2016 (8) TMI 1380 - HC - Income Tax

Interest income from fixed deposits not considered business income, denied deduction under Section 80HHC.

Shri Gerard Perira Versus The Income-Tax Officer, Range XV (1), Chennai

The High Court upheld the classification of interest income from fixed deposits as 'income from other sources,' denying its treatment as 'business ... Computation of deduction u/s 80HHC - interest from fixed deposits formed out of compulsory retention and transfer of export realisation is income from business liable for inclusion as business profit - Held that:- Referring to Section 80HHC learned standing counsel for the Income Tax Department submitted that if the Company is engaged in the business of export, income earned out of exports of any goods or merchandise, deduction to the extent of profits, referred to in sub-Section (1B) alone would be allowed, if only the income is derived by the assessee, from the export of such goods or merchandise, and not from any other source. Further on the facts and circumstances of the case, interest income has been derived, not from the export of goods or merchandise, but derived from the deposits made by the appellant and therefore, interest income, earned by the assessee, cannot be treated as 'business income', liable for deduction. Interest income earned from the deposits, should be treated only as 'other source' and therefore, both the appellate authority, as well as the Tribunal, have rightly decided the issue, in favour of the Revenue. Legislature has engrafted the provisions, as to how, the Company engaged in the business of export, out of India, of any goods or merchandise, can be allowed, to compute the total income of the assessee, deduction to the extent of profits, referred to, in sub-Section (1B), derived by the assessee, from such export of goods or merchandise, meaning thereby, that such income from the said proceeds of the goods or merchandise, should be earned in convertible foreign exchange or in otherwords, and not income generated within the country, from other sources. - Decided in favour of revenue. Issues Involved:1. Classification of Interest Income2. Deduction under Section 80HHC3. Nexus between Interest Income and Export Business4. Applicability of Judicial PrecedentsIssue-wise Detailed Analysis:1. Classification of Interest Income:The primary issue was whether the interest income of Rs. 20,58,049 earned by the appellant from fixed deposits should be classified as 'business income' or 'income from other sources.' The appellant contended that the interest income should be treated as 'business income' since the deposits were made as a requirement for obtaining credit facilities from the bank, essential for the export business. The assessing officer, however, classified it under 'other sources,' denying the deduction under Section 80HHC.2. Deduction under Section 80HHC:The appellant claimed deductions under Sections 80HHC and 80L of the Income Tax Act, 1961. The assessing officer allowed the deduction under Section 80HHC only to the extent of Rs. 4,93,188, excluding the interest income from fixed deposits. The appellant argued that the interest income should qualify for deduction under Section 80HHC as it was integral to the business operations.3. Nexus between Interest Income and Export Business:The appellant argued that the interest income had a direct nexus with the export business, as the deposits were mandatory for availing credit facilities from the bank. The appellant cited a letter from the State Bank of India confirming the requirement of such deposits for credit facility extension. The appellate authorities, however, held that the interest income did not have a direct link with the export business and was thus not eligible for deduction under Section 80HHC.4. Applicability of Judicial Precedents:The appellant relied on the decision of the Special Bench (Delhi) of the ITAT in Lalsons Enterprises v. DCIT (89 ITD 25) to support their claim. However, the Commissioner of Income Tax (Appeals) and the Tribunal rejected this reliance, favoring the decision of the Madras High Court in CIT v. Nizar Ahmed & Co., 259 ITR 244, which held that interest income from deposits should be classified as 'income from other sources' and not 'business income.' The Tribunal also considered the decision in CIT v. Chinnapandi, 282 ITR 389, which supported the exclusion of interest income from business profits for the purpose of Section 80HHC.Judgment Analysis:Classification of Interest Income:The Court upheld the decision of the assessing officer and appellate authorities, confirming that the interest income from fixed deposits should be classified as 'income from other sources.' The Court emphasized that the deposits were made for the appellant's benefit to earn higher interest and were not a direct result of the export business.Deduction under Section 80HHC:The Court concluded that the interest income did not qualify for deduction under Section 80HHC as it was not derived directly from the export of goods or merchandise. The Court reiterated that Section 80HHC allows deductions only on profits directly arising from export activities.Nexus between Interest Income and Export Business:The Court rejected the appellant's argument of a direct nexus between the interest income and export business. It held that the interest earned on deposits, even if required for credit facilities, did not constitute business income as per the provisions of the Income Tax Act.Applicability of Judicial Precedents:The Court relied on the decisions in CIT v. Nizar Ahmed & Co., CIT v. Chinnapandi, and the Supreme Court's affirmation in Ravindranathan Nair v. Deputy Commissioner of Income-Tax (Assessment), 262 ITR 669 (Ker.), to support its conclusion. It dismissed the appellant's reliance on the Special Bench decision, affirming that the interest income should be treated as 'income from other sources.'Conclusion:The High Court dismissed the Tax Case Appeal, holding that the interest income earned from fixed deposits should be classified as 'income from other sources' and not 'business income.' Consequently, the interest income was not eligible for deduction under Section 80HHC of the Income Tax Act. The Court's decision was based on the interpretation of the relevant statutory provisions and supported by judicial precedents.