IN THE ITAT, DELHI BENCH ‘I’

Assistant Commissioner, Circle 31(1), Delhi

v.

Arun Puri

I.P. BANSAL, JUDICIAL MEMBER

AND R.C. SHARMA, ACCOUNTANT MEMBER

IT APPEAL NO. 4402 (DELHI) OF 2005

CROSS OBJECTION NO. 88 (DELHI) OF 2006

[ASSESSMENT YEAR 2002-03]

September 21, 2007

Section 80HHC read with section 56 of the Income-tax Act 1961 - Deductions - Exporters - Assessment year 2002-03 - Whether when surplus funds are parked with bank and interest is earned thereon it can only be categorized as income from other sources and same goes entirely out of reckoning for purpose of section 80HHC-Held, yes - Whether, however, to give effect to this position, Assessing Officer while computing profits of export business will have to remove from debit side of profit & loss account corresponding interest expenditure that has been laid out to earn such income from other sources - Held, yes.

FACTS

The assessee was engaged in the business of export of scarves, bags, fashion accessories, handicrafts, furnishings, artificial jewellery, etc. Besides business income, the assessee had also income from other sources as well during the year under consideration. The assessee had shown interest income under the head ‘business income’ and claimed deduction under section 80-HHC. The Assessing Officer disallowed the assessee’s claim that the netting of interest i.e. interest on overdraft on borrowed funds should be set off against interest received on FDRs and had treated interest income as income from other sources and not allowed benefit of deduction under section 80-HHC on interest income. The Commissiner (Appeals) while allowing deduction to extent of 10 per cent on interest income in terms of Explanation of section 80HHC did not allow netting of interest paid on overdraft obtained against these FDRs while computing deduction under section 80HHC.

On appeal ;

HELD

The issue regarding treatment of interest income while computing deduction under section 80HHC has been elaborately considered by the Jurisdictional High Court in case of CIT v. Shri Ram Honda Power Equipment [2007] 289 ITR 475/158 Taxman 474 (Delhi). Broad principles for determining the nature of interest income, as to whether such interest income is ‘business income’ as computed under section 28 to 44 or income from other sources as determined under section 56 read with section 57 were laid out. The first category of such interest income was held by the 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 matter fell under first category where Assessing Officer treats such income as not related to business of exports, but as ‘income from other sources’. However, the Jurisdictional High Court in such situation have held that these receipts merits separate treatment under section 56 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 & 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. [Para 3]

It is quite clear 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 & 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 view of the proposition laid down by Jurisdictional High Court as discussed above, the Assessing Officer was required to exclude any interest expenditure if any relatable to such income from the Profit & Loss Account of export business. At the very same time such interest expenditure was required to be reduced from the interest income for bringing the net interest income to tax net under section 56. However, before allowing such interest expenditure, the assessee was required to establish that it had incurred interest expenditure for getting the bank deposit on which interest income was earned. Only where assessee was 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 was 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 & Loss Account was required to be disturbed. The matter was restored 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 above observation. [Para 4]