Delhi High Court
Cit vs Nectar Lifesciences Ltd on 20 October, 2011
Author: Sanjiv Khanna
16
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ ITA 1543/2010
CIT ..... Appellant
Through Mr. Anupam Tripathi, Sr.
Standing Counsel.
versus
NECTAR LIFESCIENCES LTD ..... Respondent
Through Mr. S. Krishnan, Advocate.
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE R.V.EASWAR
ORDER
% 20.10.2011
The present appeal under Section 260A of the Income Tax Act,
1961 (Act, for short) filed by the Revenue relates to computation of
deduction claimed by the assessee under Section 80HHC for the
assessment year 2004-05.
2. Vide order dated 22nd February, 2011, the following question of
law was framed:-
"Whether on the facts and circumstances of the
case, has the Hon‟ble Tribunal not grossly erred in
holding that the interest earned from the FDRs
was profits derived from the export of activities
and thus eligible for deduction u/s 80 HHC
particularly when it is in clear violation of the
decision of the Hon‟ble Supreme Court in the case
of M/s Pandian Chemicals Vs. CIT."
3. By a separate order passed in today‟s date we have disposed of
ITA 125/2009 between the Revenue and the respondent-assessee
pertaining to the immediate earlier assessment year 2003-04. For the
sake of convenience, we reproduce the entire order disposing of ITA
125/2009:-
On 28th August, 2009, the following questions of
law were framed:-
"a) Whether the Ld. ITAT has erred in law in
the facts and circumstances of the case in
confirming the order of the CIT(A) whereby the
CIT(A) held that since the interest paid on
borrowed funds is more than the interest received
on FDR, therefore, 90% of the gross interest
received from FDR should not be reduced from
the business income of the assessee for computing
deduction under Section 80HHC?
b) Whether the Ld. ITAT was correct in law
in holding that the interest on FDR should not be
reduced from the business profits since the interest
income is not assessed by the assessing officer
under the head „Income from other sources‟?"
2. The respondent-assessee is a company engaged
in the business of manufacturing and sale of bulk
drugs. It is also exporting drugs manufactured by
them.
3. For the assessment year 2003-04, return of
income declaring income of Rs.4,81,84,570/- was
filed on 2nd December, 2003. The respondent-
assessee had claimed deduction under Section
80HHC of the Income Tax Act, 1961 (Act, for
short) of Rs.98,24,195/-.
4. The Assessing Officer noticed that the
respondent-assessee had not reduced 90% of the
miscellaneous income from the profit of business
and a questionnaire dated 23rd January, 2006 was
issued. The Assessing Officer observed that
interest was earned on FDRs, which were kept
with the bank as security under their lien for the
opening of letter of credits. The Assessing Officer
in the assessment order has further recorded as
under:-
"...........The letter of credit is the working
capital facility extended by the bank for purchase
of raw material and includes usage period of 60
days and 120 days. For accounting purposes it has
been shown separately under the misc. income
else it can be netted with the interest expenditure
paid to the bank for working capital limits. hence,
the same has direct nexus with the manufacturing
and export business."
5. He thereafter computed deduction under
Section 80HHC by excluding 90% of the
miscellaneous income and including interest
earned on FDRs. In the final computation made by
the Assessing Officer, interest earned on FDRs
mentioned above was treated as part of business
income and not as income from other sources.
6. On appeal filed by the respondent-assessee, the
CIT (Appeals) accepted the contention of the
assessee that interest earned on FDRs should be
set of or netted of, from the interest paid by the
assessee to the bank. The CIT (Appeals) while
accepting the contention of the assessee has
recorded as under:-
"1. Interest on FDR:
After examination of the documents filed by the
assessee before me and as well as with the
assessing officer I found that FDRs are purchased
by assessee out of the borrowed fund and kept
with Bank under security under their lien for the
opening of letter of credit. Since the FDRs are
purchased for business compulsion therefore, in
view of various legal pronouncement made and
has also referred by the assessee about the
considered view that assessee should be allowed,
Netting of the interest received and paid for
computing the business profit. Since interest on
borrowed fund is higher than interest received
therefore, 90% of the gross interest received from
FDR should not be reduced from the business
income of the assessee for computing deduction
u/s 80HHC of the Income Tax Act."
