1995 (3) TMI 133 - AT - Income Tax

Assessing Officer, Assessment Order, Business Income, Carrying On Business, Fixed Deposit, Interest Income, Other Sources

Summary

Issues:
- Assessment of interest income under section 80HHC
- Correctness of treating interest income as business income
- Validity of deduction under section 80HHC

Analysis:

The judgment by the ITAT Calcutta-A involved an appeal by an assessee against an order passed by the CIT under section 263 of the Income-tax Act. The assessee, a partnership firm engaged in the export of hosiery goods and knitting, claimed deduction under section 80HHC for interest income on fixed deposits with banks. The CIT contended that the interest income should be taxable under "Other sources" and not as business income, leading to a proposed revision of the assessment order.

The assessee argued that the interest income was integral to its business activities, as the fixed deposits were made as security for obtaining loans, and therefore, should be considered business income eligible for deduction under section 80HHC. The CIT, however, disagreed, stating that the intention behind the fixed deposits was not solely for security purposes but also for earning interest. The CIT directed the Assessing Officer to recalculate the deduction after assessing the interest income under "Other sources."

The ITAT, after considering the contentions, found in favor of the assessee. It observed that the interest income from fixed deposits, made as security for obtaining credit facilities, should be viewed as part of the business activities and taxed under the head "Business." The ITAT referred to a judgment by the Calcutta High Court supporting the treatment of interest arising from the utilization of commercial assets as business income. It emphasized that the link between fixed deposits and business activities justified treating the interest as business income under section 80HHC.

The ITAT distinguished the cases cited by the department, where interest on deposits was not considered business income due to the absence of business operations. In contrast, the present case involved an established business engaged in local and export activities, with fixed deposits offered as security for loans. The ITAT concluded that the CIT's view was not sustainable, as the interest income was sufficiently linked to the business activities, warranting the allowance of deduction under section 80HHC.

Ultimately, the ITAT set aside the CIT's order, upholding the Assessing Officer's decision to grant the deduction under section 80HHC. It ruled that the Assessing Officer's actions were not erroneous or prejudicial to revenue interests, thereby allowing the appeal in favor of the assessee.