Commissioner of Income Tax Delhi-VIII, New Delhi vs Indian Handicrafts

The substantial questions of law formulated by this Court in the present matter are as under:- (i) Whether ITAT was correct in law in holding that the assessee was entitled to reduce interest paid by it on bank overdrafts against interest received by it on FDRs, while calculating deduction u/s 60HHC read with Explanation (baa) of the Income Tax Act?

(ii) Whether the ITAT was correct in law in deleting the interest charged by the income tax Officer u/s 234-B of the income tax Act?

The Respondent has been served. Ms. Prem Lata Bansal, Senior Standing Counsel for the Revenue and Mr. Prakash Kumar, Advocate, appearing on behalf of the Respondent Assessee, agree that the first question stands covered by the Judgment of this Court in Rishi Dev Batra Vs. Dr. (Mrs.) Anup Suri . 2. In the present case, the Assessing Officer (AO) did not allow netting of interest in regard to the FDRs pledged with the Bank by the Assessee for the purposes of availing overdraft limits for its export business. The CIT (Appeals) while allowing the Assessee''s appeal held that to the extent that the overdraft limits had been used for business, the interest from the FDRs should be treated as business income and considered for Section 80HHC deduction. The CIT(A) directed the AO to verify the amount so earned and calculate the Section 80HHC deduction.

Aggrieved that the CIT(A) had not itself allowed netting of interest, the Assessee filed an appeal before the Income Tax Appellate Tribunal (ITAT). The ITAT relied on its decision in (2004) 89 ITD 25 and upheld the contention of the Assessee that only the net interest paid shall be taken into account for the purpose of calculating profits and gains of business for calculating deduction u/s 80HHC.

This Court in its decision in Shri Ram Honda Power Equip''s case (supra) has held in para 20 that interest earned on Fixed Deposits for the purpose of availing credit facilities from the Bank does not have an immediate nexus with the export business and, therefore, has to be necessarily treated as income from other sources and not business income, thus taking it out of the ambit of Section 80HHC altogether. Accordingly, the decision of the ITAT on this point is set aside. Question (i) is accordingly answered in favour of the Revenue and against the Assessee.

As regards the second question, the CIT(A) held that interest u/s 234B has to be charged on the declared, income and directed fee AO to proceed on that basis- affirmed decision of the C1T(A) amendment to Section 234B of the Act with retrospective effect from 1-4-1989 by the Finance Act, 2001 by which. words "assessed tax" occurring in that provision have been defined in Explanation 1(b) to mean tax on assessed income. Accordingly, the decision of the ITAT on this point is set aside. Question (ii) is answered in favour of the Revenue and against the Assessee. The Appeal is accordingly allowed and disposed of as such, with no order as to costs.