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2005 (5) TMI 246 - AT - Income TaxInterpretation Of Statutes - Disallowance of exemption u/s 10A - Industrial Undertaking - Free Trade Zone - Interest earned on FDs - Foreign exchange gain - business of manufacturing of gold jewellery studded with diamonds - HELD THAT - If the provisions of section 10A and section 80HH are read in juxtaposition it would be seen that section 10A entitles an assessee to deduction of such profits and gains as are derived from the export of articles or things. On the other hand u/s 80HH deduction is available to an assessee in respect of profits and gains derived from an industrial undertaking. The crucial words in both the sections are derived from . In our view there is hardly any material difference between the legal requirements of section 80HH and section 10A. In the case of Pandian Chemicals Ltd. 2003 (4) TMI 3 - SUPREME COURT it was observed by the Supreme Court that the words derived from must be understood as something which has a direct or immediate nexus with the industrial undertaking. In that case the assessee derived interest on deposits made with the Electricity Board for the supply of electricity for running the industrial undertaking. Thus the deposits made by the assessee were essential requirement for carrying on the functioning of the industrial undertaking. The electricity was required for the purpose of running the industrial undertaking. Nevertheless the Hon ble Supreme Court held that the interest earned by the assessee on such deposit was not profit derived from the industrial undertaking and therefore the assessee is not entitled to deduction u/s 80HH. Thus we do not consider it necessary to discuss the various cases which have been relied upon by the ld. counsel for the assessee. As mentioned above the Supreme Court decision in the case of Pandian Chemicals Ltd. was not considered in any of the cases. We therefore hold that the interest income is not eligible for deduction u/s 10A as such income cannot be said to be in the nature of profits and gains derived from the export of articles or things. Therefore on this issue we confirm the order of ld. CIT(A). Interest income can be excluded from the profits - We direct the Assessing Officer to exclude from the profits only the net interest. The assessee may be allowed an opportunity to establish direct nexus between the interest payment and interest receipt and the interest expenditure which is directly referable to earning of interest income may be deducted therefrom and only the net interest income if any may be excluded from the profits for the purpose of section 10A. Foreign exchange gain - There is no material difference between the requirement of section 80HHC and section 10A. The profit on account of foreign exchange gain is directly referable to the articles and things exported by the assessee. Such profits are therefore in the same nature as the sale proceeds and there is no reason while deduction u/s 10A should not be allowed in respect of such exchange gain. Therefore we vacate the order of the ld. CIT(A) on this issue. In the result the appeal stands partly allowed.
Issues Involved:
1. Eligibility of interest income for deduction under section 10A of the Income-tax Act. 2. Enhancement of assessed income by excluding foreign exchange gain from profits eligible for deduction under section 10A. Detailed Analysis: Issue 1: Eligibility of Interest Income for Deduction under Section 10A The first issue concerns whether the interest income of Rs. 2,67,212 earned on fixed deposits kept with banks for business purposes is eligible for deduction under section 10A of the Income-tax Act. The assessee, a private limited company engaged in manufacturing gold jewelry, claimed that this interest should be considered business income and not income from other sources, thereby qualifying for deduction under section 10A. The Assessing Officer and CIT(A) denied this claim, relying on several judicial precedents, including the Supreme Court's decision in Pandian Chemicals Ltd. v. CIT, which held that the term "derived from" implies a direct nexus with the industrial undertaking. The interest earned on deposits made for business purposes was deemed not to have such a direct nexus and thus was not eligible for deduction under section 10A. The Tribunal upheld this view, noting that the legal requirements of section 10A and section 80HH, both using the term "derived from," were similar. The Tribunal cited the Supreme Court's interpretation in Pandian Chemicals Ltd. and other cases, concluding that the interest income did not qualify for the deduction under section 10A. However, the Tribunal accepted the alternative claim that only the net interest income (interest received minus interest paid) should be excluded from the profits. The Tribunal directed the Assessing Officer to exclude only the net interest income from the profits for the purpose of section 10A, allowing the assessee to establish the direct nexus between the interest payments and receipts. Issue 2: Enhancement of Assessed Income by Excluding Foreign Exchange Gain from Profits Eligible for Deduction under Section 10A The second issue pertains to the CIT(A)'s enhancement of the assessed income by excluding a foreign exchange gain of Rs. 98,38,801 from the profits eligible for deduction under section 10A. The assessee argued that this gain, realized from higher export proceeds due to favorable exchange rate fluctuations, should be considered part of the export turnover and thus eligible for deduction. The Tribunal agreed with the assessee, noting that the foreign exchange gain was directly referable to the export of articles and things. The Tribunal cited various judicial pronouncements, including ITAT decisions, which held that such gains are in the nature of additional sales price and thus qualify for deduction under section 10A. The Tribunal vacated the CIT(A)'s order on this issue, allowing the deduction for the foreign exchange gain. Conclusion: The appeal was partly allowed. The Tribunal confirmed the CIT(A)'s decision to exclude interest income from the deduction under section 10A but directed that only net interest income should be excluded. The Tribunal vacated the CIT(A)'s enhancement of the assessed income by excluding the foreign exchange gain, allowing the deduction under section 10A for such gains.
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