2018 (12) TMI 463 - HC - Income Tax

Deduction u/s 80HHC - interest income in toto forms part of eligible business profits for the purpose of deduction u/s 80HHC and only 90% has to be excluded from the business profits - whether the deposits made by the assessee with the banks had an immediate nexus with the business? - Held that - The matter requires a fresh adjudication and a fresh look by the AO by thoroughly examining the factual position and bearing in mind the legal position pointed out in the preceding paragraphs. During the course of such proceedings it is open to the assessee to place all their submissions including the submission based on the decision in the case of ACG Associated Capsules (P) Ltd. 2012 (2) TMI 101 - SUPREME COURT OF INDIA . The appeal filed by the Revenue is allowed, the order passed by the Tribunal as well as the CIT(A) are set aside, the assessment order dated 31.01.2006, on this particular head alone namely, the entitlement for deduction under Section 80HHC is set aside and the matter is remanded to the Assessing Officer for a fresh consideration to proceed in accordance with law in the manner indicated above.

Summary

Issues:
Interpretation of Section 80HHC of the Income Tax Act for deduction eligibility based on interest income.

Analysis:
The High Court of Madras heard an appeal filed by the Revenue against the order of the Income Tax Appellate Tribunal regarding the Assessment year 2003-04. The main issue was whether the interest income should be considered as part of eligible business profits for deduction under Section 80HHC, with only 90% to be excluded. The Commissioner of Income Tax (Appeals) had allowed the assessee's appeal, stating that the interest income was related to business activities and thus only 90% should be excluded. The Tribunal upheld this decision, citing relevant case law. However, the High Court found that the CIT(A) did not assess whether the bank deposits were exclusively for obtaining Letter of Credit, a crucial business requirement.

The Court referred to a previous case involving similar facts and concluded that the income from deposits should not be claimed as a deduction if it was merely incidental and not the primary purpose of the business activity. The Court highlighted the need for a full assessment of facts, which were lacking in the current case. The Revenue argued that the interest earned on fixed deposits for credit facilities should be treated as income from other sources, not business income, based on decisions from the Delhi High Court. The Court determined that a fresh adjudication by the Assessing Officer was necessary to re-examine the factual and legal aspects of the case.

The respondent requested that only 90% of the net interest included in profits should be considered for deduction, relying on a Supreme Court decision. The High Court allowed the Revenue's appeal, setting aside the Tribunal and CIT(A) orders, and remanded the matter to the Assessing Officer for a fresh consideration in accordance with the law. The Court emphasized the need for a thorough examination of facts and legal positions, allowing the assessee to present all submissions, including those based on relevant case law.

In conclusion, the judgment focused on the interpretation of Section 80HHC regarding the treatment of interest income for deduction eligibility, emphasizing the importance of a detailed assessment of facts and legal principles in determining the tax implications for the assessee.