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Issues: (i) Whether interest earned on fixed deposits and earnest money deposits constituted business income for the purpose of Explanation (baa) to section 80HHC; and (ii) whether depreciation could be allowed and later withdrawn when the assessee had not claimed it.
Issue (i): Whether interest earned on fixed deposits and earnest money deposits constituted business income for the purpose of Explanation (baa) to section 80HHC.
Analysis: The deposits were found to have been made out of business compulsion and as part of the assessee's export business requirements. The funds were linked to overdraft borrowings, the deposits were required to secure quota rights and business facilities, and the interest arose from deposits that were integrally connected with the business operations. On these facts, the income from such deposits was treated as arising from the business itself.
Conclusion: The issue was decided in favour of the assessee and against the Revenue; the interest on the fixed deposits and earnest money deposits was held to be business income.
Issue (ii): Whether depreciation could be allowed and later withdrawn when the assessee had not claimed it.
Analysis: The governing principle applied was that depreciation under section 32 is a benefit available to the assessee and cannot be thrust upon it when not claimed, subject to the statutory conditions in sections 32 and 34. The contrary view based on the later Bombay High Court decision was distinguished as not displacing the rule laid down by the Supreme Court on the facts relevant to this controversy. The withdrawal of depreciation was therefore not justified once the assessee had not sought that allowance.
Conclusion: The issue was decided in favour of the Revenue; the depreciation was held to be allowable and the withdrawal of the allowance was upheld.
Final Conclusion: The appeal succeeded only in part, with the assessee prevailing on the treatment of interest income and the Revenue succeeding on the depreciation issue.
Ratio Decidendi: Income arising from deposits that are integrally connected with and compelled by the assessee's business operations is business income, and depreciation cannot be forced upon an assessee where the statutory allowance is not claimed.
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