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2005 (11) TMI 221 - AT - Income TaxDeduction u/s 80HHC and 80-I - Profits of the Business - Industrial undertaking - Computation of total turnover - Can interest received from money lending business would be part of local turnover for the purpose of deduction u/s 80HHC - Deduction u/s 80-IA - Duty drawback - Exchange rate fluctuation. HELD THAT - In our view the case is like insurance companies where the main activity is insurance business and income arising therefrom is invested in short-term deposits with the banks so as to earn maximum income. In assessee's case also whenever surplus funds were available with the assessee the same were parked in banks by way of short-term fixed deposits to earn higher rate of interest rather than keeping the money idle in the safe or in any other account without earning any interest or interest at lower rate. Hon'ble Supreme Court in the case of CIT vs. Cocanada Radhaswami Bank Ltd. 1965 (4) TMI 11 - SUPREME COURT , held that for the purpose of computation of income the interest on securities separately classified, income by way of interest from such securities does not cease to be part of income from business income if the securities are part of trading assets. In the absence of separate books of account, it is impossible to identify whether funds of moneylending business are invested in export business or vice versa. Therefore, funds of both the businesses are inter-twined, intermingled and interlaced with each other. The AO has himself treated the interest received on fixed deposits as income from business. Therefore, the fixed deposits are to be treated as stock-in-trade and consequently the interest received from fixed deposits has to be treated as profits and gains of business or profession. As we have held that interest from fixed deposits is to be assessed under the head Profits and gains of business or profession , therefore, provisions of Expln. (baa) in s. 80HHC would not be applicable. Whether assessee will be entitled for deduction u/s 80-I of the Act for asst. yr. 1991-92 in respect of income received earned by the assessee - Under s. 80-I any profit and gains derived from an industrial undertaking shall be allowed deduction at specified rate in computing the assessee's total income. Hon'ble Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. vs. CIT 1978 (4) TMI 1 - SUPREME COURT held that the expression derived from is narrower than the expression attributable to . The income eligible for deduction u/s. 80-I must have direct nexus with the industrial activities of the assessee and hence interest income earned by assessee from moneylending business, though is in the nature of business income cannot be said to have direct nexus with the industrial activities of the assessee. Consequently, the assessee will not be entitled for deduction u/s 80-I of the Act on interest income earned by the assessee from moneylending business. In the result, the Revenue's appeal for asst. yr. 1991-92 is partly allowed. Deduction u/s 80-IA - Duty drawback - Since the issue relating to deduction u/s 80-IA in respect of money tending business is not contained in the grounds of appeal and no additional ground has been raised, we reject the plea of the assessee. However, we are unable to agree with the assessee that deduction u/s 80-IA is available in respect of any business on the ground that s. 80-IA(1) is an enabling section whereas sub-s. (5) of s. 80-IA is machinery section which deals with the computation of deduction under this section. sub-s. (5)(i)(a) talks about the deduction at specified rate in respect of profits and gains derived from such industrial undertaking. In the machinery section the expression any business has not been used. Accordingly, the provisions of ss. 80-IA(1) and 80-IA(5) are to be interpreted harmoniously and would mean that assessee will be eligible for deduction in respect of such income which are derived from industrial undertaking. It is clear that if duty drawback is received by way of export incentive, it cannot be said to have been derived from industrial activities of the assessee. However, when excise duty/import duty is refunded in the name of duty drawback under the Central Excise Act/Customs Act, the same is to be treated as directly or inextricably linked with the industrial activities of the assessee. Hon'ble Madras High Court in the case of CIT vs. Madras Motors/M.M. Forgings Ltd. 2002 (3) TMI 10 - MADRAS HIGH COURT has held that the assessee will be eligible for deduction u/s 80HH of the Act in respect of Modvat credit which is similar to duty drawback. The assessee in this situation will be eligible for deduction u/s 80-IA of the Act. We accordingly direct the AO to verify the fact whether the assessee has received duty drawback under the Central Excise Act or as export incentive under the scheme announced by the Government. Exchange rate fluctuation - It is nothing but part of trading receipts. The assessee makes the sales in foreign currency. The realisation thereof on receipt of such sale proceeds may result in a gain attributable to exchange rate fluctuation. Therefore, the amount received on account of foreign exchange fluctuation will be in the nature of trading receipt and the assessee will be eligible for deduction u/s 80-IA in respect of foreign exchange rate fluctuation since it has direct nexus with the industrial activities of the assessee. In the result, the assessee's appeals for asst. yrs. 1997-98 and 1998-99 are partly allowed.
Issues Involved:
1. Treatment of interest income for deduction under Sections 80HHC and 80-I of the IT Act, 1961. 2. Deduction under Section 80-IA for duty drawback received. 3. Deduction under Section 80-IA for exchange rate fluctuation. Detailed Analysis: 1. Treatment of Interest Income for Deduction under Sections 80HHC and 80-I: The primary issue in the Revenue's appeal for the assessment year 1991-92 was whether the interest received by the assessee should be treated as income from business and thereby eligible for deductions under Sections 80HHC and 80-I of the IT Act, 1961. The assessee had two units: one for the export of ready-made garments and another for moneylending. The interest received from banks on fixed deposits (FDRs) was treated by the AO as income from "other sources" rather than "profits and gains from business." Upon appeal, the CIT(A) directed the AO to treat the interest income as business income, citing a nexus between the invested monies and the interest received. The assessee argued that the funds invested in short-term deposits were part of the moneylending business, which constituted stock-in-trade. The Tribunal agreed, noting that the funds from both the export and moneylending businesses were intermingled, and the idle funds parked in short-term deposits retained their character as stock-in-trade. Therefore, the interest received was to be treated under "profits and gains of business or profession," making it eligible for deduction under Section 80HHC but not under Section 80-I, as the latter requires a direct nexus with industrial activities. 2. Deduction under Section 80-IA for Duty Drawback Received: The second issue was whether the duty drawback received by the assessee was eligible for deduction under Section 80-IA. The AO held that duty drawback and exchange rate fluctuation receipts were not eligible for deduction under Section 80-IA as they did not have a direct nexus with the industrial undertaking. The CIT(A) upheld this view, following the Supreme Court decision in CIT vs. Sterling Foods. The assessee contended that duty drawback reduces the cost of raw materials and is directly linked to the manufacturing process. The Tribunal acknowledged the distinction between duty drawback received as export incentives and as refunds under the Customs and Central Excise Acts. It concluded that duty drawback received as a refund of duties paid on inputs used in manufacturing has a direct nexus with industrial activities and is eligible for deduction under Section 80-IA. The AO was directed to verify whether the duty drawback was received under the statutory provisions or as export incentives. 3. Deduction under Section 80-IA for Exchange Rate Fluctuation: The final issue was whether the exchange rate fluctuation gains were eligible for deduction under Section 80-IA. The assessee argued that these gains were part of the trading receipts, arising from the realization of sale proceeds in foreign currency. The Tribunal agreed, stating that exchange rate fluctuations are directly related to the industrial activities and thus eligible for deduction under Section 80-IA. Conclusion: The Tribunal partly allowed the Revenue's appeals for the assessment years 1991-92, 1997-98, and 1998-99, holding that the interest income from moneylending business is eligible for deduction under Section 80HHC but not under Section 80-I. The assessee's appeals for the assessment years 1997-98 and 1998-99 were also partly allowed, granting deductions under Section 80-IA for duty drawback (subject to verification) and exchange rate fluctuation gains.
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