DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-(1), BENGALURU vs. RAJESH EXPORTS LIMITED, BENGALURU

The Revenue has raised the following grounds of appeal: 1. Whether the Ld. CIT(A) was correct in holding that a sum of Rs. 63,27,63,087/- interest income earned by the assessee from fixed deposits were liable to tax under the head 'Income from Business' and not under the head 'Income from Other Sources' as held by the Assessing Officer?

Whether the Ld. CIT(A) was correct in holding that all the FDs held by the assessee company are held by the SEZ unit only and no FDs are held by non-SEZ unit despite noting in para 12.1 of the impugned order that FDs are required by both SEZ and non SEZ units to establish their own Letter of Credits in order to import the gold bullion.

The assessee imports and sells gold bullion, manufactures and exports jewellery and other products, and operates three units: non-SEZ, SEZ, and SIDCUL. The non-SEZ unit imports bullion for domestic sale and manufactures gold products for export. The SEZ unit imports bullion, manufactures intricate gold jewellery, and exports it. The SIDCUL unit imports raw gold, refines it into pure gold, and sells it domestically. On 31st December 2017, the assessee filed its return declaring a loss of ₹481,41,75,778, which was selected for scrutiny. The dispute concerns interest of ₹63,27,63,087 earned on bank fixed deposits maintained against letters of credit. The assessee treated the interest as income of its SEZ business and claimed a deduction under section 10A of the Income-tax Act.

Aggrieved by the assessment order, the assessee appealed to the learned CIT(A), who passed the appellate order on 24 March 2025. The learned CIT(A) considered the issue in paragraph 12 and allowed the assessee’s claim by following the decision of the Hon’ble Karnataka High Court in ITA No. 1/2009 for assessment year 2004-05 in the assessee’s own case. In paragraph 12.4, the learned CIT(A) reproduced the decision of the Coordinate Bench in the assessee’s case for assessment year 2004-05 and, in paragraph 12.5, allowed the claim by following the decisions of the Hon’ble jurisdictional High Court and the Tribunal.

Aggrieved by the order of the learned CIT(A), the Assessing Officer is in appeal before us. The learned Departmental Representative submitted that deduction of income from a Special Economic Zone is governed by section 10AA of the Income-tax Act and that only profits derived from the SEZ undertaking qualify for deduction. According to the Revenue, interest on fixed deposits is not income derived from the export of goods and is therefore ineligible for deduction under section 10AA. It was further argued that the learned CIT(A) had mechanically followed the decisions of the Hon’ble Karnataka High Court and the jurisdictional Tribunal, although interest on fixed deposits could not be regarded as income derived from the industrial undertaking. The Revenue also submitted that those decisions concerned assessment year 2004-05 and the deduction under section 10B, whereas the language of sections 10B and 10AA differs materially. Accordingly, the decisions relied upon by the learned CIT(A) did not support allowance of the assessee’s claim. The learned Departmental Representative also referred to the 40-page written submissions filed before us.

The learned authorised representatives, Shri S. Parthasarathi and Shri Surya Tejas L., Advocates, filed a 78-page paper book containing the return of income, computation of total income, balance sheet, the Tribunal’s order in the assessee’s own case for assessment year 2004-05 in ITA No. 51/Bang/2008 dated 14 August 2008, and the Hon’ble Karnataka High Court’s decision in ITA No. 1/2009 dated 14 October 2014 affirming the Coordinate Bench’s order.

