TMI Blog2005 (5) TMI 241X X X X Extracts X X X X X X X X Extracts X X X X ..... C from Rs. 2.23 crores to Rs. 2.17 crores. 3. Being aggrieved, the assessee impugned the action of the AO in appeal before the CIT(A). It was explained before the CIT(A) that whether interest income should be treated as income from other sources or income from business would not make any material difference in view of cl. (baa) of Explanation below s. 80HHC(4A) of the IT Act, which was introduced w.e.f. 1st April, 1992. Reference was also made to Explanatory Notes for explaining the purpose of inserting such Explanation. It was explained that while these items were in the nature of income but had no element of turnover and, therefore, it gave a distorted picture of export profits which were to be computed as per the existing formula given in s. 80HHC(3). It was also explained that the assessee had itself reduced 90 per cent of the interest for the purpose of computing the deduction under s. 80HHC and only 10 per cent of such amount remained as business profit for the purpose of computing deduction under s. 80HHC. The learned CIT(A) considered these submissions and held that for the purpose of computing deduction under s. 80HHC, interest @ 90 per cent was required to be reduced on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that requires to be decided whether interest declared by the assessee was a business income or income from other sources? The second question related to this issue is that whether 10 per cent of interest can be considered against the expenses incurred for earning such interest even if it is held to be taxable under the head "Income from other sources"? A copy of P L a/c is placed at p. 1 of the paper book. The same shows that there is no debit on account of interest in the P L a/c. The assessee has credited interest of Rs. 59,66,540 to its P L a/c and the computation of deduction under s 80HHC is at p. 3 of the paper book which shows that 90 per cent of the amount of entire interest of Rs. 59,66,540 which worked out to Rs. 53,64,486 was reduced from the profits and gains of the business as per Expln. (baa) to s. 80HHC. In the case of Rani Paliwal vs. CIT, the Hon'ble High Court has held that 90 per cent of the gross interest received by the assessee was required to be reduced for the purpose of computing deduction under s. 80HHC(3) and the amount of interest paid by the assessee could not be deducted from the gross amount of interest for the purpose of reducing 90 per cent of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder reference was in consonance with the treatment given for the earlier assessment years and allowed by the AO. However, for the assessment year under reference, the AO has treated such interest as income from other sources. The assessee is not in the business of money-lending. In fact, almost the entire income of the assessee is exempt under s. 80HHC and the interest earned by the assessee is on surplus funds available. Therefore, the interest earned on surplus funds could not be considered as profit derived from export of goods, as it does not have any direct or immediate nexus with the export business of the assessee. This view also funds support from the judgment of Hon'ble Supreme Court in the case of Pandian Chemicals Ltd. vs. CIT (2003) 183 CTR (SC) 99 : (2003) 262 ITR 278 (SC). In fact, the case of the assessee stands on much weaker footing as keeping the surplus money in FDRs has no connection with the business of the assessee. Moreover, no specific arguments were advanced by the learned counsel in support of the contention that such income was taxable as business profit. Therefore, we confirm the findings of the authorities below and reject this ground of appeal in trea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w.e.f. 1st April, 1992. The rationale for reducing the amount of interest, commission, rent, brokerage and receipts of similar nature included in the P L a/c was explained by the Explanatory Note as given in (1991) 96 CTR (St) 200 : (1991) 190 ITR (St) 299 was that the assessee must have incurred atleast some expenses for earning such income. Therefore, the legislative intent was to restrict the reduction to the extent of 90 per cent and not to the extent of 100 per cent. Thus, the amount of 10 per cent of such receipts was considered to be as forming part of the expenses for earning such income. Therefore, to that extent part of receipts was held to be included in the business profit for the purpose of computing deduction under s. 80HHC because expenses for earning such income are already charged to P L a/c. This issue had also come up before the Tribunal, Chandigarh Bench, in the case of Hero Exports (P) Ltd. vs. Asstt. CIT in ITA No. 803/Chandi/1997, for the asst. yr. 1994-95, where it was held that such expenses to the extent of 10 per cent would not fall in the category of direct costs or indirect costs mentioned in cl. (b) to s. 80HHC(3) for the purpose of computing profits o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espect of those items, which in this case are in the form of duty drawback of Rs. 1,33,317, is to be considered for earning such income. Therefore, these expenses would not fall in the category of "direct costs" or "indirect costs" mentioned in cl. (b) of s. 80HHC(3) for the purposes of computing profits on exports of trading goods. We have also seen that the assessee has not included 10 per cent of export incentives in the business profit from export of trading goods as the same has been separately worked out. Accordingly, the revised computation of profits from export of trading goods given by the assessee at Rs. 19,832 is quite correct and is in conformity with the legislative intent of apportioning 10 per cent of receipts mentioned in Expln. (baa) to s. 80HHC(4B) for common expenses. As regards the objection raised by the Revenue that s. 80HHC(3) does not provide for such adjustment, the same is not correct. We have to separately compute the business profits from trading goods by reducing the direct and indirect costs from the export turnover in respect of such trading goods. This also implies that expenses, which related to earning of export incentives as explained by the CBDT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (SC), the Hon'ble apex Court has held that proportionate management expenses had to be deducted from the gross dividend income for the purpose of the relief under s. 80M. The rationale behind the same is that part of management expenses have to be equally considered against earning of 'Income from other sources'. A copy of the P L a/c is at p.1 of the paper book, which shows profit of Rs. 2,77,38,679.97 inclusive of bank interest of Rs. 59,66,540. Total expenses debited to P L a/c aggregate to Rs. 2,69,39,537. Thus, it would be fair, appropriate and reasonable to apportion 10 per cent of expenses of bank interest of Rs. 59,66,540 which works out to Rs. 5,96,654 against earning of bank interest. If these expenses are apportioned towards interest income which is liable to tax under the head 'Income from other sources' and is to be separately computed, the same would result in increase in export profits of Rs. 5,96,654. The same would be entitled to deduction under s. 80HHC 6.5 In the light of these facts and circumstances of the case, we are of the view that 10 per cent of interest receipts of Rs. 59,66,540 is attributable to expenses for naming such interest income and, therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X
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