2018 (1) TMI 1319 - AT - Income Tax

Profits eligible for deduction under section 10A - Tribunal held that interest earned out of deposits not made out of any compulsion or necessity would not help augment the export activity of the Appellant - whether the interest income in question was assessable under the head profits and gains of business or profession and not income from other sources ? - Held that - Decided in favour of assessee as relying on case of M/s. Hewlett Packard Global Soft Ltd. 2017 (11) TMI 205 - KARNATAKA HIGH COURT wherein held assessee was entitled to 100% exemption or deduction under Section 10-A of the Act in respect of the interest income earned by it on the deposits made by it with the Banks in the ordinary course of its business and also interest earned by it from the staff loans and such interest income would not be taxable as Income from other Sources under Section 56 of the Act.

Summary

Issues:
1. Inclusion of interest on fixed deposits in profits eligible for deduction under section 10A of the Act.
2. Augmentation of export activity through interest earned on deposits.
3. Application of precedent from CIT v. Motorola India Electronics P. Ltd.
4. Assessment of interest income under the head of 'profits and gains of business or profession' vs. 'income from other sources'.

Analysis:

Issue 1:
The primary issue raised in the appeal was whether interest on fixed deposits should be considered as part of the profits eligible for deduction under section 10A of the Act. The Tribunal held that the interest earned from deposits not made out of compulsion or necessity would not contribute to augmenting the export activity of the Appellant. However, it was argued that the fixed deposits were made out of export realizations and advances received, establishing a direct nexus to the business of the undertaking. The Full Bench opinion dated 30.10.2017 influenced the decision, leading to a conclusion in favor of the assessee on this issue.

Issue 2:
The second issue revolved around the augmentation of export activity through interest earned on deposits. The Tribunal's decision to not consider such interest as beneficial for the Appellant's export activity was challenged. The argument was made that interest earned from deposits made out of export realizations and advances received directly contributed to the business of the undertaking. The Full Bench opinion guided the resolution of this issue in favor of the assessee.

Issue 3:
Regarding the application of precedent from CIT v. Motorola India Electronics P. Ltd., the Tribunal was questioned for not following a decision rendered on similar facts. The argument was made that the decision in the mentioned case was applicable to the Appellant's situation. Ultimately, the questions of law raised in this context were answered in the affirmative and in favor of the assessee.

Issue 4:
The final issue pertained to the assessment of interest income under the appropriate head for taxation purposes. The Tribunal's classification of the interest income under 'income from other sources' was contested. It was contended that the interest income should be assessed under the head of 'profits and gains of business or profession.' The decision was influenced by the Full Bench opinion, resulting in a modification of the impugned order of the Tribunal in favor of the assessee.

In conclusion, the appeal was disposed of with a comprehensive analysis of the raised issues, guided by legal interpretations and precedents to determine the outcome in favor of the assessee on various aspects related to interest income and its treatment under the relevant provisions of the Act.