2016 (11) TMI 746 - AT - Income Tax

Interest received on fixed deposit - whether was part of business income and therefore should have been considered for deduction under section 80HHC? - whether the interest earned by the assessee on fixed deposit with Vijay Bank is part of business profit or to be assessed under the head income from other sources - netting of interest receipt against the interest expenses - Held that - We find that the fixed deposits have been made as a precondition for credit limit and which was required for earning in the business of export and therefore receipts of interest has direct nexus with the export business of the assessee and inextricably linked with the export business and it was not a case of parking of funds simpliciter thus we hold that the interest income earned from the fixed deposit was a part of business profit and netting of interest expenses against the interest income earned from the FDR is accordingly allowed while computing deduction under section 80HHC of the Act. - Decided in favour of assessee

Issues Involved:
1. Determination of total income by the Commissioner of Income Tax (Appeals).
2. Ignoring material facts and evidence in computing total income.
3. Legality of the computation of total income.
4. Classification of interest received on Fixed Deposit as income from other sources.
5. Netting of interest receipt/payment for assessment.

Issue-wise Detailed Analysis:

1. Determination of Total Income:
The appellant firm, engaged in manufacturing and exporting bed-spreads, filed its return of income showing ?1,14,34,884/- after claiming deduction under section 80HHC. The initial assessment was completed at ?2,74,65,742/-. Upon reassessment, the income was determined at ?2,88,86,917/- due to the restriction of the deduction under section 80HHC to ?92,79,363/- because the appellant's turnover exceeded ?10 crores and did not fulfill the twin conditions of section 80HHC.

2. Ignoring Material Facts and Evidence:
The appellant argued that the Commissioner of Income Tax ignored material facts and evidence presented. However, the Tribunal did not specifically address this issue as it was considered general in nature and not required to be adjudicated upon.

3. Legality of Computation of Total Income:
The appellant contended that the computation of total income was bad in law and against the actual facts and evidence on record. This issue was also considered general and not specifically adjudicated upon by the Tribunal.

4. Classification of Interest on Fixed Deposit:
The appellant argued that the interest received on fixed deposits, which were made as a precondition for a credit limit with the bank, should be considered as business income and not as income from other sources. The Tribunal examined whether the interest earned on fixed deposits with the bank was part of business profit or should be assessed under 'income from other sources'. The Tribunal referenced the Supreme Court's decision in ACG Associated Capsules Pvt. Ltd. vs. CIT, which concluded that only 90% of net interest included in the profits of business should be deducted under Explanation (baa) to Section 80HHC. The Tribunal found that the interest income had a direct nexus with the export business and was not simply a case of parking surplus funds.

5. Netting of Interest Receipt/Payment:
The appellant also raised the issue of netting interest receipts against interest expenses. The Tribunal noted that in the appellant's case for the assessment year 1998-99, the direct nexus between interest received and paid was accepted, and netting of interest was allowed. The Tribunal upheld the principle that netting should be allowed where there is a direct nexus between the interest earned and the business activity, as supported by the Delhi High Court and the Supreme Court in various cases, including CIT vs. Sahi Export House and Liberty Footwear Company vs. CIT.

Conclusion:
The Tribunal allowed the appeal of the assessee, holding that the interest income earned from the fixed deposit was part of business profit and that netting of interest expenses against the interest income earned from the FDR was permissible while computing deduction under section 80HHC of the Act. The decision was pronounced on 5th September 2016.

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