2005 (12) TMI 221 - AT - Income Tax

Deduction u/s 80HHC in respect of interest income - Interest income from fixed deposit receipts placed as margin money with the bank for the purpose of availing various credit facilities - Taxability of interest income under the head Income from other sources or 'business' - HELD THAT - The source of the interest no doubt continues to be the fixed deposit, but since the fixed deposit, which was either to be treated as pure investment, became converted into an asset utilization for the purpose of the business, which became a commercial asset, and therefore, the interest became taxable as 'business income'. It would be too simplistic a view, to tell that even after the conversion of the fixed deposit (investment) into a commercial asset which was put to use for the purpose of facilitating the assessee's business, the source of the interest still continues to be the investment and not the commercial asset. The characteristic of the asset had changed and the change cannot be ignored while examining the nature of the interest income. We, therefore, hold that the interest income is liable to be assessed as 'business income'. In the result, the grounds are allowed. Deduction u/s. 80HHC in respect of DEPB and DFRC - The DEPB is issued as an optional facility for exporters who do not wish to go through the licensing route. The objects of the DEPB scheme 'is to neutralize incidence of customs duty on the import content of the export product. The neutralization shall be provided by way of grant of duty credit, against the export product'. The credit is given as a percentage of the FOB value of exports made in freely convertible currency. The credit is available against export products and at such rates as may be specified by way of public notice, for import of raw material, intermediates, components, etc. The DEPB is freely transferable subject to the condition that it shall be for import at the port specified by the DEPB, which shall be the port from where exports have been made. The conditions of issue of DFRC and DEPB show that the immediate source of these two receipts is the actual exports of goods out of the country. No person other than an exporter would be eligible for these two receipts. The immediate source of DEPB and DFRC is, therefore, the exports made by the assessee and in that view of the matter, the ratio laid down by the Supreme Court in the case of Hindustan Lever Ltd. vs. CIT 1997 (9) TMI 7 - SUPREME COURT , is also fully satisfied in the sense that the immediate source of the DEPB and DFRC is the exports made by the assessee. Thus, we hold that the assessee is entitled to deduction u/s. 80HHC in respect of DEPB and DFRC. The ground is allowed.

Summary

Issues:
1. Assessment of interest income under the head "Income from other sources" vs. "business income" and corresponding deduction under s. 80HHC.
2. Treatment of DEPB and DFRC receipts for deduction under s. 80HHC.
3. Disallowance of monies paid to the Customs Department.
4. Disallowance of vehicle expenses.
5. Levy of interest under ss. 234B and 234C.

Assessment of Interest Income:
The appeal involved the assessment of interest income of Rs. 5,10,008 under the head "Income from other sources" instead of "business income" by the IT authorities. The assessee contended that the interest income should be assessed under the head "business" and claimed deduction under s. 80HHC. The ITAT held that since the interest was derived from fixed deposit receipts utilized as margin money for credit facilities, it was linked to the business activities. The interest was considered as "business income" eligible for deduction under s. 80HHC, excluding 90% of the interest amount for computing the deduction.

Treatment of DEPB and DFRC Receipts:
The IT authorities treated DEPB and DFRC receipts as business receipts under s. 28(iv) of the Act, denying deduction under s. 80HHC. The assessee argued that the DEPB receipts should be eligible for deduction under s. 80HHC based on a Tribunal order. The ITAT analyzed the nature of DEPB and DFRC receipts, concluding that they were directly linked to export activities, making them eligible for deduction under s. 80HHC. The ITAT directed the AO to allow the deduction for DEPB and DFRC receipts.

Disallowance of Monies Paid to Customs Department and Vehicle Expenses:
The ITAT dismissed the disallowance of monies paid to the Customs Department as not pressed. Regarding the disallowance of 20% of vehicle expenses, the ITAT upheld the disallowance in principle but reduced it to 10% due to potential personal use of vehicles, partially allowing the ground.

Levy of Interest under ss. 234B and 234C:
The ITAT found that interest was mechanically charged under ss. 234B and 234C without reasons provided in the assessment order. Following a Tribunal decision, the ITAT directed the AO to afford the assessee an opportunity before charging interest and provide adequate reasons. The appeal was partly allowed based on these findings.