Joginder Pall, A.M.: By this order, we shall dispose of this appeal of assessee filed against order of CIT(A), Jalandhar, for asst. yr. 1998-99. only grievance of assessee projected through its grounds of appeal is that learned CIT(A) was not justified in upholding order of AO in disallowing part of claim of assessee for deduction under s. 80HHC. facts of case are that assessee had credited interest from banks amounting to Rs. 59,66,540 on FDRs in bank to P&L a/c. While computing deduction under s. 80HHC, assessee had reduced 90 per cent of interest received from net profit for purpose of computing deduction under s. 80HHC as per Expln. (baa) below s. 80HHC(4B) inserted by Finance (No. 2) Act, 1992, w.e.f. 1st April, 1992. While completing assessment, AO treated interest on FDRs as income from other sources and thereby reduced deduction under s. 80HHC from Rs. 2.23 crores to Rs. 2.17 crores. Being aggrieved, assessee impugned action of AO in appeal before CIT(A). It was explained before CIT(A) that whether interest income should be treated as income from other sources or income from business would not make any material difference in view of cl. (baa) of Explanation below s. 80HHC(4A) of IT Act, which was introduced w.e.f. 1st April, 1992. Reference was also made to Explanatory Notes for explaining purpose of inserting such Explanation. It was explained that while these items were in nature of income but had no element of turnover and, therefore, it gave distorted picture of export profits which were to be computed as per existing formula given in s. 80HHC(3). It was also explained that assessee had itself reduced 90 per cent of interest for purpose of computing deduction under s. 80HHC and only 10 per cent of such amount remained as business profit for purpose of computing deduction under s. 80HHC. learned CIT(A) considered these submissions and held that for purpose of computing deduction under s. 80HHC, interest @ 90 per cent was required to be reduced only if it was held as "profits and gains of business" under cl. (baa) of Explanation 80HHC. According to him, interest on FDRs was not business profit and, therefore, remaining 10 per cent of interest was not to be considered for purpose of computing deduction under s. 80HHC. Accordingly, learned CIT(A) upheld order of AO. assessee is aggrieved by order of CIT(A). Hence, this appeal before us. learned Authorised Representative for assessee drew our attention to p. 4 of paper book which is copy of Explanatory Notes when cl. (baa) of Explanation 80HHC was inserted in Act. He submitted that cl. (baa) of Explanation refers only to nature of receipts by way of brokerage, commission and rent charges or any other receipt of similar nature. It does not say that such receipt should only be or from business profit. He submitted that cl. (baa) of Explanation to s. 80HHC refers to reduction to extent of 90 per cent of gross amount and this view is also covered by judgment of jurisdictional High Court in case of Rani Paliwal vs. CIT (2003) 185 CTR (P&H) 333: (2004) 268 ITR 220 (P&H), where it was held that reduction of 90 per cent in respect of items of nature mentioned therein including interest was to be reduced from gross amount and not in respect of net amount. He submitted that assessee had reduced interest @ 90 per cent in respect of gross amount and not in respect of net amount. He further referred to judgment of Hon ble Punjab & Haryana High Court in case of Liberty Footwear Co. vs. CIT (2004) 191 CTR (P&H) 378, where it was held that even if receipts from machinery hire charges and building rent were assessable as business income, 90 per cent of same had yet to be excluded for computing profits of business for purpose of deduction under s. 80HHC. Thus, it was submitted that learned CIT(A) was not justified in excluding 10% of amount of interest for purpose of computing deduction under s. 80HHC. learned Departmental Representative, on other hand, heavily relied on orders of authorities below. We have heard both parties and carefully considered rival submissions with reference to facts, evidence and material on record. We have also gone through orders of authorities below. Now, first issue that requires to be decided whether interest declared by assessee was business income or income from other sources? second question related to this issue is that whether 10 per cent of interest can be considered against expenses incurred for earning such interest even if it is held to be taxable under head "Income from other sources"? copy of P&L a/c is placed at p. 1 of paper book. same shows that there is no debit on account of interest in P&L a/c. assessee has credited interest of Rs. 59,66,540 to its P&L a/c and computation of deduction under s. 80HHC is at p. 3 of paper book which shows that 90 per cent of amount of entire interest of Rs. 59,66,540 which