ORDER
Vimal Gandhi, Vice President
1. The Hon’ble President vide his order dt. 8th April, 2002, constituted this Special Bench to consider the following question :
“Whether, on the facts and circumstances of the case, the earning of interest on its idle and surplus funds temporarily invested by the assessee constitutes business so as to be eligible for deduction under Section 80HHC of the IT Act or such income is to be treated as income from other sources.”
2. The facts of the case are that the assessee-firm was a 100 per cent exporter in the period relevant to asst. yr. 1990-91 under consideration. It disclosed in its return export sales at Rs. 40,60,000 and showed net profit at Rs. 28,73,275 which included interest of Rs. 59,544. The assessee claimed deduction under Section 80HHC of the IT Act on the total income returned. There is no dispute that the assessee is entitled to deduction under the above provision. The AO while computing deduction under Section 80HHC, held that interest income of Rs. 59,544 was liable to be assessed under the head “other sources” and, therefore, does not qualify for deduction. He accordingly assessed the above amount under the head “other sources” and treated it as assessee’s taxable income. Deduction under Section 80HHC on the balance income was allowed.
3. The assessee impugned above action of the AO in appeal and claimed that interest received on short-term deposit and on money advanced for a temporary period was “business income” and not income from :other sources” it was emphasised that the assessee was a 100 per cent export unit and interest was earned on loan given temporarily. The interest was part of business income. The assessee had been paying and receiving interest from sister concerns as a reciprocal arrangement and as part of its business. The interest was earned by utilizing surplus funds to minimize burden and to improve profitability of business. It was a measure of business prudency. Therefore, on facts and in the circumstances of the case, the interest has to be treated as a part of business income.
4. The learned Dy. CIT(A) upheld the order of the AO with the following observations :
“6. The facts of the case as also the submissions of the appellant’s authorised representative have been carefully considered. There does not seem to be much force in the submissions of the appellant’s authorised representative. Deduction under Section 80HHC is to be allowed if sale proceeds are receivable in convertible foreign exchange. The interest income by no means can be said to be sale proceeds nor is it receivable in convertible foreign exchange. Further, the deduction shall be of the profits derived by the assessee from the export of goods or merchandise interest is not profit derived from the export of goods or merchandise. The word ‘derived’ has been considered by various High Courts. In the case to Hindustan Lever Ltd v. CZT (1980) 121 ITR 951 (Bom), the Bombay High Court while interpreting the expression ‘derived from’ observed that only the proximate source is to be considered and not the source to which it may be ultimately be referable. In the case of Cochin Co. v. CIT (1978) 114 ITR 822 (Kei) the Kerala High Court observed ‘profit or gain can be said to have been from an activity carried on by a person only if the activity is the immediate and effective source of said profit or gain. There must be a direct nexus between the activities and the earning of profit or gain cannot be said to have been derived from an activity merely by a reason of the fact that the said activity may have helped to earn the said income as profit in an indirect or remote manner’. In view of these decisions the interest income cannot be said to be profits derived by the assessee. Still further, the interest income has been assessed by the ITO under the head ‘income from other sources’ and not as profits and gains of business. Income has been defined in Section 2(24) of the IT Act. The definition is inclusive and not exhaustive. Therefore, income would include profits and gains of business but profits and gains of business cannot be said to be synonymous with the word income. Therefore, the interest which has been assessed as ‘income from other sources’ may form part of the assessee’s income but cannot be said to be profits and gains of business.”
5. The assessee impugned above disallowance in appeal before the Tribunal, Jaipur Bench, Jaipur. After hearing the parties, the Bench found divergence of views of Benches on the point involved. The Jaipur Bench of the Tribunal had decided the issue against the assessee in the case of Reliance Trading Corporation v. ITO (ITA No, 1642/Jp/1993, dt. 25th Sept., 2001) [reported at (2001) 73 TTJ (Jp) 851–Ed.]. The Delhi Bench of the Tribunal on the other hand, in the case of Asstt. CIT v. Brij Bhushan Lal & Sons (2000) 69 TTJ (Del) 379 had held that interest income earned on deposits was business income for purposes of Section 80HHC of the IT Act. The matter was accordingly referred to the Hon’ble President by the Jaipur Bench to constitute a Special Bench.
6. After noticing the divergence of opinion, the Hon’ble President referred the question for consideration by the Special Bench. In the above background, the matter was heard by this Special Bench at Jaipur.
