Facts of the Case

The assessee, M/s Intra Port India, had earned interest income on surplus funds deposited with banks. While computing deduction under Section 80HHC of the Income-tax Act, the treatment of such interest income became the subject matter of dispute.

The Revenue preferred an appeal before the Delhi High Court contending that the issue already stood concluded by the earlier judgment of the Court in CIT v. Shri Ram Honda Power Equip (2007) 289 ITR 475, wherein it was held that interest earned on surplus funds parked with banks is assessable as income from other sources and is not eligible to be treated as profits derived from export business for Section 80HHC purposes.

Issues Involved

  1. Whether interest earned on surplus funds deposited with banks constitutes business income or income from other sources.
  2. Whether such interest income can be included while computing deduction under Section 80HHC of the Income-tax Act.
  3. Whether the principles laid down in CIT v. Shri Ram Honda Power Equip were applicable to the present case.

Petitioner’s Arguments (Revenue)

  • The Revenue argued that the controversy was fully covered by the decision of the Delhi High Court in CIT v. Shri Ram Honda Power Equip.
  • It was submitted that interest earned on surplus funds parked with banks cannot be regarded as profits and gains of business.
  • Such interest income is assessable under Section 56 as “Income from Other Sources”.
  • Consequently, the amount could not form part of the profits eligible for deduction under Section 80HHC.

Respondent’s Arguments (Assessee)

  • The assessee supported the order passed in its favour.
  • The assessee sought continuation of the benefit granted under the impugned order concerning the computation of deduction under Section 80HHC.

Court Findings

The Delhi High Court observed that the issue raised in the appeal was directly covered by its earlier decision in CIT v. Shri Ram Honda Power Equip (2007) 289 ITR 475.

The Court reiterated that where surplus funds are parked with banks and interest is earned thereon, such income can only be categorized as Income from Other Sources under Section 56 of the Income-tax Act.

The Court further held that such receipt falls outside the scope of profits and gains from business or profession and therefore cannot be taken into account for computing deduction under Section 80HHC.

Important Clarification

The Court relied upon and applied the following principle laid down in CIT v. Shri Ram Honda Power Equip:

  • Interest earned on surplus funds deposited with banks is taxable as income from other sources.
  • Such interest income is 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 because otherwise business profits would stand artificially reduced by expenditure relating to income that is itself excluded from Section 80HHC computation.

Sections Involved

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

Court Order

  • The appeal filed by the Revenue was allowed on the concerned issue.
  • The impugned order was set aside to that extent.
  • The directions issued in CIT v. Shri Ram Honda Power Equip were held applicable to the present case as well.
  • The appeal was accordingly disposed of.

Link to download the order -
https://delhihighcourt.nic.in/app/case_number_pdf/2008:DHC:3177-DB/RAS03122008ITA5532006.pdf

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