2002 (3) TMI 200 - AT - Income Tax

Summary

Issues Involved:
1. Inclusion of interest on Fixed Deposits (FDs) for deduction u/s 80HH.
2. Netting of interest for the purpose of exclusion under section 80HH.

Summary:

Issue 1: Inclusion of Interest on FDs for Deduction u/s 80HH
The primary issue in this case was whether the interest on Fixed Deposits (FDs) amounting to Rs. 5,71,689 should be included in the computation of deduction u/s 80HH. The Assessing Officer and the CIT(A) excluded this interest income on the ground that it was not derived from the Industrial Undertaking. The Tribunal upheld this view, emphasizing that the expression "derived from" should be construed narrowly. The Tribunal relied on various judicial precedents, including the Supreme Court's interpretation in Sterling Foods and Pandian Chemicals Ltd., which held that the direct and immediate source of income must be the Industrial Undertaking itself, not any other source like bank deposits. The Tribunal concluded that interest on FDs, even if used as security for cash credit facilities, does not fulfill the requirement of being directly derived from the Industrial Undertaking.

Issue 2: Netting of Interest for the Purpose of Exclusion u/s 80HH
The assessee raised an additional ground, arguing that if the interest on FDs is to be excluded, then only the net interest (gross interest minus interest expenditure) should be excluded. The Tribunal rejected this alternative contention, stating that since the interest income is to be treated as "income from other sources," there is no justification for netting interest expenditure against it. The Tribunal cited Tuticorin Alkali Chemicals & Fertilizers Ltd. and other judicial precedents to support this view. The Tribunal also noted that the assessee failed to provide evidence that borrowed funds were used for making the deposits, which would have justified netting under section 57(iii).

Conclusion:
The appeal of the assessee was dismissed, affirming that the interest income on FDs does not qualify for deduction u/s 80HH and rejecting the claim for netting of interest.