2007 (6) TMI 242 - AT - Income Tax

Issues Involved:
1. Application of Provisions of Section 145 and Gross Profit Rate
2. Treatment of Interest on FDRs as 'Income from Other Sources'
3. Exclusion of Duty Difference and FDR Interest from Eligible Business Income under Section 80-IB
4. Reduction of Deduction under Section 80HHC by the Amount of Deduction under Section 80-IB

Issue-wise Detailed Analysis:

1. Application of Provisions of Section 145 and Gross Profit Rate:
The assessee contested the application of provisions of Section 145 and the gross profit (G.P.) rate applied by the Assessing Officer (AO). The AO observed discrepancies in the reconciliation of raw materials and finished goods, leading to the rejection of the books of account. The AO applied a G.P. rate of 27.3% compared to the 22% declared by the assessee, resulting in a trading addition. The CIT(A) accepted the rejection of books but applied a G.P. rate of 22.5%, providing partial relief. Upon review, it was found that the assessee maintained comprehensive records and adhered to EXIM policy norms, which were verified by independent authorities. The Tribunal concluded that the AO's rejection of the books and the application of a higher G.P. rate were unjustified, leading to the deletion of the trading addition.

2. Treatment of Interest on FDRs as 'Income from Other Sources':
The assessee argued that interest on FDRs should be treated as business income since the FDRs were kept as margin money for availing overdraft facilities used in the export business. However, the AO and CIT(A) treated the interest as 'Income from Other Sources' and did not allow netting against interest paid on loans. The Tribunal upheld this treatment, referencing the Supreme Court decision in CIT vs. Dr. V.P. Gopinathan, which established that interest on FDRs is not business income and cannot be netted against business expenditure.

3. Exclusion of Duty Difference and FDR Interest from Eligible Business Income under Section 80-IB:
The AO excluded the value of duty difference and interest on FDRs from the eligible business income for calculating deduction under Section 80-IB, reducing the deduction claimed by the assessee. The CIT(A) confirmed this action. The Tribunal, however, found that the duty difference was part of the direct cost of the business and should not be excluded from the eligible business income. The Tribunal directed the AO to treat the duty difference as part of the direct cost and allow the deduction under Section 80-IB as claimed by the assessee. The interest on FDRs was correctly treated as 'Income from Other Sources.'

4. Reduction of Deduction under Section 80HHC by the Amount of Deduction under Section 80-IB:
The AO first allowed the deduction under Section 80-IB and then reduced the deduction under Section 80HHC by the amount of the Section 80-IB deduction. The CIT(A) upheld this approach. The assessee argued that deductions under Sections 80HHC and 80-IB should be computed independently. The Tribunal agreed, noting that Section 80AB, which has an overriding effect on Chapter VI-A, supports the independent computation of deductions. The Tribunal directed the AO to allow the deduction under Section 80HHC on the full profit without reducing it by the Section 80-IB deduction, ensuring the total deductions do not exceed the business profits.

Conclusion:
The Tribunal allowed the assessee's appeal in part, reversing the rejection of the books of account and the application of a higher G.P. rate, and directed the AO to treat the duty difference as part of the direct cost for Section 80-IB deduction. The treatment of interest on FDRs as 'Income from Other Sources' was upheld. The Tribunal also directed the AO to compute the deductions under Sections 80HHC and 80-IB independently. The Revenue's appeal was dismissed.

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