2014 (10) TMI 974 - HC - Income Tax

Exemption to section 10B - connection with activity of export - the interest earned in respect of bank deposits kept for opening letters of credit - Held that - Obtaining of letters of credit is an essential activity for undertaking exports and the deposit of amounts for that purpose is a condition precedent. If the deposits so made have yielded interest it certainly is attributable to or can be said to be derived from the activity of export Unless the amount is referable to the activity of the concerned industry and it has close nexus with such activity it cannot be brought under the purview of section 80HH of the Act Thus setting aside the order of the Tribunal in so far as it relates to items (b) and (c) claimed by the respondent viz. (b) Interest given by the banks in respect of the moneys received by the said banks on behalf of the assessee-company against the pub lic issue of shares ; and (c) Interest earned in respect of the temporary intercorporate deposits kept by the assessee-company with other companies out of the proceeds of the public issue of shares.

Summary

Issues:
- Disallowance of deductions claimed under section 10B of the Income-tax Act for interest earned on bank deposits and intercorporate deposits
- Interpretation of profits and gains derived from a 100% export-oriented undertaking
- Application of relevant case law in determining tax exemptions for specific types of income

Analysis:
1. The appeal by the Revenue challenged the Hyderabad Bench B of the Income-tax Appellate Tribunal's order allowing deductions claimed by the respondent under section 10B of the Income-tax Act for interest earned on bank deposits and intercorporate deposits. The respondent, a 100% export-oriented unit, sought exemptions for these amounts in their returns for the assessment year 1995-96.

2. The Assessing Officer disallowed the deductions, leading to an appeal by the respondent to the Commissioner of Income-tax (Appeals) and subsequently to the Tribunal. The Tribunal allowed the appeal, permitting all three amounts for exemption, including interest earned on bank deposits for opening letters of credit and intercorporate deposits from public issue proceeds.

3. The High Court analyzed the provisions of section 10B, emphasizing that profits and gains derived from a 100% export-oriented undertaking should not be included in the total income of the assessee. The court noted that while interest from bank deposits for opening letters of credit could be directly linked to export activities, interest from public issue share deposits and intercorporate deposits lacked a clear nexus to export-related profits.

4. Referring to relevant case law, including the Supreme Court judgment in Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT, the Commissioner of Income-tax (Appeals) disallowed the claims, citing that such income falls under section 56 of the Act. The Tribunal, however, reversed this decision without adequate legal reasoning, prompting the High Court to intervene.

5. The High Court highlighted the importance of a close nexus between income and the activities of the concerned industry, as established in judgments like CIT v. Pandian Chemicals Ltd. The court partially allowed the appeal, setting aside deductions for interest on public issue share deposits and intercorporate deposits while upholding the relief for interest earned on bank deposits for opening letters of credit.

6. The judgment serves as a significant clarification on the interpretation of profits and gains derived from a 100% export-oriented undertaking under section 10B of the Income-tax Act, emphasizing the necessity of a direct connection between income claimed for exemption and export-related activities.