7. We have heard Sh. N.C. Dhadda, the learned chartered accountant for the assessee Sh. Dilip Shivpuri and other learned Departmental Representatives for the Revenue. The learned representative of the assessee submitted at the very outset that the changes brought about by the legislature in Section 80HHC w.e.f. 1st April, 1992, were not applicable in this case as assessment year involved was asst. yr. 1990-91. In this connection, our attention was drawn to circular of CBDT No. 621, dt. 19th Dec., 1991, and also to certain decisions of various High Courts.
8. Sh. Dhadda further submitted that the assessee is a 100 per cent export unit and exports goods after processing raw material. He drew our attention to P&L a/c of the assessee at p. 1 of the paper book and also to the details of interest account at p. 21. The perusal of interest account shows that interest was received from two concerns, namely, M/s S.K. Gems and M/s Jaipur Trading Co. Out of total receipts of Rs. 60,357, the assessee paid interest of Rs. 813 and this way credited net interest of Rs. 59,544 to the P&L a/c. It was submitted that the assessee was maintaining current accounts with above two parties. Some times, money was borrowed from these concerns and on other occasions, money was advanced to these parties as would be evident from copies of the accounts of the parties available at pp. 5 and 6 of the paper book. This reciprocal arrangement was followed to facilitate business. The amount advanced to above parties was made out of realization from export and as and when funds were not required for making exports. Funds were also obtained from above two firms when needed for purposes of business. Thus, movement of funds was inextricably linked with business of the firm. It was contended that the plea of the assessee was not properly considered by the AO. The AO had only observed that reply of the assessee on the subject was not “convincing” and treated the interest income as income from “other sources” and hence, not eligible for deduction under Section 80HHC,
9. The learned counsel further pointed out that advances were made out of circulating capital and it was prudent act of businessman to earn more income and reduce its liabilities. With reference to finding of learned CIT(A) that interest was not “profit derived from export of goods”, the learned representative submitted that it was not necessary for the assessee to prove that interest was “profits derived from export” for the rebate under Section 80HHC. The interest was earned on business funds and by using circulating and working capital for a short duration with a view to earn income. Advances were not made by way of investment. The interest was incidental receipt and part of profits and gains of business. The interest in the year under reference has come out of funds generated by exports and it has nexus with export business and, therefore, it is “eligible profit of business”. The assessee, in this connection, relied upon a direct decision of Hon’ble Bombay High Court in the case of CIT v. Punit Commercial Ltd. (2000) 245 ITR 550 (Bom) wherein their Lordships observed as under :
“Held, that, in the instant case, Section 80HHC(3)(a) of the IT Act, 1961, was applicable as the assessee is a 100 per cent exporter. Hence, the entire business income was deemed to be profit derived from export of goods. Therefore, the interest income could only fall ‘under business income.’ Section 80HHC(3)(a) deals with a 100 per cent exporter. Hence, the entire profits are entitled to deduction. This would include interest income also.”
10. The assessee further placed reliance on other two decisions of Bombay High Court in CIT v. Nagpur Engineering Co. Ltd. (2000) 245 ITR 806 (Bow), the High Court followed is own earlier decision in CIT v. Paramount Premises (P) Ltd. (1991) 190 ITR 259 (Bom), where interest from deposits pending use &r from deposits required for obtaining guarantee for its business was treated as eligible for consideration as business income. This precedent was considered good enough for similar treatment for tax relief under Section 80HHC as well. The Supreme Court has dismissed SLP of the Department as reported in (2000) 244 JTR (St) 54. The learned counsel also relied upon Circular of CBDT No. 564, dt. 5th July, 1990 [(1990) 184 ITR (St) 137).
11. The learned counsel for the assessee then drew our attention to the instrument of partnership of the assessee-firm under which the partners are authorised to carry on any business as may be mutually agreed to by the partners from time to time.
12. The learned counsel further submitted the expression “business” is of wide import. For definition of business, the learned counsel referred to the decisions of the Hon’ble Supreme Court in the case of Mazagaon Dock Ltd. v. CIT (1958) 34 ITR 368 (SC) and to the case of Narain Swadeshi Weaving Mills v. CEPT (1954) 26 ITR 765 (SC). He further submitted that all the tests laid down by the Hon’ble Supreme Court in above cases are satisfied in the present case. Intention, object and purpose of the assessee in advancing loan was to earn business income. The learned counsel further argued that having regard to the heads of income mentioned in Section 14 of the IT Act, it is first to’be seen whether the income falls under the head “business”. In case the income does not fall under the head “business” only then, income could be assessed under the head “other sources”. In this connection, the learned counsel relied upon the decision of Hon’ble Supreme Court in the case of CIT v. Govinda Choudhary & Sons (1993) 203 ITR 881 (SC). He also referred to another decision of Hon’ble Supreme Court in the case of S.G. Mercantile Corporation (P) Ltd. v. CIT (1972) 83 ITR 700 (SC). It was emphasized that the interest income was earned by utilizating commercial assets and, therefore, interest was business income. Reference in this connection was made to the decision of Hon’ble Calcutta High Court in the case of CIT v. Tirupati Woollen Mills Ltd. (1992) 193 JTR 252 (Cal).
