By TIOL News Service

ALLAHABAD, AUG 01, 2017: THE ISSUE BEFORE THE COURT IS - Whether interest earned by exporter on FDRs pledged with bank for availing credit facility, is liable for deduction in terms of explanation (baa) u/s 80HHC(4C), while computing his taxable income under the head "profits and gains of business and profession". YES is the verdict.

Facts of the case:

The Assessee, being an exporter of carpets, was under an obligation to invest some money in fixed deposit with the bank in order to avail credit facility for export. On this fixed deposit, he had earned interest and therefore claimed deduction of 90% of the said interest under explanation (baa) to sub-section (4C) of Section 80HHC. The same was however disallowed by the AO. Since the Assessee's appeal had failed before CIT(A) as well as ITAT, he preferred present appeal on the short substantial question of law as to whether the interest of Rs.10,32,523/- earned by assessee on fixed deposit receipts pledged with the bank for availing credit facility for the purposes of export, would be 'income from business' or it would be income from other sources, liable to deduction in terms of explanation (baa) after sub-section (4C) of Section 80HHC while computing his taxable income under the head "profits and gains of business and profession".

On appeal, the HC held that,

++ it is seen that the Government of India in order to encourage export inserted Section 89A of Income Tax Act w.e.f. 1st June, 1982 for providing tax relief to Indian companies or a resident of India having export turnover exceeding a specified limit. This provision of Section 89A of the Act was replaced by Section 80HHC vide Finance Act, 1983 w.e.f. 1.4.1983. The aforesaid Section 80HHC so inserted, inter alia, provides for deductions in respect of profit from export business as referred to in sub-section (1B) of Section 80HHC in computing the total income of the assessee. Explanation (baa) to sub-section (4C) of Section 80HHC in relation to export business defines "profits of the business" to mean the profits of the business as computed under the head "Profits and gains of business or profession" and as reduced, inter alia, by ninety per cent of any receipt by way of brokerage, commission, interest, rent or any other receipt of similar nature. A combined reading of Section 28, 80HHC with explanation (baa) aforesaid reveals that in relation to export business profits of the business would be computed (i) after deduction of specified percentage of profit as envisaged under sub-section (18) of Section 80HHC and then by computing it under the head "profits and gains of business and profession" after reducing it, inter alia, by ninety per cent of the receipt of interest. The aforesaid explanation (baa) do not specify the source of interest so received which is deductible from the profits and gains of business and profession. The main provision of Section 80HHC(1) is in relation to deductions of the profits to the extent specified under sub-section (1B) of it in computing the total income of assessee derived from the export business whereas the explanation (baa) provides for reduction of the income from business of export so computed under the head "profits and gains of business or profession" by the interest income to the extent specified;

++ the provision of Section 80HHC(1) and explanation (baa) to sub-section (4C) of it operates in totally two different situations. Section 80HHC provides for exclusion of the percentage of profits in computation of the total income of an assessee from export whereas the explanation (baa) provides for reduction of 90% interest receipt from unspecified sources in computing profits of the business of export under the "head profits and gains of business and profession". Thus, the income from the business of export after excluding the percentage as provided under Sub-section (1 B) has to be on computation under the head "profits and gains of business and profession" as provided u/ss 28 to 44 of the Act is reduced by the specified percentage of interest in accordance with explanation (baa) to sub-section (4C) of Section 80HHC of the Act. The emphasis is that the word used under Section 80HHC of the Act is 'derived' and the use of the said word is very important for determining the nature of the interest income. No doubt the above provision uses the word 'derived' and as pointed out it has a narrower meaning in comparison to the expression income attributable to business. However, in the case at hand, there is hardly any relevancy regarding the nature of the interest income earned by the assessee. Notwithstanding its nature, as the specified percentage of the said interest is deductible from the "profits of business" computed under the head "profits and gains of business and profession" as provided under the explanation (baa) to sub-section (4C) of Section 80HHC of the Act, the interest income as specified is deductible. Accordingly, the substantial question raised in this appeal is answered holding that the interest income earned by the assessee of the description specified is deductible from the income of the assessee under the head "profits and gains of business and profession" and this would be in addition to the deduction permissible under Section 80HHC(1) in respect of computing the total income in relation to the export business. The order of the ITAT stands modified accordingly.

(See 2017-TIOL-1444-HC-ALL-IT)