1998 (7) TMI 116 - AT - Income Tax

Summary

Issues Involved:
1. Classification of interest income on deposits.
2. Eligibility for deduction under section 80HHC of the IT Act.

Detailed Analysis:

1. Classification of Interest Income on Deposits:

The assessee, a private limited company engaged in the manufacture of spice oils and other products, filed returns for the assessment years 1991-92 and 1992-93. The primary issue was whether the interest income on deposits should be classified under 'business income' or 'other sources'. The assessee initially reported the interest income under 'other sources' but later revised the returns to classify it under 'business income' to claim deductions under section 80HHC.

The Assessing Officer (AO) and the CIT(A) held that the interest on deposits with banks and other institutions should be assessed under 'other sources'. The assessee argued that the interest income was part of the business income as the deposits were made from the working capital not immediately required for business purposes. The Tribunal examined the nature of the deposits and found that they were made from surplus funds and not as part of the business operations. The Tribunal referred to the Kerala High Court's decision in Collis Line (P) Ltd. vs. ITO, which held that interest on bank deposits is assessable under 'other sources' if the deposits were made from idle funds not immediately required for business.

2. Eligibility for Deduction under Section 80HHC:

The assessee claimed deductions under section 80HHC on the interest income, arguing that it was part of the business income derived from export activities. The Tribunal noted that section 80HHC allows deductions on profits derived from the export of goods or merchandise. The Supreme Court in Cambay Electric Supply Industrial Co. Ltd. vs. CIT clarified that the term 'derived from' has a narrow meaning, implying a direct nexus between the income and the business activity.

The Tribunal also referred to the Kerala High Court's decision in CIT vs. Cochin Refineries Ltd., which held that interest income from deposits does not qualify as business income for deductions under section 80HHC. The Tribunal concluded that the interest income, being from surplus funds and not directly from export activities, does not qualify for deductions under section 80HHC.

The Tribunal dismissed the appeals filed by the assessee for both assessment years, affirming the classification of interest income under 'other sources' and denying the deductions under section 80HHC.