1. This Larger Bench of three Judges has been constituted, to decide the questions of law, referred by a Division Bench on 21.07.2003, as follows:-

“(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?”

2. For the purpose of deciding the questions of law, referred to above, we are referring to the facts of D.B. Income Tax Appeal No.13/2002.

3. The Income Tax Appeal was filed against the order dated 25.09.2001, passed by the Income Tax Appellate Tribunal, Jaipur Bench, Jaipur in Income Tax Appeal No.1642/JP/93, for Assessment Year 1989-90.

4. The return of the income was filed by the assessee-firm declaring the total income at Rs. NIL in the status of R.F. along with audit report under Section 44AB of the Income Tax Act, 1961 (in short 'the Act'), and report under Section 80HHC(4) of the Act on 27.10.1989, for 15 months. A notice under Section 143(2) of the Act was served, and in compliance thereof, a representative of the firm had attended the proceedings, and produced the books of accounts, cash-book, ledger, stock register, bank book, journal, purchase vouchers, expenses vouchers and sales bill books. The Assessing Officer (AO) noticed, on examining the books of accounts, that the assessee-firm had claimed deductions under Section 80HHC of the Act in respect of n. p. of Rs.23,82,541/-, which included Rs.37,215/- by import licence premium; Rs. 1,76,930/-as interest income; Rs.2,000/-towards disallowance out of telephone expenses; and Rs.1196/- as income tax added to the total income.

5. On an explanation with regard to deduction under Section 80 HHC in respect of interest income amounting to Rs.1,76,930/-, as this income did not derive from export of goods or merchandise, the Authorized Representative submitted that it relied upon paras 1.8 and 1.9 of the expert opinion, given on the subject, by Shri O.P. Vaish, Advocate, Supreme Court, dated 11.03.1989, filed in the case of M/s Gupta Jewel Corpn. Jaipur, a sister concern, for the Assessment Year 1989-90.

6. The AO rejected the deduction and held that the interest income had not been derived by the assessee-firm from export of any goods or merchandise. As per the provisions of Section 80HHC of the Act, the assessee was not entitled to such deduction, and was entitled to deduction only in respect of profits derived by it from export of goods or merchandise. The claim was, thus, disallowed.

7. The Commissioner of Income Tax(Appeals), Rajasthan-II, Jaipur, did not accept the contention of the assessee, that the amounts of which the interest income was earned, represented the appellant's business income. Since these amounts were not required immediately for the business by the appellant, it made short term deposits and earned interest on them. It was argued that the income earned by exploiting a commercial asset was chargeable under the head business, and accordingly the deduction under Section 80HHC of the Act, was allowable. The CIT(A) held that the interest earned by the appellant on the deposits made out of the funds not required in its business, were not the profits derived from the export of goods or merchandise. The provisions of sub-Section (3) of Section 80HHC of the Act, could not be applied to the facts and circumstances of the case. The interest income of the appellant was not entitled to any deduction under Section 80HHC, because the basic requirements of the section were not satisfi