimately connected with the export business, but the same is not exclusively arising by virtue of the export business. It clearly shows that the Commissioner himself was of the view that interest income earned by the assessee was part of the business income and, as we have already stated, that because of the Explanatory Memoranda to Finance (No. 2) Bill, 1991 the Commissioner disallowed the claim. Therefore, we are of the view that the decision of the Apex Court in the case of Tuticorin Alkali Chemicals (supra) is not applicable on the facts of the present case.
20.1. We further noted that the Apex Court has observed in his findings that the company could not claim any relief under section 70 or section 71 since its business had not started and, therefore, could not be in computation of business income or loss . . . . .. . . .From these observations it can be inferred easily that the Apex Court was very much aware while observing these observations that the business was not yet started. Therefore, any adjustment cannot be made under the same head or any other head of income. From these observations it can be easily presumed that the Apex Court was of the view that any income or loss can be adjusted if the same was made for the purpose of same business. Therefore, also we are of the view that the netting of the two interests has to be allowed in the present case, as the facts are different in the present case with that of the facts in the case of Tuticorin Alkali (supra).
21. In case of CIT v. Bokaro Steel Ltd. (supra) the Apex Court has observed that if the assessee received any amounts which are inextricably linked with the process of setting-up of its plant and machinery, such receipts will go to reduce the cost of its assets. These are receipts of a capital nature and cannot be taxed as income.
22. From the observations of the Hon’ble Supreme Court it can be easily inferred that there should be inextricably link with the interest income earned and the business activities. We have seen the facts of the present case. The assessee received interest income on short-term deposits and paid interest on the long-term borrowings, which reduces the burden of assessee on account of payment of interest which was paid for the purpose of the business and in this proposition there is no dispute that the amount paid on interest account was for the purpose of business. Therefore, there was an inextricably link. Accordingly we are of the view that the assessee is entitled to deduction under section 80HHC of the Income Tax Act, 1961.
23. In the case of Pink Star v. Dy. CIT (supra) at p. 142, the Tribunal discussed similar issue and allowed the claim of the assessee. In this case the decision of the Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT (supra) and the decision in the case of CIT v. Bokaro Steels Ltd. (supra) were discussed in detail and then allowed the claim of the assessee, The observations and findings of the Tribunal are given from paras 15 to 18 of the order, which are reproduced here as under :
“15. We now come to the last issue in connection with the deduction under section 80HHC. Here also, as in the case of labour charges, in its original Profit & Loss account assessee had shown a net debit of Rs. 34,24,095 as interest paid to the bank. No credit on account of interest was reflected in the Profit & Loss account. However, at the insistence of the assessing officer, assessee furnished a detailed Profit & Loss account in which bank interest debited amounted to Rs. 36,21,595 (Rs. 36,89,553 – 67,958) and bank interest credited amounted to Rs. 1,97,500. This, that is Rs. 36,21,545-Rs. 1,97,500 gives a net amount of Rs. 34,24,095 which was shown as net debit in the Profit & Loss account. The assessing officer, applying the same logic as in the case of labour charges, reduced the profits of business by 90 per cent of Rs. 1,97,500. The submissions of the learned counsel and the learned Departmental Representative are the same as they were in respect of labour charges above. In para 12 above we have already observed that credits and debits of the same nature should be netted out against each other in order to avoid any distortion in the profits. The same analogy will apply in case of interest also. It cannot be denied that despite earning interest of Rs. 1,97,500, the said earning has merely gone to reduce the net interest burden of the assessee from Rs. 36,21,595 to Rs. 34,24,095. Thus, in effect, there is no income on account of interest included in the profits of the business and hence no reduction whatsoever is called for as envisaged in clause (baa) of the Explanation to section 80HHC.
16. We are conscious of the decision of the Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT (1997 ) 227 ITR 172 (SC). However, the facts in that case are quite distinguishable. In that case, assessee had sought to adjust interest income against expenditure which was to be capitalised. This would have not only distorted the actual cost of construction, but more importantly, an income which had no characteristic of a capital receipt would have escaped the tax net. Therefore, the Supreme Court did not allow a revenue receipt to be adjusted against capital expenditure.
17. In another case i.e. in CIT v. Bokaro Steel Ltd. (1999) 151 CTR (SC) 276 (1999) 102 Taxman 94 (SC), at the relevant time, the assessee was in the process of constructing its factory and installation of plant. During this period assessee had given some of its capital assets to the contractors for use and had charged the contractors for the same. It had also given interest-bearing advances to the contractors so that the contractors did not have to raise funds from outside agencies. The Tribunal and the High Court held that all these amounts received by the assessee had gone to reduce the cost of construction. These were in the nature of capital receipts which could be set off against capital expenditure incurred by the assessee during the relevant assessment years. The Supreme Court, distinguishing its decision in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) affirmed the view taken by the High Court by observing as follows :
‘However, while interest earned by investing borrowed capital in short-term deposits is an independent source of income not connected with the construction activities or business activities of the assessee, the same cannot be said in the present case where the utilisation of various assets of the company and the payments received for such utilisation are directly linked with the activity of setting-up the steel plant of the assessee. These receipts are inextricably linked with the setting-up of the capital structure of the assessee-company. They must, therefore, be viewed as capital receipts going to reduce the cost of construction.’
