Commissioner Of Income-Tax, Jalandhar v. M/S Hansa Agencies Pvt. Ltd

ITA No. 180 of 2002 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 180 of 2002 Date of Decision: 3.2.2011 Commissioner of Income-tax, Jalandhar ....Appellant. Versus M/s Hansa Agencies Pvt. Ltd. ...Respondent. CORAM:-HON'BLE MR. JUSTICE ADARSH KUMAR GOEL.HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. PRESENT: Mr. Vivek Sethi, Advocate for the appellant. Mr. Pankaj Jain, D.K. Goyal, Rohit Sood and Rishabh Kapoor, Advocates for the respondent. AJAY KUMAR MITTAL, J. 1.This order shall dispose of ITA Nos. 180, 182 and 196 of2002 as learned counsel for the parties are agreed that these involveidentical questions of law. For brevity, the facts are being taken fromITA No. 180 of 2002. 2.This appeal has been preferred by the revenue underSection 260A of the Income Tax Act, 1961 (in short “the Act”) againstthe order dated 3.5.2002 passed by the Income Tax Appellate Tribunal,Amritsar Bench, Amritsar (hereinafter referred to as “the Tribunal”) inITA No. 49(ASR)/1995, relating to the assessment year 1991-92,claiming the following substantial questions of law:- “1.Whether, the Tribunal is right in law in holding thatinterest income of Rs.3,87,498/- formed part of profitsand gains of business or profession of the assesseewhile working out deduction under section 80HHC ofthe Income-tax Act, 1961?interest income of Rs.3,87,498/- formed part of profitsand gains of business or profession of the assesseewhile working out deduction under section 80HHC ofthe Income-tax Act, 1961? 2.Whether, the Tribunal is correct in law in ignoring theprovisions of sub-sections (1) & (3) of section 80HHCwhile holding that provisions of clause (baa) to theExplanation to section 80HHC are not applicableearlier to asstt. year 1992-93 wherein 'Profits' weresubstituted for 'whole of income' w.e.f. 01.04.1989? 3. Whether, the order of Ld. Tribunal is perverse in lawas it has failed to consider material and relevant factsas discussed by the A.O. and the learned Istappellate authority?” 3.Briefly stated, the facts for adjudication as narrated in theappeal are that the assessee is engaged in the export of handicraftsand other goods and filed its return on 27.12.1991 for the assessmentyear 1991-92 declaring an income of Rs.1,25,550/-. The case of theassessee was taken up for scrutiny. The Assessing Officer held thatthe income accrued/received as interest on the deposits invested withdifferent banks did not form part of profits earned from the businessand assessed under the head “income from other sources.” TheAssessing Officer restricted the deduction under Section 80HHC of theAct to the profits derived from the business of goods exported outsideIndia by excluding the interest income of Rs.3,87,498/- assessed underthe head “income from other sources” as the same had no relevancywith the income assessed under the head “Income from Profits andGains of Business or Profession” of export business. Feelingaggrieved, the assessee filed an appeal before the Commissioner ofIncome Tax (Appeals) [hereinafter referred to as “the CIT(A)”] who vide order dated 25.11.1994 dismissed the appeal on the basis of orderpassed in the case of assessee's sister concern, i.e. M/s Suri Sons,Basti Nau, Jalandhar, wherein the interest income was treated as'income from other sources'. On further appeal, relying upon thedecision of this Court in Commissioner of Income-tax v. Isher DassMahajan and Sons [2002] 253 ITR 284 (P&H), the Tribunal vide orderdated 3.5.2002 allowed the appeal of the assessee holding that theprovisions of Clause (baa) to the Explanation to Section 80HHC of theAct would not apply to the years earlier to assessment year 1992-93 i.e.uptil assessment year 1991-92 and, therefore, interest on fixed depositswould not be excluded from profits of the business for calculatingdeduction under Section 80HHC of the Act. Hence, the present appealby the revenue. 4.We have heard learned counsel for the parties. 4.We have heard learned counsel for the parties. 5.The point for determination in this case is whether theinterest received on fixed deposits made by the assessee by utilizingthe surplus funds for earning interest would form part of businessincome on which deduction under Section 80HHC of the Act would beadmissible to the assessee. 6.Learned counsel for the revenue submitted that the interestearned by the assessee on the fixed deposits with the bank was by wayof utilization of its surplus funds which was for earning interest resultinginto 'income from other sources' and, therefore, it did not qualify fordeduction under Section 80HHC of the Act. Learned counsel urged thatsimilar issue has been considered by Bombay High Court inCommissioner of Income Tax v. Ravi Ratna Exports (P) Ltd. [2000] ITA No. 180 of 2002-4-246 ITR 443 (Bom), Kerala High Court in Abad Enterprises v.Commissioner of Income Tax [2002] 253 ITR 319 (Ker) and G.T.N.Textiles Ltd. v. Deputy Commissioner of Income Tax (Assessment)and another[2005]279 ITR 72 (Ker); Karnataka High Court in KabadiEnterprises v. Income Tax Officer[2007] 290 ITR 610 (Kar) andMadras High Court in Dollar Apparels v. Income-Tax Officer[2007]294 ITR 484 (Mad), in favour of the revenue. 