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2006 (11) TMI 541 - AT - Income TaxDeduction u/s 10A and 10B - interest income - deposits lying in the EEFC account - advancing of intercorporate loans out of the funds of the undertaking - head “Income from business” or “Income from other sources'' - HELD THAT:- Keeping this distinction in mind, we have to necessarily hold that the entire profits deriving from the business of undertaking should be taken into consideration, while computing the eligible deduction u/s 10A/10B of the Act, by applying the mandatory formula. As the Legislature wanted to specifically exclude receipts by way of brokerage, commission, rent, charges or any other receipt of similar nature, from “the profits of the business", in section 80HHC the hon’ble High Court, it has specifically inserted Explanation (baa). If the Legislature intended to exclude interest from the term “Profit of business of undertakings" under section 10A/10B, a similar provision as in the case of section (baa) would have been inserted. No such Explanation has been introduced in section 10A/10B. Thus, we agree with the submissions of learned counsel for the assessee and direct the Assessing Officer to recompute the deduction u/s 10A and 10B of the Act on the lines indicated above for the assessment year 2001-02. In the result this ground of the assessee is allowed in the assessment year 2001-02. We have already held interest income in this case has to be assessed under the head “Income from business.” While doing so, the Assessing Officer has to compute separately income earned by way of interest. To compute the interest income, all connected and related expenditure has to be allowed. In this case, the assessee had to necessarily hold the funds in deposits and advances due to embargo placed by the Government, restricting prepayment of the external commercial borrowing. The assessee has to necessarily hold on to the funds, which would otherwise have been utilised to repay the liability which would have reduced its liability to pay interest. Thus there is a clear nexus between the external commercial borrowings and the funds placed for short-term deposits, and other deposits. Thus in our considered opinion, the relatable expenditure has to be deducted. In the result this ground of the assessee is allowed for the assessment years 1997-98 and 1998-99. For the assessment year 2001-02, though the principle do not change, the ground of netting of interest is an alternative ground. As we have directed that due to change in law, deduction u/s 10A/10B has to be granted on this business receipts, the ground becomes infructuous. In the result ITAs are allowed in part as indicated above and COs are dismissed.
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