2008 (11) TMI 50 - HC - Income Tax

Tribunal held that interest income on fixed deposits earned by the assessee be treated as business income as against income from other sources . Consequently assessee would be required to deduct 90% of such interest from the profits of the business under Section 80HHC held that interest earned for the purpose of availing of credit facilities from the bank does not have an immediate nexus with export business hence impugned judgment of the Tribunal is held erroneous

Summary

Issues:
1. Classification of interest income on fixed deposits as "business income" or "income from other sources" for the purpose of Section 80HHC deduction.

Analysis:
The High Court of Delhi heard an appeal under Section 260A of the Income Tax Act, 1961 regarding the classification of interest income on fixed deposits for the assessment year 2003-04. The Revenue challenged the Tribunal's decision that treated the interest income as "business income" instead of "income from other sources," affecting the deduction under Section 80HHC. Despite notice, the respondent did not appear, leading the Court to proceed with the case. The Revenue contended that the Tribunal's decision contradicted a previous judgment, which the Court accepted after reviewing the case's facts.

The assessee initially declared the interest income on fixed deposits as "business income." However, during scrutiny, the Assessing Officer reclassified it as "income from other sources," disallowing the Section 80HHC deduction. The CIT(A) upheld this decision, leading to the Revenue's appeal before the Tribunal. The Tribunal, disagreeing with the CIT(A), found a direct nexus between the interest income and the business, thus classifying it as business income. The High Court disagreed with this interpretation, citing a previous judgment that specified conditions for treating interest income on fixed deposits.

The Court referenced the previous judgment, emphasizing that interest earned on fixed deposits for availing credit facilities should be treated as "income from other sources" and not as business income. It highlighted the necessity to remove such income from the profit and loss account for Section 80HHC purposes. Based on this analysis, the High Court set aside the Tribunal's decision and directed the Assessing Officer to allow the deduction in line with the Court's observations and the previous judgment.

In conclusion, the High Court clarified the classification of interest income on fixed deposits, emphasizing the distinction between business income and income from other sources for the purpose of Section 80HHC deduction. The judgment provided specific guidelines based on legal precedents to ensure accurate treatment of such income in tax assessments.