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TMI Blog2010 (4) TMI 863X X X X Extracts X X X X X X X X Extracts X X X X ..... jewellery at the Noida SEZ. In the profit & loss account, the assessee had credited sum of Rs. 44,36,745 as bank interest and treated the same to be export profit for the purpose of claiming deduction under section 10A of the Act. On being asked by the Assessing Officer as to why this interest on FDRs should not be treated as income from other sources, the assessee replied that he had earned interest on FDRs, which are either used for obtaining bank guarantee, and for taking overdraft limit for the purposes of the business and, thus, the interest so earned is eligible for deduction under section 10A of the Act. However, the Assessing Officer rejected the assessee's plea and on the facts of the present case, he held that interest income on FDRs is assessable under the head "Income from other sources", and, it does not qualify for deduction under section 10A of the Act. 4. Being aggrieved with the Assessing Officer's order, the assessee preferred an appeal before the ld. CIT(A). 5. Before the ld. CIT(A), the assessee contended that the FDRs were made out of the funds generated from the business operation of SFZ unit and kept as security for availing various credit facilities and b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch is out of surplus fund. This is inconsequential as to how the surplus fund had been generated. The FDRs might have been used for the purpose of obtaining bank guarantee or overdraft facilities, nevertheless, the nature of income arising out of such deposit cannot be termed as export profit. The export turnover has been earned for the purpose of this section-- "export turnover means the consideration in respect of export (by the undertaking) of article or things received in, or brought into, India by the assessee in convertible foreign exchange. . . ." The wordings of section 10A under unequivocally stipulates a direct link between export of goods and deduction from the total income. "10A(1) subject to the provisions of the section, a deduction of such profit and gains as are derived by an undertaking from the export of article or things or computer software for a period of 10 consecutive assessment years. . . . shall be allowed from the total income of the assessee." 7. It is very clear that deduction is in respect of profit which emanates from export turnover in convertible foreign exchange and this cannot be extended to domestic earning on FDRs in rupees. The earning of int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess fund accumulated with the assessee out of profit of the undertaking earned from year-to-year were deployed into the fixed deposits made with the bank, which, in turn, were kept as bank guarantee for obtaining bank loan or overdraft facilities. He further pointed out that the total FDRs of Rs. 1.91 crores were given as security for availing overdraft limit of Rs. 1.7 crores from the bank. He, thus, submitted that the FDRs were made out of funds generated from the business operation of the unit and were kept as security for availing various credit facilities and/or bank guarantees as a matter of commercial expediency/necessity and business compulsion, and consequently, the interest income earned on such FDRs would necessarily be in the nature of business income, and not income from other sources. In other words, he contended that since the FDRs were created out of business funds and not out of surplus fund of the assessee, and were kept as deposit or security for availing various loan facilities from Bank, not out of choice but out of business compulsion, the interest earned on such FDRs is, thus, to be categorized as business income for the purpose of computing deduction under s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or things or computer software" used in sub-section (1) of section 10A, a further expression in sub-section (4) of section 10A has been used running as "profits of the business of the undertaking". In other words, he submitted that section 10A(1) of the Act prescribes that profit and gains as are derived by an undertaking from the export of articles or things or computer software is eligible for deduction, but further section 10A(4) provides that for the purpose of sub-section (1), the profits derived from export of articles or things or computer software shall be the amount which bears to the "profits of the business of the undertaking", the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking. Therefore, he contended that the above provisions clearly show that separate formula has been given for allowing deduction under section 10A(4) using the expression "profits of the business undertaking", and, therefore, it would not be correct to the test each and every item of income on the anvil of phrase "derived from undertaking" in order to determine the amount of pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... undertaking. In order to decide this aspect of the matter, we have to dwell upon the nature and source of fixed deposits made by the assessee. In this connection, the ld. counsel for the assessee has invited our attention to the chart of sequence of events depicting the source of the fund for making FDRs with the bank. From the details filed by the assessee and from the audited accounts, it is seen that the assessee is a proprietor of two concerns, viz., M/s. Meenakshi International and M/s. Surbhi Enterprises. The profit from M/s. Meenakshi International has been claimed to be eligible for deduction under section 10A of the Act. The assessee's another concern, viz., M/s. Surbhi Enterprise's business is not covered by the exemption provisions of section 10A of the Act. In the return of income filed by the assessee, the net profit determined as per the audited profit & loss account and balance sheet of M/s. Meenakshi International amounting to Rs. 1,01,58,220 has been claimed to be exempted under section 10A of the Act. The assessee's total turnover is from export of gold jewellery. The net profit in respect of another concern M/s. Surbhi Enterprises is shown at a negative of Rs. 