Where interest earned did not have direct and proximate nexus, with income from business of export, interest could not be deducted as income from export u/s. 80HHC (3)(a), and has to be given same treatment for tax, as “income from other sources” u/s. 56.

Where interest earned did not have direct and proximate nexus, with income from business of export, interest could not be deducted as income from export u/s. 80HHC (3)(a), and has to be given same treatment for tax, as “income from other sources” u/s. 56.

Income Tax
RELIANCE TRADING CORPORATION VS INCOME TAX OFFICER - (HIGH COURT)

Held In sub-section (3) of Section 80HHC of the Act, the words used are, “derived from”. In our view, the words “derived from”, are of restricted meaning, and are not as wide as are “attributable to”. The 'stand-alone' provision of Section 80HHC of the Act has to be construed on its own wordings. A distinction sought to be made in respect of the definition of “profits of the business” under sub-section (baa) of the Explanation, to mean the profits of the business as computed under the head “Profits and gains of business or profession”, which incorporates the entire procedure for computing the business income under Section 28 to 44 of the Act. Dehors Section 80HHC of the Act, the consistent approach is that where the statutory provision talks of “income derived from” the business activity in question, the nexus theory should be applied in order to determine whether a particular item of income is business income or not. (para 37) It is the settled proposition in interpretation of the statutes, that while ascertaining the true scope of a provision in a statute, attention must necessarily be paid not only to the text, but also the context. In Reserve Bank of India Vs. Peerless General Finance And Investment Co. Ltd.[1987] 61 Company Cases 663, it was observed that interpretation must depend on the text and the context. Where the plain literal interpretation of a statutory provision produces a manifestly unjust result, which could not have been intended, the Court must avoid such interpretations. (para 39) In Commissioner of Income-Tax Vs. Shri Ram Honda Power Equip(supra), the Delhi High Court held that the word “interest” in clause (baa) of the Explanation to Section 80HHC of the Act, is indicative of net interest i.e. gross interest as reduced by expenditure incurred by the assessee in earning such interest. (para 40). While applying the direct and proximate nexus test, we are of the view that where the interest earned does not have direct and proximate nexus, with the income from the business of export, the interest cannot be deducted as income from export under Section 80HHC (3)(a) of the Act, and has to be given the same treatment for tax, as “income from other sources” under Section 56 of the Act. (para 41)

All these appeals were admitted on the following questions of law:-



“(1) Whether the assessee is entitled for deduction under section 80 HHC on interest income of Rs.1,76,930/- as per law as existing at the relevant assessment year?


(2) Whether the amendment in section 80 HHC, by way of insertion of sub-section (4B) excluding interest income for the purpose of deduction under section 80 HHC will affect the deduction of interest income under section 80 HHC for the period prior to amendment?


(3) In case the assessee is not earning income in convertible foreign exchange by way of an interest on the money advanced, even then, whether the assessee is eligible for deduction under section 80 HHC of the Act?”


And vide order dated 21.07.2003, the appeals were referred to a Larger Bench for decision of the questions of law.


A Larger Bench after elaborate discussion, vide order dated 01.05.2015 has answered the questions of law as under:-


“The question No.1 is, thus, answered in favour of the Revenue, and against the assessee.


So far as question No.2 is concerned, on the aforesaid discussion, we are also of the view that the amendment in Section 80HHC, by way of insertion of sub-section (4B), excluding interest income for the purposes of deduction under Section 80HHC of the Act, will also affect the deduction of interest income under Section 80HHC of the Act, for the period prior to the amendment, inasmuch as the applicability of the principle of direct and proximate nexus to the business income, will apply both, to the provisions of the Act prior to, and after the amendment, which came into effect by the Finance Act, 1992, with effect from 01.04.1992. The question No.2, is thus decided in favour of the Revenue and against the assessee.


On the question No.3, we hold that the earning of the income convertible from foreign exchange by way of interest, is not necessary so long as the interest is derived from business of export, and has direct and proximate nexus, with the income earned out of the profits retained for the export business. The earning of the income convertible from foreign exchange, is not a test for determining, as to whether deduction is allowable in respect of the income derived from the profits retained for export business. The question No.3, is also decided in favour of the Revenue and against the assessee.”


The questions of law having been answered by a Larger Bench vide order dated 01.05.2015, the appeals stand finally disposed of in terms of the order of Larger Bench. A copy of the judgment be placed in each of the connected file.



(ANUPINDER SINGH GREWAL),J. (AJIT SINGH),ACTING C.J.

Certificate:


All corrections made in the judgment/order have been incorporated in the judgment/order being emailed.



KAMLESH KUMAR

P.A.

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