2014 (9) TMI 1195 - HC - Income Tax

Deduction u/s 80HHC - Characterization of income - interest earned - business income or income from the other sources - HELD THAT - Interest income earned by the Respondent/ Assessee is an earning out of its business activity only, as it has direct nexus with the said amount of business activity. The interest received by the Respondent/Assessee is having direct or proximate relationship with their main business activity and as such, the same has to be treated as business income . As stated earlier, the money of the company was used for making investment in the bank deposits or call money market or inter-corporate deposits with the objective for availing short term loans or for keeping deposits for the purpose of LC's and said money had always retained its character as business assets. In our opinion, the surplus money, unless and until it is pulled out totally from the business and having absolutely no nexus with the amount or ancillary business activity and thereby the same is deposited with the bank only and solely with a view of earning interest by keeping the said funds idle, then it can be treated as non-business income or income from the other sources. In view of the facts of the present cases, we are of the opinion that the interest earned by the Respondent/Assessee is business income only and we hold that the Income Tax Appellate Tribunal has rightly held that the interest income earned by the Respondent/Assessee is a business income. - Decided against revenue

Summary

Issues Involved:

1. Whether the interest income earned by the assessee qualifies as business income for the purpose of deduction under Section 80HHC of the Income Tax Act, 1961.
2. Whether the interest earned on various deposits should be treated as business income or income from other sources.

Detailed Analysis:

Issue 1: Whether the interest income earned by the assessee qualifies as business income for the purpose of deduction under Section 80HHC of the Income Tax Act, 1961.

The core issue is whether the interest income earned by the assessee should be classified as business income, allowing the assessee to claim deductions under Section 80HHC of the Income Tax Act, 1961. The assessee is engaged in the export business and other activities, including auto accessories and general merchandise. The Memorandum and Articles of Association of the company allow it to lend, advance, or deposit money as part of its business activities. The assessee argued that these money market operations are part of its business activities, thus qualifying the interest income as business income.

The Assessing Officer initially classified the interest income as "income from other sources," denying the benefit of Section 80HHC. However, the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal (ITAT) both held that the interest income should be treated as business income, thereby allowing the deduction under Section 80HHC.

Issue 2: Whether the interest earned on various deposits should be treated as business income or income from other sources.

The Revenue Department contended that the interest income should be classified as "income from other sources" since the funds invested were surplus and not required for the business. They argued that the assessee failed to demonstrate a nexus between the investments and its business activities. The Revenue relied on several judgments, including Godavari Sugar Mills Ltd., Bharti Televentures Ltd., and Collis Line (P.) Ltd., which supported their stance that interest earned from idle or surplus funds should be considered income from other sources.

Conversely, the assessee's counsel argued that the interest income had a direct nexus with the business activities. They pointed out that the funds were used for providing security for short-term loans and Letters of Credit, which are integral to the business operations. The counsel cited judgments such as CIT v. Lok Holdings, Radhasoami Satsang v. CIT, and CIT v. Dalmia Promoters Developers (P.) Ltd., which supported the classification of such interest income as business income.

Court's Findings:

The court analyzed the facts and legal precedents extensively. It noted that the assessee had consistently treated the interest income as business income for many years, and the Revenue had accepted this classification in earlier assessments. The court emphasized the principle of consistency, as established in Radhasoami Satsang v. CIT, where it was held that in the absence of any material change, the Department should not take a different view from previous assessments.

The court found that the interest income had a direct nexus with the business activities, as the funds were used for obtaining short-term loans and opening Letters of Credit. The object clauses of the company's Memorandum and Articles of Association supported the business nature of these investments. The court concluded that the interest income retained its character as business assets and should be treated as business income.

Conclusion:

The court held that the interest income earned by the assessee is "business income" and not "income from other sources." Consequently, the assessee is entitled to claim deductions under Section 80HHC of the Income Tax Act, 1961. The appeals by the Revenue Department were dismissed, and the orders of the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal were upheld. The questions framed were answered in favor of the assessee, affirming that the interest income qualifies as business income.