Deduction u/s. 80HHC allowed for interest on F.D. used to avail LC Facility if it have direct nexus with export business

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 we are concerned with the situation where the Assessing Officer himself has treated interest earned on the FDRs, which were given to the bank as security to avail of the credit facility, as business income and exports. The Assessing Officer has himself held that the FDRs were used to avail the working capital limits. In the assessment order it is not stated or even alleged that the said credit facilities from the bank had no nexus with the export business. On the other hand, it is stated that they had nexus with the letter of credit and the Assessing Officer has held that they had direct nexus with manufacturing and export business. A similar view has been taken by Delhi High Court in Commissioner of Income Tax Vs. Punjab Stainless Steel Ind. [2007] 162 Taxman 9 (Delhi) and Commissioner of Income Tax Vs. Anand Kumar [2007] 164 Taxman 330 (Delhi).