2014 (11) TMI 63 - HC - Income Tax

Claim of exemption u/s 10B Interest on bank deposits kept for opening Letters of Credit Interest received against public issue of shares Interest earned on ICDs Held that - Obtaining of letters of credit is an essential activity for undertaking exports, and the deposit of amounts for that purpose is a condition precedent - If the deposits so made have yielded interest, it certainly is attributable to or can be said to be derived from, the activity of export. Assessee gone for public issue to mobilise the resources - The intending purchasers of the shares made deposits corresponding to the value of the shares, which they propose to purchase between the date of application and date of allotment of shares or rejection of application, as the case may be, the amounts yielded interest - The interest so yielded cannot be said to be an income derived from 100% export activity - Before it has allotted shares, the assessee has taken away the money deposited by the intending purchasers of shares and has invested in some companies - The interest that is earned from such deposits was sought to be clubbed with the amount representing profits and gains derived from 100% export activity - thus, the order of the Tribunal is partly set aside regarding the interest received against public issue of shares and interest earned on ICDs and the order relating to interest earned in respect of bank deposits kept for opening Letters of Credit is sustained Decided partly in favour of revenue.

Summary

Issues:
- Disallowance of certain deductions claimed by the respondent under Section 10B of the Income Tax Act, 1961.
- Interpretation of Section 10B and its applicability to profits and gains derived from export-oriented activities.
- Analysis of interest earned on bank deposits for opening Letters of Credit, public issue of shares, and inter-corporate deposits in relation to export activities.
- Comparison of Tribunal's decision with relevant Supreme Court judgments.
- Consideration of the nexus between income and export activities under Section 80HH of the Act.

Analysis:
The High Court of Andhra Pradesh addressed the disallowance of deductions claimed by the respondent under Section 10B of the Income Tax Act, 1961. The respondent, a 100% Export Oriented Unit, sought exemptions for interest earned on various financial activities related to export operations. The Assessing Officer disallowed these deductions, leading to an appeal before the Commissioner of Income Tax and subsequently before the Tribunal. The Tribunal allowed the appeal, permitting all three amounts claimed by the respondent for exemption.

The Court delved into the interpretation of Section 10B, emphasizing that profits and gains from export-oriented undertakings should not be included in the total income of the assessee. While interest earned on bank deposits for opening Letters of Credit was deemed directly related to export activities, the interest from public issue share deposits and inter-corporate deposits posed challenges in establishing a clear nexus with export operations. The Court scrutinized the nature of these financial transactions and their alignment with the core export-focused objectives of Section 10B.

In analyzing the Tribunal's decision, the Court referenced Supreme Court judgments, particularly Tuticorin Alkali Chemicals & Fertilisers Limited v. Commissioner of Income Tax. This case highlighted the assessability of certain types of income under Section 56 of the Act, emphasizing the need for a close nexus between income and industrial activities. The Court critiqued the Tribunal's reliance on its previous order and emphasized the importance of aligning judgments with established legal principles, as exemplified in Pandian Chemicals Limited v. Commissioner of Income Tax.

Furthermore, the Court considered the applicability of Section 80HH of the Act concerning the nexus between income and industrial activities. Drawing parallels with relevant judgments, the Court partially allowed the appeal, disallowing deductions related to interest earned on public issue share deposits and inter-corporate deposits while upholding the exemption for interest earned on bank deposits for opening Letters of Credit. The judgment highlighted the necessity of establishing a direct link between income and export-oriented activities to qualify for tax exemptions under Section 10B.