2017 (7) TMI 1013 - HC - Income Tax

Deduction permissible under Section 80HHC(1) in respect of computing the total income in relation to the export business - interest income earned - Held that - There is hardly any relevancy regarding the nature of the interest income earned by the assessee-appellant. Notwithstanding its nature, as the specified percentage of the said interest is deductible from the profits of business computed under the head profits and gains of business and profession as provided under the explanation (baa) to sub-section (4C) of Section 80HHC of the Act, the interest income as specified is deductible. Accordingly, the substantial question raised in this appeal is answered holding that the interest income earned by the assessee of the description specified is deductible from the income of the assessee under the head profits and gains of business and profession and this would be in addition to the deduction permissible under Section 80HHC(1) in respect of computing the total income in relation to the export business.

Summary

Issues Involved:
1. Nature of interest income earned on fixed deposits pledged for availing credit facility for export.
2. Applicability of Section 80HHC and explanation (baa) to sub-section (4C) of the Income Tax Act in computing taxable income.
3. Interpretation of "profits of the business" and "derived from" in the context of export business.

Issue-wise Detailed Analysis:

1. Nature of Interest Income Earned on Fixed Deposits:
The primary issue was whether the interest earned by the assessee-appellant on fixed deposit receipts pledged with the bank for availing credit facility for export is to be considered as income from business or income from other sources. The court noted that the interest earned on such deposits had a close link with the business activity of the assessee and should be treated as business income. This view was supported by precedents like Commissioner of Income Tax Vs. Producin P. Ltd. and Commissioner of Income Tax Vs. Indo Aquatics Ltd., where interest earned on deposits made for business necessities was considered business income.

2. Applicability of Section 80HHC and Explanation (baa) to Sub-section (4C):
Section 80HHC of the Income Tax Act, inserted to encourage exports, provides for deductions in respect of profits from export business. Explanation (baa) to sub-section (4C) of Section 80HHC specifies that "profits of the business" should be reduced by ninety percent of any receipt by way of interest, among other things. The court observed that the provisions of Section 80HHC(1) and explanation (baa) operate in different contexts. While Section 80HHC(1) pertains to the exclusion of a percentage of profits in computing total income from export, explanation (baa) deals with the reduction of interest income from the computed profits of the business.

3. Interpretation of "Profits of the Business" and "Derived From":
The court examined whether the interest income could be considered "derived from" the export business, a term which has a narrower meaning compared to "attributable to" business. The court referenced the Supreme Court's decision in Commissioner of Income Tax Vs. Sterling Foods, which discussed the term "derived from." However, it concluded that in the present case, the focus was on the deduction of interest income under explanation (baa) rather than the exclusion of profits derived from export under Section 80HHC(1). The court found that the interest income, being closely linked to the export business, should be treated as business income and thus deductible under explanation (baa).

Conclusion:
The court held that the interest income earned by the assessee-appellant on fixed deposits pledged for availing credit facility for export is deductible from the income computed under the head "profits and gains of business and profession." This deduction is in addition to the permissible deduction under Section 80HHC(1) for computing total income related to export business. The order of the Income Tax Appellate Tribunal dated 28.12.2006 was modified accordingly, and the appeal was allowed to this extent.