7. The Revenue filed an appeal before the Income
Tax Appellate Tribunal (for short, the tribunal),
but by the impugned decision dated 29th July,
2008, the said appeal was dismissed. While
dismissing the appeal, the tribunal noticed and has
observed that interest earned on the FDRs was not
income from other sources, but had been treated as
business income.
8. Mr. Tripathi, learned counsel appearing for the
Revenue in the present appeal has submitted that
interest earned on the FDRs should be treated as
income from other sources and not income derived
from export. He has referred to the decisions
rendered in Pandian Chemicals Ltd. Vs.
Commissioner of Income Tax, Madurai (2003) 5
SCC 590, K. Ravindranathan Nair Vs. Deputy
Commissioner of Income Tax (Assessment) and
Another [2003] ITR 669 (Ker.), South India
Shipping Corporation Vs. Commissioner of
Income Tax [1999] ITR (Vol.240) 24 (Madras),
Commissioner of Income Tax Vs. Cosmos
International [2009] 318 ITR 314 (Delhi) and
Commissioner of Income Tax Vs. Shri Ram
Honda Power Equip [2007] 289 ITR 475 (Delhi)
9. The aforesaid contention of the appellant-
Revenue was considered by this Court in Shri
Ram Honda Equip (supra) and it has been held as
follows:-
"35. Turning to the submissions in the present
cases, as regards the first of the categories, viz.,
the parking of surplus funds, there should be no
dif ficulty at all. In view of the large number of the
decisions of the hon‟ble Supreme Court in the
context of section 56 and section 57 and those of
the Kerala High Court in the context of section
80HHC itself, we are unable to accept the
contention of the assessees based on Snam
Proghetti [1981] 132 ITR 70 (Delhi) that interest
earned on parked surplus funds should qualify as
business income. Clearly, Snam Proghetti [1981]
132 ITR 70 (Delhi) was not rendered in the
context of section 80HHC and cannot but be
confined to the facts of that case. Circular No.
564, dated July 5, 1990 (see [1990] 184 ITR (St.)
137), can also not help in interpreting section
80HHC which is a "stand alone" provision. We
are, therefore, of the view that where surplus
funds are parked with the bank and interest is
earned thereon it can only be categorised as
income from other sources. This receipt merits
separate treatment under section 56 of the Act
which is outside the ring of profit and gains from
business and profession. It goes entirely out of the
reckoning for the purposes of section 80HHC. To
give effect to this position, the Assessing Officer
while computing profits of the export business
will have to remove from the debit side of the
profit and loss account the corresponding interest
expenditure that has been "laid out" to earn such
income from other sources. Otherwise this will
depress the profits by an amount which is out of
the reckoning of section 80HHC, a consequence
not intended to be brought about.
36. The other category is where the exporter
is required to mandatorily keep monies in fixed
deposit in order to avail of credit facility for the
export business. The argument on behalf of the
assessee is that but for such a stipulation by the
bank there was no need for the exporter to keep
the money in fixed deposit and therefore the
income earned from such fixed deposits bears a
direct nexus to the business activity itself. Given
the repeated affirmation by the hon‟ble Supreme
Court of three judgments of the Kerala High Court
on the same issue, we are inclined to follow the
view expressed by the Kerala High Court on each
of these occasions. We accordingly hold that
interest earned on fixed deposits for the purposes
of availing of credit facilities from the bank, does
not have an immediate nexus with the export
business and therefore has to necessarily be treated
as income from other sources and not business
income. Question (a) and issue (i) are answered
accordingly."
10. Thereafter, the Division Bench examined
the question of netting of interest under Clause
(bba) of the Explanation to Section 80HHC.
Learned counsel for the Revenue is, therefore,
right in his contention that interest income earned
from the FDRs does not qualify for deduction
under Section 80HHC of the Act, but has ignored
the findings of the Division Bench in Shri Ram
Honda Equip (supra) on the question of netting of
interest, if the interest earned on FDRs has nexus
with the export business of the assessee for the
purpose of Clause (bba) of the Explanation to
Section 80HHC. It is the second aspect which is
relevant and material in the present case.
11. After examining the said provision and
several judgments, the Division Bench in Shri
Ram Honda Equip (supra), in conclusions (v) to
(ix) has held as under:-
"(v) Interest earned on fixed deposits for the
purposes of availing of credit facilities from the
bank, does not have an immediate nexus with the
export business and therefore has to necessarily be
treated as income from other sources and not
business income.
