Income Tax Appellate Tribunal - Delhi
Asstt. Cit, Range-1 vs Smt. Iqbal Kaur on 1 July, 2007
ORDER
R.C. Sharma, Accountant Member
1. This is an appeal filed by the revenue against the order of CIT(Appeals) dated 14-5-2004 for the assessment year 2001-02, in the matter of orders passed under Section 143(3)/148 of the Income Tax Act, 1961.
2. Rival contentions have been heard and record perused. In the grounds of appeal as many as ten grounds have been raised by the revenue but the crux of the issue revolves around the direction of the CIT(Appeals) for allowing claim of deduction under Section 80HHC of the Act on the interest income of the assessee who is 100 per cent exporter. In the course of assessment, under Section 143(3)/148 of the Act, the assessing officer treated the interest income credited in the P&L account on FDRs, as income from 'other sources' instead of 'business income'. The Assessing Officer also did not allow netting of the interest expenditure paid on the overdraft limit availed against FDRs held by it, on which the assessee has earned interest income.
3. By the impugned order, CIT(Appeals) observed that FDRs were purchased to maintain overdraft facility to run the business smoothly and this was a common routine business activity. He, therefore, held that FDRs were purchased out of business income accordingly and interest earned from FDRs is income from business and not income from 'other sources'. He further directed the assessing officer to allow deduction under Section 80HHC of the Act on such interest income.
4. It was argued by the learned DR Shri G.S. Sahota that FDRs were made out of surplus fund which were not required by the assessee firm for business activities. At any time during the year under consideration, there was no nexus between the income earned on FDRs and income earned from business. After pointing out the various decisions relied on by the assessing officer in his order, he strongly contended for upholding the order of the assessing officer for treating such interest income as income from other sources and not eligible for claiming deduction under Section 80HHC of the Act.
5. On the other hand, learned AR Shri Anil Kumar Gupta referred various decisions of the High Courts and. Tribunal Orders wherein preponderance of decisions goes in favour of the assessee and the interest income earned by the exporter out of FDRs made out of business income was treated as "income from business" and not as "income from other sources". He also submitted that even on the ground of tax effect, the appeal of the revenue deserves to be dismissed in view of the CBDT Instruction No. 2 dated C 24-10-2005 for not filing appeal where tax effect is less than Rs. 2 lakhs.
6. We have considered the rival contentions carefully gone through the orders of the authorities below. In view of the ground raised before us raises a substantial question of law, the plea of the assessee for not entertaining the appeal of the revenue in view of CBDT Instruction dated 24-10-2005, cannot be accepted and we are, therefore, inclined to decide the issue on merits.
7. On the basis of material on record, we found that in this case interest income has been treated by the assessing officer as "income from other sources" whereas the Commissioner (Appeals) has treated the interest income as business income and directed only for allowing claim of deduction under Section 80HHC but also netting of income. The issue regarding treatment of interest income while computing deduction under Section 80HHC has been elaborately considered by the Delhi High Court in case of CIT v. Shri Ram Honda Power Equipment wherein decisions of various High Courts on the same issue was considered and elaborate reasoning has been given for arriving at the conclusion and broad principles for determining the nature of interest income, as to whether such interest income is "business income" as computed under Sections 28 to 44 of the Act or income from other sources as determined under Section 56 read with Section 57 of the Act, were also laid out. The first category of such interest income was held by the Hon'ble High Court as arising out of parking of surplus fund, such income is to be treated as 'income from other sources'. The second category of cases are those where assessing officer himself treats the interest income as 'income from business', on the plea that such interest income was inextricably linked with the export business. Here we are concerned with first category where assessing officer treats such income as not related to business of exports, but as 'income from other sources'. However, the High Court in such situation have held that these receipts merits separate treatment under Section 56 of the Act which is outside the ring of 'profit and gains from business and profession'. The court has further provided that to give effect to this position, the assessing officer while computing the profits of the export business will have to remove from the debit side of the Profit and Loss Account, the corresponding interest expenditure that had been "laid out" to earn such income from other sources. Otherwise, this will depress the profit by an amount which is out of reckoning of Section 80HHC, a consequence not intending to be brought about. Following is the relevant observation of the Hon'ble High Court at Para 19:
...We are, therefore, of the view that where surplus funds are parked witht he bank and interest is earned thereon it can only be categorized as income from other sources. This receipt merits separate treatment undersection 56 of the Act which is outside the ring of profits and gains fromCbusiness and profession. It goes entirely out of the reckoning for the purpose of Section 80HHC. To give effect to this position, the assessing officer while computing profits of the export business will have to remove from the debit side of the Profit and Loss Account the corresponding interest expenditure mat has been 'laid out' to earn such income from other sources. Otherwise this will depress the profits by an amount which is out of the reckoning of Section 80HHC, a consequence not intended to be brought about.
8. It is quite clear from the above proposition that if the assessee has incurred any expenditure for making the FDRs, interest income of which is brought to tax under the head 'income from other sources', such interest expenditure is to be taken out from the profits of export business, and at the same time such interest expenditure is to be deducted while arriving at net income from interest on bank deposit. Taking out such interest income and interest expenditure out of the Profit and Loss Account prepared for computing export profits, will change such export profit, therefore, assessing officer is to recalculate permissible deduction under Section 80HHC with reference to such revised export profits. On the other hand, such interest expenditure is to be allowed as a deduction while computing net interest income to be taxed under Section 56 as income from other sources. In the instant case before us the assessing officer has held the interest income as income from other sources. In view of the proposition laid down by Jurisdictional High Court as discussed above, the assessing officer is required to exclude any interest expenditure if any relatable to such income from the Profit and Loss Account of export business. At the very same time such interest expenditure is required to be reduced from the interest income for bringing the net interest income to tax net under Section 56 of the Income Tax Act. However, before allowing such interest expenditure, the assessee is required to establish that it had incurred interest expenditure for getting the bank deposit on which interest income was earned. Only where assessee is able to prove that cheques issued for making the bank deposits had been issued out of credit facilities availed by it or out of borrowed funds, such exclusion of interest expenditure is permissible. If the assessing officer found that no interest expenditure had been incurred for making such bank deposits on which assessee is in receipt of interest income, no deduction of interest expenditure under Section 57 is permissible, nor export profit as per Profit and Loss Account is required to be disturbed. We, therefore, restored the matter back to the file of the assessing officer for deciding the issue of deduction of interest expenditure out of the interest income earned by the assessee and recomputation of deduction under Section 80HHC in the light of our observation and the proposition laid down by Delhi High Court in the case of Shri Ram Honda Power Equipment (supra). We direct accordingly.
9. In the result, the appeal of the revenue is allowed for statistical purposes.