13. The learned counsel further referred to the decision of Hon’ble Rajasthan High Court in the case of CIT v. Rajasthan Land Development Corporation (1995) 211 ITR 597 (Raj). He pointed out that in the said decision, interest was earned in period prior to setting up of business and the said case has no application to a case where business was already in existence. It was further submitted that the above case was distinguishable on facts as the present was not a case of investment, but utilization of commercial funds. The assessee had given money to carry on money lending business. It was accordingly, submitted that only principle (circumstance No. (v) mentioned by their Lordship was applicable in this case. The learned counsel once again drew our attention to Clause (3) of the partnership deed to emphasise that partners of the assessee-firm could carry “any other business” from time to time. The above clause distinguished his case from the case of CIT v. Rajasthan Land Development Corporation (supra). The learned counsel for the assessee in this connection, drew our attention to the decision of Hon’ble Gujarat High Court in the case of CIT v. Motilal Hirabhai Spg. & Wvg. Co. Ltd. (1978) 113 ITR 173 (Guj). It was further submitted that advance of money by the assessee was never treated as an investment in the past. The intention of the assessee was clear that advances were not made as an investment. In support of this, the learned counsel for the assessee relied upon on the affidavit of the partners of the firm, available at p. 38 of the paper book. He further cited following decisions :
(i) CIT v. Punit Commercial Ltd. (supra); (ii) CIT v. Nagpur Engg. Co. Ltd. (supra);
(iii) Honda Siel Power Products Ltd. v. Dy. CIT (2000) 69 TTJ (Del) 97 : (2001) 77 ITD 123 (Del);
(iv) Poompuhar Shipping Corporation Ltd. v. ITO (1991) 39 TTJ (Mad) 206;
(v) Avon Apparels v. TTO 22 Tax World 399 (Jp);
(vi) Gupta Jewels Corporation v. Asstt. CIT 21 Tax World 385 (Jp);
(vii) Binodiram Balchand & Co. v. CIT (2001) 251 ITR 819 (MP); and
(viii) Pearl Polymers Ltd. v. Dy. CIT (2002) 74 TTJ (Del)(SB) 1 : (2002) 80 ITD 1 (Del)(SB).
14. The learned counsel further submitted that the decision of Jaipur Bench of Tribunal in the case of Reliance Industries (supra) was distinguishable. It was not a case of the assessee earning interest as business income. It was a case of investment.
15. Sh. Sud, appearing for the Intervener, submitted that amendment made in Section 80HHC w.e.f. 1st April, 1992, was applicable prospectively only. For the above proposition, Sh. Sud placed reliance on decision of Hon’ble Punjab & Haryana High Court in the case CIT v. Isher Dass Mahajan & Sons (2002) 253 ITR 284 (P&H). He also relied upon decision of Hon’ble Supreme Court in the case of CIT v. Karnal Co-operative Sugar Mills Ltd. (2000) 243 ITR 2 (SC). He submitted that intention of the legislature was clear in amending the provisions of Section 80HHC. If interest income was to be deducted while determining business income even as per the law before amendment, there was no need to amend the provision. He relied upon the decision reported in the case of Padmasundra Rao (Decd.) and Ors. v. State of Tamil Nadu and Ors. (2002) 255 ITR 147 (SC). It. was accordingly contended that interest earned on FDR in his case was business income. For the reasons given hereinbelow, we accept legal proposition advanced by Sh. Sud. However, facts under which interest was earned by his client, are not known and, therefore, the case of his assessee is required to be decided separately in the light of the decision hereinafter given.
16. The learned Departmental Representative, Shri Dilip Shivpuri, opposed above submissions. It was his contention that the business of the assessee Was buying of rough gem stones and selling them after processing. He drew our attention to Part (III) of the return submitted by the assessee. The nature of business or profession is described as “manufacturer and exporter of emerald and stones”. The assessee nowhere claimed that it was carrying on “money-lending business”.
