TMI Blog2008 (11) TMI 42X X X X Extracts X X X X X X X X Extracts X X X X ..... at, even though by our order dated 06.11.2008 notice had been issued to the respondent/assessee, despite service, the assessee has not entered appearance. This left us, with no other alternative, but to hear the matter in the absence of the respondent/assessee. 3. The short question which has arisen for our consideration in the present appeal is, whether in the facts and circumstances, as found by authorities below in the instant case, the interest earned on fixed deposits kept by the respondent/assessee with the bank would enter the ring of profits under the provisions of Section 80 HHC of the Act. The other supplementary issue which arises for consideration is, whether the respondent/assessee ought to be allowed the benefit of 'netting' i.e. a set off, in respect of, interest received on fixed deposits kept with the bank, against the, interest paid to the bank on over draft facilities availed by the respondent/assessee from the bank. 4. In order to decide the issue, the following brief facts require to be noted. 5. The assessee/respondent, who is a 100 percent exporter of readymade garments had surplus funds which were put in a fixed deposit with the bank. The said fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing Officer returned a categorical finding that the assessee had earned interest from the fixed deposit made from surplus funds and, therefore, interest earned from such fixed deposit could not partake the character of proceeds earned from exports. 8. Being aggrieved, the respondent/assessee filed an appeal with the Commissioner of Income-tax (Appeals) [hereinafter referred to as the 'CIT(A)']. The CIT(A) by his order dated 05.08.2003 sustained the view of the Assessing Officer that interest proceeds received from the bank had to be treated as 'income from other sources' as it had no direct or immediate nexus with the export business of the respondent/assessee. On the issue of 'netting' of interest, the CIT(A) held that the same cannot be allowed as this was paid as interest on over draft facility, which was, utilized in the export business. The CIT(A), however, held that the interest paid by the respondent/assessee on overdraft facility having been incurred for the purpose of business, was allowable as deductions from business income. In other words, the CIT(A) held that interest paid on overdraft facility cannot be allowed as a deduction against the interest income which is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in the context of section 80 HHC itself, we are unable to accept the contention of the assessees based on Snam Proghetti [1981] 132 ITR 70 (Delhi) that interest earned on parked surplus funds should qualify as business income. Clearly, Snam Proghetti [1981] 132 ITR 70 (Delhi) was not rendered in the context of section 80 HHC and cannot but be confined to the facts of that case. Circular No. 564, dated July 5, 1990 (see [1990] 184 ITR (St.) 137), can also not help in interpreting section 80 HHC which is a 'stand alone' provision. We are, therefore, of the view that where surplus funds are parked with the bank and interest is earned thereon it can only be categorized as income from other sources. This receipt merits separate treatment under section 56 of the Act which is outside the ring of the profit and gains from business and profession. It goes entirely out of the reckoning for the purpose of section 80 HHC. 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 that has been 'laid out' to earn such income from ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'gross interest'. Therefore, in deducting such interest, the Assessing Officer will take into account the net interest i.e, 'gross interest' as reduced by the expenditure incurred on earning such interest. The aforesaid conclusions of the Court have to be read with the observations made in paragraph 70 and 71, wherein the Court has observed as follows:-''.'. we entirely agree with the following formulation of the Special Bench of the Tribunal in Lal Sons [2004] 89 ITD 25 (Delhi) (page 62) : 'If the interest received is found to have a nexus with the business, still it remains to be excluded from the profits of the business by virtue of Explanation (baa)(1), but the claim is that the quantum of such interest income to be excluded must be determined in accordance with the computation provisions relating to business by allowing expenditure by way of interest which bears a nexus with the interest receipt. The computation provisions include section 37(1) under which any expenditure incurred or laid wholly and exclusively for the purpose of the business is to be allowed as a deduction. Therefore, any expenditure incurred which has a connection or nexus with the interest receipt has ..... 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