2005 (1) TMI 16 - AAR - Income Tax

Applicant a non-resident individual set up a jewellery unit in SEZ in Noida UP - for his business he has to import precious metal to India for which he is required to submit import performance guarantee/financial security/letter of credit held that interest on FDRs cannot be treated as income derived from export business of SEZ unit held that it will not be correct to set off the said interest on securities/FDRs etc. with expenses incurred on such securities/FDRs

Summary

Issues:
- Determining whether interest accrued on FDRs can be considered as income derived from export business of SEZ unit under section 10A.
- Analyzing if the interest on security/FDRs can be set off against expenses incurred on such security/FDRs.
- Assessing how the income and expenses should be treated for assessment purposes.

Issue 1: Interest as Income from Export Business:
The applicant, a non-resident individual planning to set up a Jewellary Unit in a Special Economic Zone (SEZ) in Noida, sought advance ruling on whether interest accrued on FDRs can be treated as income derived from the SEZ export business under section 10A. The Commissioner argued that such interest cannot be considered business income as it lacks a direct relation to the export business. The ruling authority concurred, stating that interest on FDRs, not held as business assets, falls under "income from other sources" and not "profits and gains of business or profession." The authority emphasized that section 10A, which deals with profits from export, does not encompass interest income from securities like FDRs.

Issue 2: Set Off of Interest against Expenses:
The applicant also questioned if the interest on security/FDRs could be set off against expenses incurred on such securities. The ruling authority clarified that while the interest cannot be directly set off against expenses, any reasonable sum paid as commission or remuneration for realizing the interest on FDRs can be deducted as expenses under section 57(i) of the Act in computing income under "income from other sources."

Issue 3: Treatment for Assessment Purposes:
Regarding the treatment for assessment purposes, the ruling authority held that the interest income, after deducting reasonable expenses paid for realizing the interest, will be chargeable to tax under "income from other sources." The permissible deductions for such interest income are specified under section 57(i) of the Act, allowing expenses related to realizing the interest to be deducted. The ruling emphasized that interest income from FDRs does not qualify as derived from the export business, and the expenses incurred for realizing such interest can be considered for deduction.

In conclusion, the ruling clarified that interest accrued on FDRs cannot be categorized as income derived from the SEZ export business under section 10A. The ruling also outlined the permissible deductions for expenses related to realizing the interest on FDRs, ensuring compliance with the provisions of the Income Tax Act for assessing such income under the appropriate head.