THE COMMISSIONER OF INCOMETAX, COCHI vs. M/S.ABAD FISHERIES LTD.

JUDGMENT Ramachandran Nair, J. This is an appeal filed by the Revenue under Section 260A of the Income Tax Act against the order of hte Income Tax Appellate Tribunal allowing the appeal filed by the assessee for the year 1993-94. Assessee among other things was engaged in export of sea-food during the previous year. Under the Liberalised Exchange Rate Management System (LERMS) introduced by the Reserved Bank of India, assessee was allowed to retain 60% of the foreign exchange earning in a deposit with the RBI to be either utilised for import of goods or to be converted into Indian rupee at the close of the accounting year. The deposit under LERMS earned the assessee difference in foreign exchange at the time of encashment and also interest paid by the RBI in foreign exchange. The interest paid by RBI in foreign exchange was equivalent to Rs.7,22,183/-. The assessee treated this as part of business income and claimed deduction under Section 80HHC of the Income Tax Act. However, the Assessing Officer held that interest

2 received from the RBI on foreign exchange under the LERMS is income from other sources and it cannot be reckoned for the purpose of computation of business income. Even though first appeal was unsuccessful, assessee filed second appeal which was allowed by the Tribunal, against which Revenue has filed this appeal.

3 the assessee to utilise the foreign exchange deposit either for making payment for import of goods or to credit in Indian rupee at the close of the financial year. There is no dispute that the converted value of the deposit with exchange rate fluctuation is business income of the assessee. The short question to be considered is whether interest earned on such deposit is also to be treated as business income. The assessee has relied on the very same decision based on which Tribunal rendered the decision i.e. in COMMISSIONER OF INCOME-TAX V. GOVINDA CHOUDHURY AND SONS (1993) 203 ITR 881. That was a case where the Supreme Court held that interest awarded for belated payment of contract amount in arbitration proceedings is an accretion to the contract receipts and consequently it is business income. The contention of Senior counsel appearing for the assessee is that the principle laid down by the Supreme Court is squarely applicable to the facts of this case because interest paid by RBI on the foreign exchange deposit retained by it under the LERMS is an accretion to export proceeds and it gets credited along with export credit in Indian rupee. Counsel for the Revenue on the other hand relied on the decision of the Supreme Court in PANDIAN CHEMICALS LTD. V. COMMISSIONER OF INCOME-TAX (262 ITR 278) and that of this court in K.RAVEENDRANATHAN NAIR V. DEPUTY COMMISSIONER OF INCOME-TAX (ASSESSMENT) & ANOTHER reported at page 669 of the same ITR. In the above decision what the Supreme Court held is that 4 interest earned on deposit of the assessee held with the Electricity Board is not income from business. We do not think the decision has any application to the facts of this case. So far as the decision of the Kerala High Court relied on by the Revenue is concerned, it is interest on fixed deposit retained by the exporter. We are of the view that the scheme under which assessee received interest from the RBI cannot be treated as a normal deposit for earning interest. It is a liberalised scheme of retention of foreign exchange of exporters from out of sale proceeds which entitles not only for exchange rate advantage at the close of the accounting year when the foreign exchange deposit is converted, but will also entitle it for interest on foreign exchange retained for the purpose of RBI. The assessee- exporter who opts for the LERMS scheme is not entitled to utilise foreign exchange until the end of the year and therefore, the interest accretion in between virtually goes to sell the export earning which is business income of the assessee. We are, therefore, of the view that the earning of income on export of goods and the earning of interest on foreign exchange received in the form of consideration has a direct nexus to the business income of the assessee and therefore, the interest received is interest derived from business and hence income from business. Besides this, it is worthwhile to refer to Explanation (baa) of Section 80 HHC of the Act which is as follows: "(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--

5 (1) ninety per cent of any sum referred to in clauses (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." It is clear from the above that the profits of business of an exporter includes among other things income in the nature of brokerage, commission, interest, rent etc. which presupposes that interest derived from business of an exporter is income from business. Therefore, it is not as if an exporter cannot earn interest in the nature of business income in the course of his business. It is obvious from this that interest income derived in the course of business of the exporter is also income from business, 90% of which is to be excluded in the computation of export profit. In view of the above findings, we uphold the order of the Tribunal holding that the interest income received by the assessee from RBI on the deposit maintained under the LERMS scheme is business income. The question referred is therefore answered in favour of the assessee and consequently we dismiss the appeal filed by the Revenue.

C.N.RAMACHANDRAN NAIR Judge V.K.MOHANAN Judge pms