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fund and not out of surplus fund, and, therefore, the interest earned on fixed deposits is assessable under the head "Business". But, after considering the totality of the facts and circumstances of the case and elucidating the position of law, we find ourselves not to be in agreement with the assessee's contention that the interest earned on fixed deposit is assessable under the head "Business". In the present case, as already pointed out above, the fixed deposits were made in the name of the assessee's proprietary concern M/s. Meenakshi International out of the funds transferred from assessee's another concern M/s. Surbhi Enterprises. The funds available with the assessee in its proprietary concern M/s. Surbhi Enterprises has been transferred to the account of M/s. Meenakshi International for the purpose of creating fixed deposits in the name of M/s. Meenakshi International. The transaction of transferring fund from assessee's one proprietary concern to another, is not at all connected to the very business of the eligible undertaking carried out by the assessee. Mere because the assessee has been able to accumulate fund out of profit from business and the amount so accumulated wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss income but it would fall under the head "Income from other sources". In the present case, the fixed deposits were initially made on 7-9-2002 to 11-9-2002 with ABN Amro Bank out of the funds transferred from the assessee's one proprietary concern M/s. Surbhi Enterprises to assessee's another proprietary concern M/s. Meenakshi International, and on maturity of those fix deposits on 20-9-2002 and 21-9-2002, the amount were transferred from ABN Amro Bank to Vyasya Bank, and fresh deposits out of the same maturity proceeds were made on 20-9-2002 and 21-9-2002 with Vyasya Bank with maturity date falling due on 19-9-2006 and 20-9-2006. Nothing has been shown or pointed out by the assessee that the fixed deposits initially made with ABN Amro Bank were made in the course of carrying out any business activity. Nothing has also been shown that when these fixed deposits were transferred from ABN Amro Bank to Vyasya Bank, the same were made in the course of business activity of eligible undertaking. The assessee subsequently obtained overdraft facility on 23-11-2002, and at the time of availing overdraft facility, the assessee had chosen to place the fixed deposits, which were already create ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon'ble Delhi High Court has held that the interest income earned on fixed deposits created out of surplus fund and bearing no nexus with the business activity of the assessee, shall not be considered as business income but is income from other sources. Even if one were to draw an analogy in the cases not covered by the provisions of section 80HHC read with clause (baa) to the Explanation below sub-section (4C) of section 80HHC, the interest income earned on the fixed deposits created out of surplus fund and bearing no nexus with the business activity of the assessee cannot be treated as business income as so held by the Hon'ble jurisdictional High Court in the case of Shree Ram Honda Power Equipments (supra). Therefore, the contention of the ld. counsel for the assessee that the decision of Hon'ble Delhi High Court in the case of Shree Ram Honda Power Equipments (supra) is not applicable to the controversy involved in the present case, is rejected. 20. The aforesaid decision in the case of Shri Ram Honda Power Equipment (supra) has been followed by the Hon'ble Delhi High Court in its later decision in the case of CIT v. Delhi Brass & Metal Works Ltd. [2009] 313 ITR 352 , where th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... porters v. Dy. CIT [2003] 130 Taxman 203, where it was consistently held by the Hon'ble Kerala High Court that interest income earned on fixed deposits having to be kept for availing of credit facilities from the bank, does not qualify as business income. The Hon'ble Delhi High Court further noted that the aforesaid three decisions has been affirmed by the Hon'ble Supreme Court by the dismissal of the Special Leave Petition, order being reported in [2003] 265 ITR (St.) 38, [2003] 263 ITR (St.) 3 and [2003] 264 ITR (St.) 142 respectively. While taking a view that, in both the situations, the interest earned on fixed deposits does not have any immediate nexus with the export business and, hence, will have to be treated as income from other sources, the Hon'ble Delhi High Court has