Issues Involved: 1. Interpretation of "profits derived from such export" in Section 80HHC. 2. Determination of the nature of interest income. 3. Applicability of netting to interest income.
Issue-wise Detailed Analysis:
1. Interpretation of "profits derived from such export" in Section 80HHC: The court examined whether the expression "profits derived from such export" restricts the profits available for deduction to only those items of income directly relatable to the business of export. The court clarified that the nexus test must be applied to exclude income not directly related to export activities. Profits derived from exports should be computed using the formula: \[ \text{Profits derived from exports} = \text{Profits of the business} \times \frac{\text{Export turnover}}{\text{Total turnover}} \]
2. Determination of the nature of interest income: The court addressed whether interest income should be categorized as "business income" or "income from other sources." It held that interest earned on surplus funds parked in fixed deposits should be treated as "income from other sources" because it lacks a direct nexus with the export business. However, interest earned on fixed deposits kept for availing credit facilities required for the export business also does not qualify as business income. This position was affirmed by the Supreme Court in several judgments, including those of the Kerala High Court.
3. Applicability of netting to interest income: The court examined whether the term "interest" in Explanation (baa) to Section 80HHC connotes net interest (gross interest less expenditure incurred to earn such interest) or gross interest. The court held that the term "interest" refers to net interest. It emphasized that the computation of business income must account for the expenditure incurred to earn the interest, aligning with the principle that only net interest should be included in the profits. The court affirmed the decision of the Special Bench of the Income-tax Appellate Tribunal in Lalsons Enterprises, which supported this interpretation.
Conclusions: 1. The nexus test must be applied to exclude income not directly related to export activities. 2. Interest earned on surplus funds and fixed deposits kept for availing credit facilities should be treated as "income from other sources." 3. The term "interest" in Explanation (baa) to Section 80HHC refers to net interest, and netting should be allowed where interest income is computed as business income.
Summary: The court provided a comprehensive interpretation of Section 80HHC, emphasizing the need to apply the nexus test to determine profits derived from exports. Interest income from surplus funds and fixed deposits kept for credit facilities should be categorized as "income from other sources." The court affirmed that net interest, not gross interest, should be considered when computing profits for deduction under Section 80HHC. The judgment aligns with the principle that only net interest should be included in the profits, ensuring that the computation reflects the actual business income.
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