7.Distinguishing Isher Dass Mahajan and sons case(supra) on the basis of which the Tribunal had decided the appeal ofthe assessee, it was contended that there interest earned on fixeddeposits was in the nature of business income as would be evident froma perusal of the following observations recorded in that case:- “A perusal of the order passed by the Tribunal showsthat the assessee had earned interest on the depositit made with Swami Motors for the purchase of car.Another part of the interest had been earned ondeposits with the I.D.B.I. The Tribunal onconsideration of the evidence has found that both thedeposits were made for purposes which wereincidental to the normal business activity of theassessee. Still further, even the interest on FDRswas relatable to the running of business as thesewere used for availing of the credit facilities from thebank. Nothing has been pointed out to show thatthese findings of fact recorded by the Tribunal, arecontrary to any evidence on the file.” ITA No. 180 of 2002-5- 8.Elaborating further, it was argued that Direct Tax Laws(Amendment) Act, 1989 effective from 1.4.1989 had substituted thewords “profits” in place of “whole of the income” in Section 80HHC ofthe Act for calculating deduction admissible thereunder. Introduction ofclause (baa) to Explanation to Section 80HHC by Finance (No.2) Act,1991 w.e.f. 1.4.1992 was to exclude income from interest, commission,rent etc. to the extent of 90% from gross total income for arriving atbusiness profits and determining the benefit admissible under Section80HHC of the Act. It would, thus, mean that after 1.4.1992, 90% ofinterest income rebatable to business income had to be reduced fromgross total income for determining profits from business as 10%expenses were allowable as deduction which might have been incurredfor earning such income. Support was gathered from the judgment ofthe Apex Court inCommissioner of Income Tax v. K.Ravindranathan Nain [2007] 295 ITR 228 (SC) and Bombay HighCourt in Commissioner of Income Tax v. Bangalore Clothing Co.[2003] 260 ITR 371 (Bom). In other words, it was urged that whereinterest income was not business income, no change in legal positionhad taken place either before or after introduction of clause (baa) inExplanation to Section 80HHC of the Act. Support was also sought tobe drawn from the judgment of this Court in Commissioner of IncomeTax v. Nahar Exports Ltd. [2008] 296 ITR 419 (P&H). 9.On the other hand, controverting the submissions, learnedcounsel for the assessee on the strength of decision of this Court inIsher Dass Mahajan and Sons's case (supra) submitted that theamendment by Finance (No.2) Act, 1991 whereby Clause (baa) in ITA No. 180 of 2002-6- 9.On the other hand, controverting the submissions, learnedcounsel for the assessee on the strength of decision of this Court inIsher Dass Mahajan and Sons's case (supra) submitted that theamendment by Finance (No.2) Act, 1991 whereby Clause (baa) in ITA No. 180 of 2002-6- Explanation to Section 80HHC was inserted was effective from 1.4.1992and applicable to the assessment year 1992-93 onward and wasindicative of legislative intent not to exclude the income from interestetc. prior thereto. According to the learned counsel, interest on depositswas also profits of the business on which benefit of Section 80HHC wasavailable to the assessee. Supporting the order of the Tribunal, thereliance was placed on the decisions of the Bombay High Court inCommissioner of Income-Tax v. Paramount Premises (P) Ltd.[1991] 190 ITR 259 (Bom) and Commissioner of Income Tax v.Nagpur Engineering Co. Ltd. [2000] 245 ITR 806 (Bom) tosubstantiate his submissions. 10.We have given our thoughtful consideration to therespective submissions made by the learned counsel for the parties andfind substantial merit in the submissions made by learned counsel forthe revenue. 11.In order to effectively resolve the controversy raised in thisappeal, the following facets of the issue require an answer:- (a)Whether interest on fixed deposits earned by theassessee would form part of profits of the businessunder Section 80HHC of the Act;assessee would form part of profits of the businessunder Section 80HHC of the Act; (b)Effect of insertion of clause (baa) in Explanation toSection 80HHC by Finance (No.2) Act 1991 w.e.f.1.4.1992.Section 80HHC by Finance (No.2) Act 1991 w.e.f.1.4.1992. 