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2017 (2) TMI 109 - AT - Income TaxDisallowance of deduction under section 10AA - income earned from trading exports of diamonds - Held that - The assessee in the case on hand is eligible for deduction of its income earned from trading exports of diamonds under section 10AA of the Act and therefore uphold the finding of the learned CIT(A) on this issue in the impugned order. See Geetanjali Exports Corporation Ltd. & Others 2013 (5) TMI 922 - ITAT MUMBAI . Treatment of interest on FDs as income from other sources - Held that - Following the aforesaid decision of the Coordinate Bench of the Tribunal in the case of Jewel Arts (2017 (2) TMI 39 - ITAT MUMBAI) which is on similar factual/legal matrix as the case on hand, we are of the considered opinion that the said interest receipts earned by the assessee out of FDs kept with Banks by way of margin money made for the purposes of the assessee s business of import/ export trading in diamonds, constitutes business receipts/income and is therefore eligible for deduction under section 10AA of the Act. Income earned from out of FDs made with Banks for business purposes constitutes business receipts/income and is therefore eligible for deduction under section 10AA
Issues Involved:
1. Disallowance of deduction under section 10AA. 2. Treatment of interest on FDs as 'income from other sources'. Issue-wise Detailed Analysis: 1. Disallowance of Deduction under Section 10AA: The assessee, engaged in trading and import/export of polished diamonds, gold, and gold jewellery, claimed a deduction of ?3,61,19,032 under section 10AA of the Income Tax Act, 1961 for the A.Y. 2011-12. The Assessing Officer (AO) disallowed this deduction, arguing that the assessee had neither manufactured nor produced any goods or articles nor provided any services, as the imported diamonds were merely re-exported without any value addition. The AO rejected the assessee's claim that the term 'services' as used in section 10AA(9) of the Act should be read as defined in the SEZ Act, 2005, which would override the provisions of section 10AA of the Act. The CIT(A) allowed the assessee's claim for deduction under section 10AA, interpreting that the term 'services' includes trading activities, as defined under the SEZ Act and SEZ Rules. The CIT(A) relied on judicial pronouncements, including the ITAT decisions in Geetanjali Exports Corporation Ltd. and Goenka Diamonds and Jewellers Ltd., which supported the view that trading for re-export qualifies as 'services' under the SEZ Act, thereby entitling the assessee to the deduction under section 10AA. The Tribunal upheld the CIT(A)'s decision, agreeing that the provisions of the SEZ Act, which include trading as 'services', have an overriding effect due to the non-obstante clause in section 51(1) of the SEZ Act. This interpretation was consistent with previous Tribunal decisions, confirming that the assessee's trading activities qualified for the deduction under section 10AA. 2. Treatment of Interest on FDs as 'Income from Other Sources': The assessee contested the treatment of interest income of ?1,23,10,695 earned from Fixed Deposits (FDs) as 'income from other sources' instead of 'business income'. The FDs were made as margin money for opening a Letter of Credit (L/C) with Corporation Bank for the assessee's import/export business. The assessee argued that the interest income had a direct nexus with the business and should be considered business income, eligible for deduction under section 10AA. The CIT(A) upheld the AO's decision, treating the interest income as 'income from other sources'. However, the Tribunal reversed this decision, citing the case of Jewel Arts, where it was held that interest earned on FDs kept as margin money for business purposes should be treated as business income. The Tribunal noted that the FDs were not made from excess funds but were a business requirement, thereby constituting business receipts eligible for deduction under section 10AA. Conclusion: The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to allow the deduction under section 10AA for the assessee's trading activities. Additionally, the Tribunal allowed the assessee's appeal, treating the interest income from FDs as business income eligible for deduction under section 10AA. Consequently, the Revenue's appeal was dismissed, and the assessee's cross-appeal was partly allowed.
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