worked out to Rs. 53,64,486 was reduced from profits and gains of business as per Expln. (baa) to s. 80HHC. In case of Rani Paliwal vs. CIT (supra), Hon ble High Court has held that 90 per cent of gross interest received by assessee was required to be reduced for purpose of computing deduction under s. 80HHC(3) and amount of interest paid by assessee could not be deducted from gross amount of interest for purpose of reducing 90 per cent of same. In case of K.S. Subbiah Pillai & Co. (India) (P) Ltd. vs. CIT (2003) 179 CTR (Mad) 522: (2003) 260 ITR 304 (Mad), following two questions were raised before Hon ble Madras High Court: "1. Whether on true construction of Expln. (baa) to s. 80HHC of I T Act, 1961, interest, rent and commission are to be deducted from export profits or only net receipts, if any, after taking into account payments? Whether on true construction of Expln. (baa) to s. 80HHC of IT Act, all net receipts by way of interest, rent and commission should be aggregated before deduction and only net balance, if any, should be deducted from export profits?" By referring to cl. (baa) of Explanation to s. 80HHC, Hon ble High Court held that only amounts already included in computation of "profits and gains of business or profession" were required to be reduced to extent of 90 per cent and, therefore, interest paid and claimed as deduction in computation of profits and gains of business cannot be set off against interest received and computed under "Income from other sources". Thus, it was held that interest paid by assessee and claimed against profits and gains of business could not be adjusted against interest received for purpose of reducing 90 per cent of interest for purpose of computing deduction under s. 80HHC. ratio of this judgment is also more or less same as that of Hon ble Punjab & Haryana High Court in case of Smt. Rani Paliwal (supra). In any case, this issue is not before us because assessee has not reduced 10 per cent of net interest, it has reduced 10 per cent from gross amount. In fact, there is no interest paid by assessee. In this case, assessee has credited interest of Rs. 59,66,540 to P&L a/c as business income and same is included in profits and gains of business. However, Revenue has taken view that such interest was taxable under head, "Income from other sources". We find from copy of assessment order for earlier asst. yr. 1997-98 that assessee had earned interest on FDRs and 90 per cent thereof which worked out to Rs. 5,96,654 was reduced for purpose of computing deduction under s. 80HHC by treating same as part of business profit. This action of assessee for assessment year under reference was in consonance with treatment given f o r earlier assessment years and allowed by AO. However, for assessment year under reference, AO has treated such interest as income from other sources. assessee is not in business of money-lending. In fact, almost entire income of assessee is exempt under s. 80HHC and interest earned by assessee is on surplus funds available. Therefore, interest earned on surplus funds could not be considered as profit derived from export of goods, as it does not have any direct or immediate nexus with export business of assessee. This view also funds support from judgment of Hon ble Supreme Court in case of Pandian Chemicals Ltd. vs. CIT (2003) 183 CTR (SC) 99: (2003) 262 ITR 278 (SC). In fact, case of assessee stands on much weaker footing as keeping surplus money in FDRs has no connection with business of assessee. Moreover, no specific arguments were advanced by learned counsel in support of contention that such income was taxable as business profit. Therefore, we confirm findings of authorities below and reject this ground of appeal in treating interest as income from other sources. next issue that requires to be considered by this Bench is whether cl. (baa) of Explanation to s. 80HHC will come into operation for purpose of (baa) of Explanation to s. 80HHC will come into operation for purpose of computing deduction under s. 80HHC, if interest is held to be taxable as income from other sources. In this connection, it would be appropriate to reproduce hereunder cl. (baa) of Explanation to s. 80HHC: "(baa) "profits of business" means profits of business as computed under head "Profits and gains of business or profession" as reduced by (1) ninety per cent of any sum referred to in cls. (iiia), (iiib) and (iiic) of s. 28 or of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of similar nature included in such profits; and (2) profits of any branch, office, warehouse or any other establishment of assessee situate outside India;" bare reading of cl. (baa) shows that it shall come into operation only if interest income forms part of profits of business computed under head "Profits and gains of business or profession". In case such interest income