He further argued that there was no material on record to support claim of the assessee that it carried the business of money-lending. The learned Departmental Representative drew our attention to the definition of “money lend” as per. The Rajasthan Money Lenders Act. In this connection, the learned Departmental Representative placed strong reliance on decision of Hon’ble Rajasthan High Court in the case of CIT v. Rajasthan Land Development Corporation (supra). Their Lordships has laid down five circumstances/ situations to determine whether the interest income could be assessed as “business” or income from “other sources”. Their Lordships have laid down the following principles :
“The following principles are applicable in assessing interest income under the provisions of the IT Act, 1961 : (i) interest on fixed deposits and other deposits before the commencement of business is an income from other sources; (ii) income from interest on deposits of surplus money during the construction period is also to be considered as income from other sources; (iii) interest income in respect of surplus money, not required for business and deposited in banks, or with persons as idle money, for safekeeping would be assessable as income from other sources. If the income from interest is from a fund which has been brought as surplus capital, it would be assessable as income from other sources; (iv) in respect of investment of surplus fund there is divergence of opinion between different High Courts and the Rajasthan High Court has held that if the surplus funds are invested instead of keeping them idle, the income by way of interest should be treated as income from other sources; (v) if the surplus funds emerge out of business regularly carried on by the assessee and with the intention to carry on the business of money-lending the loan is advanced the income therefrom would be income from business. The intention has to be gathered with reference to all the activities of advancing money which should be permitted by the objects of the company and also by the resolution of the board of directors to carry on the business of money-lending.”
17. The learned Departmental Representative further drew our attention to definition of “loan” in Sub-section (9) of Section 2 of The Rajasthan Money Lenders Act, 1963, to contend that above clause is not applicable if loan is advanced to a trader. If the intention of the assessee was to carry on money-lending business he would have taken a money-lending license. He further drew our attention to pp. 5 and 6 of the paper book where copies of accounts of M/s S.K. Gems and M/s Jaipur Trading Co., Jaipur, are available to contend that the assessee is mostly taking or receiving money from two parties only. These loans were unsecured loans. The accounts with the parties were running accounts. The trait of money lending is missing in this case. The claim of money-lending business is also not supported by the documentary evidence such as Hundi, pronote or other collateral securities. No pawning is shown, no borrowing or broker is involved which are normal traits of money-lending. The learned Departmental Representative further argued that in money-lending business usually there are borrowed funds. He referred to decision of Bombay Bench in the case of Nirja Birla v. Asstt. CIT (1998) 61 TTJ (Bom) 346 : (1998) 66 ITD 148 (Bom) and read at p. 163 of the report. He also referred to decision of the Supreme Court in CIT v. Sutiej Cotton Mills Supply Agency Ltd- (1975) 100 ITR 706 (SC) where it is observed that when shares are purchased with borrowed funds, it is normally indicative of intention to trade. No borrowed funds are shown to have been utilized in making advances in this case. No inference that interest was earned as part of business, could be drawn from facts and circumstances of the case. The learned Departmental Representative further argued that even if interest was business income, it was not “income derived from export”. The deduction under the statutory provisions was to be allowed only on “profits derived from export”. The test of Sub-section (1) to Section 80HHC was not satisfied. Formula for computation under Section 80HHC(3) will come into play only if conditions of above Sub-section (1) are satisfied. The learned Departmental Representative relied upon decision of Privy Council in the case of CIT v. Raja Bahadur Kamakhaya Narayan Singh and Ors. (1948) 16 JTR 325 (PC) to contend that “interest” cannot be business receipt. Immediate source of interest income in the present case is the amount advanced and not realization of export. The learned Departmental Representative supported his argument by referring to the decision of Hon’ble Supreme Court in the case of Hindustan Lever Ltd. v. CIT (1999) 239 ITR 297 (SC). He also drew our attention to the decision of Hon’ble Bombay High Court in the case of CIT v. K.K. Doshi & Co. (2000) 245 ITR 849 (Bom) and also in the case of CIT v. S.G. Jhaven Consultancy Ltd. (2000) 245 ITR 854 (Bom). He also referred to the following decisions in support of his contention :
(i) CIT v. Paramount Premises (P) Ltd. (supra);
(ii) Nanji Topanbhai & Co. v. Asstt. CIT (2000) 243 ITR 192 (Ker);
(iii) CIT v. Pandian Chemicals Ltd. (1998) 233 ITR 497 (Mad); and
(iv) CIT v. Kantilal Chhotalal (2000) 246 ITR 439 (Bom).
Special stress was laid by the learned Departmental Representative on decision of Hon’ble Bombay High Court in the case of CIT v. K.K. Doshi & Co. (supra). In the said case, their Lordships held that service charges received by the assessee were not an activity of manufacture and export. The amount received had no direct nexus with export activity and was, therefore, not entitled to be taken into account in calculating special deduction under Section 80HHC of the IT Act. The learned Departmental Representative also made special reference to another decision of Bombay High Court in the case of CIT v. Kantilal Chhotalal (supra), wherein their Lordships held that definition of total turnover and Clause (baa) of the Explanation to Section 80HHC inserted by Finance (No. 2) Act, 1991, was only clarificatory in nature. In other words, reassortment labour charges, commission, interest, rent or receipts of similar nature, could not be included in the total turnover. The learned Departmental Representative also stated that there was not much discussion in the decision of Punjab & Haryana High Court referred to by learned counsel for the assessee, whereas the above decision of Bombay High Court was given after full consideration of amendment made in 1991 and, therefore, should be applied in this case.
