2005 (7) TMI 334 - AT - Income Tax

Deduction u/s 10B - 100% Export Oriented Undertaking - manufacture and export of pharmaceuticals - Whether the Interest income earned on letter of credit for import of raw material, margin money deposit set apart and earmarked by the Bankers from the overdraft account is essential part of the business activity or not - HELD THAT - The business of the present assessee in the export-oriented undertaking did not include making deposit with banks and the interest earned from the deposits on account of letter of credit for purchase of raw materials has no link with the profits and gains of export business of the assessee and as to how it could be claimed as interest income derived from 100 per cent export-oriented undertaking. There is no nexus to show that the profits and gains are derived from hundred per cent export-oriented undertaking to which this section applies that the deposits has nothing to do with the manufacture or production of any article or thing. The interest income earned from deposits with the bank is not connected with profits and gains which are derived from hundred per cent export-oriented undertaking or from manufacturing any article or thing. The expression 'any profits and gains' derived by the assessee from a hundred per cent export-oriented undertaking to which this section applies as used in section 10B of the Act has a distinct but narrow meaning and it cannot receive a flexible or wider concept. The assessee is entitled to claim deduction of the amount which it derives as direct profit by export of manufactured goods in its newly established hundred per cent export-oriented undertaking. Any indirect or incidental profit cannot be regarded as profit earned out of the main business activity. The ratio of the decision of the Hon'ble Apex Court in the cases of Pandian Chemicals Ltd. 2003 (4) TMI 3 - SUPREME COURT and Cambay Electric Supply Industrial Co. Ltd. 1978 (4) TMI 1 - SUPREME COURT has finally settled this issue. It is clear from the provision itself that deduction of such profits and gains deprived from hundred per cent export oriented undertaking must be understood as something which direct and inextricably linked to the assessee's industrial undertaking. But in this case, the interest is earned on margin money deposited for letter of credit for import of raw materials which has no connection with the profits and gains derived from hundred per cent export-oriented undertaking. Respectfully following the decisions of the Hon'ble Apex Court in the cases of Pandian Chemicals, Sterling Foods, Cambay Electric Supply Industrial Co. Ltd., etc. we confirm the orders of the lower authorities. In the result, the appeal of the assessee is dismissed.

Summary

Issues Involved:

1. Classification of interest income earned from margin money deposit for obtaining a letter of credit.
2. Eligibility of such interest income for exemption under section 10B of the Income-tax Act, 1961.

Detailed Analysis:

1. Classification of Interest Income:

The primary issue in this appeal is whether the interest earned by the assessee from margin money deposits for obtaining letters of credit for the import of raw materials should be classified as 'business income' or 'income from other sources'. The assessee, engaged in the manufacture and export of pharmaceuticals, claimed this interest income as business income, seeking exemption under section 10B of the Income-tax Act, 1961. The Assessing Officer and the CIT (Appeals) classified this interest income as 'income from other sources', leading to its taxation under that head.

2. Eligibility for Exemption under Section 10B:

The Tribunal had to determine if the interest income could be considered as profits and gains derived from a 100% export-oriented undertaking, thus qualifying for exemption under section 10B. The assessee argued that the interest income was an integral part of the business activity, as it was derived from margin money deposits linked to the import of raw materials, essential for manufacturing. The assessee cited several Supreme Court decisions to support the argument that such interest should be considered business income.

Tribunal's Findings:

The Tribunal reviewed the relevant legal provisions and case laws, including decisions from the Supreme Court and High Courts. Key points considered include:

- Section 10B Provisions: The Tribunal examined section 10B, which provides for the exclusion of profits and gains derived by an assessee from a 100% export-oriented undertaking from total income, provided certain conditions are met.

- Case Law Analysis:
- Bokaro Steel Ltd. and Karnal Co-operative Sugar Mills Ltd.: These cases were distinguished as they dealt with interest on advances and deposits linked directly to the setting up of plants and machinery, which were considered capital receipts.
- Govinda Choudhury & Sons: The interest was deemed business income as it was attributable to the business activity of executing government contracts.
- Pandian Chemicals Ltd. and Sterling Foods: The Supreme Court held that the term "derived from" implies a direct nexus between the income and the industrial undertaking, which was not present in the case of interest earned from deposits.

- Nature of Income: The Tribunal emphasized that the nature of income is crucial. The interest earned from margin money deposits had no direct nexus with the profits and gains derived from the export-oriented undertaking. It was classified as 'income from other sources' because the immediate source of income was the deposit itself, not the industrial activity.

Conclusion:

The Tribunal concluded that the interest income earned from margin money deposits for letters of credit did not qualify as profits and gains derived from the 100% export-oriented undertaking. Therefore, it did not meet the criteria for exemption under section 10B of the Income-tax Act, 1961. The appeal of the assessee was dismissed, and the orders of the lower authorities were confirmed.