2011 (11) TMI 485 - HC - Income Tax

Deduction u/s 80HHC - rent and interest received from parking of surplus funds bonds etc. - Held that - It is not material and relevant whether the factory building was a business asset or there was no intention to part or sell the same. Rent received is specifically taxable under the head income from house property . Where surplus funds are parked with the bank and interest is earned thereon it can only be categorized as income from other sources. To give effect to this position the Assessing Officer while computing profits of the export business will have to remove from the debit side of the profit and loss account the corresponding interest expenditure that has been laid out to earn such income from other sources. Further interest earned on fixed deposits for the purposes of availing of credit facilities from the bank does not have an immediate nexus with the export business and therefore has to necessarily be treated as income from other sources and not business income - This receipt merits separate treatment under section 56 which is outside the ring of profit and gains from business and profession. It goes entirely out of the reckoning for the purposes of section 80HHC - Decided in favour of the Revenue.

Issues:
1. Interpretation of Section 80HHC of the Income Tax Act, 1961 regarding eligibility of income earned by Assessee for relief.
2. Treatment of interest income and rent received by the respondent for computing deduction under Section 80HHC.
3. Determination of whether interest income from fixed deposits and rent received should be considered as business income for claiming deduction under Section 80HHC.
4. Applicability of legal precedents in determining the taxability of interest income and rent received.

Analysis:

1. The primary issue in this case revolves around the interpretation of Section 80HHC of the Income Tax Act, 1961, concerning the eligibility of income earned by the Assessee for relief under this section. The key question raised was whether the Tribunal correctly held that the income earned by the Assessee through rent and interest was eligible for relief under Section 80HHC.

2. The respondent, a company, was entitled to a deduction under Section 80HHC for the assessment year 1989-90. However, a dispute arose during the computation of this deduction regarding the treatment of rent received and interest income. The Assessing Officer observed that the interest income from various sources could not be considered as business income and therefore should not be included for computing the deduction under Section 80HHC. Additionally, the rent earned was deemed to be taxable under the head 'income from house property.'

3. The first appeal ruled in favor of the assessee, stating that both interest income and rent received should be computed and included for claiming the deduction under Section 80HHC. The tribunal, in its order, upheld the decision of the CIT (A) by considering the nature of the income and its relation to the business activities of the assessee. It was determined that the interest income from fixed deposits, generated from earlier profits and retained for business purposes, qualified as business income eligible for deduction under Section 80HHC.

4. Legal precedents played a crucial role in the judgment, with references made to various court decisions to support the arguments presented. The tribunal relied on the Supreme Court's decision in Vikram Cotton Mills case to justify the treatment of rental income as part and parcel of the business, making it eligible for deduction under Section 80HHC. Additionally, the tribunal referred to the judgment in the case of Snam Progetti S P A to support the inclusion of interest income from fixed deposits as business income, further reinforcing the decision to allow the deduction under Section 80HHC.

In conclusion, the High Court answered the question of law in favor of the Revenue and against the respondent-assessee, emphasizing the specific taxability of rental income under the head 'income from house property' and the treatment of interest income from fixed deposits as business income for the purpose of claiming deduction under Section 80HHC. The judgment provides a comprehensive analysis of the issues involved, highlighting the significance of legal interpretations and precedents in tax matters.

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