18. In rebuttal, the learned counsel for the assessee argued that amendment made by Finance Act, (No. 2) Act, 1991, under Section 80HHC was not declaratory or retrospective. It was prospective only. This was clear from Circular No. 621 issued by CBDT on 19th Dec., 1991, referred to earlier. The learned counsel further argued that Sub-section (3) of Section 80HHC is a substantive provision and could not be retrospectively applied through the introduction of an Explanation. In this connection, the learned counsel drew our attention to the case of CIT v. S.R. Patton (1992) 193 ITR 49 (Ker). The learned counsel further argued that while deciding the case, their Lordships of Bombay High Court did not take into account circular and explanatory notes explaining the statutory provisions. The learned counsel drew our attention to the decision of the Special Bench of Tribunal in the case of Pearl Polymers Ltd. v. Dy. CIT (supra), wherein the learned Members have held that the above provision was prospective and not clarificatory in nature.
19. The assessee further emphasized that money was not kept by the assessee with others for safe custody. It was given to earn interest. The assessee was not governed by Money Lenders Act. The provisions of above statute clearly provide that money-lending business could be carried by a trader without a licence. The borrowing was not essential for carrying money-lending business. No fixed time of lending is necessary. The learned. counsel for the assessee further argued that provisions for Section 80HHC are different from provisions of Section 80-I or 80HH of IT Act. Under those provisions, it is necessary to prove that income in question was derived from the industrial undertaking. However, requirement of Section 80HHC is different. If it is proved that the assessee had profits from export, the computation of such profits is to be made as per formula provided in Sub-section (3). It is not necessary to prove that each and every receipt is “income derived from export”. The assessee had only to prove that its business income from export and, thereafter deduction is to be computed as per Sub-section (3) of Section 80HHC.
20. We have considered the rival submissions in the light of material available on record. Provisions of Section 80HHC in asst. yr. 1990-91 are as under :
“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.”
[Other parts of the above sub-section, Sub-sections (1A) and (2) are not being produced as they are not relevant.]
Sub-section (3) is to the following effect :
“(3) For the purposes of Sub-section (1) profits derived from the export of goods or merchandise out of India shall be :
(a) in a case where the business carried on by the assessee consists exclusively of the export out of India of the goods or merchandise to which this section applies, the profits of the business as computed under the head “Profits and gains of business or profession”.
(b) in a case where the business carried on by the assessee does not consist exclusively of the export out of India of the goods or merchandise to which this section applies, the amount which bears to the profits of the business (as computed under the head ‘Profits and gains of business or profession’) the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee.’
[The other sub-sections of Section 80HHC are not being produced as they are not relevant for discussion!.
21. For the asst. yr. 1991-92, a change was introduced in Sub-section (3) of Section 80HHC by combining the effect of both Clauses (a) and (b), but that change is not material for our purposes.
22. A major change was brought about in Section 80HHC w.e.f. 1st April, 1992, through the addition of Clause (baa) in the Explanation to the section and addition of Sub-section (4A) by the Finance (No. 2) Act, 1991, providing meaning to expression ‘profits and gains’ as under:
“(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 Clause (iiia), (iiib) and (iiic) 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
(2) the profits of any branch, office, warehouse or any other establishment of the assessee situate outside India.”
23. After carefully consideration of the submissions of both the parties on the above changes, we are of the view that above amendments are not applicable in the present case in the asst. yr. 1991-92. The changes brought in the statute through the Finance (No. 2) Act, 1991 w.e.f. 1st April, 1992, are applicable for the asst. yr. 1992-93 and in subsequent assessment years, For the above view, we rely upon circular of CBDT and the decision of the Special Bench in the case of International Research Park Laboratories Ltd. v. Dy. CIT (1994) 50 TTJ (Del)(SB) 216 : (1995) 212 ITR 1 (At)(SB). The Special Bench took note of Circular of CBDT No. 621, dt. 19th Dec., 1991, as amended by Circular No. 642, dt. 11th Dec., 1992, and observed as under :
“In view of the categorical statement contained in circular, which contained the Explanatory Notes given on the provisions relating to direct taxes, it is clear that these amendments are only prospective in nature and it will apply only in relation to the asst. yr. 1992-93 and subsequent assessment years and there is no mention that it will apply retrospectively or is of a clarificatory nature as provide a basis for the argument that they could be applied for the earlier assessment years also…….. This is prospective legislature intention to set right the distortion in the application of the formula and, therefore, intended to be prospective in nature.”