12.Addressing on the first facet of the issue involved, thepurpose of incorporating Section 80HHC of the Act may be noticed. Aperusal of the provisions of Section 80HHC of the Act makes it clear that two essential conditions for invoking the provisions are that theassessee must be engaged in the business of export out of India of anygoods or merchandise and secondly the deduction is applicable only ifsale proceeds of such goods or merchandise exported out of India arereceivable by the assessee in convertible foreign exchange. Thelegislative intent behind incorporating Section 80HHC was to allowbenefit thereunder where the assessee had exported the goods outsideIndia and had brought convertible foreign exchange in the form of saleproceeds in India. It was for the purpose to encourage person engagedin the export business for bringing the sale proceeds of goods ormerchandise which had been exported out of India to strengthen theeconomy of the country and not for earning interest or any other incomeearned in Indian currency in India. 13. Sub-section (1) of Section 80HHC of the Act, inter alia,provides that subject to and in accordance with the provisions of theSection, an assessee who is engaged in the business of export isentitled to claim deduction of the profits derived by it from export, whilecomputing its total income. The expression “derived from” assumesgreat significance for determining the quantum of deduction whichwould be admissible under Section 80HHC of the Act. The aforesaidexpression was described by the Apex Court in Pandian ChemicalsLtd. v. Commissioner of Income Tax [2003] 262 ITR 278 (SC) in thefollowing terms:- “The word “derived” has been construed as far backin 1948 by the Privy Council in CIT v. Raja BahadurKamakhaya Narayan Singh [1948] 16 ITR 325 when it said: “The word 'derived' is not a term of art. Its usein the definition indeed demands an enquiryinto the genealogy of the product. But theenquiry should stop as soon as the effectivesource is discovered. In the geneological treeof the interest land indeed appears in thesecond degree, but the immediate andeffective source is rent, which has suffered theaccident of non-payment. And rent is not landwithin the meaning of the of the definition.” “The word “derived” has been construed as far backin 1948 by the Privy Council in CIT v. Raja BahadurKamakhaya Narayan Singh [1948] 16 ITR 325 when it said: “The word 'derived' is not a term of art. Its usein the definition indeed demands an enquiryinto the genealogy of the product. But theenquiry should stop as soon as the effectivesource is discovered. In the geneological treeof the interest land indeed appears in thesecond degree, but the immediate andeffective source is rent, which has suffered theaccident of non-payment. And rent is not landwithin the meaning of the of the definition.” This definition was approved and reiterated in 1955by a Constitution Bench of this court in the decisionof Mrs. Bacha F. Guzdar v. CIT [1995] 27 ITR 1 atpage 7. It is clear, therefore, that the word “derivedfrom” in section 80HH of the Income-tax Act, 1961,must be understood as something which has direct orimmediate nexus with the appellant's industrialundertaking. Although electricity may be required forthe purposes of the industrial undertaking, thedeposit required for its supply is a step removed fromthe business of the industrial undertaking. Thederivation of profits on the deposit made withElectricity Board cannot be said to flow directly fromthe industrial undertaking itself.” Section 80HHC(3) of the Act provides for the formula for computing deduction admissible under sub-section (1), where anassessee has both the turnovers i.e., domestic as well as export. Itprovides that profits derived from export shall be the amount whichbears to the profits of the business, the same proportion as the exportturnover in respect of such goods bears to the total turnover of thebusiness carried on by the assessee. The formula is: Export profits = Profits of the business x Export turnover Total turnover 15.Whether interest earned on fixed deposits yields profits ofthe business or not has been subject matter of consideration beforevarious courts. 