2011 (10) TMI 15 - HC - Income Tax

The interest paid on borrowed funds is more than the interest received on FDR, therefore, 90% of the gross interest received from FDR should not be reduced from the business income of the assessee for computing deduction u/s 80HHC. - Held that -interest earned on the FDRs, which were given to the bank as security to avail of the credit facility, as business income and exports. The AO has himself held that the FDRs were used to avail the working capital limits.decided in favour of Assessee.

Summary

Issues:
1. Interpretation of Section 80HHC for deduction calculation.
2. Treatment of interest earned on fixed deposits in relation to business income.

Analysis:
1. The case involved the interpretation of Section 80HHC of the Income Tax Act, 1961, regarding the deduction calculation for the respondent-assessee, a company engaged in manufacturing and exporting drugs. The main issue was whether the interest earned on fixed deposits should be reduced from the business income for computing the deduction under Section 80HHC. The Assessing Officer initially included the interest earned on fixed deposits as part of business income and did not reduce it from the profits. The CIT (Appeals) accepted the assessee's contention that the interest earned on fixed deposits should be netted off against the interest paid to the bank, as the fixed deposits were purchased out of borrowed funds for business purposes. The tribunal also upheld this decision, stating that the interest earned on fixed deposits was not income from other sources but business income.

2. The Revenue argued that the interest earned on fixed deposits should be treated as income from other sources and not as income derived from exports. They referred to various legal precedents to support their contention. However, the Division Bench, in line with previous judgments, held that interest earned on fixed deposits for availing credit facilities did not have an immediate nexus with the export business and should be treated as income from other sources. The court emphasized the importance of the nexus between the interest earned on fixed deposits and the business activity. The Division Bench also discussed the netting of interest under the Explanation to Section 80HHC, stating that interest income earned from fixed deposits did not qualify for deduction unless it had a nexus with the export business of the assessee. The court highlighted the need for a direct connection between the fixed deposit interest and the business activity to be eligible for deduction under Section 80HHC.

In conclusion, the court ruled in favor of the respondent-assessee, stating that the interest earned on fixed deposits, which were given as security for credit facilities related to the export business, should be considered as part of business income and not as income from other sources. The judgment emphasized the importance of establishing a direct nexus between the interest earned on fixed deposits and the business activity to determine its treatment for deduction purposes under Section 80HHC.