2009 (5) TMI 617 - AT - Income Tax

Deduction u/s 10A - Interest earned on fixed deposits - Whether or not the deduction is available u/s 10A on the interest income - AO observed that the interest income on fixed deposits was in the nature of income from other sources as it had no relation with the activity of export of goods and merchandise - It was therefore held that assessee not entitled to deduction u/s 10A - No relief was allowed in the first appeal. HELD THAT - We find that sub-section (1) also employs the expression derived from the export of articles. But it is not the end of the matter. The expression profits derived from export of articles or things or computer software as employed in sub-section (1) or (1A) has been given a specific meaning in sub-section (4). Once the expression derived from having restricted scope has been specifically defined in the same section then the meaning of such expression as understood in common parlance will not be applicable. Rather the specific meaning given to it will come into play. We further note that sub-section (4) has been worded on the pattern of section 80-IA prior to its substitution with effect from 1-4-2000 which referred to profits and gains derived from any business of an industrial undertaking . From the facts of the instant case it is noted that the assessee had given FDRs to the bank for obtaining credit facility. Such interest income has nexus with the business of the undertaking and falls under the head Profits and gains of business or profession as having relation with the carrying on of the business. Similar view has been taken in the case of Motorola India Electronics (P.) Ltd. 2006 (11) TMI 541 - ITAT BANGALORE . In our considered opinion CIT(A) was not justified in treating the interest income as not derived from the export activity. We therefore hold that the assessee was entitled to deduction u/s 10A in respect of the interest income. The resultant denial of deduction u/s 10A is deleted. Appeal is allowed.

Summary

Issues:
1. Denial of claim for deduction under section 10A on interest income.

Analysis:
The appeal arose from the Commissioner of Income-tax (Appeals) order concerning the assessment year 2003-04. The primary issue raised was the denial of the assessee's claim for deduction under section 10A on interest income amounting to Rs. 9,00,961. The Assessing Officer disallowed the deduction, stating that the interest earned on fixed deposits was not derived from the export of goods and merchandise. The Assessing Officer relied on the distinction between "derived from" and "attributable to," as interpreted in various judgments, to support the denial of the deduction. The first appeal also did not grant any relief to the assessee.

The learned Counsel for the assessee argued that the interest income from fixed deposits should be eligible for deduction under section 10A because parking funds in FDRs were necessary to avail credit facilities from the bank. The Counsel referred to a case where a similar deduction was allowed. The Departmental Representative opposed this, contending that the interest income from FDRs was not business income and thus not eligible for section 10A deduction.

Upon considering the arguments and relevant precedents, the Tribunal analyzed section 10A(1), which allows deduction for profits and gains derived from the export of articles. The Tribunal observed that the term "derived from" necessitates a direct connection to the export activity for eligibility. The Tribunal cited cases where the Supreme Court clarified the interpretation of "derived from" in similar contexts. The Tribunal further examined section 10A(4), which defines "profits derived from export" as a proportion of total business turnover, expanding the scope of eligible profits beyond direct export earnings.

The Tribunal concluded that the interest income from FDRs, linked to obtaining credit for business operations, had a direct nexus with the business undertaking and qualified as "profits and gains of business or profession." Relying on the interpretation of "derived from" and the expanded scope under section 10A(4), the Tribunal held that the assessee was entitled to the deduction under section 10A for the interest income. Consequently, the denial of the deduction was overturned, and the appeal was allowed.