2012 (9) TMI 372 - SC - Income Tax

Business income or Income from other sources - Interest income on Foreign Currency Deposit Account - whether assessee is entitled to get the benefit of Section 10A? - Held that - As similar question arose in CIT Versus Menon Impex P. Ltd. 2002 (9) TMI 75 - MADRAS HIGH COURT wherein the deduction u/s 10A was allowed. In the case of Commissioner of Income Tax vs. Sterling Foods 1999 (4) TMI 1 - SUPREME COURT it was held that the mere fact that the deposit was made for obtaining Letter of Credit which Letter was, in turn, used for the purpose of business undertaking did not establish a direct nexus between the interest and industrial undertaking. Remit the cases to the ITAT for deciding the matter afresh after examining the transaction in question as done by the Madras High Court in the case of Menon Impex Private Limited.

Summary

Issues:
Assessment of interest income under the Income Tax Act, 1961 - Interpretation of Section 10A - Application of the judgment of the Madras High Court in Menon Impex Private Limited case.

The Supreme Court heard arguments from both sides and granted leave in a batch of three cases. In a civil appeal, the assessee, a 100% Export Oriented Unit earning foreign exchange through software development and exports, received interest income on a Foreign Currency Deposit Account permitted by FERA. The assessee claimed exemption under Section 10A of the Income Tax Act, but the sum was questioned to be assessed under 'Other Sources' in Section 56 of the Act. The High Court's judgment was based on the Madras High Court's decision in Menon Impex Private Limited case, where the Tribunal had to determine if interest income from funds related to a Letter of Credit was derived from the profits of the business of the industrial undertaking to qualify for Section 10A benefits. The Madras High Court concluded that the interest was earned on a deposit made by the assessee in banks, and the direct nexus between the interest and the industrial undertaking was not established. The Supreme Court set aside the impugned judgment and remitted the cases to the Income Tax Appellate Tribunal for a fresh decision after examining the transaction in question, similar to the detailed analysis done by the Madras High Court in the Menon Impex Private Limited case. The ITAT was directed to allow the assessee to produce relevant documents before making a decision on the legal question. Consequently, the civil appeals filed by the assessee were allowed with no order as to costs.

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