Further, referring to the decision of the Supreme Court in the case of Chalapaili Sugars Ltd. v. CIT (1975) 98 ITR 167 (SC), their Lordships observed as follows :
‘In case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of the fixed assets created as a result of such expenditure. By the same reasoning if the assessee receives any amounts which are inextricably linked with the process of setting-up its plant and machinery, such receipts will go to reduce the cost of its assets. These are receipts of a capital nature and cannot be taxed as income.’
18. Understanding the above two decisions, in our opinion it follows that whereas a revenue receipt cannot be adjusted against capital expenditure, a capital receipt can be so adjusted. On the same analogy, in our view, while computing profits of business for the purposes of section 80HHC revenue receipts can be adjusted against revenue expenditure of the like nature. Just as income earned by the assessee from letting out assets to the contractor, which were to be used during and for the construction were held to be capital receipts in the case of Bokaro Steel Ltd. (supra) which went to reduce the capital expenditure, in the present case, revenue receipt in the form of interest went to reduce the revenue expenditure of interest, because funds were borrowed for the purpose of business and funds were kept in fixed deposits for the purpose of business. It was one of the conditions laid down by the bank while granting credit facilities to the assessee. Therefore, interest income was inextricably linked with the business of the assessee and hence the adjustment. Since expenditure on interest is higher than the interest income, no interest income augmented the profits of the business which needed to be reduced as envisaged by clause (baa). This very principle has been followed by us while dealing with the issue relating to labour charges in earlier paras and also in respect of interest income. ”
24. By going through the observations and finding of the Tribunal in the case of Pink Star (supra), we find that the issue in discussed in great detail. In this case, as we have already stated that both the decisions of the Apex Court are also discussed i.e. in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. and Bokaro Steels (supra) and then the finding was given in favour of assessee, by holding that the interest income was inextricably linked with the business of the assessee and hence the adjustments were correctly made by the assessee.
25. Here in the present case before us, the facts are similar. Hence also the assessee paid interest on borrowings and the surplus funds were invested and the assessee received interest, Therefore, we are of the view that netting has to be allowed in the present case also.
26. In the case of Snam Progetti, SPA v. Addl. CIT (supra), the Hon’ble Delhi High Court has held as under :
“Held, that the assessee had not come from Italy to make bank deposits in India but had come to carry on business, and the income earned by it by depositing spare funds in banks and earning interest thereon would also be business income and for the purpose of set off it could not be treated as separate from business income. Therefore, the loss brought forward from the assessment year 1970-71 had to be set off also against the interest income for the assessment year 1971-72.
By the court : ‘The question to be seen in such a case is whether the interest income is derived also from what may be described as ‘business activity’. If it is so derived then the mere fact that it is taxed under a different section will make no difference. The approach to the problem has, therefore, to be dissociated from the section under which the tax is imposed in the form of income.”
27. The ratio of the decision of the jurisdictional High Court is also applicable on the facts of the present case. According to this decision also the netting of the two interest should be allowed and the case here before us is the case of netting of the two interests. Therefore, we are of the view that netting of the interest has to be allowed to the assessee.
28. We have also seen the case laws relied upon by the learned Departmental Representative. In the case of CIT v. Pandian Chemicals Ltd. (1998) 233 ITR 497 (Mad), the facts were different, The issue was in regard to new industrial undertaking in backward area and the assessee has received interest on deposit with Electricity Board. There was no nexus of these deposits with the business of the assessee. Therefore, the deduction on account of interest of interest was not allowed.
29. In the case of Berlia & Co. v. Assistant Commissioner (supra) the facts were different. In this case there was only interest income in regard to surplus funds and there was no payment on borrowings. Therefore, it was held that there was no direct nexus between the assessee’s export business and the earning of the interest income was treated as income from other sources. Here in the present case, the payments on account of interest was there and the receipts were also there, and the net result of interest was taken into Profit & Loss account, which was for the business purpose.
30. In the case of CIT v. Sterling Foods (1999) 237 1TR 579 (SC), the Apex Court has held that sale of import entitlement cannot be treated as income from export business. Therefore, the income out of sale of import entitlement was not considered for the purpose of section 80HH. The facts here before us, as we have already stated, are different. Here, the question is of netting of the two interests, i.e., payment of interest and receipt of interest, which were for the purpose of business only. Therefore, this decision is also distinguishable on facts.
31. In view of all these discussions and in view of the circumstances of the present case, we are of the view that the assessee is entitled for netting of the two interests and we hold so.
32. In regard to deduction under section 80HH and 80-I, we are of the view that these deductions have also to be allowed to the assessee because the unit of the assessee is an industrial undertaking, which is not in dispute, and we have already held that the interest income is income derived from industrial undertaking. For this reason we have given our detailed reasoning while disposing of the ground in regard to deduction under section 80HHC and for the same reasoning we hold that deduction under section 80HH and 80-I are allowable on the facts of the present case. In view of these facts and circumstances we cancel the direction given by the Commissioner for modifying the order of the assessing officer.
33. In the result, the appeal of the assessee is allowed in part.