2012 (12) TMI 750 - AT - Income Tax

Interest Income Business Income v/s Income from Other Sources Held that - There is no direct nexus between interest income and income derived out of exports therefore the lower authorities are justified in treating the interest income as income from other sources - This common ground is accordingly dismissed. Rent received from its employees against allotting them dwelling units Held that - Nature of the recovery made from the employees is that the recovery goes to reduce the staff welfare expenses in the hands of the assessee-company. The rent recovery made from the employees is not an independent income or a different source of income. The assessee is providing residential quarters to the employees against which a nominal rent is recovered from them. The recovery ultimately reduces the cost in the hands of the assessee. Therefore the recovery is in the nature of business income. This is because it reduces the business expenditure - rent recoveries as business income in the hands of the assessee company in favour of assessee. Recovery of pay for notice period and other recoveries from employees for certain facilities like telephone calls and similar utilities, these recoveries are in the nature of business income are to be treated as business income in the hands of the assessee - appeals filed by assessee are partly successful. Deduction of expenditure incurred in foreign exchange from total turnover profits from business Held that - As the export sales are more than 75% of total sales. CIT(A) has failed to appreciate that after the amendment to section 10B with effect from 1-4-2001 the eligible deduction would be profit proportionate to the export turnover upon total turnover. The CIT(A) has rightly held in favour of the assessee because the provision for full exemption was omitted from the statute book only with effect from the assessment year 2002-03. Therefore the provision does not apply to the impugned assessment year 2001-02 - This issue is accordingly decided against the Revenue. Depreciation allowance Held that - Issue is remitted back to the AO for adjudicating the issue after examining the relevant materials afresh. The issue is remanded back to the Assessing Officer - In result, appeals filed by the assessee are partly allowed.

Issues involved:
1. Classification of interest income as business income or income from other sources.
2. Treatment of rent received from employees as business income.
3. Treatment of recoveries from employees for notice period and utilities as business income.
4. Deduction of expenditure incurred in foreign exchange from total turnover.
5. Eligibility for full deduction of profits from business based on export sales percentage.
6. Allowance of depreciation.
7. Treatment of interest income from margin money deposits.
8. Treatment of expenses incurred in foreign currency with reference to total and export turnover.

Analysis:
1. Interest Income Classification: The issue raised was whether interest income should be classified as business income or income from other sources for the assessment years 2001-02, 2005-06, and 2006-07. The lower authorities relied on the Supreme Court's decision in Pandian Chemicals Ltd. vs. CIT to hold that interest on bank deposits is not income derived from exports. The assessee argued that the deposits were made to obtain working capital facilities and thus should be considered business income. However, the Tribunal upheld the lower authorities' decision, stating there was no direct nexus between interest income and income from exports, therefore treating it as income from other sources.

2. Rent Received from Employees: The issue involved the treatment of rent received from employees for dwelling units as business income or income from other sources. The Assessing Officer considered it as income from other sources, but the Tribunal disagreed. It held that the recovery from employees to reduce staff welfare expenses was in the nature of business income as it ultimately reduced the cost for the assessee. Citing precedents, the Tribunal directed the assessing authority to treat the rent recoveries as business income.

3. Recoveries from Employees: The Tribunal addressed the recoveries made from employees for notice periods and utilities as business income for the assessment year 2001-02. It concluded that these recoveries were akin to the rent recoveries and should be treated as business income, following the same reasoning.

4. Foreign Exchange Expenditure Deduction: The issue was whether the expenditure incurred in foreign exchange should be deducted from total turnover. The Tribunal upheld the Commissioner's decision, citing a Special Bench ruling that supported the deduction of such expenditure from total turnover.

5. Profit Deduction Eligibility: The Tribunal considered the eligibility for full deduction of profits from business based on export sales percentage for the assessment year 2001-02. It was noted that the provision for full exemption was omitted from the statute book only from the assessment year 2002-03, and thus the Tribunal decided against the Revenue's argument, upholding the Commissioner's decision.

6. Depreciation Allowance: The Tribunal directed a re-examination of the depreciation allowance for the assessment year 2006-07, instructing the assessee to provide necessary details for verification by the Assessing Officer.

7. Interest Income Treatment: The Tribunal addressed the treatment of interest income from margin money deposits, overturning the Commissioner's decision and restoring the assessing authority's finding that the interest income should be treated as income from other sources.

8. Expenses in Foreign Currency: The Tribunal decided against the Revenue's argument regarding the treatment of expenses incurred in foreign currency with reference to total and export turnover, citing the Special Bench ruling in support of its decision.

In conclusion, the Tribunal partly allowed the appeals filed by the assessee, dismissed the Revenue's appeal for the assessment year 2001-02, and partly allowed the Revenue's appeals for the assessment years 2005-06 and 2006-07.

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