is held to be taxable under head "Income from other sources", same would not form part of profits of business and cl. (baa) will not be applicable to this case. Such interest would be liable to be computed under head "Income from other sources". However, in present case, it is noted that assessee had maintained only one complete P&L a/c where GP along with other receipts including interest of Rs. 59,66,540 were credited. All expenses relating to business including expenses relating to earning of interest income have been debited to P&L a/c. Even if interest income is taxed under head "Income from other sources", it would be unfair to deny deduction of proportionate expenses necessary for earning such income. In case proportionate expenses for earning such income are reduced from P&L a/c, same would result in increase in export profit for which assessee would be entitled to deduction under s. 80HHC. Now, question that requires to be considered is that what would be extent of proportionate expenses for earning such interest income. As mentioned earlier, cl. (baa) of Explanation to s. 80HHC was inserted by Finance (No. 2) Act, 1991, w.e.f. 1st April, 1992. rationale for reducing amount of interest, commission, rent, brokerage and receipts of similar nature included in P&L a/c was explained by Explanatory Note as given in (1991) 96 CTR (St) 200: (1991) 190 ITR (St) 299 was that assessee must have incurred atleast some expenses for earning such income. Therefore, legislative intent was to restrict reduction to extent of 90 per cent and not to extent of 100 per cent. Thus, amount of 10 per cent of such receipts was considered to be as forming part of expenses for earning such income. Therefore, to that extent part of receipts was held to be included in business profit for purpose of computing deduction under s. 80HHC because expenses for earning such income are already charged to P&L a/c. This issue had also come up before Tribunal, Chandigarh Bench, in case of Hero Exports (P) Ltd. vs. Asstt. CIT in ITA No. 803/Chandi/1997, for asst. yr. 1994-95, where it was held that such expenses to extent of 10 per cent would not fall in category of direct costs or indirect costs mentioned in cl. (b) to s. 80HHC(3) for purpose of computing profits of export of trading of goods. relevant findings recorded in aforesaid order are as under: "11. We have heard both parties and given our thoughtful consideration t o rival submissions. We have also examined facts, evidence and material on record. From facts detailed above, it is obvious that assessee h d revised claim for deduction under s. 80HHC during course of assessment proceedings by filing letter dt. 27th Dec., 1996, duly supported by auditor s report in Form No. 10CCAC. There was no need for assessee to file revised return in order to revise its claim for deduction under s. 80HHC. Such claim could be made even by filing letter. same was duly considered by AO and CIT(A). Therefore, assessee cannot be faulted on this ground that claim was revised during course of assessment proceedings. As regards merits of claim, dispute relates only to computation of profits from export of trading goods. In return of income, assessee had shown such profits at Rs. 6,010 and in revised claim; assessee had shown such profit at Rs. 19,332. Sub-cl. (b) of s. 80HHC(3) provides that in case export out of India is of trading goods, profits derived from such export shall be export turnover in respect of such trading goods as reduced by direct costs and indirect costs attributable to such exports. "Direct costs" have been defined in item (d) of Explanation as to costs directly attributable to trading goods exported out of India including purchase price of such goods. Item (d) of Explanation to s. 80HHC(3) defines "indirect costs" as to mean costs not being direct costs, allocated in ratio of export turnover in respect of trading goods to total turnover. Clause (baa) of Explanation to s. 80HHC provides for reduction by 90 per cent of items referred to in cls. (iiia), (iiib) and (iiic), and other items mentioned therein. This Explanation was inserted by Finance (No. 2) Act, 1991, w.e.f. 1st April, 1992. In Explanatory Notes referred to above, it has been explained that rationale behind reducing amount by 90 per cent and retaining 10 per cent interest thereof is that assessee must have incurred some expenses for earning such income which is part of common expenses. Therefore, it is natural to assume that 10 per cent of such expenses in respect of those items, which in this case are in form of duty drawback of Rs. 1,33,317, is to be considered for earning such income. Therefore, these expenses would not fall in category of "direct costs" or "indirect costs" mentioned in cl. (b) of s. 80HHC(3) for purposes of computing profits on exports of trading goods. We have also seen that assessee