On careful consideration of facts and orders of the Ld. Lower Authorities, we find that now this issue is squarely covered in favour of the assessee by the decision off the full bench of Honorable Karnataka High court in Commissioner of Income Tax vs. Hewlett Packard Global Soft Ltd. [2017] 87 taxmann.com 182 (Karnataka) (FB)/[2018] 403 ITR 453 (Karnataka) (FB)/[2017] 299 CTR 118 (Karnataka) (FB)[30-10-2017] where in it is held as under :- “2. The conflict of opinion of the Two Division Benches has resulted in the aforesaid Reference to the Full Bench. The earlier view was taken in favour of the assessee by the first Division Bench in CIT v. Motorola India Electronics (P.) Ltd. [2014] 46 taxmann.com 167/225 Taxman 11 (Kar.) (Mag.). The subsequent Division Bench taking a different view on 10/04/2014 in the present I.T.A.No.812/2007 referred the aforesaid Questions of Law for consideration by the Full Bench. 3. The first Division Bench in its decision dated 11/12/2013 held that the Respondent - assessee, a 100% Export Oriented Unit (EOU) which is exporting Software like the Respondent - assessee in the present case was entitled to 100% deduction under Section 10-A of the Income Tax Act, 1961 ('Act' for short) in respect of the interest income earned by it during the relevant Assessment Year from Exchange Earner's Foreign Currency (EEFC) Account and the same would be construed as "Business Income of the assessee derived from the Undertaking" within the meaning of Section 10-A of the Act. The Division Bench held that the Profits of the business of the Undertaking includes the Profits and Gains from export of the articles as well as all other incidental incomes derived from the business of the Undertaking and what is exempted under Section 10-A/10-B of the Act is not merely Profits and Gains from the export of articles but also the income from the business of the Undertaking. 4. The Division Bench held that the assessee Motorola India Electronics (P) Ltd. was a 100% Export Oriented Unit which has exported Software and earned the income and a portion of that income is deposited in EEFC Account and yet another portion of the amount was invested within the country by way of Fixed Deposits and yet another portion was invested by way of loans to the sister concerns and on which the assessee derived interest or the consideration received from sale of Import Entitlements which was permissible in law and therefore the interest received and the consideration received by the sale of Import Entitlements was to be construed as income of the business of the Undertakings and the Division Bench held that there is a direct nexus between this income and the income of the business of the Undertaking, though it does not partake the character of a Profit and Gains from the sale of articles but it is the income which is derived from the consideration realized from export of articles. The assessee was thus held entitled to 100% deduction for the Assessment Year 2001-02 under Section 10-A/10-B of the Act. 5. However, the subsequent Division Bench took a different view on 10/04/2014 in the present I.T.A.No.812/2007 and relying upon certain Supreme Court decisions referred therein, held that the Undertaking/Assessee could have more sources of income other than the profits and gains as are derived by them from the export of articles or things or Computer Software and such Undertakings contemplated under Section 10-A(1) of the Act are entitled to seek benefit of deduction only in respect of the profit derived from export of articles or things or Computer Software. 6. The subsequent Division Bench further held that the expression "Total Turnover of the business carried on by the Undertaking" would mean only the turnover of the export business of the Undertaking and not any other activity from the Undertaking which earns profit, which could be a part of total income of the assessee. The Division Bench, therefore, proceeded to take a view that the Respondent assessee/Undertaking, M/s. Hewlett Packard Globalsoft (P.) Ltd. which invested its surplus funds in Banks and received interest thereon and also interest on the staff loans, such interest earned by the Undertaking/assessee had no direct nexus with the business of the Undertaking and in other words the business of the Undertaking as contemplated under Section 10-A of the Act is only the export of articles or things or Computer Software and interest on surplus amount in Bank deposit or loans to staff could not have any nexus with the business of the Undertaking as contemplated under Section 10-A(4) of the Act. 7. The Division Bench, therefore, held that they were unable to agree with the view taken by the earlier Division Bench in the case of Respondent Assessee - Motorola India Electronics (P) Ltd. (supra) and thus the matter was required to be referred to the Full Bench for its opinion. 8. We have heard the learned counsels, Mr. K.V. Aravind for the Revenue and Mr. T. Suryanarayana for the Respondent - Assessee. 9. The Scheme of the Income Tax Act, 1961 is that the said Act is divided into XXIII Chapters, comprising of Section 1 to Section 298 and Fourteen Schedules to the Act. We are mainly concerned with Chapter II (Basis of Charge - Section 4 to Section 9-A); Chapter III (Incomes which do not form part of Total Income - Section 10 to Section 13-B) Chapter IV (Computation of Total Income, providing for different Heads of Income - Part-D - Profits and Gains of Business or Profession - (Section 28 to Section 44DB) and Chapter VI-A (Deductions to be made in computing Total Income, Part A - General, comprising of Section 80-A to 80-B and Part B - Deductions in respect of certain payments, comprising of Section 80C to 80GGC and Part C - Deductions in respect of certain incomes - comprising of Section 80H to Section 80TT. 10. Out of this broad scheme of the Act, since the cited cases before us mostly pertain to Part C of Chapter VI-A which deals with the deductions to be made in computing Total Income under Section 80-H, 80HH, 80HHC etc, we would deal with these provisions when relevant case laws are discussed by us. 11. As against the Chapter VI-A relating to Deductions from Gross Total Income as provided in Chapter VI-A of the Act, Section 10-A and 10-B contained in Chapter III of the Act provide for exemptions or 100% deduction in Chapter III which deals with "Incomes which do not form part of the Total Income" and Section 10-A deals with "Special provisions in respect of the newly established Undertakings in Free Trade Zone, etc.(FTZ)" and Section 10-AA deals with "Special provisions in respect of newly established Units in Special Economic Zones (SEZs)" and Section 10-B deals with "Special provisions in respect of newly established 100% Export Oriented Units (100% E.O.Us)". 12. Before coming to the crux of the controversy, let us have a look at the brief factual background of the Respondent assessee for the Assessment Year 2001-02 in question.

