EXCELRA KNOWLEDGE SOLUTIONS PRIVATE LIMITED,HYDERABAD vs. DCIT, CIRCLE-8(1), HYDERABAD

We have heard the learned AR and the learned DR and considered the relevant material on records. The assessee has explained the reason for raising additional grounds separately that, inadvertently, the assessee did not raise these grounds at the time of filing of the appeal and therefore, pleaded for admission of additional grounds in view of the judgement of the Hon'ble Supreme Court in the case of CIT vs. NTPC (229 ITR 382). There is no dispute that the grounds raised by the assessee along with petition for admission of additional grounds are emanating

Ground No.1 is general in nature and does not require any specific adjudication.

Ground No.2 is regarding disallowance of claim of exemption u/s 10AA by the Assessing Officer in respect of interest earned by the assessee on fixed deposits which was assessed as income from other sources. During the course of assessement proceedings, the Assessing Officer noted that the assessee has earned interest income on fixed deposits made with banks which has been included in the business income while computing deduction u/s 10AA of the Act. The Assessing Officer held that the interest income received on bank deposit is not a business income and therefore, the same is assessable to tax under the head other sources. Accordingly, the Assessing Officer has disallowed the claim of deduction u/s 10AA on the interest income of Rs.4,40,41,931/-.

Being aggrieved by the said action of the Assessing Officer, the assessee filed an appeal before the learned CIT (A) but Page 4 of 19 could not succeed. Before the Tribunal, the learned AR contended that the fixed deposits were made from the export receipts and directly from the EEFC Account. He has further contended that since the deposits with banks were made out of the export proceeds and assessee is a 100% export oriented unit located in SEZ have to receive its sale proceeds in convertible foreign exchange. Therefore, the entire turnover is from exports which is eligible for deduction u/s 10AA of the Act. The parking of surplus fund out of the export proceeds is an integral part of the export business activity and assessable to tax as business income. Further, the deposits in the banks is for commercial expediency and interest income cannot be delinked with the export income. In support of his contention, he has relied upon the decision of the Hon'ble Karnataka High Court in the case of Hewlett Packard Global Soft Ltd (403 ITR 453) (Kar.) (Full Bench) wherein the Hon'ble High Court has held that the interest earned by the assessee from parking of the surplus funds in the deposits is incidental to the business income of the assessee and therefore, eligible for deduction u/s 10A of the Act. The Hon'ble Madras High Court in the case of CIT vs. Sankhya Technology (P) Ltd (427 ITR 361 (Mad.) has agreed with the view taken by the Hon'ble Karnataka High Court in the case of Hewlett Packard Global Soft Ltd (Supra). He has relied upon the decision of the Hon'ble Delhi High Court in the case of Riveira Home Furnishing vs. ACIT (279 ITR OL 401 (Del.) as well as the decision of the Hon'ble Madras High Court in the case of California Software Co Ltd vs. CIT (2020) 422 ITR 514 (Mad.) and also the judgment of the Hon'ble Madras

On the other hand, the learned DR has submitted that the interest income received on bank deposits is not a business income and liable to be assessed under the head “other sources”. It is not an income derives from business activities of exports and therefore, not eligible for deduction u/s 10AA of the Act. The Assessing Officer has relied upon the decision of the Hon'ble Madras High Court as well as the judgment of the Hon'ble Uttarakhand High Court. The Assessing Officer has assessed the Page 7 of 19 income received from bank deposits as income from other sources and denied the claim of interest u/s 10AA of the Act and the assessee has accepted the said decision of the Assessing Officer for the A.Ys 2017-18 & 2018-19 respectively. He has further contended that the judgment of the Hon'ble Karnataka High Court in the case of CIT vs. Hewlett Packard Global Soft Ltd (Supra) has been challenged before the Hon'ble Supreme Court and the SLP is pending adjudication before the Hon'ble Supreme Court. Even otherwise, in the said case of Hewlett Packard Global Soft Ltd (Supra) the interest was earned by the said company on the surplus fund with banks and advance of staff loan and therefore, it was allowed as eligible for deduction u/s 10A of the Act only on the ground that there was only a short-term deposits made by the assessee of its surplus fund and other income was earned from the loan advanced to the employees, which has direct nexus with the business of the assessee. However, in the case in hand, the assessee has made the fixed deposits for a long duration, as evident from the balance sheet of the assessee and running from year to year. He has relied upon the decision of the Hon'ble Supreme Court in the case of Orissa State Warehousing Corporation vs. CIT reported in 237 ITR 589 and submitted that the Hon'ble Supreme Court has laid down the rule of interpretation of fiscal statute shall have to be interpreted on the basis of the language used therein and not de hors the same and the Court ought not, under any circumstances, to substitute its own impression and ideas in place of the legislative intent as is available from the plain reading of the statutory provisions.