24. Para 32.15 of the Explanatory Notes issued on amended provisions make it abundantly clear that amendments made in Section 80HHC were to take effect from 1st April, 1992, and were accordingly, to apply in asst. yr. 1992-93 and in subsequent assessment years. The circular of CBDT makes the position absolutely clear.
25. The decision of Hon’ble Punjab & Haryana High Court in CIT v. Isher Dass Mahajan & Sons (supra) has also laid down that amendment of Section 80HHC made w.e.f. 1st April, 1992, is prospective and shall apply only from asst. yr. 1992-9? onwards.
26. In the case of Collector of Central Excise v. Dhiren Chemical Industries (2002) 254 ITR 554 (SC) a Constitutional Bench of Hon’ble Supreme Court headed by the then Chief Justice of India, laid down the following law relating to application of circulars issued by Board:
“By Court : Regardless of the interpretation that we have placed on the said phrase, if there are circulars which have been issued by the Central Board of Excise and Customs which place a different interpretation upon the said phrase, that interpretation will be binding upon the Revenue”.
27. The aforesaid decisions of the Constitutional Bench thus puts an end to all doubts regarding binding nature of circulars issued by the Board. In fact, this is first judgment of five Hon’ble Judges giving precedent to the circulars over interpretation given by the Court. It will not be unreasonable to infer that officers functioning under the Board should not be permitted to argue against the circulars of the Board. Circulars are binding on all officers or authorities functioning under the income-tax. Therefore, when the relevant circular says that the amendments are to take effect from 1st April, 1992, and shall apply from asst. yr. 1992-93 onward, it is not open to the Revenue authorities to contend and apply these amendments in earlier assessment years. This would be contrary to the decision of the Hon’ble Supreme Court referred to above.
28. It was vehemently contended on behalf of the Revenue that decision of Hon’ble High Court on the above issue is more elaborate than contrary decision of Hon’ble Punjab & Haryana High Court. This argument has only stated to be rejected. As a subordinate authority, it is not for this Tribunal to reconcile or even attempt to reconcile divergent views of different Hon’ble High Courts. In the present case, we are inclined to follow and apply circular of CBDT as discussed above and leave the matter at that :
29. For the same reasons, we apply provisions of Circular of CBDT No. 564, dt. 5th July, 1990, relied upon by the learned counsel for the assessee. Para 5 of the said circulars is as under:
“(v) the deduction shall be of profits derived by the assessee from the export of goods of merchandise. What constitutes “profits” derived from the export of goods or merchandise out of India has been defined in Sub-section (3) of Section 80HHC. This Sub-section (3) lays down that the profits derived from the export of goods or merchandise shall be the amount which bears to the profits of the assessee (as computed under the head “profits and gains of business or profession”) the same proportion as the “export turnover” bears to the “total turnover” of the business carried on by the assessee.
4. Sub-section (3) of Section 80HHC statutorily fixes the quantum of deduction on the basis of a proportion of the profits of the business under the head “profits and gains of business or profession” irrespective of what could strictly be described as “Profits derived from the export of goods is to be computed in the following manner :
F.Y.
1993-94
F.Y.
1994-95
F.Y. 1995-96
Contract at SL No. 1
2,03,29,855
1,38,58,715
10,000
Contract at SI. No. 2
6,59,27,338
19,20,000
Contract at SI. No. 3
_
13,56,002
2,03,29,855
7,97,86,052
32,86,002
30. In the case of Asstt. CIT v. Sharda Gums and Chemicals (2000) 66 TTJ (Jd) 256 : (2001).76 ITD 282 (Jd), Jodhpur Bench of Tribunal took a similar view and observed as under :
“The above referred Sub-section (3) clearly indicates that first of all profits of the business should be computed under the head “Profits and gains of the business or profession” in accordance with the provisions of IT Act, 1961. Once the profits and gains of business are computed in accordance with the provisions of the Act, the assessee will be entitled to grant of 100 per cent deduction in respect of such profits derived from the business of the export of goods in a case where the business carried on by the assessee consisted exclusively of the export of eligible goods. In cases, where the assessee’s business did not consist exclusively of export of such goods out of India, the assessee will be entitled to grant of deduction of proportionate amount of such income from business computed under the head “profit and gains of business” in the ratio of export turnover with the total turnover. The item of business income derived by the assessee engaged in the business of exports, which do not directly relate to export business could not be taken out or reduced from such profits and gains of business for purposes of working the deduction allowable under Section 80HHC.”
