2010 (12) TMI 126 - HC - Income Tax

Substantial question of Law - Whether the Income-Tax Appellate Tribunal was justified in law in holding that the interest on a fixed deposits in banks and another interest were not eligible for deduction under Section 80 HHD of the Income-Tax Act 1961 - The expression derived from has come up for interpretation in the case of Commissioner of Income Tax Vs. Sterling Foods Banglore (1999 -TMI - 5740 - SUPREME Court) The interest income is not derived from the foreign tourists. It is the deposit which is made of the advances received from those foreign tourists which is kept in the bank account and interest is received there from. Such an interest cannot be treated to be derived from the services provided to the foreign tourists. This interest income is not the result of services provided to those foreign tourists. Rather further income is earned from the income generated from the services provided to those foreign tourists which source obviously becomes beyond the first degree. There is another difficulty in the way of the assessee. Such profit derived from services provided to foreign tourists should be in convertible foreign exchange income in question is received from banks in India in Indian currency and not in foreign exchange. By no stretch of imagination the assessee can take benefit thereof for the purpose of Section 80HHD of the Act. - Thus these appeals are dismissed in favour of Revenue and against the assessee

Issues:
Interpretation of Section 80 HHD of the Income Tax Act regarding deduction eligibility for interest income on fixed deposits in banks related to services provided to foreign tourists.

Analysis:
1. Common Question of Law for Four Assessment Years:
- The appeals raised a common question of law for the same assessee across four different assessment years. The issue revolved around the eligibility of interest income on fixed deposits in banks for deduction under Section 80 HHD of the Income Tax Act.

2. Substantial Question of Law:
- The key substantial question of law admitted in the appeals was whether the Income-Tax Appellate Tribunal correctly held that interest income on fixed deposits and other interest were not eligible for deduction under Section 80 HHD of the Income Tax Act.

3. Facts and Background:
- The appellant, a private limited company operating as a tour operator for Japanese tourists visiting the Buddhist Circuit in India, received advances in foreign exchange from tourists. The appellant deposited these advances in short-term deposits in Indian banks, earning interest. The dispute arose when the Assessing Officer disallowed the deduction claimed under Section 80 HHD, stating that the interest income did not qualify as derived from the business of providing services to foreign tourists.

4. Appellant's Argument:
- The appellant argued that the interest income should be considered part of the profits derived from services provided to foreign tourists, as per the statutory formula in Section 80 HHD. Referring to relevant case law and Supreme Court decisions, the appellant emphasized the need for a liberal interpretation of the provision to encourage earning foreign exchange for the country.

5. Department's Contention:
- The department contended that since the interest income was not directly derived from services to foreign tourists and categorized as "other income," it could not qualify for deduction under Section 80 HHD. The department highlighted the importance of the expression "derived from" in determining eligibility for the deduction.

6. Interpretation of "Derived From" and Precedent Analysis:
- The court analyzed the term "derived from" in light of previous Supreme Court judgments, emphasizing the need for a direct nexus between profits and the industrial undertaking. Citing relevant cases, the court clarified that income must be directly linked to the services provided to qualify for deduction under Section 80 HHD.

7. Decision and Rationale:
- The court ruled in favor of the Revenue, dismissing the appeals. It concluded that the interest income from fixed deposits did not qualify as profits derived from services to foreign tourists under Section 80 HHD. The court emphasized that the interest income was not directly linked to the services provided and did not meet the criteria for deduction.

This detailed analysis of the judgment provides a comprehensive overview of the issues involved, the arguments presented by both parties, the legal interpretations applied by the court, and the final decision rendered by the judges.

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