2000 (3) TMI 1085 - AT - Income Tax

Summary

Issues Involved:
1. Classification of interest income.
2. Eligibility for deduction under section 80HHC.
3. Nexus between business activity and interest income.
4. Set-off of interest paid against interest received.

Issue-wise Detailed Analysis:

1. Classification of Interest Income:
The primary issue is whether the interest income of Rs. 81,910 should be classified as "income from business" or "income from other sources." The Assessing Officer treated the interest as income from other sources, arguing that it was earned in India from parties situated in India and thus did not qualify for deduction under section 80HHC. The CIT(A) reversed this decision, considering the interest as business income because it was earned from surplus funds of the export business.

2. Eligibility for Deduction under Section 80HHC:
The Assessing Officer excluded the interest income from the purview of profits and gains of business, arguing that for income to qualify for deduction under section 80HHC, it must be earned in foreign currency from export activities. The CIT(A) disagreed, stating that the interest income was part of the business profits because it was derived from business funds. However, the Tribunal emphasized that section 80HHC applies only to profits derived directly from export activities, not incidental income like interest.

3. Nexus Between Business Activity and Interest Income:
The Tribunal examined whether there was a direct nexus between the assessee's business activities and the earning of interest income. Citing various case laws, including decisions from the Supreme Court and High Courts, the Tribunal concluded that the interest income did not have a direct nexus with the export business. It referred to the principle that income must be derived directly from the business activity to be considered business income. The Tribunal found that the surplus funds, even if arising from export profits, were not a commercial asset in the business sense and thus the interest income should be classified under "income from other sources."

4. Set-off of Interest Paid Against Interest Received:
The assessee sought to set off the interest paid on export packing credit against the interest received. However, since the Tribunal classified the interest received as "income from other sources," it did not allow the set-off against interest paid, which was related to business expenses.

Conclusion:
The Tribunal set aside the order of the CIT(A) and restored the decision of the Assessing Officer, classifying the interest income as "income from other sources" and disallowing the deduction under section 80HHC. The appeal by the Revenue was allowed.