31. From the above discussion, it is clear that in the asst. yr. 1990-91, the assessee was to show that it was engaged in the business of export out of India of any goods or merchandise to which Section 80HHC was applicable to qualify for the deduction, which was to be computed as provided in Section 80HHC(3) of the Act. What was to be taken into account was profits and gains of business in the same proportion which export turnover bore to the total turnover. It was not necessary that every receipt, to qualify for the deduction must be ‘derived from export of goods or merchandise”. It should be part of profit and gains of business.
32. In the present case, the Revenue authorities have held that interest is income from ‘other sources’ and not from ‘business’. It is Revenue’s stand that the assessee did not carry money-lending business. In support of above, strong reliance has been placed on decision of Hon’ble Rajasthan High Court in the case of Rajasthan Land Development Corporation (supra). We agree that the assessee might not have carried money-lending business, but question to be decided is whether interest receipt is “business income” or income from “other sources”.
33. Before considering above question, it is necessary to bear in mind that income can be assessed under the head ‘other sources’ only if income does not fall under any other head of income. In case it is held that receipt in question is “business income”, there is no need to go to the residuary head “other sources”. The Hon’ble Supreme Court in the case of S.G. Mercantile Corporation (P) Ltd. v. CIT (supra) has held.
“The residuary head of income can be resorted to only if none of the specific heads is applicable to the income in question; it comes into operation only after the preceding heads are excluded”.
34. In order to determine whether interest receipt in question, is business income, we must know what is “business”. The word ‘business’ is, as has often been said, one of wide import and in fiscal statute, it must be construed in a broad rather than restricted sense. It connotes some real, substantial and systematic ‘or organized course of activity or conduct with a set purpose. For assessment under the head ‘other sources’, it is essential that income should flow from a source. The learned counsel for assessee has rightly placed reliance on several decisions defining income. We have taken note of those decisions.
35. The Revenue in support of its case and Jaipur Bench of the Tribunal in the case of Reliance Trading Corporation (ITA No. 1642/Jp/1993) as per order dt. 25th Sept., 2001, placed great reliance on decision of the Hon’ble Rajasthan High Court in the case of Rajasthan Land Development Corporation (supra). It was a case of corporation incorporated under a statute and related to interest income earned prior to commencement of business. Their Lordships after considering aim and object of the corporation set forth in the memorandum of the corporation made the following observations :
“None of the clauses of Chapter 4 which refers to the business and funds of the corporation or of Chapter 7 which refers to ordinary and special loans confers any power on the assessee to give loans to the various persons to whom it has been advanced during the relevant assessment years. No resolution or other authority has been brought on record from which it could be said that the assessee was engaged in the business of advancing the loans.”
36. It was thus treated to be case where business of advancement of loan could not be carried by the association as per its memorandum. In order to appreciate above observations, we are to bear in mind the following observations of Lord Sterndale, M.R. in the case of IRC v. Korean Syndicate Ltd. (1921) 12 Tax Cases 181, 202 (CA):
“If you once get the individual and the company spending exactly on the same basis, then there would be no difference between them, at all. But the fact that the limited company comes into existence in a different way is a matter to be considered. An individual comes into existence for many purposes, or perhaps sometimes for none, whereas a limited company comes into existence for some particular purpose and if it comes into existence for the particular purpose of carrying out a transaction by getting possession of concessions and turning them to account, then that is a matter to be considered when you come to decide whether doing that is carrying on a business or not.”
37. The above observations were quoted with approval by the Hon’ble Supreme Court in the case of Karanpura Development Co. Ltd. v. CIT (1962) 44 ITR 362 (SC) as also in the case of S.G. Mercantile Corporation (P) Ltd. v. CIT (supra).
38. Having regard to objects with which the corporation was incorporated, their Lordships of Hon’ble Rajasthan High Court held that in advancing loan the corporation did not carry on business and accordingly interest earned could not be assessed under the head “business”. It was assessable under the head “other sources”. The said decision was given on peculiar facts of the case. Here the assessee-firrn is entitled to take and give advances for business and for earning interest and, therefore, above case is distinguishable and has no application.
39. Now reverting again to the question, whether interest received by the assessee can be said to be “business income”. In order to assess interest as “business income”, the case can fall in any of the following categories among others :
“(i) The loan on which interest is earned may have such connection with main business activity that interest earned has only to be treated as an incidental receipt. In such cases, interest would be “business income”.