The Respondent assessee during the relevant year operated four Units set up under the Scheme formulated by the Government in the name of Software Technology Parks of India (STPI) for 100% Export of the Computer Software Units. The Government of India to promote the fast growing Industry of Software and Software Technology in our country, made a special provision for providing incentive in the form of Tax Exemption by inserting Section 10-A in Chapter III of the Act which provision is quoted herein below and the same provided for a 100% deduction of Profits and Gains derived by an Undertaking from the export of articles or things or Computer Software for a period of ten consecutive Assessment Years from the beginning of its setting up, if such Undertaking begins to manufacture or produce such Articles or things or Computer Software in its Export Undertaking. The said provision was substituted by Finance Act, 2000, with effect from 01/04/2001 in place of the earlier Section 10-A, which was inserted by Finance Act, 1981. 14. Section 10-B of the Act was also substituted by the Finance Act, 2000, with effect from 01/04/2001 in place of earlier provisions of Section 10-B of the Act inserted by Finance Act, 1988 with effect from 01/04/1989 and it provided for such 100% deduction of profits and gains derived by a 100% Export Oriented Undertaking set up in specified Zones like STPI etc. 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 such Articles. 15. There is no dispute of facts before us as found by the Income Tax Tribunal with the Respondent - assessee, as a 100% Export Oriented Unit had four Units set up in the Software Technology Park of India (STPI) Scheme and it had no other Units from which it carried on any other activity other than the 100% export of Software projects during the Assessment Year 2001- 02 under consideration. 16. The assessee earned during the said Assessment Year 2001- 02, interest income of Rs. 4,68,037/- on the Short Term Deposits made by it to the tune of Rs. 6,46,88,606/- out of its Surplus Funds temporarily parked in the Current Account held in Citi Bank, Hong Kong and also earned interest of Rs. 6,02,309/- from the Advances of loans to its staff members. The deduction in respect of both the said interest income was claimed as a 100% deduction under Section 10-A of the Act during the said relevant year as income from "Profits and Gains" of export business. But, the Assessing Authority under the Act held that such interest income was not entitled to 100% deduction under Section 10-A of the Act, but such interest income was taxable under Section 56 of the Act, as 'Income from Other Sources' and that is the bone of contention between the assessee and the Revenue before us. 17. The learned counsel for the Revenue, Mr. Aravind relying upon the following judgments under Sections 80-HH, 80-HHC and 80-I of the Act which scheme of Deductions under Chapter VI-A of the Act is different from the scheme of Exemptions from tax under Sections 10-A and 10-B in Chapter III of the Act, submitted that the interest income derived by the Respondent assessee cannot be said to be "Profits and Gains" as derived by an Undertaking from the export of articles and therefore such interest income earned from Banks and staff loans has to be taxed under Section 56 of the Act as "Income from other Sources" and 100% deduction treating them as "profits and gains of business" is not allowable under 80-A of the Act. 18. The relevant extracts of the judgments mainly relied upon by the learned counsel for the Revenue are quoted below for ready reference. 19. In Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278/129 Taxman 539 (SC), the Hon'ble Supreme Court dealing with a controversy with regard to interest on deposits with Electricity Board held that the same could not be treated as 'Profits and Gains derived from Industrial Undertaking" for the purposes of Section 80-HH of the Act. The relevant paragraphs 4 and 6 of the judgment are quoted below for ready reference.