16.In Ravi Ratna Exports (P) Ltd's case (supra), theBombay High Court while considering the issue relating to admissibilityof deduction under Section 80HHC of the Act where the interest incomeearned by the assessee from fixed deposits was income from othersources, it was held that it was not to be taken into consideration forcomputation of special deduction under Section 80HHC of the Act. 17.Similar issue arose before Kerala High Court in AbadEnterprises and G.T.N. Textiles Ltd's cases (supra). It was observedthat as per Section 80HHC of the Act, deduction is admissible in respectof profit which is derived by the assessee from the export of goods ormerchandise and such profit and gain can be said to have beenderived from an activity carried on by a person only if the activity is theimmediate and effective source of the profit or gain. It was recordedthat the interest on bank deposits, interest on income tax refund andcommission received on sale of machinery and cotton canvassing was not income from business which may entitle the assessee to deductionunder Section 80HHC of the Act. 18.Karnataka High Court in Kabadi Enterprises' case(supra) was dealing with a situation where interest income was notreferable to the export business. There was no nexus or link betweenthe income earned and the export activity of the assessee. Theassessee was held not entitled to benefit of deduction in terms ofSection 80HHC of the Act. 19.The plea of the revenue wasaccepted by the Madras HighCourt in Dollar Apparels case (supra), where the issue relating tointerest on deposit was held not admissible to deduction under Section80HHC of the Act with the following observations:- not income from business which may entitle the assessee to deductionunder Section 80HHC of the Act. 18.Karnataka High Court in Kabadi Enterprises' case(supra) was dealing with a situation where interest income was notreferable to the export business. There was no nexus or link betweenthe income earned and the export activity of the assessee. Theassessee was held not entitled to benefit of deduction in terms ofSection 80HHC of the Act. 19.The plea of the revenue wasaccepted by the Madras HighCourt in Dollar Apparels case (supra), where the issue relating tointerest on deposit was held not admissible to deduction under Section80HHC of the Act with the following observations:- “In K.S. Subbiah Pillai and Co. (India) P. Ltd. v. CIT[2003] 260 ITR 304 (mad), where the issue raisedwas whether on a true construction of Explanation(baa) to Section 80HHC of the Act, interest, rent andcommission are to be deducted from export profits oronly net receipts, if any, after taking into account thepayments, this court observed as follows (page 306): “Clause (baa) under the Explanation to section 80HHC defines profits of the business ascomputed under the head 'Profits and gains ofbusiness or profession'. The deductions to bemade are from the amount of profit socomputed and not from the amount computedunder any other head of income of that assessee. The reference to 'such profits' insub-clause (1) of clause (baa) can only be tothe profits of the business computed under thehead 'Profits and gains of business orprofession'. Addition of prefix 'the' to 'profits' inclause (baa), while referring to the profits andgains of business or profession makes it clearthat it is only the amounts already included inthat computation which are now to be reducedto the extent of 90 per cent, if those items areincluded in sub-clause (1) of that definition.Interest paid and claimed as deduction in thecomputation of profits and gains for business,cannot be set off against interest received andcomputed under income from 'other sources'.”That apart, in CIT v. A.S. Nizar Ahmed and Co.[2003] 259 ITR 244 (Mad) where the claim of theassessee, which was a firm doing export business,that the interest received on its deposits with thebank should be treated as part of the income frombusiness was negatived by the Assessing Officer, asalso by the Commissioner, but was upheld by theTribunal, on a reference, this court while answeringthe question in favour of the Revenue, held asfollows (at page 246): “The interest paid by the assessee to the bank was, no doubt, an item of expenditure in thecomputation of its business income. That,however, would not justify taking the incomethat the assessee received by way of intereston the deposits that it had with the bank, aspart of its business income when in reality itwas not. The deposit made with the bank wasfor the convenience and benefit of theassessee with a view to derive higher interestincome. It was not a deposit made pursuant toany requirement imposed by the bank at thetime of sanctioning of the facilities. The bank'sdecision to extend the facilities was linkedmore to the business prospects of theassessee and the confidence the bank had inthe integrity and entrepreneurial capacity of thepartners of the firm who ran the business.” In the instant case, the Tribunal held that thedeposits made by the assessee with the bank haveno direct link to the sanctioning limit by the bank.Even assuming that the deposits were made as apre-condition of the bank for sanctioning the limit, itcannot be considered as income from exportearnings, as there is no nexus between exportearnings and interest income and the interest incomewas earned from the deposits and not from the In the instant case, the Tribunal held that thedeposits made by the