2003 (9) TMI 284 - AT - Income Tax

Summary

Issues Involved:
1. Whether the discount received from the bank on certificates of deposit is eligible for deduction under Section 80HHC of the Income Tax Act, 1961.
2. Whether the discount received should be treated as "interest" or "any other receipt of a similar nature" under Explanation (baa) of Section 80HHC.

Issue-wise Detailed Analysis:

1. Eligibility of Discount Received for Deduction under Section 80HHC:

The core issue revolves around whether the discount received from the bank on certificates of deposit qualifies for deduction under Section 80HHC. The Assessing Officer (AO) initially disallowed the deduction, contending that the discount is akin to interest and falls within the scope of "any other receipt of a similar nature" as per Explanation (baa) to Section 80HHC. The AO argued that the discount, like interest, is earned on deposits and should be excluded from the profits eligible for deduction.

In contrast, the assessee argued that the discount is not similar to interest and should not be excluded. The CIT(A) had previously ruled in favor of the assessee for the assessment years 1992-93, 1993-94, and 1995-96, stating that the discount is not in the nature of interest and thus should be included in the profits eligible for deduction.

2. Treatment of Discount as "Interest" or "Any Other Receipt of a Similar Nature":

The AO's position was that the discount should be treated as "interest" or at least as "any other receipt of a similar nature," which would require reducing 90% of the discount from the business profits eligible for deduction under Section 80HHC. The AO cited the CBDT circular No. 647, which clarifies that the difference between the issue price and face value of certificates of deposit should be treated as "discount" and not "interest." However, the AO argued that this clarification was limited to the context of Section 194A (TDS provisions) and did not alter the fundamental nature of the receipt.

The CIT(A) disagreed with the AO, holding that the discount does not fall under "any other receipt of a similar nature" as per Explanation (baa). The CIT(A) referenced the clarification by the Bombay Chartered Accountants Society and concluded that the discount received on certificates of deposit is not similar to interest, commission, or brokerage and thus should not be excluded from the profits eligible for deduction.

Tribunal's Findings:

The Tribunal considered the arguments from both sides and reviewed the relevant provisions of Explanation (baa) of Section 80HHC, which defines "profits of the business" for the purpose of the deduction. The Tribunal noted that the discount on certificates of deposit is not explicitly covered by the terms "brokerage, commission, interest, rent, charges, or any other receipt of a similar nature."

The Tribunal emphasized that the expression "any other receipt of a similar nature" should be interpreted in the context of the specified terms. Since the discount on certificates of deposit does not share the characteristics of the specified terms and is directly related to the assessee's business activities, it should not be excluded from the profits eligible for deduction.

The Tribunal also referenced various judicial pronouncements, including the decision of the Hon'ble Calcutta High Court in CIT vs. Tirupati Woollen Mills Ltd. and the Bombay High Court in CIT vs. Bangalore Clothing Co., which supported the view that income arising from the utilization of business funds, even if temporarily surplus, should be treated as business income.

Conclusion:

The Tribunal upheld the CIT(A)'s decision, confirming that the discount received from the bank on certificates of deposit is not in the nature of interest or any other receipt of a similar nature under Explanation (baa) to Section 80HHC. Therefore, the discount should be included in the profits eligible for deduction under Section 80HHC. The appeal of the Revenue was dismissed.