Section 80HH of Income Tax Act grants deduction in respect of profits and gains "derived from" an industrial undertaking. The contention of the appellant before us is that interest earned on the deposit made with the Electricity Board (assessee) for the supply of electricity to the appellants industrial undertaking should be treated as income derived from the industrial undertaking within the meaning of section 80HH. It is submitted that without the supply of electricity the industrial undertaking could not run and since electricity was an essential requirement of the industrial undertaking, the industrial undertaking could not survive without it. It is further pointed out that for the purpose of getting this essential input, the statutory requirement was that the deposit must be made as a precondition for the supply of electricity. Consequently, according to the appellant, the interest on the deposit should be treated as income derived from the industrial undertaking within the meaning of section 80HH.

… … 6. The word " derived" has been construed as far back in 1948 by the Privy Council in CIT v. Raja Bahadur Kamakhaya Narayan Singh (1948) 16 ITR 325 (PC) when it said : "The word derived is not a term of art. Its use in the definition indeed demands an enquiry into the genealogy of the product. But the enquiry should stop as soon as the effective source is discovered. In the genealogical tree of the interest land indeed appears in the second degree, but the immediate and effective source is rent, which has suffered the accident of non-payment. And rent is not land within the meaning of the definition." This definition was approved and reiterated in 1955 by a Constitution Bench of this Court in the decision of Mrs. Bacha F. Guzdar v. CIT (1955) 27 ITR 1 (SC). It is clear, therefore, that the words 'derived from' is s.80HH of the IT Act, 1961 must be understood as something which has direct or immediate nexus with the appellant's industrial undertaking. Although electricity may be required for the purposes of the industrial undertaking, the deposit required for its supply is a step removed from the business of the industrial undertaking. The derivation of profits on the deposit made with Electricity Board cannot be said to flow directly from the industrial undertaking itself.' 20. In Liberty India v. CIT [2009] 317 ITR 218/183 Taxman 349, the Hon'ble Supreme Court dealing with the controversy of profit from Duty Exemption Payback Scheme (DEPB), Duty drawback incentives dealing with deduction under 80-IB of the Act held that the profit derived on sale of such DEPB and Duty draw back Entitlements by the assessee could not be said to be Profits and Gains "derived from" which are "ancillary" as compared with the words "attributable to" and therefore such profits on sale of DEPB/Duty drawback Entitlements was not deductible under Section 80-IB of the Act. The relevant discussion as found in paragraph 16 of the judgment is quoted below for ready reference.

The Division Bench of Bombay High Court in CIT v. Symantee Software India (P.) Ltd. [MANU/MH/2575/2014] rightly held, in our opinion, that the provisions of Chapter VI-A in the context of 'Deductions' cannot be allowed to be telescoped in Section 10-A and the deduction under Section 10-A has to be given effect to at the prior stage of computing the profits and gains of the business, whereas Chapter VI-A comes in for application after the Gross Total Income is determined by adding the income under various independent Heads of Income in Chapter IV comprising of Sections 14 to 59 of the Act. 33. The relevant extract from paragraphs 19 to 21 of Bombay High Court decision is also quoted below for ready reference.