(ii) That earning of interest may in itself be real, substantial, systematic, regular continuous and organized activity to be a business. For example, where an assessee apart from being exporter of goods or carrying some similar trade takes loan by discounting of LCs or from market and or uses its funds to earn interest. The activity is carried on a regular and organized manner. It is substantial as it is carried on a large scale. It is continued from year to year and for a number of years. The activity satisfies all the tests of term “business”, which is term of wide amplitude. There is borrowing, there is lending and both are carried with risk and with intention to earn interest income. There is no reason why such regular and continued activity should not be termed as “business”. The amendment made in Section 80HHC w.e.f. 1st April, 1992, excluding 90 per cent of receipts like interest from “profits and gains of business” further lends support to the argument that an exporter could have interest income as part of business receipt.
In the case of CIT v. Mottial Hirabhai Spg. & Wvg. Co. Ltd (supra), the assessee, a public limited company had stopped running its textile mill and started earning interest on advances and deposits. The assessee had been showing income of interest under the head “other sources” in the past. Even in the disputed assessment year, interest income was shown under the head “other sources”. However, subsequently, the company claimed that interest was liable to be assessed as “business income” as money was being advanced and deposited for earning interest in an organized manner. Their Lordships of Gujarat High Court, after considering Clauses 25 and 26 of the article of association of company agreed with the view taken by the Tribunal in assessing interest income under the head “business”. The Court further observed as under:
“The Tribunal then considered the activity of the assessee and it found that it advanced monies to various parties with a view to achieving the object with which it was formed and that there was a systematic activity of advancing monies to various parties from time to time. The Tribunal was obvious referring to the material produced before it by the assessee which shows not only how the board of directors dealt with the question of advances but also that from calendar year 1965 till calendar year 1972, the assessee was advancing monies to various parties on different terms both as to duration of the advances as also interest. The Tribunal held that the activity of advancing monies to various parties was a sort of an organized activity undertaken by the assessee-company and that, therefore, its income was liable to be taxed as profits and gains of business and not as income from other sources. The Tribunal rightly applied the relevant tests, namely, volume, frequency, continuity and regularity of transactions in reaching the Conclusion that it arrived at. That forgoing discussion would show that the Tribunal reached its ultimate decision after taking into account all the relevant circumstances and upon a balanced consideration of the entire evidence on record and on application of the correct legal tests.”
(iii) That earning of interest may be part of several activities of one integrated business. For setting up a business, a businessman would need a place to set up a shop; office or factory, employees to carry on manufacture and or trading activities. There would be apparatus to conduct main activity and several other incidental activities. The income generated from incidental activities would also be “business income. It may be interest or other miscellaneous receipts.
40. In our considered opinion, the case of the present assessee falls under categories (i) and (iii), mentioned above. From the record of the assessee, it is seen that as a matter of accommodation, which is mutually beneficial, advances are given or taken for a short duration by the assessee or its sister concerns. The assessee is giving or taking loans as a reciprocal arrangement to facilitate its business operation. The accounts maintained with the above parties are like current accounts. Sometimes, there is credit balance and other times, there is debit balance. The interest is paid or received depending upon nature of balance in accounts. The interest is paid or received as a compensatory measure. The loan given or taken in above circumstances cannot be treated as an investment. It is only an incident of business. As a transaction or activity, it does not have sufficient weight to qualify as a source of income for taxation. The activity cannot be taken as money-lending business. It is neither regular, nor continued, nor would satisfy the test of business if its volume is taken into account. Last year, the above referred to two parties had advanced loans to the assessee and there were closing credit balances of Rs. 4,14,051 and Rs. 2,36,382 in accounts of Jaipur Trading Company and M/s S.K. Gems, respectively. Last year, interest was paid and allowed as a deduction and treated as a business transaction. This year, interest is received on account of credit given. The interest earned like interest paid is an act of business prudency. This earning of interest cannot be looked into in isolation and taken as a source of income. It is part and parcel of the main business and interest earned is an incidental receipt generated in the manner business of export is carried with gaps of time. The payment and receipt of interest are two sides of the same coin. They cannot be looked at differently and given different treatment for purposes of taxation. We are, therefore, of view that as expenditure of interest has been treated part of business, the receipt has also to be held “business receipt”. Having held that interest is business receipt, there is no need to examine whether it would fall under the residuary head of “income from other sources”. The above receipt of income was liable to be included in the business profit and taken for computation of rebate under Section 80HHC of the ITR Act.
41. The above view is supported by several decisions of different High Courts cited by learned counsel for the assessee.
42. For all the above reasons, we hold that interest earned by the assessee was business income for purposes of Section 80HHC and should be taken into account for rebate. The question is answered in favour of the assessee. The matter should now be placed before the regular Bench for disposal in accordance with law.