2016 (11) TMI 1483 - AT - Income Tax

Denial of deduction under section 10B - Claim of deduction on the amount of refund of CST - Held that - Special Bench of the Tribunal in the case of Maral Overseas Ltd. (2012 (4) TMI 345 - ITAT INDORE) held that once an income forms part of the business of the eligible undertaking there is no further mandate in section 10B of the Act to exclude it from the profits eligible for deduction. Quite clearly the schematic mechanism of section 10B of the Act especially a joint reading of sub-section (1) and sub-section (4) would show that there is no requirement for the assessee to establish a direct nexus with the business of the undertaking so long as the relevant income forms part of the business of the undertaking. In the present case the assessment order itself reveals that the refund of Rs. 2, 59, 903/- on account of CST has been assessed as a part of the business income of the 100% EOU. Similar is the situation with regard to the interest income of Rs. 68, 677/- earned on term deposit with the bank and interest of Rs. 47, 441/- earned on deposit with Gujarat Electricity Board. Thus we find that the claim of the assessee for deduction u/s. 10B of the Act is quite justified. In fact the judgment of the Hon ble Karnataka High Court in the case of Motrola India Electronics (P) Ltd (2014 (1) TMI 1235 - KARNATAKA HIGH COURT) is directly on the point of allowability of deduction under section 10B of the Act in relation to interest income earned from inter-corporate loans. The Hon ble High Court has considered the definition of profits derived from export contained in sub-section (4) of section 10B of the Act and held that the said income was eligible for deduction contemplated under section 10B(1) of the Act

Summary

Issues:
1. Disallowance of claim of deduction u/s. 10B for Central Sales-tax (CST) refund.
2. Disallowance of claim of deduction u/s. 10B of interest earned on term deposits.
3. Disallowance of claim of deduction u/s. 10B of interest earned on deposit with Gujarat electricity board.

Issue 1 - CST Refund:
The appellant, a partnership firm, claimed deduction under section 10B for CST refund, interest earned on term deposits, and interest earned on deposits with Gujarat Electricity Board. The Assessing Officer disallowed the deduction on the grounds that these incomes did not constitute first-degree profit of the 100% Export Oriented Undertaking (EOU) and were not received in convertible foreign exchange. The CIT(A) upheld the AO's decision. The appellant argued that the CST refund, being related to the EOU unit, should be eligible for section 10B benefits. The Special Bench's decision in Maral Overseas Ltd. was cited to support the claim. The tribunal held that the income of the EOU was eligible for deduction under section 10B as the incomes were part of the business income of the EOU.

Issue 2 - Interest on Term Deposits:
The appellant claimed deduction under section 10B for interest earned on term deposits required by the bank as margin money. The AO disallowed this claim, stating that such interest income was not directly related to the EOU's business. The appellant argued that as the interest income was assessed as business income, it should be eligible for deduction under section 10B. The tribunal, considering the legal position and the decision in Motrola India Electronics (P) Ltd., allowed the appellant's claim for deduction under section 10B.

Issue 3 - Interest on Deposit with Gujarat Electricity Board:
The appellant claimed deduction under section 10B for interest earned on a deposit with Gujarat Electricity Board. The AO disallowed this claim, contending that the deposit was not for business purposes. The appellant argued that such deposits were kept for business purposes and should be eligible for deduction under section 10B. The tribunal, after considering the legal position and precedents, allowed the appellant's claim for deduction under section 10B.

The tribunal consolidated two appeals involving common issues for convenience. The appellant's claims for deduction under section 10B were upheld by the tribunal, emphasizing that the incomes in question were part of the business income of the EOU and thus eligible for deduction. The tribunal's decision in the appeal for the assessment year 2007-08 was held to apply mutatis mutandis to the appeal for the assessment year 2008-09. Consequently, the appeals filed by the appellant were allowed.