R.C. Sharma, A.M.: This is appeal filed by Revenue against order of CIT(A) dt. 14th May, 2004, for asst. yr. 2001-02, in matter of orders passed under s. 143(3)/148 of IT Act, 1961. Rival contentions have been heard and record perused. In grounds of appeal as many as ten grounds have been raised by Revenue but crux of issue revolves around direction of CIT(A) for allowing claim of deduction under s. 80HHC of Act on interest income of assessee who is 100 per cent exporter. In course of assessment, under s. 143(3)/148 of Act, AO treated interest income credited in P&L a/c on FDRs, as income from other sources instead of business income . AO also did not allow netting of interest expenditure paid on overdraft limit availed against FDRs held by it, on which assessee has earned interest income. By impugned order, CIT(A) observed that FDRs were purchased to maintain overdraft facility to run business smoothly and this was common routine business activity. He, therefore, held that FDRs were purchased out of business income accordingly and interest earned from FDRs is income from business and not income from other sources . He further directed AO to allow deduction under s. 80HHC of Act on such interest income. It was argued by learned Departmental Representative Shri G.S. Sahota that FDRs were made out of surplus fund which were not required by assessee firm for business activities. At any time during year under consideration, there was no nexus between income earned on FDRs and income earned from business. After pointing out various decisions relied on by AO in his order, he kly contended for upholding order of AO for treating such interest income as income from other sources and not eligible for claiming deduction under s. 80HHC of Act. On other hand, learned Authorised Representative Shri Anil Kumar Gupta referred various decisions of High Courts and Tribunal Orders wherein preponderance of decisions goes in favour of assessee and interest income earned by exporter out of FDRs made out of business income was treated as "income from business" and not as "income from other sources". He also submitted that even on ground of tax effect, appeal of Revenue deserves to be dismissed in view of CBDT Instruction No. 2 dt. 24th Oct., 2005 for not filing appeal where tax effect is less than Rs. 2 lakhs. We have considered rival contentions carefully gone through orders o f authorities below. In view of ground raised before us raises substantial question of law, plea of assessee for not entertaining appeal of Revenue in view of CBDT Instruction dt. 24th Oct., 2005, cannot be accepted and we are, therefore, inclined to decide issue on merits. On basis of material on record, we found that in this case interest income has been treated by AO as "income from other sources" whereas CIT(A) has treated interest income as business income and directed only for allowing claim of deduction under s. 80HHC but also netting of income. issue regarding treatment of interest income while computing deduction under s. 80HHC has been elaborately considered by Delhi High Court in case of CIT vs. Shri Ram Honda Power Equip & Ors. (2007) 207 CTR (Del) 689: (2007) 289 ITR 475 (Del) wherein decisions of various High Courts on same issue was considered and elaborate reasoning has been given for arriving at conclusion and broad principles for determining nature of interest income, as to whether such interest income is "business income" as computed under ss. 28 to 44 of Act or income from other sources as determined under s. 56 r/w s. 57 of Act, were also laid out. first category of such interest income was held by Hon ble High Court as arising out of parking of surplus fund, such income is to be treated as income from other sources . second category of cases are those where AO himself treats interest income as income from business , on plea that such interest income was inextricably linked with export business. Here we are concerned with first category where AO treats such income as not related to business of exports, but as income from other sources . However, High Court in such situation have held that these receipts merits separate treatment under s. 56 of Act which is outside ring of profit and gains from business and profession . Court has further provided that to give effect to this position, AO while computing profits of export business effect to this position, AO while computing profits of export business will have to remove from debit side of P&L a/c, corresponding interest expenditure that had been "laid out" to earn such income from other sources. Otherwise, this will depress profit by amount which is out of reckoning of s. 80HHC, consequence not intending to be brought about. Following is relevant observation of Hon ble High Court at Para 19: "...We are, therefore, of view that where surplus funds are parked with bank and interest is earned thereon it can only be categorized as income from other sources. This receipt merits separate treatment under s. 56 of Act which is outside ring of profits and gains from business and profession. It goes entirely out of reckoning for purpose of s. 80HHC. To give effect to this position, AO while computing profits of export business will have to remove from debit side of P&L a/c corresponding interest expenditure that has been laid out to earn such income from other sources. Otherwise this will depress profits by amount which is out of reckoning of s. 80HHC, consequence not intended to be brought about." (p. 495) It is quite clear from above proposition that if assessee has incurred any expenditure for making FDRs, interest income of which is brought to tax under head Income from other sources , such interest expenditure is to be taken out from profits of export business, and at same time such interest expenditure is to be deducted while arriving at net income from interest on bank deposit. Taking out such interest income and interest expenditure out of P&L a/c prepared for computing export profits, will change such export profit, therefore, AO is to recalculate permissible deduction under s. 80HHC with reference to such revised export profits. On other hand, such interest expenditure is to be allowed as deduction while computing net interest income to be taxed under s. 56 as income from other sources. In instant case before us AO has held interest income as income from other sources. In view of proposition laid down by Jurisdictional High Court as discussed above, AO is required to exclude any interest expenditure if any relatable to such income from P&L a/c of export business. At very same time such interest expenditure is required to be reduced from interest income for bringing net interest income to tax net under s. 56 of IT Act. However, before allowing such interest expenditure, assessee is required to establish that it had incurred interest expenditure for getting bank deposit on which interest income was earned. Only where assessee is able to prove that cheques issued for making bank deposits had been issued out of credit facilities availed by it or out of borrowed funds, such exclusion of interest expenditure is permissible. If AO found that no interest expenditure had been incurred for making such bank deposits on which assessee is in receipt of interest income, no deduction o f interest expenditure under s. 57 is permissible, nor export profit as per P&L a/c is required to be disturbed. We, therefore, restored matter back to file of AO for deciding issue of deduction of interest expenditure out of interest income earned by assessee and recomputation of deduction under s. 80HHC in light of our observation and proposition laid down by Delhi High Court in case of Shri Ram Honda Power Equipment (supra). We direct accordingly. In result, appeal of Revenue is allowed for statistical purposes. *** ASSISTANT COMMISSIONER OF INCOME TAX v. SMT. IQBAL KAUR