1998 (3) TMI 179 - AT - Income Tax

Summary

Issues Involved:
1. Classification of interest on fixed deposits as 'business income' or 'income from other sources'.
2. Inclusion of processing charges in the total turnover for computing the deduction under section 80HHC.

Detailed Analysis:

1. Classification of Interest on Fixed Deposits:
Assessee's Argument:
The assessee contended that the interest on fixed deposits should be classified as 'business income'. The argument was based on the fact that the deposits originated from surplus business funds and were used as collateral for business purposes. The representative cited several case laws, including CIT v. Madras Refineries Ltd. [1997] 228 ITR 354, to support the claim that interest on such deposits should be treated as business income.

Revenue's Argument:
The Revenue argued that the interest should be classified as 'income from other sources'. The departmental representative pointed out that the Assessing Officer had erroneously included the interest in business income, which led to an excess deduction under section 80HHC. Citing the Kerala High Court decision in Collis Line (P.) Ltd. v. ITO [1982] 135 ITR 390 and the Patna High Court decision in Bokaro Steel Ltd. v. CIT (No. 2) [1988] 170 ITR 545, it was argued that interest on term deposits is not income derived from business activities.

Tribunal's Decision:
The Tribunal upheld the Revenue's stance, stating that the interest on fixed deposits should be classified as 'income from other sources'. The Tribunal noted that the direct source of the interest was the bank deposit, not the export business. The Tribunal referenced the Supreme Court's observation in Tuticorin Alkali Chemicals & Fertilisers Ltd. v. CIT [1997] 227 ITR 172, which emphasized that interest income is generally of a revenue nature unless received as damages or compensation. Therefore, the Commissioner was justified in directing the Assessing Officer to exclude the bank interest from business income and treat it as income from other sources.

2. Inclusion of Processing Charges in Total Turnover:
Assessee's Argument:
The assessee argued that processing charges should not be included in the total turnover for computing the deduction under section 80HHC. The representative cited the Supreme Court decision in McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148, which defined 'turnover' as the total amount set out in the bill of sale for goods. The representative also referenced Circular No. 564 issued by the Central Board on 5-7-1990, which clarified that domestic turnover consists only of the sale of goods or merchandise.

Revenue's Argument:
The Revenue contended that processing charges should be included in the total turnover as they were part of the business profit. The departmental representative argued that excluding processing charges from the total turnover while including them in business profits would distort the computation of export profits eligible for deduction under section 80HHC.

Tribunal's Decision:
The Tribunal modified the Commissioner's order, directing the Assessing Officer to exclude processing charges from both the profits of the business and the total turnover. The Tribunal referenced the Pune Bench decision in Salgaocar Mining Industries Ltd. v. Dy. CIT [1997] 61 ITD 105 and the Bombay Bench decision in Nathani Steels Ltd. v. Dy. CIT [1996] 57 ITD 584, which held that service charges and commissions not connected to the sale of goods should not be included in the turnover. The Tribunal emphasized that it is only the profits from exports that should be considered for the deduction under section 80HHC.

Conclusion:
The appeal was partly allowed. The Tribunal upheld the classification of interest on fixed deposits as 'income from other sources' and directed the exclusion of processing charges from both the profits of the business and the total turnover for computing the deduction under section 80HHC. The Tribunal ensured that the assessee would not be in a worse position regarding the computation of the deduction under section 80HHC after giving effect to this order.