Commissioner of Income Tax and Another vs Hajee Jaffar Shariff

B.V. Nagarathna, J.—The revenue has preferred this appeal by challenging the order dated 30th Sept., 2004 passed in ITA No. 602/Bang/1999 raising the following substantial questions of law:

(1) Whether the interest income derived by the Assessees from the fixed deposits made in banks can be treated as business income of the Assessee despite the Assessee not carrying on any banking activity and was a mere exporter of silk waste and polished granites ?

(2) Whether the Tribunal was correct in holding that for the purpose of computation of deduction u/s 80HHC of the Act the gross total income should include not only the income from profits of export sales but also interest income derived from fixed deposits made in banks in India?

The facts of the case are that the Respondent-Assessee has been assessed to tax in the status of a registered firm. It is carrying on business of export in silk waste and polished granites. For the assessment year 1996-97 the return of income was filed which was processed u/s 143(1)(a) of the Act. The assessing officer found that the Assessee had received interest income from fixed deposits made in the banks and he held that the said income was from other sources and not business income and accordingly did not allow any deduction u/s 80HHC of the Income Tax Act. According to the Respondent-Assessee the fixed deposits had been pledged els security to obtain credit for its export business and that the income earned from the fixed deposits had to be adjusted towards the interest payments made on the bank loans. The assessing officer, however, held that the entre income has to be brought to tax under the head of income from other sources and as a separate head and did not bring the same under income from business and passed an assessment order on 28th Feb., 1998.

The Respondent-Assessee being aggrieved by the said order preferred an appeal before the Commissioner (Appeals) contending that the interest earned on fixed deposits cannot be brought to tax under the head income from other sources and that the same could not be set off towards the expenditure incurred under the business income for payment of interest. The said contention was not accepted and the appeal was rejected. Being aggrieved by the said order, the Assessee carried the matter before the Tribunal. The Tribunal reasoned that the amounts in the fixed deposits were pledged as security and the loan was utilised for business purpose and therefore the interest that accrued on the said fixed deposits should be set off towards the interest paid as business expenditure and placing reliance on a decision of the Calcutta High Court in the case of COMMISSIONER OF Income Tax Vs. TIRUPATI WOOLEN MILLS LTD., held that the interest earned is chargeable under the head, profits and gains under the business and accordingly granted relief of deduction u/s 80HHC of the Act. Being aggrieved by the said orders, the revenue has preferred this appeal.

We have heard the learned Counsel for the revenue and the learned Counsel for the Respondent-Assessee.

It is submitted on behalf of the Appellants that the Tribunal was not right in holding that the interest income derived by the Assessee from the fixed deposits should be treated as business income of the Assessee when the Assessee was not carrying on any bank business, but was an exporter of silk waste and polished granites. He has also contended that it is u/s 80HHC of the Act, only when the income is derived by the Assessee, taking into consideration the nature of business, such income can be deducted under the provision. But in the instant case that is not so, as the business of the Assessee is export of silk waste and polished granites and not banking business. He has also relied upon a decision of the apex court in the case of Pandian Chemicals Ltd. Vs. Commissioner of Income Tax, in support of his submission.

Per contra, counsel for the Respondent-Assessee submits that the Tribunal was justified in granting the relief of .deduction u/s 80HHC of the Act as the fixed deposits were taken out from the business income of the Assessee and the said fixed deposits were pledged for obtaining a loan in order to utilise for export business and however there was a direct nexus between interest received and interest paid and since the interest paid was more than interest received, there was nothing to be reduced from the profit of business for the purpose of computing deduction u/s 80HHC, He has also relied upon a decision of the Supreme Court reported in the case of Commissioner of Income Tax, Orissa Vs. Govinda Choudhury and Sons, Gosaninuagaon, Orissa, in support of his submission and another decision of this Court reported in the case of CIT v. Chinna Nachimuthu Constructions (2008) 170 Taxman 272 (Kar) so as to contend that the order of the Tribunal does not call for any interference in this appeal.

Having heard the counsel on both sides, it is not in dispute that Respondent-Assessee is engaged in the export business of silk waste and polished granites for the purpose of which he has obtained credit facilities. To obtain the credit facilities by the Assessee which was required for the purpose of his export business, it was necessary to pledge the fixed deposits as a collateral security. The question, however, is as to whether the interest earned on the fixed deposits should be adjusted towards the interest payments paid, payments made on the bank deposits and as to whether the benefit u/s 80HHC of the Act has to be covered. The material on record discloses that the fixed deposits were given as a security for the loan obtained for the purpose of utilising the same for its export business. The interest paid on the said deposit has to be treated as a business expenditure. The deposits were required so that the Assessee could avail overdraft facilities as and when it was required for the purpose of business. The Assessee is a 100 per cent exporter and it has no other business except the business of exports. When the fixed deposits were made out of the business fund, the interest that accrues on the said deposit has to be treated as "business income" and not as "income from other sources." Since the Assessee has no other business, in our considered view the deduction u/s 80HHC has been rightly given by the Tribunal in the instant case.

At this stage, it is necessary to consider the decisions cited on the Bar on this aspect of the matter. In the case of CIT v. Chinna Nachimuthu Constructions (supra), this Court held that when the Assessee has invested certain amounts in fixed deposits to secure bank quarantee in order to acquire the contract work, the interest accrued on such deposit has to be treated as its business income. While holding so, this Court relied upon a decision of the apex court in CIT v. Govinda Choudhury & Sons referred to supra. The said decision which is rendered by a Bench of three Judges categorically states that with regard to amounts received under an arbitration award by the Assessee which was a company in the said case, the said amount was treated as business income and not income from other sources.

However, the learned Counsel for the Appellants relied upon another decision of apex court in Pandian Chemicals Ltd. v. CIT (supra), to contend that with regard to deposits made with the Electricity Board, the interest on the said deposits would not be said to be derived from the industrial undertaking as it is a step removed from the business undertaking and therefore not liable for deduction u/s 80HHC of the Act.

We are of the view that on the facts of the present case and taking into consideration the decisions referred to supra, the decision in Pandian Chemicals Ltd. v. CIT (supra), would not be applicable to the present case. In the instant case as already stated for the purpose of its business that is export business, the fixed deposits were given as security in order to avail credit facilities and consequently on facts we are of the considered view that the decisions in Govinda Choudhury &Sons (supra) and Chinna Nachimuthu Constructions (supra) are applicable and the decision of the apex court in Pandian Chemicals Ltd. v. CIT (supra) can be distinguished. Accordingly, we answer the substantial questions of law raised in this appeal against the revenue and dismiss the appeal.