2023 (1) TMI 1151 - AT - Income Tax

Deduction u/s 10AA - interest on FDR along with Forward Premium, Bank Charges and Interest paid - These activities are inextricable part of the business of the assessee or not - CIT (A) treating the income from Fixed Deposit as income from other source where in the nexus of business transaction was already proved - HELD THAT - The assessee in the ordinary course of business had to furnish fixed deposits on the Import Export transactions to banks for the purpose of availing loans and making payments to the suppliers. A new Fixed Deposit is given to the Banks for each and every import export transaction who after completing all the formalities gives fresh loans to our clients. Thus each and every Fixed Deposit has a corresponding Bank Loan for each and every Import Export trading transactions undertaken by our clients. Therefore none of the Fixed Deposits are independent of business. The Banks charges interest/processing charges etc on all such loans given. Net residue (difference between the Interest Earned and the Finance Loan and other Charges etc) if any, by our clients is nothing but an outcome of undertaking an Import Export Transaction which is in the normal course of trading business of diamonds eligible for exemption u/s. 10AA - The above income can be compared to the Forex Gains which is earned due to Currency Fluctuations. Fluctuations in Forex Gains is considered to be a part of the business activity and is treated as a resultant of the Import Export Activity undertaken, thus exempt u/s. 10AA of the Income Tax Act. On similar lines, since the Interest on Fixed Deposits are attributable and incidental to the trading business carried on by the assessee, the same has rightly been claimed as exempt u/s. 10AA - In the result, the results declared by the assessee after netting off the FDR Interest with interest paid and Forex loss are eligible to be adjusted against Business Profit. Ground raised by the assessee are allowed.

Summary

Issues Involved:
1. Whether the income derived from manufacturing activity in the SEZ unit is eligible for deduction under Section 10AA.
2. Whether the income from trading activity in the SEZ unit qualifies as a service for the purposes of Section 10AA.
3. Whether the accounting results declared by the assessee can be disturbed without rejecting the books of accounts.
4. Whether the interest income from Fixed Deposits can be treated as business income and eligible for deduction under Section 10AA.

Detailed Analysis:

1. Eligibility of Income from Manufacturing Activity for Deduction under Section 10AA:
The assessee, a partnership firm, claimed deduction under Section 10AA amounting to Rs. 13,13,66,314/-. The AO denied the deduction, arguing that no manufacturing activity occurred at the SEZ unit. However, the assessee provided extensive documentation, including government approvals, customs supervision, and detailed transaction flows, to substantiate the manufacturing activities. The appellate tribunal concluded that the manufacturing activities were indeed conducted at the SEZ unit, making the income eligible for deduction under Section 10AA.

2. Income from Trading Activity as a Service under Section 10AA:
The assessee engaged in trading diamonds through the SEZ unit and claimed this activity as a service eligible for deduction under Section 10AA. The tribunal referred to the SEZ Act, 2005, and relevant government notifications, which include trading (import for re-export) in the definition of "service." The tribunal found that the assessee's trading activities met the criteria for services under Section 10AA, thus qualifying for the deduction.

3. Disturbance of Accounting Results without Rejection of Books of Accounts:
The AO questioned the profits declared by the assessee without rejecting the books of accounts. The tribunal emphasized the principle that accepting books of accounts is the rule, and rejecting them is an exception. The AO did not provide any findings of inaccuracies in the books maintained by the assessee. Therefore, the tribunal directed the AO to accept the results declared by the assessee for manufacturing and trading activities, upholding the integrity of the books of accounts.

4. Treatment of Interest Income from Fixed Deposits as Business Income:
The assessee argued that interest earned on Fixed Deposits, which were linked to import-export transactions, should be considered business income and eligible for deduction under Section 10AA. The tribunal agreed, citing precedents where similar interest income was treated as part of business profits. The tribunal allowed the netting off of interest earned with interest paid and forex losses, thereby treating the net interest income as eligible for deduction under Section 10AA.

Conclusion:
The tribunal allowed the assessee's appeal on all substantive grounds, confirming the eligibility of income from both manufacturing and trading activities for deduction under Section 10AA. It also upheld the treatment of interest income from Fixed Deposits as business income eligible for deduction. The revenue's appeal was dismissed as it became infructuous in light of the findings in the assessee's favor. The order was pronounced on 14th September 2022.