TMI Blog2014 (1) TMI 1235X X X X Extracts X X X X X X X X Extracts X X X X ..... the articles as well as all other incidental incomes derived from the business of the undertaking - what is exempted is not merely the profits and gains from the export of articles but also the income from the business of the undertaking - thus, the Tribunal was justified in extending the benefit to the amounts also there was no merit in these appeals Decided against Revenue. - Mr. N Kumar and Mrs. Rathnakala, JJ. For the Appellant : Sri K.V. Aravind, Adv. For the Respondent : Sri. S. Parthasarathi, Adv. JUDGEMENT Per : N Kumar, J. These appeals are filed by the revenue challenging the order passed by the Tribunal holding that the interest payable on the fixed deposits constitutes profits of the business of the undertaking. As such, the assessee is entitled to the benefit under Sections 10A and 10B of Income Tax Act, 1961 (hereinafter referred to as the Act for brevity). 2. The assessee had earned interest from the following sources:- 1. Deposits lying in the EEFC account and 2. Advancing of inter-corporate loans out of the funds of the undertaking. The assessee had outstanding borrowings by way of External Commercial Borrowings (ECBs in short) obtained in earlier years. The asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Tribunal. The Tribunal insofar as the assessment year 1998 99 is concerned, held that the interest income from EEFC account and the interest recovered on loans advanced to the sister concern are admissible deduction under the head Income from Business. It further held that as per the predominant view of the various high courts, the interest income arising from the transaction connected with the business would be business income and they affirmed the findings recorded by the appellate authority. Hence, they extended the benefit under Section 10B of the Act, for the assessment year 1998 99. 3. However, while dealing with the very same question for the assessment year 2001 02, they took note of the change in the law. They extracted Section 10B (1) and (4) of the Act and held that it was an exemption section and income from these undertakings, which are covered by the section did not form part of the total income. However, by virtue of the amendment, in particular, introduction of Sub-section (4) to Section 10B of the Act, the methodology of arriving at the export profits of the business of the undertaking is given in a formula. The terminology used in Sub-section 4 is profits of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A No.428/2007 was admitted on 19.11.2011 and ITA No.447/2007 was admitted on 14.03.2008 to consider the following substantial questions of law, which reads as under: In ITA No.428/2007: (1) Whether in the facts and circumstances of the case the finding of the appellate authorities that interest received by the assessee out of surplus funds and deposited in Banks and other sister concerns should be brought to tax under the head "Income from Business" and not under the head "Income from other sources", is perverse, arbitrary and contrary to law? 2. Whether the finding of the appellate authorities having regarding to the facts and circumstances of the case and the law that the interest income deposited out of surplus funds in Banks and sister concerns and EEFC account should be treated as part of the total income for the purpose of computing deduction under Sections 10A and 10B of the Income Tax Act, is perverse and arbitrary? In ITA No.447/2007: 1. Whether the Appellate Authorities committed an error in holding that the interest income deposited out of surplus funds in Banks and sister concerns and EEFC account should be treated as part of the total income for the purpose of computin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ributable to industrial undertaking." The Apex Court n the case of COMMISSIONER OF INCOME TAX VS. STERLING FOODS REPORTED IN (1999) 237 ITR 579 (SC), while dealing with Section 80HH has held as under: "There must be, for the application of the words "derived from", a direct nexus between the profits and gains and the industrial undertaking." In the case of COMMISSIONER OF INCOME TAX VS. MENON IMPEX (P) LTD. REPORTED IN (2003) 259 ITR 403 (MAD), dealing with exemption under Section 10A of the Act, has held as under: "It was pointed out that unless the source of the income is from an industrial undertaking, such income cannot be regarded as "derived from" industrial undertaking. It was held that the income derived from sale of import entitlement could only be said to be the export promotion scheme and not the industrial undertaking." Following the aforesaid judgments, the Madras High Court in the case of COMMISSIONER OF INCOME TAX VS. THE MADRAS MOTORS LIMITED REPORTED IN (2002) 257 ITR 60 (MAD) has held that the interest which is earned by the assessee from the bank deposits would not have a direct nexus with the industrial undertaking of the assessee and would only be incidental in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there is change in the law for the assessment year 2001 02. Section 10(B)(1) and (4) reads as under:- "Section 10B : Special provisions in respect of newly established hundred per cent export-oriented undertakings.- (1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by a hundred per cent export-oriented undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee : Provided that where in computing the total income of the undertaking for any assessment year, its profits and gains had not been included by application of the provisions of this section as it stood immediately before its substitution by the Finance Act, 2000, the undertaking shall be entitled to the deduction referred to in this sub-section only for the unexpired period of aforesaid ten consecutive assessment years : Provided further that for the assessment year beginning on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also the income from the business of the undertaking. 8. In the instant case, the assessee is a 100% EOU, which has exported software and earned the income. A portion of that income is included in EEFC account. Yet another portion of the amount is invested within the country by way of fixed deposits, another portion of the amount is invested by way of loan to the sister concern which is deriving interest or the consideration received from sale of the import entitlement, which is permissible in law. Now the question is whether the interest received and the consideration received by sale of import entitlement is to be construed as income of the business of the undertaking. There is a direct nexus between this income and the income of the business of the undertaking. Though it does not par take the character of a profit and gains from the sale of an article, it is the income which is derived from the consideration realized by export of articles. In view of the definition of Income from Profits and Gains incorporated in Subsection (4), the assessee is entitled to the benefit of exemption of the said amount as contemplated under Section 10B of the Act. Therefore, the Tribunal was justif ..... X X X X Extracts X X X X X X X X Extracts X X X X
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