2007 (9) TMI 453 - AT - Income Tax

Summary

Issues involved: Appeal filed by revenue and cross-objection by assessee against CIT (Appeals) order for assessment year 2002-03.

Deduction of 10% on interest income u/s Explanation (baa) of section 80HHC:
The revenue contested the CIT (Appeals) decision to allow deduction of 10% on interest income u/s Explanation (baa) of section 80HHC. The assessee, on the other hand, objected to the disallowance of netting interest paid on overdraft against FDRs from interest received on FDRs while computing deduction u/s Explanation (baa) of section 80HHC.

Treatment of interest income under section 80HHC:
The assessee, engaged in export business, claimed deduction under section 80HHC for interest income but the Assessing Officer disallowed the claim, treating interest income as income from other sources. The issue was examined in light of the CIT v. Shri Ram Honda Power Equipment case where the nature of interest income was discussed. The High Court differentiated between interest income arising from surplus funds parked with the bank and interest linked to export business. It was emphasized that interest expenditure related to income from other sources should be excluded from export business profits while also being deducted from interest income for taxation purposes under section 56.

Decision and Directions:
The Tribunal directed the Assessing Officer to reevaluate the deduction of interest expenditure from interest income earned by the assessee and recalculate the deduction under section 80HHC based on the revised export profits. It was clarified that interest expenditure must be proven to be incurred for obtaining bank deposits generating interest income. The matter was remanded back to the Assessing Officer for appropriate action in line with the High Court's ruling in the Shri Ram Honda Power Equipment case.

In conclusion, the appeal of the revenue and cross-objection of the assessee were allowed for statistical purposes, with specific directions provided for the reassessment of interest expenditure and deduction under section 80HHC as per the legal principles established by the High Court.