2009 (2) TMI 511 - AT - Income Tax

Summary

Issues Involved:
1. Treatment of interest income from fixed deposits.
2. Inclusion of foreign exchange rate difference gain in export turnover for section 80HHC deduction.
3. Addition to the closing stock of finished goods.

Detailed Analysis:

1. Treatment of Interest Income from Fixed Deposits:
The primary issue was whether the interest income of Rs. 10,95,220 from fixed deposits should be classified as "business income" or "income from other sources." The Assessing Officer treated it as "income from other sources," denying netting benefits. The CIT(A) found a portion of the interest income, Rs. 3,34,120, as business receipts eligible for deduction under section 80HHC, while the remaining Rs. 7,61,100 was treated as "income from other sources."

The Tribunal examined various judgments, emphasizing that the classification of interest income depends on the specific facts of each case. It referenced cases like CIT v. Bokaro Steel Ltd. and CIT v. Karnal Co-operative Sugar Mills Ltd., which highlighted that interest income could be considered business income if it is inextricably linked to the business activities. The Tribunal concluded that the CIT(A) correctly treated Rs. 3,34,120 as business income due to its nexus with the business. However, for the remaining amount, the Tribunal remitted the case back to the Assessing Officer to examine the nexus between the interest paid and received, directing the AO to decide in light of the discussed judgments.

2. Inclusion of Foreign Exchange Rate Difference Gain in Export Turnover:
The second issue was whether the foreign exchange rate difference gain of Rs. 73,97,334 should be included in the export turnover for section 80HHC deduction. The Tribunal referenced the Special Bench decision in Asstt. CIT v. Prakash L. Shah, which held that the amount realized within the prescribed period in convertible foreign exchange should be included in the export turnover, regardless of the year of realization. The Tribunal directed the Assessing Officer to recalculate the deduction under section 80HHC, ensuring that the relevant portion of the foreign exchange difference is considered both in profit and turnover.

3. Addition to the Closing Stock of Finished Goods:
The third issue was the addition of Rs. 20,89,502 to the closing stock of finished goods. The Assessing Officer valued the closing stock at Rs. 5,166 per carat, while the assessee valued it at Rs. 4,915 per carat. The CIT(A) deleted the addition, noting that the assessee's method of valuation was consistent and not disputed by the Assessing Officer. The Tribunal upheld the CIT(A)'s decision, finding no defects in the assessee's books of account or stock register and noting that the assessee's valuation method was justified. The Tribunal dismissed the revenue's appeal on this ground.

Conclusion:
The Tribunal partly allowed the revenue's appeal for statistical purposes and remitted the issue of the remaining interest income back to the Assessing Officer. The Tribunal also directed the recalculation of the section 80HHC deduction considering the foreign exchange rate difference. The Tribunal dismissed the revenue's appeal regarding the addition to the closing stock, confirming the CIT(A)'s decision.