observed that in the light of the repeated affirmation by the Hon'ble Supreme Court of three judgments of the Hon'ble Kerala High Court on the same issue, they are inclined to follow the view expressed by the Kerala High Court on each of these occasions. It was further observed by the Delhi High Court that the Kerala High Court has consistently followed the earlier judgments listed at (i) to (iv) of paragra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly income from "other sources" and it does not constitute business income for the purpose of computation of relief under section 80HHC of the Act. Similar view has been taken by the Hon'ble Kerala High Court in the case of K. Ravindranathan Nair (supra) holding that the interest from short-term deposits received by the assessee was not direct result of any export of any goods or merchandise. An identical view has also been taken by the Hon'ble Kerala High Court in the following cases:-- (i) Abad Enterprises' case (supra). (ii) Urban Stanislaus Co.'s case (supra). (iii) GTN Textiles Ltd. v. Dy. CIT [2005] 279 ITR 72 . 23. For the reasons given above and in the light of the facts of the present case, we have no hesitation in holding that the interest earned on fixed deposits made with the bank is assessable under the head "Other sources". 24. Even otherwise assuming that interest earned by the assessee on fixed deposit is assessable under the head "Business", the same by no stretch of imagination or by any standard can be construed to be the profit of the business of the assessee's undertaking eligible for deduction under section 10A of the Act inasmuch as when this surplus fun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits derived from export of articles or things or computer software shall be the amount, which bears to the profit of the business of the undertaking, the same proportionate as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking. From the conjoint reading of section 10A(1) and 10A(4), it is clear that what is deductible from the total income of the assessee under section 10A is the profit and gains as are derived by an undertaking from the export of articles or things or computer software. In the formula, the expression "profits of the business of the undertaking" would mean the profit earned from the business of the undertaking referred to in section 10A(1) of the Act and not the profit of any other business carried on by any assessee. The deduction available under section 10A(1) is undertaking-based and not assessee-based. Therefore, to include any item of income within the ambit of "profits of the business of the undertaking", one must prove and establish that that item of income sought to be included in the profits of the business of the undertaking for the purpose of section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 10A(1) would give its colour to the expression "profits of the business of undertaking" used in section 10A(4) of the Act. Merely because in the formula provided in section 10A(4), the expression "profits of the business of the undertaking" is used for the purpose of determining the profits derived from export of article or things or computer software, the expression "derived by an undertaking from the export of articles or things or computer software" used in section 10A(1) and expression "profits derived from export of articles or things or computer software" used in opening part of section 10A(4), or, in other words, the general expression "derived from", cannot be ignored while determining profit of the business of the undertaking for the purpose of allowing deduction under section 10A(1) of the Act because the aforesaid expression involves only those items of profits which are derived from business of undertaking. Even if we give the liberal interpretation to the expression "profits of the business of the undertaking" used in sub-section (4) of section 10A, one must prove and establish that the profit claimed as deduction under section 10A is the profit of the business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s case. In the light of these facts, we do not find it fit to burden this order by discussing those cases relied upon by the ld. counsel for the assessee, and they shall be deemed to be construed as not applicable to the facts of the present case, which is covered by principles enunciated by jurisdictional High Court as well as Supreme Court as discussed above. 28. In the light of the discussions made above, the ground regarding the assessee's claim of deduction on interest income earned on FDR under section 10A(1) is rejected, and the issue is decided in favour of the revenue and against the assessee. The order of the CIT(A) on this issue is, thus, upheld accordingly. 29. The next issue raised by the assessee in this appeal is with regard to the charging of interest under sections 234B and 244A of the Act, which is found to be consequential in nature. Thus, the Assessing Officer shall examine this issue and workout the actual amount of interest chargeable under sections 234B and 244A as per provisions of law contained in that behalf. 30. In the result, the appeal filed by the assessee is partly allowed for a statistical purpose as ground relating to the charging of interest und ..... X X X X Extracts X X X X X X X X Extracts X X X X
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