(vi) Once business income has been determined by
applying accounting standards as well as the
provisions contained in the Act, the assessee
would be permitted to, in terms of section 37 of
the Act, claim as deduction, expenditure laid out
for the purposes of earning such business income.
(vii) In the second stage, the Assessing Officer
will deduct from the profits of the business
computed under the head "Profits and gains of
business or profession" the following sums in
order to arrive at the "profits of the business" for
the purposes of section 80HHC(3) :
(a) 90 per cent. of any sum referred to in clauses
(iiia), (iiib) and (iiic) of section 28 i.e., export
incentives ;
(b) 90 per cent. of any receipts by way of
brokerage, commission, interest, rent, charges or
any other receipt of a similar nature included in
such profits ; and
(c) profits of any branch, office, warehouse or any
other establishment of the assessee situate outside
India.
(viii) The word "interest" in clause (baa) of the
Explanation connotes "net interest" and not "gross
interest". Therefore, in deducting such interest,
the Assessing Officer will take into account the
net interest i.e., gross interest as reduced by
expenditure incurred for earning such interest.
The decision of the Special Bench of the Income-
tax Appellate Tribunal in Lalsons [2004] 89 ITD
25 (Delhi) to this effect is affirmed. In holding as
above, we differ from the judgments of the Punjab
and Haryana High Court in Rani Paliwal [2004]
268 ITR 220 and the Madras High Court in
Chinnapandi [2006] 282 ITR 389 and affirm the
ruling of the Special Bench of the Income-tax
Appellate Tribunal in Lalsons [2004] 89 ITD 25
(Delhi).
(ix) Where, as a result of the computation of
profits and gains of business and profession, the
Assessing Officer treats the interest receipt as
business income, then deduction should be
permissible, in terms of Explanation (baa) of the
net interest, i.e., the gross interest less the
expenditure incurred for the purposes of earning
such interest. The nexus between obtaining the
loan and paying interest thereon (laying out the
expenditure by way of interest) for the purpose of
earning the interest on the fixed deposit, to draw
an analogy from section 37, will require to be
shown by the assessee for application of the
netting principle."
12. Referring to the aforesaid conclusions,
another Division Bench of this Court in
Commissioner of Income Tax Vs. Shahi Export
House [2010] 195 Taxman 163 (Delhi) has held
as under:-
"7. A conjoint reading of conclusion
Nos.1,4, 5 and 6 and particularly No.5 would
clearly demonstrate that only in those cases where
interest earned on fixed deposits have an
immediate nexus with the export business would
be treated as income from business and interest
earned on fixed deposits which does not have an
immediate nexus with the export business, it
would be treated as income from other sources.
The court opined that when the interest was earned
on the fixed deposits for the purposes of availing
of credit facilities from the bank, it did not have
such a nexus with the export business and
therefore, had to be necessarily treated as income
from other sources and not the business income.
8. Thus, insofar as earning of interest on fixed
deposit is concerned, the determinative test is as to
whether such interest has "immediate nexus" with
the export business."
13. In the present case we are concerned with
the situation where the Assessing Officer himself
has treated interest earned on the FDRs, which
were given to the bank as security to avail of the
credit facility, as business income and exports.
The Assessing Officer has himself held that the
FDRs were used to avail the working capital
limits. In the assessment order it is not stated or
even alleged that the said credit facilities from the
bank had no nexus with the export business. On
the other hand, it is stated that they had nexus with
the letter of credit and the Assessing Officer has
held that they had direct nexus with manufacturing
and export business. A similar view has been
taken by Delhi High Court in Commissioner of
Income Tax Vs. Punjab Stainless Steel Ind.
[2007] 162 Taxman 9 (Delhi) and Commissioner
of Income Tax Vs. Anand Kumar [2007] 164
Taxman 330 (Delhi).
14. In view of the aforesaid legal position
and the admitted facts, the question of law is
answered against the appellant-Revenue and in
favour of the respondent-assessee. The appeal is
accordingly disposed of without any order as to
costs.
