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2005 (11) TMI 221 - ITAT MADRAS-BDeduction 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.
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