assessee with the bank haveno direct link to the sanctioning limit by the bank.Even assuming that the deposits were made as apre-condition of the bank for sanctioning the limit, itcannot be considered as income from exportearnings, as there is no nexus between exportearnings and interest income and the interest incomewas earned from the deposits and not from the export business. Hence, following the ratio laid downby this court in K.S. Subbiah Pillai and Co. (India) P.Ltd. v. CIT [2003] 260 ITR 304 (Mad) and in CIT v.A.S. Nizar Ahmed and Co. [2003] 259 ITR 244 (Mad),we hold that the Tribunal was justified in deciding theissues in favour of the Revenue and we do not seeany reason to interfere with the findings rendered bythe Tribunal with regard to the issues raised in thequestions of law referred to above earlier.” 20. Thus, answering the first aspect of the issue, it is held thatincome accrued/received in India by way of interest on the depositsmade out of surplus funds for earning interest would be income fromother sources and could not be termed as income of the assesseefalling under the head 'Profits or Gains of Business or Profession' fordetermining profits of the business under Section 80HHC of the Act.However, an exception to the above said proposition would emanate ina situation where interest is earned on deposits made by the assesseewhich are essential for providing security against overdrafts or cashcredit limits or to secure the letter of credits/margin money etc., wherethe interest income would be in the nature of business income and notincome from other sources. 21.Taking up second facet of the issue involved herein, it maybe noticed that the Direct Tax Laws (Amendment) Act, 1989 effectivefrom 1.4.1989, inter alia, substituted the word “profits” for “whole of theincome” in sub-sections (1) and (1A) of Section 80HHC of the Act and inclause (a) of sub-section (4A), the word “profits” was substituted for “income”. The ambit and scope of the amendment was explained bythe Central Board of Direct Taxes (CBDT) vide its circular No. 559dated 4[th] May, 1990: (1990) 184 ITR (st.) 110. Sub-clause (I) of Clause10.7 relevant for the purposes of present appeal reads thus:- “10.7 Amendments of section 80HHC to rationalisethe provisions of the section and to remove certainanomalies.- Section 80HHC of the Income-tax Act,after its amendment by the Finance Act, 1988,provides for 100% deduction in respect of the exportprofits. The Amending Act, 1989, has made certainamendments to this section, which are discussedbelow:- (i)Under the old provisions of sub-section (1) ofthe section, where the assessee was engaged in thebusiness of export of any goods or merchandise, hewas allowed, in computing his total income, adeduction of the “whole of the income” derived by theassessee from such exports. Similarly, in sub-section (1A), which allows deduction in the case ofsupporting manufacturers, and sub-section (4A),which requires the supporting manufacturer tofurnish, with his return of income, the report of achartered accountant certifying that the deductionhas been correctly claimed, the deduction was to becomputed and allowed on the basis of “income” ofthe supporting manufacturer derived on the sale of goods or merchandise to the Export House or theTrading House. (i)Under the old provisions of sub-section (1) ofthe section, where the assessee was engaged in thebusiness of export of any goods or merchandise, hewas allowed, in computing his total income, adeduction of the “whole of the income” derived by theassessee from such exports. Similarly, in sub-section (1A), which allows deduction in the case ofsupporting manufacturers, and sub-section (4A),which requires the supporting manufacturer tofurnish, with his return of income, the report of achartered accountant certifying that the deductionhas been correctly claimed, the deduction was to becomputed and allowed on the basis of “income” ofthe supporting manufacturer derived on the sale of goods or merchandise to the Export House or theTrading House. The wordings of sub-sections (1), (1A) and(4A), according to which deductions was computedon the basis of “income” from the export activity,created confusion, as under the Income-tax Act aswell as under accountancy principles income frombusiness or profession is normally referred to as“profits”. Even sub-sections (3) and (3A) of section80HHC itself provide for determination of export“profits” of the exporter or the supportingmanufacturer and not export “income” for thepurposes of deduction under the section. Therefore,to rationalise the provisions of section 80HHC and toremove the confusion, the words “whole of theincome” used in sub-sections (1) and (1A) and theword “income” used in sub-section (4A) of the sectionhave been substituted the word “profits” in eachcase.” 