In relation to this, we also find support in the judgment of this Court in the case of Black and Veatch Consulting Pvt. Ltd. This Court has observed and held as under: "Section 10A is a provision which is in the nature of a deduction and not an exemption. This was emphasized in a judgment of a Division Bench of this Court, while construing the provisions of Section 10B, in Hindustan Unilever Ltd. v. Deputy Commissioner of Income Tax MANU/MH/0417/2010: [2010] 325 ITR 102 (Bom.) at paragraph 24. The submission of the Revenue placed its reliance on the literal reading of Section 10A under which 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 is to be allowed from the total income of the assessee. The deduction under Section 10A, in our view, has to be given effect to at the stage of computing the profits and gains of business. This is anterior to the application of the provisions of Section 72 which deals with the carry forward and set off of business losses. A distinction has been made by the Legislature while incorporating the provisions of Chapter VI-A. Section 80A(1) stipulates that in computing the total income of an assessee, there shall be allowed from his gross total income, in accordance with and subject to the provisions of the Chapter, the deductions specified in Sections 80C to 80U. Section 80B(5) defines for the purposes of Chapter VIA "gross total income" to mean the total income computed in accordance with the provisions of the Act, before making any deduction under the Chapter. What the Revenue in essence seeks to attain is to telescope the provisions of Chapter VI-A in the context of the deduction which is allowable under Section 10A, which would not be permissible unless a specific statutory provision to that effect were to be made. In the absence thereof, such an approach cannot be accepted. In the circumstances, the decision of the Tribunal would have to be affirmed since it is plain and evident that the deduction under Section 10A has to be given at the stage when the profits and gains of business are computed in the first instance." 21. Therefore, when this Court has held that Chapter VIA provides for deduction to be made in computing the total income and section 80HH deals with deduction in respect of profit and gains from the newly established undertaking or Hotel business in backward areas, then the attempt of the Revenue to telescope Chapter VIA in the context of the deduction, which is permissible under section 10A falling in Chapter III, cannot be countenanced.'

