2005 (9) TMI 243 - AT - Income Tax

Summary

Issues Involved:
1. Whether the CIT(A) erred in directing the Assessing Officer to treat 10% of the interest income as business income for allowing deduction under section 80HHC of the Income-tax Act.
2. Whether the CIT(A)'s order is erroneous in law and on facts, and if the order of DC(A) should be restored.

Detailed Analysis:

Issue 1: Treatment of Interest Income for Deduction under Section 80HHC

Facts:
The assessee claimed deduction under section 80HHC for the assessment years 1992-93 and 1993-94. For the year 1992-93, the assessee excluded 90% of miscellaneous income, including interest and rent, while computing the deduction. For the year 1993-94, the assessee earned interest on bank FDRs and deducted 90% of net miscellaneous income while computing the deduction. The Assessing Officer (AO) disagreed, stating that the gross amount of interest should be considered for computing the deduction and treated the entire interest income as "Income from other sources."

CIT(A) Decision:
The CIT(A) reversed the AO's decision based on the 'principle of consistency,' directing the AO to include net interest income instead of gross interest income while computing the deduction under section 80HHC.

Revenue's Argument:
The revenue argued that the CIT(A) erred in directing the AO to include only net interest income. The CIT(A) followed past history and ignored the legal position.

Assessee's Argument:
The assessee contended that net interest income was rightly shown and there was no point in computing deduction based on gross interest. The assessee relied on the decision in Honda Siel Powers Products Ltd. v. Dy. CIT.

Tribunal's Analysis:
- The Tribunal noted that the AO treated the gross interest income as "Business income" but excluded 90% of it for computing deduction under section 80HHC.
- Section 80HHC(1) provides deduction for profits derived from export. Explanation (baa) below sub-section (4B) defines "profits of the business" and requires excluding 90% of interest income included in such profits.
- The Tribunal emphasized that if interest income falls under "Income from other sources," it should not be included in "profits of the business."
- The Tribunal rejected the netting principle, stating that unless the funds were borrowed specifically for purchasing FDRs, netting is not applicable.
- The Tribunal cited the Supreme Court's decision in CIT v. Dr. V.P. Gopinathan, holding that interest received cannot be diminished by interest paid unless law permits such diminution.
- The Tribunal concluded that the CIT(A) erred in overturning the AO's action for the year 1992-93 and allowed the revenue's appeal.

Issue 2: Erroneous Order and Restoration of DC(A)'s Order

Facts:
For the year 1993-94, the AO treated the entire interest earned on FDRs as "Income from other sources" and disallowed the deduction under section 80HHC. The CIT(A) reversed this decision.

Revenue's Argument:
The revenue argued that the AO rightly treated the interest as "Income from other sources" because the assessee invested surplus funds in FDRs. The revenue relied on the Supreme Court's decision in Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT.

Assessee's Argument:
The assessee contended that the AO did not separately include interest on FDRs under "Income from other sources" while computing total income, so it should not be treated as such for computing deduction under section 80HHC.

Tribunal's Analysis:
- The Tribunal noted that the AO held the interest income as "Income from other sources" and excluded it from "profits of the business" for computing deduction under section 80HHC.
- The Tribunal cited various High Court decisions, including Collis Line (P.) Ltd. v. ITO and South India Shipping Corpn. Ltd. v. CIT, which held that interest on bank deposits should be assessed as "Income from other sources."
- The Tribunal concluded that the interest earned on FDRs was rightly taken by the AO as "Income from other sources" and excluded from "profits of the business" for computing deduction under section 80HHC.
- The Tribunal reversed the CIT(A)'s action for the year 1993-94 and allowed the revenue's appeal.

Separate Judgment by Judicial Member K.C. Singhal:
- K.C. Singhal disagreed with the conclusions that the word 'receipts' in clause (baa) of Explanation below section 80HHC(4B) means gross receipts and that interest on deposits with the bank cannot be netted against interest paid.
- He argued that the word 'receipts' should be construed in the context and that it is the net receipt that should be deducted.
- He cited various Tribunal decisions supporting the netting principle and concluded that netting should be allowed if interest paid and received are linked with the business activity.
- He agreed with the CIT(A)'s decision for the year 1992-93 but concurred with the majority for the year 1993-94.

Third Member Decision:
- The Third Member agreed with the Judicial Member's view that the profits of the business as defined in Explanation (baa) below section 80HHC refer to net interest.
- The Third Member followed the Special Bench decision in Lalsons Enterprises v. Dy. CIT, which held that only 90% of net interest after set off of interest paid can be reduced from business profit.

Conclusion:
- The appeals for both assessment years were allowed by the majority, with the Third Member concurring with the Judicial Member for the year 1992-93 and the majority for the year 1993-94.