We have considered the rival submissions as well as relevant material available on record. The Assessing Officer has denied the claim of deduction u/s 10AA in respect of interest income earned on the fixed deposits made with the Banks as under:

The purpose and object to provide the incentive to the 100% EOU u/s 10AA of the I.T. Act, 1961 is to bring more and more foreign exchange. The 100% deduction is allowed for first 5 years in respect of the profit and gains derived from export of such articles or things or from the services and 50% of such profits and gains for further 5 A.Ys and thereafter. Thus, sub- section (1) of section 10AA of the Act has specified the profit and gain derived from export of articles or things or services. In the normal circumstances, interest on deposits with banks falls under the head “income from other sources” except when the deposits with the Banks are made by the assessee in the ordinary course of business or in order to smooth business activity of the export i.e. availing credit facility, letter of credit or obtaining bank

The Hon'ble Karnataka High Court in the case of Hewlett Packard Global Soft Ltd (Supra) have also given a finding on the same principles of business decisions taken in view of the commercial expediency. In case of California Software Co. Ltd vs. CIT (Supra), the issue before the Hon'ble Madras High Court was regarding the treatment of employees stock option and later reversal entry made by the assessee as scheme was not materialized and therefore, there was no dispute about the nature of the said income credited in the P&L Account on account of reversal of the employees stock option. Secondly, the interest earned by the assessee in respect of the loan advance to wholly owned subsidiary in USA for working capital was also treated as a decision for commercial expediency as the assessee was having the business interest in USA.

In case of CIT vs. Pentasoft Technologies Ltd (Supra), the issue before the Hon'ble High Court was regarding the claim of deduction u/s 10A in respect of the foreign exchange fluctuation gain which is directly related to the business activity of the export sales and turnover/proceeds from exports. Thus, in all those cases, the issue was the interest it earned as an incidental and as Page 12 of 19 a result of decision of the commercial expediency. In some of the cases even the fixed deposits was made by the assessee for obtaining the letter of credit required for the business of exports and in other cases for obtaining the bank guarantee required for the business activity of the assessee and hence, the said deposit was necessary for the business activity of the assessee and the interest earned on such deposits was considered as the income earned in the normal course of business activity. In the case in hand, it is undisputed fact that the assessee has made long term deposits with the Banks which is also evident from the fact that for the A.Ys 2017-18 & 2018-19, the interest income on the same deposits with banks was assessed by the Assessing Officer as income from other sources and denied the benefit of section 10AA. Thus, it is clear that the fixed deposits made by the assessee in the case in hand are not an incidental or owing to commercial expediency but it was an investment decision taken by the assessee to earn the interest income on the surplus fund available with the assessee not required for business purposes. When the deposits were not made for business exigencies or requirement of other business obligations of the assessee like securing bank guarantee or letter of credit or margin money or security deposits etc., necessary for business which can be regarded as inextricably linked with business activity of the assessee but is a part of decision of making investment in fixed deposits for a specific motive to earn the interest income, then the income earned on such deposits cannot be regarded as directly or inextricably linked with the business activity of the assessee. The source of Page 13 of 19 deposits cannot change the nature of the income in the form of interest on the fixed deposits because the export income is already considered for the benefit of section 10AA and subsequent deposits in the bank account and interest on such deposits cannot be said to have a direct nexus with the export activity of the assessee. Thus, the decisions relied upon by the learned AR of the assessee cannot be applied to the facts of the present case. Even otherwise, when the interest on the same fixed deposits has already been treated as income from other sources for the A.Ys 2017-18 & 2018-19 which has attained the finality, then as per the rules of consistency and in the absence of any change in the facts and circumstances, the said income cannot be given a different treatment. The Hon'ble Supreme Court in the case of India Comnet International vs. Income Tax Officer (Supra) has held in Para 4 & 5 as under: “4. The impugned judgment of the High Court is based on the judgment of the Madras High Court in the case of CIT v. Menon Impex (P.) Ltd.[2003] 259 ITR 403 / 128 Taxman 11 wherein a similar question arose as to "Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the interest income derived by the assessee from funds in connection with Letter of Credit is income derived from the profits of business of the industrial undertaking so as to be entitled to get the benefit of Section 10A of the Income Tax Act, 1961?" In that case, the Madras High Court examined in detail the transaction in question and found that the assessee had set up a new industrial undertaking in Kandla Free Trade zone for manufacturing light engineering goods. The goods therein were exported during the Assessment Year 1985-1986. In the course of business, the assessee was required to open a Letter of Credit. On such Deposit, the assessee earned interest. Under the said circumstances, the High Court held, following the judgment of this Court in the case of CIT v. Sterling Foods [1999] 237 ITR 579/ 104 Taxman 204, that the interest received by the assessee was on deposit made by it in the Banks; that such deposit was the source of Page 14 of 19 income; and that, the mere fact that the deposit was made for obtaining Letter of Credit which Letter was, in turn, used for the purpose of business undertaking did not establish a direct nexus between the interest and industrial undertaking. Thus, the judgment of the Madras High Court in Menon Impex (P.) Ltd. (supra) was based on the examination of the transaction in detail which exercise has not been undertaken in the present case. For the above reasons, we set aside the impugned judgment and remit the cases to the Income Tax Appellate Tribunal ['ITAT', for short] for deciding the matter afresh after examining the transaction in question, as done by the Madras High Court in the case of Menon Impex (P.) Ltd. (supra).