has not included 10 per cent of export incentives in business profit from export of trading goods as same has been separately worked out. Accordingly, revised computation of profits from export of trading goods given by assessee at Rs. 19,832 is quite correct and is in conformity with legislative intent of apportioning 10 per cent of receipts mentioned in Expln. (baa) to s. 80HHC(4B) for common expenses. As regards objection raised by Revenue that s. 80HHC(3) does not provide for such adjustment, same is not correct. We have to separately compute business profits from trading goods by reducing direct and indirect costs from export turnover in respect of such trading goods. This also implies that expenses, which related to earning of export incentives as explained by CBDT in Explanatory Notes could note be considered against profits from trading goods. decision of Tribunal, Bombay Bench, in case of XYZ vs. Asstt. CIT (supra) also supports this view. We are unable to accept submission of learned Departmental Representative that same is distinguishable on facts. No doubt, same relates to reducing interest cost, but this item is also covered under Expln. (baa) to s. 80HHC(4B). Having regard to these facts and circumstances of case, we are of considered opinion that CIT(A) was not justified in sustaining action of AO in not allowing deduction of Rs. 1,39,317 under s. 80HHC. Accordingly, we set aside order of CIT(A) and direct AO to allow deduction under s. 80HHC of Rs. 1,39,317. This ground of appeal is allowed." Subsequently, this issue also came to be considered by Tribunal, Special Bench, in case of Surendra Engg. Corpn. vs. Asstt. CIT (2003) 78 TTJ (Mumbai)(SB) 347: (2003) 86 ITD 121 (Mumbai)(SB) where it was held that 10 pert cent of items mentioned in cl. (baa) of Explanation to s. 80HHC must b e attributed as indirect costs to earning of such income, and to that extent, indirect expenses debited to P&L a/c be reduced for purpose of computing deduction under s. 80HHC(3) of IT Act. Thus, it was held that any indirect costs which can reasonably be attributed to trading goods of receipts otherwise export turnover of trading goods will have to be left out of consideration at threshold itself. Such action is in conformity with legislative intent. reasoning given therein can equally be considered for purpose of apportioning part of such expenses debited to P&L a/c to interest income which is liable to be taxed under head "Income from other sources" because it cannot be said that expenses required to be incurred for earning such income from business would be different from earning such income under head "Income from other sources" when income is same. In fact, if legislature could consider 10 per cent of such expenses for earning of export incentives like duty drawbackcash subsidy, it would not be unreasonable to apportion 10 per cent of such expenses against income from interest and "Income from other sources". In case of CIT vs. United General Trust Ltd. (1994) 116 CTR (SC) 194: (1993) 200 ITR 488 (SC), Hon ble apex Court has held that proportionate management expenses had to be deducted from gross dividend income for purpose of relief under s. 80M. rationale behind same is that part of management expenses have to be equally considered against earning of Income from other sources . copy of P&L a/c is at p. 1 of paper book, which shows profit of Rs. 2,77,38,679.97 inclusive of bank interest of Rs. 59,66,540. Total expenses debited to P&L a/c inclusive of bank interest of Rs. 59,66,540. Total expenses debited to P&L a/c aggregate to Rs. 2,69,39,537. Thus, it would be fair, appropriate and reasonable to apportion 10 per cent of expenses of bank interest of Rs. 59,66,540 which works out to Rs. 5,96,654 against earning of bank interest. If these expenses are apportioned towards interest income which is liable to tax under head Income from other sources and is to be separately computed, same would result in increase in export profits of Rs. 5,96,654. same would be entitled to deduction under s. 80HHC. In light of these facts and circumstances of case, we are of view that 10 per cent of interest receipts of Rs. 59,66,540 is attributable to expenses for earning such interest income and, therefore, to such extent, costs of such amount are required to be reduced from expenses charged to P&L a/c. same would result in increasing export profits entitled to deduction under s. 80HHC. Thus, even if interest income is considered to be taxable under head Income from other sources , same would not affect quantum of deduction under s. 80HHC as claimed by assessee. Accordingly, we set aside order of CIT(A) and direct AO to allow deduction under s. 80HHC as claimed by assessee. This ground of appeal is allowed. In result, appeal of assessee is allowed. *** SAKAY TRADERS v. ADDITIONAL COMMISSIONER OF INCOME TAX