Facts of the Case

The assessee, Jyoti Apparels, earned interest amounting to ₹41,22,165 from Fixed Deposit Receipts (FDRs). The Income Tax Appellate Tribunal (ITAT) held that such interest income constituted business income and accordingly qualified for deduction under Section 80HHC of the Income-tax Act, 1961.

Aggrieved by the Tribunal's decision, the Commissioner of Income Tax preferred an appeal before the Delhi High Court challenging the eligibility of the interest income for deduction under Section 80HHC.

Issues Involved

  1. Whether the interest income of ₹41,22,165 earned by the assessee on FDRs could be treated as business income?
  2. Whether such interest income qualified for deduction under Section 80HHC of the Income-tax Act, 1961?

Petitioner’s Arguments (Revenue)

  • The Revenue contended that interest earned on FDRs does not arise from export business activities.
  • Such income is assessable under the head "Income from Other Sources" under Section 56 of the Act.
  • Consequently, the interest income cannot form part of profits derived from export business for the purpose of deduction under Section 80HHC.
  • Reliance was placed upon the decision of the Delhi High Court in CIT v. Sriram Honda Power Equipment (289 ITR 457).

Respondent’s Arguments (Assessee)

  • The assessee supported the findings of the ITAT.
  • It was argued that the interest income should be regarded as business income and included in the computation of profits eligible for deduction under Section 80HHC.
  • The assessee sought continuation of the relief granted by the Tribunal.

Court Findings

The Delhi High Court observed that the issue was no longer res integra and had already been settled by a series of judgments beginning with CIT v. Sriram Honda Power Equipment (289 ITR 457) and also by an earlier decision involving the same assessee in ITA No. 756/2006 decided on 19.01.2007.

The Court reiterated the principle laid down in Sriram Honda Power Equipment that where surplus funds are parked with banks and interest is earned thereon, such interest income is assessable under the head "Income from Other Sources" under Section 56 and not as business income.

The Court further clarified that such income falls outside the scope of profits and gains of business and profession and therefore cannot be considered while computing deduction under Section 80HHC.

Important Clarification by the Court

The Court emphasized the observations made in CIT v. Sriram Honda Power Equipment that:

  • Interest earned on surplus funds deposited with banks is taxable as "Income from Other Sources".
  • Such income remains outside the computation mechanism of Section 80HHC.
  • While computing export profits, the Assessing Officer must remove from the debit side of the Profit and Loss Account the corresponding interest expenditure incurred for earning such interest income.
  • This adjustment is necessary to avoid unintended reduction of eligible business profits for Section 80HHC purposes.

Section Involved

  • Section 80HHC of the Income-tax Act, 1961
  • Section 56 of the Income-tax Act, 1961

 

Court Order / Decision

  • The appeal filed by the Revenue was allowed.
  • The substantial question of law was answered in favour of the Revenue and against the assessee.
  • The Court held that interest earned on FDRs is assessable as "Income from Other Sources" and does not qualify for deduction under Section 80HHC.
  • The Assessing Officer was directed to keep in view the principles laid down in CIT v. Sriram Honda Power Equipment while computing eligible profits.

Link to Download the Order

https://delhihighcourt.nic.in/app/case_number_pdf/2008:DHC:2204-DB/RAS31072008ITA6352007.pdf

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