Therefore, the principles of commercial expediency is a determinative factor for treating the interest on deposits as income from other sources or as part of business income of the assessee. In view of the facts and circumstances as discussed above, we do not find any error or illegality in the impugned order of the learned CIT (A) qua this issue.

Ground No.3 is regarding wrong computation of book profit u/s 115JB of the I.T. Act, 1961. The learned AR of the assessee has submitted that the assessee has declared MAT at Rs.28,73,06,966/- whereas the Assessing Officer has computed the book profit at Rs.35,32,40,420/-. The learned AR has referred to the computation of book profit u/s 115JB placed at Page No.105 as well as the profit and loss account placed at page No.117 of the paper book and submitted that there is a mistake while computing the book profit by the Assessing Officer because

On the other hand, the learned DR has relied upon the orders of the authorities below.

Having considered the rival submissions and careful perusal of the relevant record, we find that though this issue was raised before the learned CIT (A) however, the learned CIT (A) has not considered this issue regarding the mistake in computation of book profit and simply dismissed the grounds of appeals of the assessee summarily as under: “The appellant is probably under confusion as to his book profits vis-à-vis income chargeable to tax. The Assessing Officer correctly charged the interest income under the head “other sources”.

Thus, the learned CIT (A) has not even taken pain to verify the relevant record as to whether there is any mistake in the computation of book profit or not. Accordingly, in the facts and circumstances of the case and in the interest of justice, this issue is remanded to the record of the Assessing Officer for proper verification of the relevant record and then to compute the book profit by considering the P&L Account and other adjustments as per the provisions of section 115JB of the I.T. Act, 1961. Needless to say, the assessee shall be given an appropriate opportunity of being heard before passing the order.

Ground No.4 which is an additional ground raised by the assessee regarding disallowance made u/s 43B of the Act on account of leave encashment. The learned AR of the assessee has submitted that the assessee had paid this amount during the year under consideration and the same was disallowed in the earlier year and therefore, the assessee has claimed deduction u/s 43B in the return of income. Thus, this disallowance was made by the CPC while processing the return of income u/s 143(1) of the Act and the Assessing Officer has also not considered this issue but simply taken the income assessed by the CPC while processing the return of income u/s 143(1) of the Act. The learned AR has thus, submitted that the Assessing Officer may be directed to verify the relevant record and then allow the claim of the assessee.

The learned DR has relied upon the orders of the authorities below.

Having considered the rival submissions as well as the relevant material available on record, it is noted that the adjustment/addition has been made by the CPC while processing the return of income u/s 143(1) of the Act in respect of the claim of deduction u/s 43B of the Act. The learned AR has pointed out that the assessee has claimed this deduction in view of the fact that in the preceding year, the claim was disallowed u/s 43B and the said amount has been paid during the year under consideration. These facts are required to be verified whether the claim made by the assessee was disallowed in the earlier year u/s Page 17 of 19 43B or not and consequently, whether this amount is otherwise allowable as a deduction. Accordingly, this issue is remanded to the record of the Assessing Officer for fresh adjudication after proper verification and examination of the relevant record and after giving an opportunity of hearing to the assessee.

The next additional ground raised by the assessee is regarding double addition made on account of interest income. The learned AR has submitted that the Assessing Officer while treating the interest income as income from other sources has made an addition of the said amount under the head income from other sources without reducing the said income from business income as declared by the assessee in the return of income. Thus, he has pleaded that the addition made by the Assessing Officer is a double addition requires to be deleted.

On the other hand, the learned DR has relied upon the orders of the authorities below.

Having considered the rival submissions and careful perusal of the assessment order, we find that the Assessing Officer has disallowed the claim of deduction u/s 10AA in respect of the interest income on fixed deposits and consequently made addition of Rs.4,40,41,931/- under the head “income from other sources”. Prima facie, it appears that when the assessee claimed deduction u/s 10AA of the Act on the interest income only at 50% as applicable for the year under consideration and then making