22.From the above reading of the amendment brought about,it is clear that the legislature unambiguously had sought to exclude allsuch receipts which had no nexus with the export activity from thecalculation of business profits for determination of admissible deductionunder Section 80HHC of the Act. 23.Further, clause (baa) in the Explanation to Section 80HHCof the Act was inserted by Finance (No.2) Act, 1991 w.e.f. 1.4.1992. The expression “profits of the business” stood defined by insertion ofclause (baa) in Explanation to Section 80HHC by Finance (No.2) Act,1991 w.e.f. 1.4.1992 which was as under:- “(baa) “profits of the business” means the profits ofthe business as computed under the head “Profitsand gains of business or profession” as reduced by- (1)ninety per cent of any sum referred to inclauses (iiia), (iiib) and (iiic) of section 28 or ofany receipts by way of brokerage, commission,interest, rent, charges or any other receipt of asimilar nature included in such profits; and clauses (iiia), (iiib) and (iiic) of section 28 or ofany receipts by way of brokerage, commission,interest, rent, charges or any other receipt of asimilar nature included in such profits; and (2)the profits of any branch, office, warehouse orany other establishment of the assesseesituate outside India.”any other establishment of the assesseesituate outside India.” 24.The scope and effect of this clause was explained by CBDTby issuing circular No. 621 dated 19.12.1991: (1992) 195 ITR (St) 154.Clauses 32.10 and 32.11 described the reason for such insertion in thefollowing terms:- “32.10 The existing formula often gives a distortedfigure of export profits when receipts like interest,commission, etc., which do not have an element ofturnover are included in the profit and loss account.32.11 It has, therefore, been clarified that “profits ofthe business” for the purpose of section 80HHC willnot include receipts by way of brokerage,commission, interest, rent, charges or any other receipt of a similar nature. As some expendituremight be incurred in earning these incomes, which inthe generality of cases is part of common expenses,ad hoc 10 per cent deduction from such incomes isprovided to account for these expenses.” 25. The scope of the said provision had been explained byBombay High Court in Bangalore Clothing Co's case (supra) asfollows:- “32.10 The existing formula often gives a distortedfigure of export profits when receipts like interest,commission, etc., which do not have an element ofturnover are included in the profit and loss account.32.11 It has, therefore, been clarified that “profits ofthe business” for the purpose of section 80HHC willnot include receipts by way of brokerage,commission, interest, rent, charges or any other receipt of a similar nature. As some expendituremight be incurred in earning these incomes, which inthe generality of cases is part of common expenses,ad hoc 10 per cent deduction from such incomes isprovided to account for these expenses.” 25. The scope of the said provision had been explained byBombay High Court in Bangalore Clothing Co's case (supra) asfollows:- “Under that Explanation, “profits of the business”, forthe purposes of Section 80HHC does not includereceipts which do not have an element of turnoverlike rent, commission, interest, etc. However, assome expenditure might be incurred in earning suchincomes an ad hoc 10 per cent deduction from suchincomes is provided for, to account for thoseexpenses. In every matter, the Assessing Officer willhave to ascertain whether the receipt of interest,commission, labour charges, etc., was a part ofoperational income. No standard test for decidingwhat would constitute operational income can be laiddown. Broadly, the Department will have to considerthe memorandum and articles of association of thecompany, the nature of the business, the nature ofthe activity and such other tests. The Departmentwill also have to ascertain as to what is the dominantbusiness of the company and whether the receipts like interest, commission, etc. accrue as a part of themain business activity or whether they accrue out ofincidental business.” 