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TMI Blog2009 (12) TMI 678X X X X Extracts X X X X X X X X Extracts X X X X ..... come .. Rs. 2,98,189 .. Rs. 61,45,377 The Assessing Officer was of the opinion that under section 10B(1), deduction was allowable only on profits derived from export of articles or things or computer software. Therefore, no deduction was possible on the above noted items on interest income. On enquiry it was submitted that assessee was having several units in various Software Technology Park (S.T.P.), therefore, satisfied the conditions of section 10B. These units generated surplus funds which were deposited in short-term deposits with the banks etc. It was submitted that the company was treating interest income etc. as business profit and therefore, deduction under section 10B should be allowed in this respect also. Reliance was placed on the decision of the Hon'ble Madras High Court in the case of CIT v. N.S.C. Shoes [2002] 258 ITR 749 and CIT v. Punit Commercial Ltd. [2000] 245 ITR 550 (Bom.). Assessing Officer did not find any force in this submission and held that Hon'ble Supreme Court has clearly held that in the case of CIT v. Sterling Foods [1999] 237 ITR 579 that whenever the expression 'derived from' was used then only profits derived from such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rect nexus with the eligible activity. Thus, there being no direct and proximate connection between the interest income and miscellaneous income with the eligible activity, the Assessing Officer has rightly denied the appellant's claim of deduction under section 10B on Rs. 61,45,377." 4. Further, the arguments regarding netting of interest was rejected by the CIT(A) vide para 3.1 of his order, which is as under : "I have considered the facts, the Bombay High Court in the case of CIT v. Punit Commercial Ltd. (supra) did not go into the larger question of law on whether or not interest income, on facts, constituted income from other sources. In the present case, interest expenses incurred have been in connection with the export business of the appellant and deduction for the same has been allowed in computing the profit or business. There is, therefore, no merit in the contention of the appellant that interest expenses, being business expenditure, be reduced from interest income, which constitutes income from other sources. This ground of appeal is, therefore, dismissed." 5. Before us, learned counsel for the assessee referred to page 19 of the paper book and pointed out that inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of Topman Exports v. ITO [2009] 318 ITR (AT) 87 (Mum.) and particularly the observations made at pages 134 and 135 wherein it was observed that if the contention of the learned Departmental Representative regarding derived from was accepted, then Explanation under section 4C would become redundant. Therefore, in view of the particular formula given in section 10B(4) the expression 'derived from' was not required to be given any effect. 7. On the other hand, the learned Departmental Representative submitted that once the expression 'derived from' was used by the Legislature then only profits from a particular business undertaking were eligible for deduction and not all kinds of profits were eligible for deduction. He agreed that the Mumbai Bench of the Tribunal has taken the view in the case of Living Stones Jewellery (P.) Ltd. (supra) that interest is eligible for deduction under section 10A but that decision was rendered without noticing the binding precedent from the Hon'ble Madras High Court in the case of CIT v. Menon Impex (P.) Ltd. [2003] 259 ITR 403, wherein it was held that interest received from the deposits made in banks was not eligible for deduction under sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom surplus funds was returned as income from business and deduction under sections 80HH and 80-I was claimed. However, the Assessing Officer denied the deduction and assessed the same as 'income from other sources'. We do not know any facts beyond this. We would like to refer to the decision of the Hon'ble Supreme Court in the case of Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278, wherein it was held as under : "Interest derived by the industrial undertaking of the assessee on deposits made with the Electricity Board for the supply of electricity for running the industrial undertaking could not be said to flow directly from the industrial undertaking itself and was not profit or gains derived by the undertaking for the purpose of the special deduction under section 80HH." From the above it is clear even interest from electricity deposit was not held eligible for deduction under section 80HH, then obvious by interest from surplus funds would not in any case can be held to be eligible for deduction under sections 80HH and 80-I. Recently, in the case of Liberty India v. CIT [2009] 317 ITR 218 (SC), the concept 'derived from' has been again upheld and it was held that under secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come from sale of import license was to be treated as business income under the Act in view of clause (iiia) of section 28, then automatically benefits conferred by section 80HH would be available. 