2006 (7) TMI 551 - AT - Income Tax

Issues Involved:
1. Whether interest earned from fixed deposits with banks is connected or interlinked with carrying on the assessee's business and, therefore, is eligible for deduction under section 80HHC from the business profits after excluding 90 per cent under Explanation (baa) to section 80HHC of the Income-tax Act, 1961.
2. Whether the receipts on account of interest, commission, brokerage, rent, charges, or any other receipt of a similar nature are to be excluded net or gross from such profits for the purpose of computation of deduction under Explanation (baa) to section 80HHC of the Income-tax Act, 1961.

Detailed Analysis:

Issue 1: Eligibility of Interest Earned for Deduction under Section 80HHC
The primary contention is whether the interest earned from fixed deposits, which are maintained as a precondition for obtaining bank loans, is connected or interlinked with the assessee's business and thus eligible for deduction under section 80HHC.

Arguments by the Assessee:
- The interest on deposits in lien with the bank should be netted off against the interest paid to the bank.
- The decision in CIT v. V. Chinnapandi [2006] 282 ITR 389 (Mad.) does not apply as it only considers whether expenses related to interest income can be deducted.
- The interest earned from deposits made as a precondition for loans is inextricably linked to the business and should be considered business income, as supported by CIT v. Bokaro Steel Ltd. [1999] 236 ITR 315 and CIT v. Karnal Co-operative Sugar Mills Ltd. [2000] 243 ITR 2 (SC).

Arguments by the Revenue:
- The interest income should be excluded from business profits under Explanation (baa) to section 80HHC.
- The case law of N.S.C. Shoes and S.S.C. Shoes Ltd. pertains to periods before the introduction of Explanation (baa) and is not applicable.
- The decision in CIT v. Sharp Industries [2006] 282 ITR 336 (Mad.) pertains to a debatable issue under section 154 and is not relevant.

Tribunal's Analysis:
- The Tribunal noted that the jurisdictional High Court in A.S. Nizar Ahmed & Co. [2003] 259 ITR 244 (Mad.) held that deposits made as a precondition for enjoying a credit facility are inextricably linked to the business and the interest derived should be considered business income.
- However, the Tribunal also recognized that the jurisdictional High Court in V. Chinnapandi and K.S. Subbiah Pillai & Co. (India) (P.) Ltd. [2003] 260 ITR 304 (Mad.) held that 90 per cent of the gross interest received must be excluded from business profits for the purpose of section 80HHC and no further deduction of expenses related to such interest is permissible.

Issue 2: Exclusion of Receipts on Net or Gross Basis
The second issue revolves around whether the receipts on account of interest, commission, brokerage, rent, charges, etc., should be excluded on a net or gross basis under Explanation (baa) to section 80HHC.

Arguments by the Assessee:
- The interest expenditure should be netted off against the interest received, and only the net interest should be excluded while computing the profits and gains from business or profession.
- The decision of the Special Bench of the Tribunal in Lalsons Enterprises v. Dy. CIT [2004] 89 ITD 25 (Delhi) (SB) supports this view.

Arguments by the Revenue:
- The exclusion should be based on the gross receipts, not net receipts, as per the plain reading of clause (baa) to Explanation to section 80HHC.
- The decision in V. Chinnapandi and K.S. Subbiah Pillai & Co. (India) (P.) Ltd. supports the exclusion of 90 per cent of the gross interest received.

Tribunal's Analysis:
- The Tribunal referred to the decision of the jurisdictional High Court in V. Chinnapandi, which clearly stated that 90 per cent of the gross receipts must be excluded from the business profits.
- The Tribunal also noted that the Bombay High Court in Bangalore Clothing Co. [2003] 260 ITR 371 emphasized that each case must be examined to determine whether the receipts are part of the operational income and thus subject to exclusion under Explanation (baa).

Conclusion:
The Tribunal concluded that:
1. Interest earned from fixed deposits, even if linked to obtaining business loans, must be excluded from business profits under Explanation (baa) to section 80HHC. The exclusion must be based on the gross receipts, not net receipts.
2. The appeals were decided in favor of the Revenue, with 90 per cent of the gross interest receipts being excluded from the business profits for the purpose of computing the deduction under section 80HHC.

Orders:
1. ITA Nos. 856/2000 and 1290/2001: Appeals of the Revenue allowed.
2. ITA Nos. 1147/2001, 274/2003, 2344, 2345/2003, and 35/2003: Appeals set aside for fresh adjudication by the Assessing Officer to determine whether the interest is business profit or income from other sources.

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