2008 (7) TMI 32 - HC - Income Tax

Interest earned by the assessee on FDRs - AO 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 - Tribunal was correct in law holding that the interest earned by the assessee on FDRs was a business income and would qualify for relief u/s 80HHC - appeal is allowed and the question is answered in favour of the revenue

Summary

Issues involved:
Interpretation of whether interest earned on Fixed Deposit Receipts (FDRs) qualifies as business income under Section 80HHC of the Income Tax Act, 1961.

Analysis:
The High Court of Delhi framed a substantial question of law regarding the classification of interest income earned on FDRs as business income eligible for relief under Section 80HHC of the Income Tax Act, 1961. The court referred to previous decisions, including CIT vs. Sriram Honda Power Equipment and CIT vs. Jyoti Apparels, to establish a precedent. The court reiterated that interest earned on surplus funds parked in banks should be categorized as income from other sources, falling outside the scope of business income. This income must be treated separately under Section 56 of the Act and should not be considered for relief under Section 80HHC. The court emphasized the need for the Assessing Officer to exclude corresponding interest expenditure from the profit and loss account while computing profits of the export business to avoid distorting the profits eligible for Section 80HHC relief. Consequently, the court allowed the appeal, ruling in favor of the revenue and against the assessee.

This judgment clarifies the treatment of interest income earned on FDRs in the context of business income under Section 80HHC. It establishes that such interest income should be considered as income from other sources, distinct from business income, and thus not eligible for relief under Section 80HHC. The court's decision underscores the importance of correctly accounting for interest income from surplus funds to ensure accurate computation of profits for tax purposes, particularly in the context of export businesses. The judgment provides guidance to Assessing Officers on the proper treatment of interest income to prevent any unintended reduction in profits eligible for tax relief under Section 80HHC.