12. The Hon'ble Supreme Court did not agree with this logic-CIT v. Sterling Foods [1999] 237 ITR 579 and the decision of Hon'ble Karnataka High Court was reversed. It was observed that it is not the criteria how the income is assessed but because of the expression "derived from" what was required is that such business profit for being eligible to a deduction should have direct nexus to the profits and gains of such industrial undertakings. In fact it was held as under : "Held, reversing the decision of the High Court, that the provisions of section 28 as amended made no difference. The word "derive" is usually followed by the word "from" and it means: "get, to trace from a source: arise from, originate in, show the origin or formation of". The source of import entitlements could not be said to be the industrial undertaking of the assessee. The source of the import entitlements could only be said to be the Export Promotion Scheme of the Central Government whereunder the export entitleme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8(iiia), (iiib), (iiic ) and (iiid) etc. were to be reduced from the profits of the business. This is so because such incentives were required to be added to the business profits in view of the first proviso to sub-section (3) of section 80HHC and the DEPB licences fall under section 28(iiid). Since the Special Bench was considering the issue regarding DEPB license, therefore it has referred to the first proviso and the meaning of business profits and it cannot be said that expression 'derived from' will have no effect where separate formula for calculation of deduction has been given. Interestingly it was also noted that in this case also one of the issue involved was deduction under section 80HHC in respect of interest income in the case of Kalpataru Colour & Chemicals which was adjudicated along with other appeals. After considering the decision of the Hon'ble High Court in the case of Indo Swiss Jewels Ltd. (supra) as well as the decision of the Special Bench in the case of Lalsons Enterprises v. Dy. CIT (supra ) as well as the decision of the Hon'ble Delhi High Court in the cases of CIT v. Sriram Honda Power Equipments [2007] 289 ITR 474 and CIT v. Delhi Brass & Metal Works Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these two sub-sections of section 10B, it is evident that a deduction is to be allowed on such profits and gains as are derived by an undertaking from the export of articles or things and as computed under sub-section (4) thereof. The words "profit and gains as are derived by" are narrower than the profits attributable or arising from the business of an assessee or an undertaking. The term "derived" has been subject-matter of judicial interpretation in various decisions, viz., CIT v. Sterling Foods [1999] 237 ITR 579 (SC) and Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278 (SC). In Sterling Foods [1999] 237 ITR 579 (SC), it is held that the word 'derive' means, 'get to trace from a source; arise from, originate in, show the origin or formation of'. In this case, the court dealt with the nature of import entitlements and it is held that the source of the import entitlements could only be said to be the Export Promotion Scheme of the Central Government, whereunder the export entitlements become available. It held that there must be, for the application of the words, "derived from", a direct nexus between the profits and gains and the industrial undertaking and in the instant case, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that both the decisions are distinguishable because both the decisions have not considered mandatory decision available from the Hon'ble Madras High Court in the case of Menon Impex (P.) Ltd. ( supra). In addition the benefit of Third Member decision in the case of Banyan Chemicals (P.) Ltd. (supra) was also not available in this case. 21. In any case the decision in the case of Menon Impex (P.) Ltd. (supra) was followed by the Hon'ble Madras High Court in the case of India Comnet International v. ITO [2008] 304 ITR 322. This decision was rendered for the assessment year 2002-03 when sub-section (4) had already been inserted on the Statute. Further in this case it was also argued that since the interest income was derived from funds retained by the bank to meet the exigencies of the business and that the entire transaction would constitute an integrated whole and the same could not be bifurcated into different areas. Reliance was also placed on the decision of the Hon'ble Supreme Court in the case of CIT v. Baby Marine Exports [2007] 290 ITR 323 for the proposition that section 10A was beneficial provisions and, therefore, should be construed liberally. But these submissions were ..... X X X X Extracts X X X X X X X X Extracts X X X X
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