26.This Court in Nahar Exports Ltd's case (supra) repellingthe contention of the assessee had in unequivocal terms recorded thatclause (baa) in Explanation to Section 80HHC of the Act would ariseonly in a situation where interest income forms part of business income.It was noticed as under:- “Once the conceded position on record is that theinterest income earned by the assessee does notform part of the income from business or profession,as computed at the time of assessment, there arisesno question of deduction of 90 per cent thereof forthe purpose of calculation of deductions underSection 80HHC of the Act. The question ofdeduction of 90 per cent of the income in terms of theclause (baa) of the Act would arise only if the sameforms a part of the income from the business orprofession. Any enabling provision for deduction of a partthereof presupposes inclusion of the entire under thathead without which the provision cannot be giveneffect to. The interest income cannot be given twodifferent treatment, i.e., while computing the incomeunder various heads at the time of assessment andanother by calculating the deduction under Section 80HHC of the Act.” 27.It would be advantageous to refer to the observations of theApex Court in K. Ravindranathan Nain case (supra) relating to theadmissibility of deduction under Section 80HHC of the Act. Afterreferring to the formula enunciated in sub-section (3) of Section 80HHCof the Act and noticed hereinabove, it was recorded as under:- Any enabling provision for deduction of a partthereof presupposes inclusion of the entire under thathead without which the provision cannot be giveneffect to. The interest income cannot be given twodifferent treatment, i.e., while computing the incomeunder various heads at the time of assessment andanother by calculating the deduction under Section 80HHC of the Act.” 27.It would be advantageous to refer to the observations of theApex Court in K. Ravindranathan Nain case (supra) relating to theadmissibility of deduction under Section 80HHC of the Act. Afterreferring to the formula enunciated in sub-section (3) of Section 80HHCof the Act and noticed hereinabove, it was recorded as under:- “In the above formula there existed four variables,namely, business profits, export turnover, totalturnover and 90 per cent of the sums referred to inclause (baa) to the said Explanation. In thecomputation of deduction under section 80HHC allfour variables had to be taken into account. All fourvariables were required to be given weightage. Thesubstitution of section 80HHC(3) secures profitsderived from the exports of eligible goods.Therefore, if all the four variables are kept in mind, itbecomes clear that every receipt is not income andevery income would not necessarily include elementof export turnover. This aspect needs to be kept inmind while interpreting clause (baa) to the saidExplanation. The said clause stated that 90 per centof incentive profits or receipts by way of brokerage,commission, interest, rent, charges or any otherreceipt of like nature included in business profits, hadto be deducted from business profits computed interms of Sections 28 to 44D of the Income-tax Act. In other words, receipts constituting independentincome having no nexus with exports were requiredto be reduced from business profits under clause(baa). A bare reading of clause (baa) (1) indicatesthat receipts by way of brokerage, commission,interest, rent, charges, etc. formed part of gross totalincome being business profits. But for the purposesof working out the formula and in order to avoiddistortion of arriving at the export profits, clause (baa)stood inserted to say that although incentive profitsand “independent incomes” constituted part of grosstotal income, they had to be excluded from grosstotal income because such receipts had no nexuswith the export turnover. Therefore, in the aboveformula, we have to read all the four variables. Onreading all the variables it becomes clear that everyreceipt may not constitute sale proceeds fromexports. That, every receipt is not income under theIncome-tax Act and every income may not beattributable to exports.” It was further noticed as under:- “In the present case, the processing charges wereincluded in the gross total income from cashewbusiness. That, even according to the assessee thesaid charges constituted an important component ofgross total income from cashew business. This is not disputed. Therefore, in terms of clause (baa), 90 percent of the “independent income” had to be deductedfrom gross total income to arrive at the businessprofits to which the fraction had to be applied. Since,the processing charges constituted independentincome similar to rent, commission, etc., whichformed part of the gross total income, the same hadto be reduced by 90 per cent as contemplated inclause (baa) to arrive at business profits.” It was further noticed as under:- “In the present case, the processing charges wereincluded in the gross total income from cashewbusiness. That, even according to the assessee thesaid charges constituted an important component ofgross total income from cashew business. This is not disputed. Therefore, in terms of clause (baa), 90 percent of the “independent income” had to be deductedfrom gross total income to arrive at the businessprofits to which the fraction had to be applied. Since,the processing charges constituted independentincome similar to rent, commission, etc., whichformed part of the gross total income, the same hadto be reduced by 90 per cent as contemplated inclause (baa) to arrive at business profits.” 