TMI Blog2011 (10) TMI 481X X X X Extracts X X X X X X X X Extracts X X X X ..... ed:- Whether on the facts and circumstances of the case, has the Hon‟ble Tribunal not grossly erred in holding that the interest earned from the FDRs was profits derived from the export of activities and thus eligible for deduction u/s 80 HHC particularly when it is in clear violation of the decision of the Hon‟ble Supreme Court in the case of M/s Pandian Chemicals Vs. CIT. 3. By a separate order passed in today‟s date we have disposed of ITA 125/2009 between the Revenue and the respondent-assessee pertaining to the immediate earlier assessment year 2003-04. For the sake of convenience, we reproduce the entire order disposing of ITA 125/2009:- 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 la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the FDRs are purchased for business compulsion therefore, in view of various legal pronouncement made and has also referred by the assessee about the considered view that assessee should be allowed, Netting of the interest received and paid for computing the business profit. Since interest on borrowed fund is higher than interest received therefore, 90% of the gross interest received from FDR should not be reduced from the business income of the assessee for computing deduction u/s 80HHC of the Income Tax Act. 7. The Revenue filed an appeal before the Income Tax Appellate Tribunal (for short, the tribunal), but by the impugned decision dated 29th July, 2008, the said appeal was dismissed. While dismissing the appeal, the tribunal noticed and has observed that interest earned on the FDRs was not income from other sources, but had been treated as business income. 8. Mr. Tripathi, learned counsel appearing for the Revenue in the present appeal has submitted that interest earned on the FDRs should be treated as income from other sources and not income derived from export. He has referred to the decisions rendered in Pandian Chemicals Ltd. Vs. Commissioner of Income Tax, Madur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt on behalf of the assessee is that but for such a stipulation by the bank there was no need for the exporter to keep the money in fixed deposit 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 of interest under Clause (bba) of the Explanation to Section 80HHC. Learned counsel for the Revenue is, therefore, right in his contention that interest income earned from the FDRs does not qualify for deduction under Section 80HHC of the Act, but has ignored the findings of the Division Bench in Shri Ram Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 89 ITD 25 (Delhi). (ix) Where, as a result of the computation of profits and gains of business and profession, the Assessing Officer treats the interest receipt as business income, then deduction should be permissible, in terms of Explanation (baa) of the net interest, i.e., the gross interest less the expenditure incurred for the purposes of earning such interest. The nexus between obtaining the loan and paying interest thereon (laying out the expenditure by way of interest) for the purpose of earning the interest on the fixed deposit, to draw an analogy from section 37, will require to be shown by the assessee for application of the netting principle. 12. Referring to the aforesaid conclusions, another Division Bench of this Court in Commissioner of Income Tax Vs. Shahi Export House [2010] 195 Taxman 163 (Delhi) has held as under:- 7. A conjoint reading of conclusion Nos.1,4, 5 and 6 and particularly No.5 would clearly demonstrate that only in those cases where interest earned on fixed deposits have an immediate 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the various judicial pronouncements including the judgment of Hon‟ble Kerala High Court in the case of K. Ravinderanathan Nair Vs. DCIT 262 ITR 669, which has been affirmed by the Hon‟ble Supreme Court by dismissing the SLP filed by the assessee against the judgment, the interest income on FDR‟s amount to Rs.42,42,898/- is treated as income of the assessee under the head Income from other sources and accordingly, disallowed for the purpose of benefit of deduction u/s 80 HHC within the meaning of explanation (bba) below section 80 HHC (4C) of the I.Tax Act. Order of the CIT (Appeals) I have examined the submission of the appellant and the observation made by the Assessing Officer in the assessment order. Vide para 5 of the Assessment Order, the A.O. has observed that appellant could not submit anything to prove direct nexus between the interest received on FDR‟s and cash credit facility taken by it. The F.D.Rs. have been made with earlier years surplus funds available with the appellant. During the course of appellate proceedings, the appellant filed letters from Punjab National Bank, Sector 16, Chandigarh Branch and State Bank of India, wherein Fix ..... X X X X Extracts X X X X X X X X Extracts X X X X
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