TMI Blog2009 (10) TMI 48X X X X Extracts X X X X X X X X Extracts X X X X ..... ggarwal with Mr. Anish Kumar, Advocates, for the appellant. Mr. Pankaj Jain with Mr. R.K. Chauhan, Advocates, for the respondent. JUDGMENT The judgment of the court was delivered by A. K. SIKRI, J. - This appeal was admitted on the following substantial questions of law :- "1) Whether the ITAT was correct in law in deleting the addition of interest income from FDRs amounting to Rs.6,85,624/- under the head "Income from Other Sources" by treating it as business income? 2) Whether the ITAT was correct in law in allowing the deduction under Section 80HHC of the Income Tax Act, 1961 when there was no profit from export business?" 2. For answering the aforesaid questions, following facts need to be mentioned. 3. The respondent/assessee had filed income tax return for the assessment year 2001-02 declaring "Nil" income. Return was processed by issuing notice under Section 143(2) of the Income Tax Act, 1961 (hereinafter referred to as the "Act"). The assessee is a 100% manufacturer/exporter of readymade garments. While framing the assessment, the Assessing Officer (AO) found that the assessee also had interest income on the fixed deposit receipts and the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... securing limits on deposits tendered with the bank on such funds and, thus, the net amount of interest of Rs.13,70,405/- was to be allowed as business expenditure. He, thus, argued that the amount of interest which had been earned had a clear nexus with the amount borrowed from the bank on which interest had been paid. The Tribunal has accepted this submission of the assessee holding that in these circumstances the interest received par-takes the character of the business receipts and it is only the net interest that would be considered for deduction under Section 80HHC of the Act. Therefore, it could not be treated as income from other sources. 6. Learned counsel for the Revenue submitted that this issue now stands covered in favour of the Revenue by the judgment of this Court in Commissioner of Income Tax v. Shri Ram Honda Power Equip, 289 ITR 475. Learned counsel for the assessee, on the other hand, argued that the case would be covered by the subsequent judgment of this Court in Commissioner of Income Tax v. Bharat Rasayan Ltd., 172 Taxman 338. 7. We have considered the submissions of learned counsel for the parties. 8. We may point out at the outset that me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income from other sources' which in any event are treated under Sections 56 and 57 of the Act and are thereforee not to be reckoned for the purposes of Section 80HHC. The AO will apply the law as explained in the judgments of the Kerala High Court referred to above which have been affirmed by the Hon'ble Supreme Court. (iv) Where surplus funds are parked with the bank and interest is earned thereon it can only be categorised as income from other sources. This Page 0528 receipt merits separate treatment under Section 56 of the Act which is outside the ring of profit and gains from business and profession. It goes entirely out of the reckoning for the purposes of Section 80HHC. (v) Interest earned on fixed deposits for the purposes of availing credit facilities from the bank, does not have an immediate nexus with the export business and thereforee has to necessarily be treated as income from other sources and not business income. (vi) Once business income has been determined by applying accounting standards as well as the provisions contained in the Act, the assessed would be permitted to, in terms of Section 37 of the Act, claim as deduction, expenditure laid out for the purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n were kept with the bank and, therefore, the assessee was entitled to the netting of interest for the interest income and expenses thereto. This is also categorically answered in Shri Ram Honda (supra). The Court was of the opinion that even in a case where the exporter is required to mandatorily keep monies in fixed deposit, in order to avail credit facility for the export business, and interest earned on fixed deposits for the purpose of availing of credit facilities from the bank, it was held that the interest income has to be treated as "income from other sources" and not business income as it does not have an immediate nexus with the export business. 12. We would like to mention the distinction between the income "derived from", the expression used in Section 80HHC, from the term "attributable to", as explained by the Supreme Court in the case of Cambay Electrical Supply Industrial Co. Ltd. v. CIT, 113 ITR 84, followed again in Ashok Leyland Ltd. v. CIT, 224 ITR 122. The words "derived from" had to be given restricted meaning and income could be said to be derived from an activity only if the said activity was the immediate minimum and effective sources of the inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had construed the judgment of the Supreme Court in IPCA Laboratory (supra) in the aforesaid manner, which is accepted by the Tribunal in the impugned judgment in the following words :- "8. In the case of CIT Vs. M/s. Paramount Products (P) Ltd. in ITA No. 3273/Del/2001 dated 13.1.2005 the Bench of the Delhi Tribunal, after considering the decision of the Apex Court in the case of IPCA Laboratory reported in 256 ITR 521, in para 7 and 8 of the order held as under :- "7. Insofar as the question of netting of the result of two activities is concerned, the Apex Court in the case of IPCA Laboratories Ltd. 266 KITR 52(SC) has already laid a dictum that if there is a loss in one activity and profit in the other then the loss cannot be ignored and the assessee will be entitled to the benefit of Section 80HHC only on then profit of the other activity, which is left after the set off of loss from the first activity. The B Bench of the Delhi Tribunal in the case of M/s. Jindal Exports Ltd. v. ITO where one of us the Ld Accountant Member was a party to the judgment after analyzing the ratio of the principle laid down by the Apex Court in IPCA Laboratories case has held that while computing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ove that while computing export profit the result of two activities is to be netted. While doing so, export incentives are also to be taken into consideration. 16. We are, therefore, of the opinion that the Tribunal rightly construed the judgment and decided the case. Contention of the Revenue was negatived by giving the following example :- "If for sub-section(3) as ld counsel is suggesting that profit should be bifurcated between two spacie (sic) i.e. one from activity of export, be it of manufactured goods or of a trading goods and the other of export incentives, then in all cases the export incentives essentially have to be a positive figure irrespective of the fact whether there is a loss in export of manufacturing goods or from export of trading goods or from both. If this position is accepted then the loss in all situation has to be ignored and deduction on export incentives which will always be a positive figure shall have to be allowed. Viewed with the angle in IPCA case also, the assessee should have entitled to deduction u/s 80HHC on export incentives even if export profits after netting the results of the two activities are in negative. However, the Hon"ble Court ..... X X X X Extracts X X X X X X X X Extracts X X X X
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