2009 (7) TMI 1300 - AT - Income Tax

Summary

Issues Involved:
1. Classification of interest income from bank deposits.
2. Entitlement for netting between interest income earned and interest paid.
3. Validity of the CIT(A)'s order and restoration of the AO's order.

Summary:

1. Classification of Interest Income from Bank Deposits:
The revenue contended that the CIT(A) erred by not following the precedent set in the assessee's own case for A.Y. 1998-99, where interest income from bank deposits was classified as "income from other sources." The revenue relied on the judgments of the Hon'ble Madras High Court in CIT Vs. Menon Impex and the Hon'ble Supreme Court in Tuticorin Alkalies Chemicals and Fertilizers Ltd. Vs. CIT. The Tribunal had previously ruled that interest income from surplus funds invested in FDRs should be considered as "income from other sources," following the Hon'ble Delhi High Court's decision in CIT Vs. Shri Ram Honda Power Equipment. However, the Hon'ble Allahabad High Court directed reconsideration of this decision, emphasizing the need to ascertain whether the interest earned had a nexus with the business.

2. Entitlement for Netting Between Interest Income Earned and Interest Paid:
The CIT(A) held that the assessee was entitled to netting between interest income earned on bank deposits and interest paid to the bank on credits availed. The revenue challenged this, arguing that since the interest income was treated as "income from other sources," netting was not permissible. The Tribunal, however, upheld the CIT(A)'s view, referencing the Special Bench decision in Lalsons Enterprises Vs. DCIT and the Hon'ble Delhi High Court's approval of netting in CIT Vs. Shree Ram Honda Power Equipment.

3. Validity of the CIT(A)'s Order and Restoration of the AO's Order:
The revenue sought to vacate the CIT(A)'s order and restore the AO's order, which had classified the interest income as "income from other sources" and disallowed the netting of interest. The Tribunal, after considering the submissions and relevant case laws, upheld the CIT(A)'s order. It was noted that the assessee, being a 100% exporter, had used the FDRs as security for availing credit limits necessary for its export business. The Tribunal favored the interpretation of the Hon'ble Bombay High Court in CIT Vs. Punit Commercial Ltd., which allowed the entire business income, including interest income, to be eligible for deduction u/s 80HHC for 100% exporters.

Conclusion:
The Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s order that classified the interest income as business income and allowed netting of interest. The decision was pronounced in the open court on 16.07.09.