2001 (1) TMI 220 - AT - Income Tax

Summary

Issues Involved:
1. Restriction of deduction under Section 80HHC of the IT Act, 1961.
2. Exclusion of interest and dividend income from "Business Income" for deduction under Section 80HHC.
3. Rejection of claim for deduction of loss due to foreign exchange fluctuations under Section 43A of the IT Act, 1961.
4. Classification of amount received on surrender of tenancy rights under Section 10(3) of the IT Act, 1961.

Issue-wise Detailed Analysis:

1. Restriction of Deduction under Section 80HHC:
The assessee appealed against the CIT(A)'s order confirming the AO's action of restricting the deduction under Section 80HHC to Rs. 12,04,575 against the claimed Rs. 46,93,152. The AO had excluded income from bank interest, interest on income-tax refund, and dividends, totaling Rs. 76.85 lakhs, from the "Business Income" for computing the deduction. The Tribunal upheld the AO's action, stating that such income was not "derived from" the export of goods or merchandise, as required by Section 80HHC, and was thus not eligible for the deduction.

2. Exclusion of Interest and Dividend Income from "Business Income":
The Tribunal considered the nature of the interest income and dividend income. It held that:
- Interest on short-term deposits of surplus funds is not directly derived from the export business and is assessable under "other sources."
- Interest on income-tax refund is not business income and cannot be considered as profit derived from exports.
- Dividend income, even if the investment was made to safeguard business interests, is assessable under "other sources" and not as business income derived from exports.
The Tribunal rejected the plea for netting off interest receipts against interest payments due to lack of a direct nexus between the borrowed funds and the funds deposited in FDs.

3. Rejection of Claim for Deduction of Loss due to Foreign Exchange Fluctuations:
The assessee claimed a deduction of Rs. 5,39,893 for loss due to foreign exchange fluctuations on a loan taken for investment in a German company. The AO and CIT(A) disallowed this, treating the loss as capital in nature. The Tribunal, however, allowed the claim, noting that:
- The investment was regarded as a business asset in earlier assessments.
- Losses on foreign exchange fluctuations had been consistently allowed as revenue losses in prior years.
- The rule of consistency and absence of new facts warranted the allowance of the claim.

4. Classification of Amount Received on Surrender of Tenancy Rights:
The AO classified the amount of Rs. 6,83,017 received on surrender of tenancy rights as a casual and non-recurring receipt under Section 10(3), making it taxable. The Tribunal, following precedent and the Special Bench decision in J.C. Chandiok vs. Dy. CIT, held that such receipts are capital in nature and not liable to tax. Consequently, the addition was deleted.

Conclusion:
The appeal was partly allowed. The Tribunal upheld the restriction of deduction under Section 80HHC and the exclusion of interest and dividend income from "Business Income" for the deduction. However, it allowed the deduction for the loss due to foreign exchange fluctuations and deleted the addition of the amount received on surrender of tenancy rights.