2019 (8) TMI 361 - HC - Income Tax

Deduction u/s 80HHC - whether interest income assessed as business income is to be excluded from the 'profits and gains of business for purposes of Section 80HHC and if so whether the gross or net interest is excludable? - HELD THAT - The bank from which the assessee availed loans for their export business, in no uncertain terms had mentioned that from and out of the export sale proceeds, they (bank) would divert some of it upon realisation of the sale proceeds towards Fixed Deposits in the name of the assessee being additional security for the loans. Thus, it is seen that the conversion of a portion of the export sale proceeds on realisation as Fixed Deposits was not on the volition of the assessee, but by a unilateral act of the bank over which, the assessee had no control. Furthermore, the bank had made it explicitly clear that the Fixed Deposits are created for being treated as additional security for the loans availed by the assessee. The Revenue does not dispute the fact that the loans availed by the assessee was for their export business. In such circumstances, there can be no dispute to the fact that these receipts have a direct and immediate nexus to the activity of export done by the assessee and in such circumstances, the said income is not deductible from the said profits of business. The Revenue cannot dispute the immediate nexus between the activity of export and the creation of Fixed Deposits to be retained by the bank as additional security towards the loan availed for the export business. Fixed Deposits have been created by the bank themselves by carving out a portion of the export sale proceeds on realisation and retaining them as Fixed Deposits in the name of the assessee to be retained by the bank as additional security for the loan availed by the assessee for their export business. As mentioned earlier, the conversion of a portion of the sale proceeds as Fixed Deposits was done by the bank themselves and not on the volition of the assessee. Therefore, we are fully convinced that the transaction was connected and closely linked with the assessee's business activity. Tribunal erred in dismissing the assessee's appeal.

Issues Involved:
1. Inclusion of sales tax and excise duty in total turnover for Section 80HHC computation.
2. Netting of interest receipts and interest payments for Section 80HHC deduction.
3. Treatment of DEPB sale proceeds under Section 80HHC.
4. Whether interest income assessed as business income should be excluded from "profits and gains of business" for Section 80HHC and whether gross or net interest is excludable.

Issue-wise Detailed Analysis:

1. Inclusion of Sales Tax and Excise Duty in Total Turnover:
The assessee contended that sales tax and excise duty should not be included in the total turnover for computing the deduction under Section 80HHC of the Income-tax Act, 1961. The CIT(A) ruled in favor of the assessee, agreeing that these components should not be included in the total turnover for the purposes of Section 80HHC.

2. Netting of Interest Receipts and Interest Payments:
The assessee argued that the Assessing Officer (AO) erred in not netting the interest receipts against interest payments, especially since both had a nexus with the export activity. The CIT(A) rejected this contention, applying the decision in CIT vs. Chinnapandi, which did not favor netting interest receipts and payments for Section 80HHC computation.

3. Treatment of DEPB Sale Proceeds:
The assessee challenged the AO's decision to adopt the entire sale proceeds of DEPB under sub-Section (baa) to Explanation to Section 80HHC. The CIT(A) sided with the assessee, directing the AO to modify the computation accordingly, which was a favorable outcome for the assessee.

4. Exclusion of Interest Income from "Profits and Gains of Business":
The primary issue on appeal was whether the Tribunal was correct in holding that interest income assessed as business income should be excluded from "profits and gains of business" for Section 80HHC purposes and whether gross or net interest should be excludable.

The assessee argued that the interest earned had a direct nexus with the business and should be treated as business income. They cited various cases to support their position, including CIT vs. A.S.Nizar Ahmed & Co., where it was held that interest with a link to export business should be netted. The Tribunal, however, applied the decision in Dollar Apparels vs. ITO, stating that interest on deposits bears no nexus with export earnings and is not entitled to special deduction under Section 80HHC.

The High Court examined precedents, including Bangalore Clothing Co., Motor Industries Co. Ltd., and Aurobindo Pharma Ltd., which highlighted that the nature of the income and its nexus with the business activity must be considered. The Court noted that the bank, from which the assessee availed loans for export business, unilaterally converted a portion of the export sale proceeds into Fixed Deposits as additional security for the loans. This action was not voluntary by the assessee but mandated by the bank, establishing a direct and immediate nexus between the interest income and the export activity.

The Court concluded that the interest income had a direct nexus with the export business and should not be excluded from the "profits and gains of business" for Section 80HHC purposes. The Tribunal's decision to exclude this income was deemed erroneous.

Conclusion:
The appeal filed by the assessee was allowed, with the substantial question of law answered in favor of the assessee. The Court held that the interest income, having a direct nexus with the export activity, should be included in the "profits and gains of business" for Section 80HHC purposes, and the Tribunal erred in its judgment. No costs were awarded.

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