2005 (5) TMI 241 - AT - Income Tax

Summary

Issues Involved:
1. Classification of interest income from FDRs as business income or income from other sources.
2. Applicability of clause (baa) of Explanation to Section 80HHC for computing deduction.
3. Proportionate expenses for earning interest income and its impact on export profits.

Issue-wise Detailed Analysis:

1. Classification of Interest Income:
The primary issue was whether the interest income from Fixed Deposit Receipts (FDRs) should be classified as business income or income from other sources. The assessee had credited interest from banks amounting to Rs. 59,66,540 on FDRs to the Profit & Loss account and reduced 90% of this interest for computing the deduction under Section 80HHC as per Explanation (baa). The Assessing Officer (AO) treated this interest as income from other sources, thereby reducing the deduction under Section 80HHC from Rs. 2.23 crores to Rs. 2.17 crores. The CIT(A) upheld the AO's decision, stating that the remaining 10% of the interest was not to be considered for the deduction under Section 80HHC since it was not business profit.

2. Applicability of Clause (baa) of Explanation to Section 80HHC:
The assessee argued that clause (baa) of Explanation to Section 80HHC refers to the nature of receipts such as brokerage, commission, and interest, and does not specify that these receipts should only be from business profits. They cited judgments from the jurisdictional High Court in the cases of Rani Paliwal vs. CIT and Liberty Footwear Co. vs. CIT, which supported the reduction of 90% of the gross amount of interest for computing the deduction under Section 80HHC. However, the Tribunal noted that the interest earned on surplus funds did not have a direct or immediate nexus with the export business of the assessee and thus could not be considered as profit derived from the export of goods. This view was supported by the Supreme Court judgment in Pandian Chemicals Ltd. vs. CIT.

3. Proportionate Expenses for Earning Interest Income:
The Tribunal recognized that the assessee had maintained a single Profit & Loss account where all expenses related to the business, including those related to earning interest income, were debited. It was deemed unfair to deny the deduction of proportionate expenses necessary for earning such interest income even if it was taxed under the head "Income from other sources." The rationale for reducing 90% of such receipts and considering 10% as forming part of the business profit was to account for the expenses incurred in earning such income. This view was supported by the Tribunal's decision in Hero Exports (P) Ltd. vs. Asstt. CIT and the Special Bench decision in Surendra Engg. Corpn. vs. Asstt. CIT. The Tribunal concluded that 10% of the interest receipts should be attributed to the expenses for earning such income, which would result in an increase in export profits entitled to deduction under Section 80HHC.

Conclusion:
The Tribunal set aside the order of the CIT(A) and directed the AO to allow the deduction under Section 80HHC as claimed by the assessee. The appeal of the assessee was allowed, recognizing that even if the interest income was taxable under the head "Income from other sources," the quantum of deduction under Section 80HHC would not be affected.