2003 (3) TMI 66 - HC - Income Tax

assessee is a leading exporter of spices in South India. Assessee claimed deduction under section 80HHC of the Act in respect of interest received on fixed deposits. The assessee had also excluded the agency despatches from the total turnover for the computation of the deduction under section 80HHC. Both the claims were rejected by the Assessing Officer. - 1. Whether, the interest income of Rs. 19,40,886 is assessable under the head Business income ? - 2. Whether, can the interest be said to be an income directly connected with the business in the sense the income is generated by the business? - 3. Whether, interest income is eligible to be considered for deduction under section 80HHC? - We answer questions Nos. 1 to 3 in favour of the Revenue and against the assessee. Further, we hold that the turnover of agency transactions will not form part of the total turnover in clause (b) of sub-section (3) of section 80HHC

Issues Involved:
1. Assessability of interest income under the head 'Business income.'
2. Connection of interest income with business activities.
3. Eligibility of interest income for deduction under section 80HHC.
4. Inclusion of agency despatches in total turnover for deduction computation under section 80HHC.
5. Correctness of excluding agency despatches from total turnover as per section 80HHC.

Issue-wise Detailed Analysis:

1. Assessability of Interest Income under the Head 'Business Income':
The respondent-assessee, a leading exporter of spices, claimed a deduction under section 80HHC of the Income-tax Act, 1961, for interest received on fixed deposits during the assessment years 1989-90 and 1991-92. The Assessing Officer rejected this claim, treating the interest income as assessable under the head "Other sources." The Tribunal, however, concurred with the first appellate authority, which had allowed the deduction based on an earlier appellate order for the year 1990-91. The court referred to CIT v. Jose Thomas [2002] 253 ITR 553 and other precedents, concluding that interest income on bank deposits is income from "other sources" and not "business income." Hence, the Tribunal's order was unsustainable, and the court answered this issue in favor of the Revenue.

2. Connection of Interest Income with Business Activities:
The court examined whether the interest income was directly connected with the business activities of the assessee. The Revenue argued that the interest income should not be considered as business income since it did not arise directly from the business operations. The court upheld this view, reiterating that interest on fixed deposits is assessable under "other sources" and not as business income, thereby not qualifying for deduction under section 80HHC.

3. Eligibility of Interest Income for Deduction under Section 80HHC:
The court addressed whether the interest income could be considered for deduction under section 80HHC. It was determined that since the interest income was not categorized as business income but as income from "other sources," it was not eligible for the deduction under section 80HHC. The court's decision was consistent with previous rulings, thereby answering this issue in favor of the Revenue.

4. Inclusion of Agency Despatches in Total Turnover for Deduction Computation under Section 80HHC:
The assessee excluded agency despatches from the total turnover for computing the deduction under section 80HHC. The Assessing Officer included these despatches in the total turnover, relying on the Supreme Court's decision in Cardamom Planters Association v. Deputy CST [1989] 75 STC 118. The Tribunal, however, upheld the first appellate authority's decision to exclude agency despatches from the total turnover. The court examined the definitions and provisions under section 80HHC and concluded that the turnover of goods belonging to others, sold on commission basis, should not be included in the total turnover for deduction purposes. This interpretation aligns with the objective of section 80HHC, which aims to provide tax relief to exporters based on their own export turnover.

5. Correctness of Excluding Agency Despatches from Total Turnover as per Section 80HHC:
The court analyzed whether the exclusion of agency despatches from the total turnover was justified. It referred to the definitions of "export turnover" and "total turnover" and the intent behind section 80HHC. The court concluded that including agency despatches in the total turnover would artificially inflate the denominator in the deduction formula, thereby reducing the relief intended for exporters. The court emphasized that the turnover for section 80HHC should only include the assessee's own goods and not those sold on behalf of others. This interpretation was consistent with the legislative intent and previous judicial decisions, thereby answering this issue in favor of the assessee.

Conclusion:
The court disposed of the appeals by the Revenue, answering the first three questions in favor of the Revenue and the last two questions in favor of the assessee. The judgment clarified the treatment of interest income and agency despatches in the context of deductions under section 80HHC, providing a detailed analysis based on legal precedents and the legislative intent behind the provisions.

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