Delhi High Court: Interest Income from Fixed Deposits Not Business Income

The High Court of Delhi clarified that interest income earned on Fixed Deposit Receipts (FDRs) should be treated as income from other sources, not business income eligible for relief under Section 80HHC of the Income Tax Act. The court emphasized the need to exclude corresponding interest expenditure while computing profits for export businesses to avoid distorting eligible profits. The judgment provides guidance to Assessing Officers on accurately accounting for interest income to prevent unintended profit reduction for tax relief purposes. The appeal was allowed in favor of the revenue and against the assessee.

---

---

Issues involved:
Interpretation of whether interest earned on Fixed Deposit Receipts (FDRs) qualifies as business income under Section 80HHC of the Income Tax Act, 1961.

Analysis:
The High Court of Delhi framed a substantial question of law regarding the classification of interest income earned on FDRs as business income eligible for relief under Section 80HHC of the Income Tax Act, 1961. The court referred to previous decisions, including CIT vs. Sriram Honda Power Equipment and CIT vs. Jyoti Apparels, to establish a precedent. The court reiterated that interest earned on surplus funds parked in banks should be categorized as income from other sources, falling outside the scope of business income. This income must be treated separately under Section 56 of the Act and should not be considered for relief under Section 80HHC. The court emphasized the need for the Assessing Officer to exclude corresponding interest expenditure from the profit and loss account while computing profits of the export business to avoid distorting the profits eligible for Section 80HHC relief. Consequently, the court allowed the appeal, ruling in favor of the revenue and against the assessee.

This judgment clarifies the treatment of interest income earned on FDRs in the context of business income under Section 80HHC. It establishes that such interest income should be considered as income from other sources, distinct from business income, and thus not eligible for relief under Section 80HHC. The court's decision underscores the importance of correctly accounting for interest income from surplus funds to ensure accurate computation of profits for tax purposes, particularly in the context of export businesses. The judgment provides guidance to Assessing Officers on the proper treatment of interest income to prevent any unintended reduction in profits eligible for tax relief under Section 80HHC.

---