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TMI Blog2011 (10) TMI 15X X X X Extracts X X X X X X X X Extracts X X X X ..... i, Sr. Standing Counsel. For Respondent: Mr. S. Krishnan, Advocate. O R D E R On 28th August, 2009, the following questions of law were framed:- a) Whether the Ld. ITAT has erred in law in the facts and circumstances of the case in confirming the order of the CIT(A) whereby the CIT(A) held that since the interest paid on borrowed funds is more than the interest received on FDR, therefore, 90% of the gross interest received from FDR should not be reduced from the business income of the assessee for computing deduction under Section 80HHC? b) Whether the Ld. ITAT was correct in law in holding that the interest on FDR should not be reduced from the business profits since the interest income is not assessed by the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on made by the Assessing Officer, interest earned on FDRs mentioned above was treated as part of business income and not as income from other sources. 6. On appeal filed by the respondent-assessee, the CIT (Appeals) accepted the contention of the assessee that interest earned on FDRs should be set of or netted of, from the interest paid by the assessee to the bank. The CIT (Appeals) while accepting the contention of the assessee has recorded as under:- 1. Interest on FDR: After examination of the documents filed by the assessee before me and as well as with the assessing officer I found that FDRs are purchased by assessee out of the borrowed fund and kept with Bank under security under their lien for the opening of letter of cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8 ITR 314 (Delhi) and Commissioner of Income Tax Vs. Shri Ram Honda Power Equip [2007] 289 ITR 475 (Delhi) 9. The aforesaid contention of the appellant-Revenue was considered by this Court in Shri Ram Honda Equip (supra) and it has been held as follows:- 35. Turning to the submissions in the present cases, as regards the first of the categories, viz., the parking of surplus funds, there should be no dif ficulty at all. In view of the large number of the decisions of the hon‟ble Supreme Court in the context of section 56 and section 57 and those of the Kerala High Court in the context of section 80HHC itself, we are unable to accept the contention of the assessees based on Snam Proghetti [1981] 132 ITR 70 (Delhi) that interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eposit and therefore the income earned from such fixed deposits bears a direct nexus to the business activity itself. Given the repeated affirmation by the hon‟ble Supreme Court of three judgments of the Kerala High Court on the same issue, we are inclined to follow the view expressed by the Kerala High Court on each of these occasions. We accordingly hold that interest earned on fixed deposits for the purposes of availing of credit facilities from the bank, does not have an immediate nexus with the export business and therefore has to necessarily be treated as income from other sources and not business income. Question (a) and issue (i) are answered accordingly. 10. Thereafter, the Division Bench examined the question of netting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ums in order to arrive at the profits of the business for the purposes of section 80HHC(3) : (a) 90 per cent. of any sum referred to in clauses (iiia), (iiib) and (iiic) of section 28 i.e., export incentives ; (b) 90 per cent. of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits ; and (c) profits of any branch, office, warehouse or any other establishment of the assessee situate outside India. (viii) The word interest in clause (baa) of the Explanation connotes net interest and not gross interest . Therefore, in deducting such interest, the Assessing Officer will take into account the net interest i.e., gross interest as reduced by e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diate nexus with the export business would be treated as income from business and interest earned on fixed deposits which does not have an immediate nexus with the export business, it would be treated as income from other sources. The court opined that when the interest was earned on the fixed deposits for the purposes of availing of credit facilities from the bank, it did not have such a nexus with the export business and therefore, had to be necessarily treated as income from other sources and not the business income. 8. Thus, insofar as earning of interest on fixed deposit is concerned, the determinative test is as to whether such interest has immediate nexus with the export business. 13. In the present case we are concerned w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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