28.On analysis of clause (baa) in Explanation to Section80HHC of the Act, the irresistible conclusion on the second issue is thatthe interest income earned from surplus funds which was for earninginterest falling under the head “income from other sources”, would notbe includible for determination of business profits under Section 80HHCof the Act. However, the assessee who earns any interest income etc.referred to in clause (baa)(1) in Explanation to Section 80HHC of theAct which is included in the business profits, 90% thereof shall bereduced from such business profits for determining the export profits forcalculating deduction under Section 80HHC of the Act from assessmentyear 1992-93 and subsequent years. 29.We now proceed to examine the judgment in Isher DassMahajan and sons case (supra) relating to assessment year 1990-91on which heavy reliance had been placed by the learned counsel for theassessee. The Tribunal had also decided the issue in favour of theassessee in view of the said decision. The finding of fact recorded inIsher Dass Mahajan case (supra) was that the interest income on deposit which had been earned by the assessee was income frombusiness and was, therefore, admissible for computation of deductionunder Section 80HHC of the Act. The issue was not where interestincome formed part of income from other sources. 30.Referring to the judgments relied upon by the learnedcounsel for the assessee, suffice it to notice that the factual situationtherein was different as these related to interest on fixed deposits whichwere made for business activities, which is not the situation here. 31.Admittedly, the assessee had received interest on fixeddeposits which were not for the purposes of business and, therefore,the income arising therefrom fell under the head “income from othersources”. Neither the judgment in Isher Dass Mahajan and sons case(supra) nor clause (baa) in Explanation to Section 80HHC of the Acthas any bearing on the decision of the present case. Accordingly, theinterest on fixed deposit received by the assessee shall not form part ofbusiness profits on which deduction under Section 80HHC of the Actwould be admissible. The Tribunal was, thus, in error in allowing intereston fixed deposits while calculating deduction under Section 80HHC ofthe Act. Consequently, the questions of law are answered in favour ofthe revenue and against the assessee.32.The appeals stand allowed. (AJAY KUMAR MITTAL) JUDGE February 3, 2011gbs (ADARSH KUMAR GOEL)JUDGE ITA No. 180 of 2002 -23- IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH Commissioner of Income-tax, Jalandhar Versus M/s Hansa Agencies Pvt. Ltd. ITA No. 182 of 2002 Date of Decision: 3.2.2011 ....Appellant. ...Respondent. CORAM:-HON'BLE MR. JUSTICE ADARSH KUMAR GOEL.HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. PRESENT: Mr. Vivek Sethi, Advocate for the appellant. Mr. Pankaj Jain, D.K. Goyal, Rohit Sood and Rishabh Kapoor, Advocates for the respondent. AJAY KUMAR MITTAL, J. The appeal is allowed. For reasons, see order of even date passed in ITA No. 180 of 2002 (Commissioner of Income-tax, Jalandhar v. M/s Hansa Agencies Pvt. Ltd). (AJAY KUMAR MITTAL) JUDGE February 3, 2011gbs February 3, 2011gbs (ADARSH KUMAR GOEL)JUDGE ITA No. 180 of 2002 -23- IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH Commissioner of Income-tax, Jalandhar Versus M/s Hansa Agencies Pvt. Ltd. ITA No. 182 of 2002 Date of Decision: 3.2.2011 ....Appellant. ...Respondent. CORAM:-HON'BLE MR. JUSTICE ADARSH KUMAR GOEL.HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. PRESENT: Mr. Vivek Sethi, Advocate for the appellant. Mr. Pankaj Jain, D.K. Goyal, Rohit Sood and Rishabh Kapoor, Advocates for the respondent. AJAY KUMAR MITTAL, J. The appeal is allowed. For reasons, see order of even date passed in ITA No. 180 of 2002 (Commissioner of Income-tax, Jalandhar v. M/s Hansa Agencies Pvt. Ltd). (AJAY KUMAR MITTAL) JUDGE February 3, 2011gbs (ADARSH KUMAR GOEL) JUDGE ITA No. 180 of 2002 -24- IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH Commissioner of Income-tax, Jalandhar Versus M/s Mayor & Co. ITA No. 196 of 2002 Date of Decision: 3.2.2011 ....Appellant. ...Respondent. CORAM:-HON'BLE MR. JUSTICE ADARSH KUMAR GOEL.HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. PRESENT: Mr. Vivek Sethi, Advocate for the appellant. Mr. Pankaj Jain, D.K. Goyal, Rohit Sood and Rishabh Kapoor, Advocates for the respondent. AJAY KUMAR MITTAL, J. The appeal is allowed. For reasons, see order of even date passed in ITA No. 180 of 2002 (Commissioner of Income-tax, Jalandhar v. M/s Hansa Agencies Pvt. Ltd). (AJAY KUMAR MITTAL) JUDGE February 3, 2011gbs (ADARSH KUMAR GOEL) JUDGE