Export-linked tax deduction under s. 80HHC: interest earned on FDRs excluded from profits after Explanation (baa).

Whether interest on FDRs constitutes "business income" for deduction under s. 80HHC, the HC held it does not, as such interest is not derived from export business and, post insertion of Explanation (baa) w.e.f. 1-4-1992, must be excluded while computing eligible profits; consequently, deduction could not be allowed by treating it as business income. The assessee's plea of consistency based on prior years' treatment was rejected because an erroneous past approach cannot override the statutory scheme after Explanation (baa), and the AO was justified in taking a different view for AYs 1997-98 and 1998-99; accordingly, the Tribunal's orders were set aside, the Department's appeals were allowed, and s. 80HHC relief was directed to be recomputed without such interest.

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Issues involved: Determination of whether interest income earned on FDRs qualifies as business income for relief u/s 80HHC of the Income Tax Act.

Issue 1 - ITA No. 756/2006 (AY 1997-98):
The High Court framed the substantial question of law regarding the classification of interest income from FDRs as business income eligible for relief u/s 80HHC. The Court held that interest earned on FDRs cannot be considered as business income, ruling in favor of the Department.

Issue 2 - ITA No. 1599/2006 (AY 1998-99):
In this case, a similar question of law was framed concerning interest income from FDRs for the relevant assessment year. The Court reiterated its stance that interest earned on FDRs does not qualify as business income eligible for relief u/s 80HHC.

The Court acknowledged the argument of consistency raised by the assessee's counsel, highlighting the past treatment of interest income from FDRs as business income. However, the Court emphasized the change in the law with the introduction of Explanation (baa) from 1-4-1992, which altered the treatment of such income. The Court concluded that the Department's approach in previous years was not in line with the law and justified the Assessing Officer's differing views for the years 1997-98 and 1998-99. The Court criticized the Tribunal's decision to allow the deduction solely based on consistency, setting aside the impugned orders and allowing both appeals.

In conclusion, the High Court ruled that interest income earned on FDRs cannot be classified as business income for relief u/s 80HHC, emphasizing the legal changes introduced by Explanation (baa) and supporting the Assessing Officer's differing views for specific assessment years. The Court set aside the Tribunal's decisions and directed the redetermination of section 80HHC deduction in accordance with their judgment.

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