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TMI Blog2005 (5) TMI 246X X X X Extracts X X X X X X X X Extracts X X X X ..... ess cannot be considered as income from other source and has to be set off against interest paid. 1.3 Your appellant prays to hold that interest earned by your appellant's undertaking is derived from the business of the undertaking and is entitled to deduction/exemption under section 10A(1) as read with section 10A(4). 2.1 The ld. CIT(A) erred in directing enhancement of your appellant's income by ordering the exclusion of the gain that accrued to your appellant during the year on account of higher realization of export proceeds outstanding on 31-3-2000 during the year at a rate higher than the rate at which they were accounted for as on 31-3-2000 as per rule 115 from the profits of the undertaking eligible for deduction under section 10A(1) as read with section 10A(4). 2.2 Your appellant submits that the said gain realized during the year on account of Exchange Fluctuation forms part of both the export turnover and total turnover and is derived from the business of undertaking and is deductible under section 10A(1) as read with section 10A(4). 2.3 Your appellant, therefore, prays to direct the cancellation of the order of enhancement. 2.4 Your appellant prays to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls (P.) Ltd. [2003] 260 ITR 258 (Mad.) 6. CIT v. Satheesh Nair [2004] 264 ITR 377 (Ker.) 7. CIT v. Rane (Madras) Ltd. [1999] 238 ITR 377 (Mad.). 7. The ld. counsel appearing on behalf of the assessee Shri D.R. Raiyani forcefully contended before us that the bank fixed deposits were not made by the assessee out of its surplus income with a view to earn any interest. It is submitted that the interest income was earned by the assessee on margin deposits, which were compulsorily required to be kept deposited in bank for the purchase of gold, which is the assessee's main raw material and also in connection with Bank Guarantee required for business purposes. It is, therefore, contended that the interest income earned by the assessee is in the nature of business income and it cannot be considered as income from other sources. The ld. counsel invited our attention to the provisions of section 10A(1), which may be reproduced below: "10A.(1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terest 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 profits or gains derived by the undertaking for the purpose of the special deduction under section 80HH." 10. The ld. counsel submitted that the aforesaid decision of Hon'ble Supreme Court was rendered in the context of section 80HH of the Income-tax Act, which requires that deduction will be allowable in respect of profits and gains derived from an industrial undertaking. It is claimed that the aforesaid Supreme Court decision cannot be applied to section 10A. Alternatively, the ld. counsel argued that for making the bank deposits for the purposes of business, the assessee has utilized borrowed funds on which interest has been paid and, therefore, such interest should be deducted from the gross interest income and only the net can be excluded for the purpose of exemption under section 10A. 11. The ld. DR Shri Bharat Bhushan strongly supported the orders of revenue authorities and has relied on the various judgments, whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s "derived from" must be understood as something, which has a direct or immediate nexus with the industrial undertaking. In that case, the assessee derived interest on deposits made with the Electricity Board for the supply of electricity for running the industrial undertaking. Thus, the deposits made by the assessee were essential requirement for carrying on the functioning of the industrial undertaking. The electricity was required for the purpose of running the industrial undertaking. Nevertheless, the Hon'ble Supreme Court held that the interest earned by the assessee on such deposit was not profit derived from the industrial undertaking and, therefore, the assessee is not entitled to deduction under section 80HH. 14. Here a reference may also be made to the Kerala High Court judgment in the case of K. Ravindernathan Nair which has also been strongly relied upon by the ld. CIT(A). The aforesaid case arose in the context of section 80HHC and the ratio of this case is reproduced below from the head note: "The provisions of section 80HHC of the Income-tax Act, 1961, clearly provide that the deduction permissible under the said section is of the profits derived by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness of the undertaking, the assessee was required to open letters of credit with banks. The banks required the assessee to make deposits as a condition for issuing such letters of credit. On these deposits, the assessee earned interest and the question was whether the assessee was entitled A to deduction under section 10A in respect of the interest income. On these facts, the Madras High Court held as under: "In this case, the interest received by the assessee was on deposits made by it in the banks. It is that deposit which is the source of income. The mere fact that the deposit made was for the purpose of obtaining letters of credit which letters of credit were in turn used for the purpose of the business of the g industrial undertaking does not establish a direct nexus between the interest and the industrial undertaking." 16. The Madras High Court drew support from the Supreme Court decisions in the cases of Cambay Electric Supply Industrial Co. Ltd. and Sterling Foods. 17. In view of the categorical legal position which emerges from the above-mentioned cases including the Supreme Court decision in the case of Pandian Chemicals Ltd., we do not consider it necessary to discu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... change gain of Rs. 98,38,801 which pertained to the sales made by the assessee in the previous year relevant to the assessment year 2000-01. 20. The ld. counsel appearing on behalf of the assessee vehemently contended before us that the foreign exchange gain is of the same nature as the sale proceeds of the goods exported by the assessee. It is also submitted that the sale consideration has been remitted in convertible foreign exchange within the stipulated period of six months. On account of fluctuation in the rate of foreign exchange, the assessee sometimes suffers a loss and sometimes earns profit in respect of sale consideration, which remains due on the last day of the accounting year and is actually received in the subsequent accounting year. The ld. Counsel contended that this issue is covered in assessee's favour by various judicial pronouncements. He referred to ITAT, Delhi Bench decision in the case of Smt. Sujatha Grover v. Dy. CIT [2002] 74 TTJ 347. In this case, for the purpose of section 80HHC, it was held that income from foreign currency fluctuation was part of export turnover and was in the nature of only additional sales price. Similar view was taken in the f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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