SUKANTA SAMANTRAY vs. COMMNR.OF INCOME TAX

Whether Reporters of Local newspapers may be allowed to see the Judgment? 2. To be referred to the Reporter or not? 3. Whether the Judgment should be reported in the Digest?

Admit. 2. The question which arises in this appeal is as under:- “Whether ITAT was correct in law in allowing benefit of netting of interest to the assessee while computing deduction u/s 80HHC of the Act?”

We have heard the final arguments with the consent of counsel for the parties.

It so happened that the assessee had earned interest on Rs.14,24,027/- on certain fixed deposit receipts. The question that arose was as to whether it has to be taken into consideration while

Both the parties agree that the matter is covered by the judgment of this court in Commissioner of Income Tax v. Shri Ram Honda Power Equip; 289 ITR 475. It is the application of the legal principle laid down in the said case, to the facts of this case, on which there is an issue between the parties.

In Shri Ram Honda Power Equip (Supra) after a detailed discussion on various aspects touching the interpretation of Section 80HHC of the Income Tax Act, the court summarized the conclusions in the following words: “(i) In computing what the profits derived from exports for the purposes of section 80HHC(1) read with section 80HHC(3) are, the nexus test has to be applied to exclude that which does not partake of profits that can be said to have been derived from the business of exports.

A conjoint reading of conclusions No.1,4,5 and 6 and particularly No.5 would clearly demonstrate that only in those cases where interest earned on fixed deposits have an immediate nexus with the export business would be treated as income from business and interest earned on fixed deposits which does not have an immediate nexus with the export business, it would be treated as income from other sources. The court opined that when the interest was earned on the fixed deposits for the purposes of availing of credit facilities from the bank, it did not have such a nexus with the export business and therefore had to be necessarily treated as income from other sources and not the business income.

Thus, insofar as earning of interest on fixed deposit is concerned, the determinative test is as to whether such interest has “immediate nexus” with the export business.

In the present case, the interest is earned from certain fixed deposit receipts. These fixed deposit receipts were not, as a result of some surplus funds available to the assessee which was parked with the bank and the interest earned thereon. It has been found, as a fact, that the money was deposited in the bank and the fixed deposit receipt was taken by the assessee for the purposes of giving bank guarantees to enable the assessee to procure quota for export. Certain other fixed deposit receipts were of EEFC Account. Such receipts were deposited with the Apparel Export Promotion Council (AEPC) against guarantees being legal pre- condition for procurement of quota in the absence of which no business is done. It clearly implies that without such quota, which was ultimately procured by the assessee, no export of garment could be made. This quota is obtained from AEPC and AEPC sanctions the quota only when fixed deposit receipts are pledged with it in the form of a bank guarantee. It is because of the reason that the exporter is required to meet various conditions prescribed for allowing the quota. One of the conditions is to make actual exports to the extent of quota. If the exports are deficient then penalties can be imposed and to safeguard that, guarantees are obtained. Likewise, fixed deposit receipts on EEFC account also relate to the export.

It would, thus, be clear that furnishing of these fixed deposit receipts is an obligation, and is a pre-condition for obtaining export quota in the absence of which exports cannot be made. In such a scenario, the furnishing of these bank guarantees is a direct nexus with the export activities of the assessee and interest earned thereupon would clearly be treated as having an immediate nexus with the export business.

We are, therefore, of the opinion that CIT appeal as well as Income Tax Appellate Tribunal has rightly applied the principle laid down in Shri Ram Honda Power Equip (Supra). It may be useful to mention that in Shri Ram Honda Power Equip (Supra) this court specifically affirmed the judgment of Special Bench of the Tribunal in Lal Sons Enterprises v. Commissioner of Income Tax; 2004 (89) ITD 25 (Delhi) and particularly the following observations which were extracted by this court as under:- “if the interest received is found to have a nexus with the business, still it remains to be excluded from the profits of the business by virtue of Explanation (baa)(1), but the claim is that the quantum of such interest income to be excluded must be determined in accordance with the computation provisions relating to business by allowing expenditure by way of interest which bears a nexus with the interest receipt. The computation provisions included section 37(1) under which any expenditure incurred or laid wholly and exclusively for the purpose of the business is to be allowed as a deduction. Therefore, any expenditure incurred which has a connection or nexus with interest receipt has to be allowed as a deduction and only the balance can be excluded from the business profits.”

Once this positions is accepted, as per the formulation of principle laid down in Shri Ram Honda Power Equip (supra) itself, netting has to be allowed by the adjustment of aforesaid interest received against the interest paid by the assessee to the bank on the credit facilities availed as is clear from the conclusion No.8 in the judgment.

We, accordingly, concur with the aforesaid view of the ITAT and thus answer the question in favour of the assessee and against the revenue, as a result this appeal is dismissed.