We are of the considered opinion that the above referred decisions relied upon by the learned counsel for the Revenue, Mr. Aravind do not cover the cases under Sections 10-A and 10-B of the Act which are special provisions and complete code in themselves and deal with profits and gains derived by the assessee of a special nature and character like 100% Export Oriented Units (EOUs.) situated in Special Economic Zones (SEZs), STPI, etc., where the entire profits and gains of the entire Undertaking making 100% exports of articles including software as is the fact in the present case, the assessee is given 100% deduction of profit and gains of such export business and therefore incidental income of such undertaking by way of interest on the temporarily parked funds in Banks or even interest on staff loans would constitute part of profits and gains of such special Undertakings and these cases cannot be compared with deductions under Sections 80-HH or 80-IB in Chapter VI-A of the Act where an assessee dealing with several activities or commodities may inter alia earn profits and gains from the specified activity and therefore in those cases, the Hon'ble Supreme Court has held that the interest income would not be the income "derived from" such Undertakings doing such special business activity. 35. The Scheme of Deductions under Chapter VI-A in Sections 80-HH, 80-HHC, 80-IB, etc from the 'Gross Total Income of the Undertaking', which may arise from different specified activities in these provisions and other incomes may exclude interest income from the ambit of Deductions under these provisions, but exemption under Section 10-A and 10-B of the Act encompasses the entire income derived from the business of export of such eligible Undertakings including interest income derived from the temporary parking of funds by such Undertakings in Banks or even Staff loans. The dedicated nature of business or their special geographical locations in STPI or SEZs. etc. makes them a special category of assessees entitled to the incentive in the form of 100% Deduction under Section 10-A or 10-B of the Act, rather than it being a special character of income entitled to Deduction from Gross Total Income under Chapter VI-A under Section 80- HH, etc. The computation of income entitled to exemption under Section 10-A or 10-B of the Act is done at the prior stage of computation of Income from Profits and Gains of Business as per Sections 28 to 44 under Part-D of Chapter IV before 'Gross Total Income' as defined under Section 80-B(5) is computed and after which the consideration of various Deductions under Chapter VI- A in Section 80HH etc. comes into picture. Therefore analogy of Chapter VI Deductions cannot be telescoped or imported in Section 10-A or 10-B of the Act. The words 'derived by an Undertaking' in Section 10-A or 10-B are different from 'derived from' employed in Section 80-HH etc. Therefore all Profits and Gains of the Undertaking including the incidental income by way of interest on Bank Deposits or Staff loans would be entitled to 100% exemption or deduction under Section 10-A and 10-B of the Act. Such interest income arises in the ordinary course of export business of the Undertaking even though not as a direct result of export but from the Bank Deposits etc., and is therefore eligible for 100% deduction. 36. We have to take a purposive interpretation of the Scheme of the Act for the exemption under Section 10-A/10-B of the Act and for the object of granting such incentive to the special class of assessees selected by the Parliament, the play-in-the-joints is allowed to the Legislature and the liberal interpretation of the exemption provisions to make a purposive interpretation, was also propounded by Hon'ble Supreme Court in the following cases:— [I] In Bajaj Tempo Ltd. v. CIT [1992] 196 ITR 188/62 Taxman 480, the Hon'ble Supreme Court held that:— "5. . . . . . Since a provision intended for promoting economic growth has to be interpreted liberally, the restriction on it, too, has to be construed so as to advance the objective of the section and not to frustrate it. But that turned out to be the, unintended, consequence of construing the clause literally, as was done by the High Court for which it cannot be blamed, as the provision is susceptible of such construction if the purpose behind its enactment, the objective it sought to achieve and the mischief it intended to control is lost sight of. One way of reading it is that the clause excludes any undertaking formed by transfer to it of any building, plant or machinery used previously in any other business. No objection could have been taken to such reading but when the result of reading in such plain and simple manner is analysed then it appears that literal construction would not be proper. …" [II] In R.K. Garg v. Union of India [1982] 133 ITR 239/[1981] 7 Taxman 53, the Hon'ble Apex Court has held as under:— '8. Another rule of equal importance is that laws relating to economic activities should be viewed with greater latitude than laws touching civil rights such as freedom of speech, religion etc. It has been said by no less a person than Holmes, J., that the legislature should be allowed some play in the joints, because it has to deal with complex problems which do not admit of solution through any doctrinaire or strait-jacket formula and this is particularly true in case of legislation dealing with economic matters, where, having regard to the nature of the problems required to be dealt with, greater play in the joints has to be allowed to the legislature. The court should feel more inclined to give judicial deference to legislative judgment in the field of economic regulation than in other areas where fundamental human rights are involved. Nowhere has this admonition been more felicitously expressed than in Morey v. Doud [351 US 457 : 1 L Ed 2d 1485 (1957)] where Frankfurter, J., said in his inimitable style: "In the utilities, tax and economic regulation cases, there are good reasons for judicial self-restraint if not judicial deference to legislative judgment. The legislature after all has the affirmative responsibility. The courts have only the power to destroy, not to reconstruct. When these are added to the complexity of economic regulation, the uncertainty, the liability to error, the bewildering conflict of the experts, and the number of times the judges have been overruled by events — self-limitation can be seen to be the path to judicial wisdom and institutional prestige and stability." The Court must always remember that "legislation is directed to practical problems, that the economic mechanism is highly sensitive and complex, that many problems are singular and contingent, that laws are not abstract propositions and do not relate to abstract units and are not to be measured by abstract symmetry"; "that exact wisdom and nice adaption of remedy are not always possible" and that "judgment is largely a prophecy based on meagre and uninterpreted experience". Every legislation particularly in economic matters is essentially empiric and it is based on experimentation or what one may call trial and error method and therefore it cannot provide for all possible situations or anticipate all possible abuses. There may be crudities and inequities in complicated experimental economic legislation but on that account alone it cannot be struck down as invalid.' 37. On the above legal position discussed by us, we are of the opinion that the Respondent assessee was entitled to 100% exemption or deduction under Section 10-A of the Act in respect of the interest income earned by it on the deposits made by it with the Banks in the ordinary course of its business and also interest earned by it from the staff loans and such interest income would not be taxable as 'Income from other Sources' under Section 56 of the Act. The incidental activity of parking of Surplus Funds with the Banks or advancing of staff loans by such special category of assessees covered under Section 10-A or 10-B of the Act is integral part of their export business activity and a business decision taken in view of the commercial expediency and the interest income earned incidentally cannot be de-linked from its profits and gains derived by the Undertaking engaged in the export of Articles as envisaged under Section 10-A or Section 10- B of the Act and cannot be taxed separately under Section 56 of the Act. 38. We therefore affirm and agree with the view expressed by the first Division Bench of this Court in the case of Motorola India Electronics (P.) Ltd. (supra) and we do not agree with the view taken by the subsequent Division Bench on 10/04/2014 in the present case.” 8. Though the Ld. CIT (A) relied on the decision of the Honourable Karnataka High Court in the assessee’s own case for AY 2004-05, the Ld AO’s appeal does not survive in view of the full bench decision of the Honourable Karnataka High Court on a similar issue. Hence, it is dismissed on both grounds.

In the result, the appeal filed by the Assessing Officer is dismissed. Order pronounced in the open court on 21st October, 2026.