Interest earned by assessee deemed business income for deduction under section 80HHC. Legislative changes not retroactive.

The Special Bench held that the interest earned by the assessee constituted business income eligible for deduction under section 80HHC. The interest was considered an incidental receipt generated in the course of business, not from investments. The legislative changes were found to be prospective and not applicable to the assessment year in question. The decision favored the assessee, directing the matter to the regular Bench for further proceedings in accordance with the law.

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Issues Involved:
1. Whether interest earned on idle and surplus funds temporarily invested by the assessee constitutes business income eligible for deduction u/s 80HHC or should be treated as income from other sources.

Summary:

1. Facts of the Case:
The assessee, a 100% exporter, disclosed export sales of Rs. 40,60,000 and net profit of Rs. 28,73,275, including interest of Rs. 59,544. The assessee claimed deduction u/s 80HHC on the total income. The AO assessed the interest income under "other sources" and disallowed the deduction on this amount.

2. Assessee's Appeal:
The assessee argued that the interest earned on short-term deposits and temporary advances was "business income" and not "income from other sources." The interest was part of business income, earned through reciprocal arrangements with sister concerns to minimize financial burden and improve profitability.

3. CIT(A)'s Observations:
The CIT(A) upheld the AO's decision, stating that interest income is not derived from export sales and cannot be considered as profits derived from the export of goods or merchandise. The CIT(A) cited various High Court decisions to support this view.

4. Tribunal's Reference to Special Bench:
Due to divergent views from different Tribunal Benches, the matter was referred to the Hon'ble President, who constituted a Special Bench to resolve the issue.

5. Special Bench Hearing:
The Special Bench heard arguments from both parties. The assessee's representative emphasized that the legislative changes in s. 80HHC effective from 1st April 1992 were not applicable to the assessment year 1990-91. The interest was earned from business funds and should be considered as business income.

6. Revenue's Argument:
The Revenue argued that the assessee was not engaged in money-lending business and the interest income should be assessed under "other sources." They relied on the decision of the Rajasthan High Court in CIT vs. Rajasthan Land Development Corporation.

7. Special Bench's Analysis:
The Special Bench analyzed the legislative changes and concluded that the amendments to s. 80HHC effective from 1st April 1992 were prospective and not applicable to the assessment year 1990-91. The Bench also considered various judicial precedents and the definition of "business."

8. Conclusion:
The Special Bench held that the interest earned by the assessee was business income for purposes of s. 80HHC and should be taken into account for rebate. The interest was an incidental receipt generated in the course of business and not an investment. The question was answered in favor of the assessee, and the matter was directed to be placed before the regular Bench for disposal in accordance with the law.

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