4. Learned counsel appearing for the Revenue submitted that the
aforesaid order passed in ITA 125/2009 should not be followed in the
present case as the interest earned on the FDRs was not treated as
business income by the Assessing Officer and the CIT (Appeals) in the
present case. The relevant portions of the assessment order and the
order of the CIT (Appeals) read as under:-
"Assessment order
"5. I have considered the reply of the
assessee on merits of the case. Assessee could not
submit anything to prove direct nexus of FDR‟s
and it‟s business income. The FDR‟s have been
made with earlier years surplus funds if the
assessee. On this issue there is settled position of
law in view of the various judicial
pronouncements including the judgment of
Hon‟ble Kerala High Court in the case of K.
Ravinderanathan Nair Vs. DCIT 262 ITR 669,
which has been affirmed by the Hon‟ble Supreme
Court by dismissing the SLP filed by the assessee
against the judgment, the interest income on
FDR‟s amount to Rs.42,42,898/- is treated as
income of the assessee under the head "Income
from other sources" and accordingly, disallowed
for the purpose of benefit of deduction u/s 80
HHC within the meaning of explanation (bba)
below section 80 HHC (4C) of the I.Tax Act.
Order of the CIT (Appeals)
I have examined the submission of the appellant
and the observation made by the Assessing Officer
in the assessment order. Vide para 5 of the
Assessment Order, the A.O. has observed that
appellant could not submit anything to prove
direct nexus between the interest received on
FDR‟s and cash credit facility taken by it. The
F.D.Rs. have been made with earlier years surplus
funds available with the appellant. During the
course of appellate proceedings, the appellant filed
letters from Punjab National Bank, Sector 16,
Chandigarh Branch and State Bank of India,
wherein Fixed Deposits of Rs.3,05,05,850/- and
Rs.2,19,58,524/- have been got issued, continued
or renewed during F.Y. 2001-02 to 2003-04. In
both the certificates, it is mentioned that "FD‟s
have been got issued, continued or renewed for the
F.Y. 2003-04 for the C.C. A/c
No.05755008700004684 of the holder of M/s
Nectar Life Sciences Ltd. and C.C. A/c
No.10214998738. This shows that these fixed
deposits were taken in the earlier years and were
renewed in F.Y. 2001-02, 2002-03 and 2003-04
for their Cash Credit accounts running with the
said banks. This clearly shows that the Fixed
deposits were already in existence and were not
taken out of the loan taken from the bank in the
form of cash credit. There is no nexus between the
loan facilities availed by the appellant and the
amount invested in fixed deposit. Nothing has
been produced neither before the A.O. nor before
me to prove any nexus between the interest
income and the interest expense."
5. It may be noted here that when the matter was taken up by the
assessee to the tribunal, the tribunal by the impugned order dated 13th
August, 2009, followed its earlier order for the assessment year 2003-
04.
6. We have examined the orders passed by the Assessing Officer
and the CIT (Appeals), relevant portions of which have been quoted
above. The order passed by the Assessing Officer is cryptic and does
not give any details and even deal with the reasons/grounds mentioned
by the Assessing Officer in the preceding year in which it was held that
the interest earned on the FDRs was business income. The finding
recorded by the Assessing Officer that the FDRs had been made with
the earlier years‟ surplus funds is without any basis or foundation. He
has not even dealt with and examined the contention that the FDRs
were given as security for availing cash credit limit. The said aspect
has been referred to and accepted by the CIT (Appeals) in his order
quoted above. CIT (Appeals) has also accepted that these FDRs were
taken in the earlier years for cash credit account maintained for
business purposes with the banks. He, thereafter, immediately in the
next sentence had drawn the inference that the FDRs were already in
existence and were not made from of the loan taken from the bank in
the form of cash credit and, therefore, there was no nexus between the
loan facility and the amount invested in the FDRs and the assessee had
not been able to prove nexus between interest income and the loan. The
aforesaid inference drawn by the CIT (Appeals) has no basis or
foundation. The said finding is an unfounded assumption based on
surmises. There is no indication or basis to draw the said inference
logically on the facts, material or record before him and adverted to in
the order. These findings are contrary to the findings of the income tax
authorities in the preceeding year quoted above
7. In these circumstances, we do not find that there is any
difference between the case for the assessment year 2003-04 and the
present case relating to the assessment year 2004-2005. The question
of law is accordingly answered against the Revenue and in favour of
the assessee. The appeal is disposed of. No costs.
SANJIV KHANNA, J.
R.V.EASWAR, J.
OCTOBER 20, 2011
NA
